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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-175171
 
PROSPECTUS
 
(COMPANY LOGO)
 
Offer to Exchange
 
$450,000,000 aggregate principal amount of 8.875% Senior Secured Second Lien Notes due 2019
 
For
 
$450,000,000 aggregate principal amount of 8.875% Senior Secured Second Lien Notes due 2019
registered under the Securities Act of 1933, as amended
 
We are offering to exchange all of our outstanding 8.875% Senior Secured Second Lien Notes due 2019 that were issued in a private placement on March 4, 2011, and which we refer to as the “old notes,” for an equal aggregate amount of our 8.875% Senior Secured Second Lien Notes due 2019, which have been registered with the Securities and Exchange Commission (the “SEC”) and which we refer to as the “exchange notes.” We refer to the old notes and the exchange notes collectively as the “notes.” If you participate in the exchange offer, you will receive registered 8.875% Senior Secured Second Lien Notes due 2019 for your old 8.875% Senior Secured Second Lien Notes due 2019 that are properly tendered. The terms of the exchange notes are substantially identical to those of the old notes, except that the transfer restrictions and registration rights relating to the old notes will not apply to the exchange notes, and the exchange notes will not provide for the payment of additional interest in the event of a registration default. In addition, the exchange notes bear a different CUSIP number than the old notes. Our obligations under the notes are jointly and severally and fully and unconditionally guaranteed on a second-priority senior secured basis by all existing and future direct or indirect wholly-owned domestic subsidiaries of Claire’s Stores, Inc. that guarantee our senior secured credit facility or that incur or guarantee certain other indebtedness, all of which we refer to in this registration statement as the “guarantors.
 
MATERIAL TERMS OF THE EXCHANGE OFFER
 
The exchange offer expires at 5:00 p.m., New York City time, on August 16, 2011, unless extended.
 
We will exchange all old notes that are validly tendered and not validly withdrawn prior to the expiration of the exchange offer.
 
You may withdraw tendered old notes at any time prior to the expiration of the exchange offer.
 
The only conditions to completing the exchange offer are that the exchange offer not violate any applicable law or applicable interpretation of the staff of the SEC and no injunction, order or decree has been or is issued that would prohibit, prevent or materially impair our ability to proceed with the exchange offer.
 
We will not receive any cash proceeds from the exchange offer.
 
There is no active trading market for the notes and we do not intend to list the exchange notes on any securities exchange or to seek approval for quotations through any automated quotation system.
 
See “Risk Factors” beginning on page 15 of this prospectus for a discussion of certain risks that you should consider in connection with an investment in the exchange notes.
 
Neither the SEC nor any state securities commission has approved or disapproved of the exchange notes or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
The date of this prospectus is July 18, 2011


 

 
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WHERE YOU CAN FIND MORE INFORMATION
 
We file annual, quarterly and current reports with the SEC. You may read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. These SEC filings are also available to the public from the SEC’s Web site at http://www.sec.gov. Our reports and other information that we have filed, or may in the future file, with the SEC are not incorporated by reference into and do not constitute part of this prospectus.
 
We have filed a registration statement on Form S-4 to register with the SEC the exchange notes to be issued in exchange for the old notes. This prospectus is part of that registration statement. As allowed by the SEC’s rules, this prospectus does not contain all of the information you can find in the registration statement or the exhibits to the registration statement. You should note that where we summarize in this prospectus the material terms of any contract, agreement or other document filed as an exhibit to the registration statement, the summary information provided in the prospectus is less complete than the actual contract, agreement or document. You should refer to the exhibits filed to the registration statement for copies of the actual contract, agreement or document.
 
We have not authorized anyone to give you any information or to make any representations about us or the transactions we discuss in this prospectus other than those contained in this prospectus. If you are given any information or representations about these matters that is not discussed in this prospectus, you must not rely on that information. This prospectus is not an offer to sell or a solicitation of an offer to buy securities anywhere or to anyone where or to whom we are not permitted to offer or sell securities under applicable law. You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state or other jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.
 
Each broker-dealer that receives exchange notes for its own account in the exchange offer for old notes that were acquired as a result of market-making or other trading activities must acknowledge that it will comply with the prospectus delivery requirements of the Securities Act in connection with any offer to resell or other transfer of the exchange notes issued in the exchange offer. The accompanying letter of transmittal relating to the exchange offer states that by so acknowledging and delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in the exchange offer for old notes that were acquired by such broker-dealer as a result of market-making or other trading activities.


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FORWARD-LOOKING STATEMENTS
 
Certain information included in this prospectus may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 periods, 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. Forward-looking statements involve known or unknown risks, uncertainties and other factors, including changes in estimates and judgments discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecasts” and similar expressions. Some of these risks, uncertainties and other factors are as follows: changes in consumer preferences and consumer spending; competition; our level of indebtedness; general economic conditions; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; uncertainties generally associated with the specialty retailing business, such as decreases in mall traffic due to high gasoline prices or other general economic conditions; 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; increases in the cost of our merchandise; significant increases in our merchandise markdowns; inability to grow our store base in Europe or expand our international franchising operations; inability to design and implement new information systems or disruptions in adapting our information systems to allow for e-commerce sales; delays in anticipated store openings or renovations; results from any future asset impairment analysis; changes in applicable laws, rules and regulations, including changes in federal, state or local regulations governing the sale of our products, particularly regulations relating to the content in our products, general employment laws, including laws relating to overtime pay and employee benefits, health care laws, tax laws and import laws; product recalls; loss of key members of management; increases in the cost of labor; labor disputes; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; 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. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. 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.
 
Forward-looking statements should, therefore, be considered in light of various factors, including those set forth in this prospectus under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus.


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PROSPECTUS SUMMARY
 
This summary contains basic information about Claire’s Stores, Inc. and the exchange offer. It does not contain all the information that may be important to you in making your investment decision. Before deciding to participate in the exchange offer, you should read the entire prospectus carefully, including the matters discussed under the caption “Risk Factors” and the detailed information and financial statements included in this prospectus.
 
Unless otherwise indicated or the context otherwise requires, references in this prospectus to “Claire’s,” “we,” “our,” “us” and the “Company” are to Claire’s Stores, Inc. and its consolidated subsidiaries.
 
Our fiscal year ends on the Saturday closest to January 31, and we refer to the fiscal year by the calendar year in which it began. Thus, for example, we refer to the fiscal year ended January 29, 2011 as our “Fiscal 2010.”
 
The Company
 
We are one of the world’s leading specialty retailers of fashionable accessories and jewelry at affordable prices for young women, teens, tweens, and girls ages 3 to 27. We are organized based on our geographic markets, which include our North American division and our European division. As of April 30, 2011, we operated a total of 3,000 stores, of which 1,960 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American division) and 1,040 stores were located in the United Kingdom, France, Switzerland, Spain, Ireland, Austria, Germany, Netherlands, Portugal, Belgium, Poland, Czech Republic and Hungary (our European division). We operate our stores under two brand names: Claire’s®, on a global basis, and Icing®, in North America.
 
As of April 30, 2011, we also franchised or licensed 391 stores in Japan, the Middle East, Turkey, Russia, Greece, South Africa, Guatemala, Malta and Ukraine. 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 Consolidated Statements of Operations and Comprehensive Income (Loss). The franchise fees we charge under the franchising agreements are reported in “Other expense (income), net” in our Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Until September 2, 2010, we operated stores in Japan through our former Claire’s Nippon 50:50 joint venture with Aeon Co., Ltd. We accounted for the results of operations of Claire’s Nippon under the equity method and included the results within “Other expense (income), net” in our Consolidated Statements of Operations and Comprehensive Income (Loss). Beginning September 2, 2010, these stores began to operate as licensed stores. Our primary brand in North America and exclusively in Europe is Claire’s. Our Claire’s customers are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6), or referred to as our Young, Younger and Youngest target customer groups.
 
Our second brand in North America is Icing, which targets a single edit point customer represented by a 23 year old young woman just graduating from college and entering the work force who dresses consistent with the current fashion influences. We believe this niche strategy enables us to create a well defined merchandise point of view and attract a broad group of customers from 19 to 27 years of age.
 
We believe that we are the leading accessories and jewelry destination for our target customers, which is embodied in our mission statement — to be a fashion authority and fun destination offering a compelling, focused assortment of value-priced accessories, jewelry and other emerging fashion categories targeted to the lifestyles of kids, tweens, teens and young women. In addition to age segmentation, we use multiple lifestyle aesthetics to further differentiate our merchandise assortments for our Young and Younger target customer groups.


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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:
 
  •  Accessories — includes fashion accessories for year-round use, including legwear, headwear, attitude glasses, scarves, armwear and belts, and seasonal use, including sunglasses, hats, fall footwear, sandals, scarves, gloves, boots, slippers and earmuffs; and other accessories, including hairgoods, handbags, and small leather goods, as well as cosmetics
 
  •  Jewelry — includes earrings, necklaces, bracelets, body jewelry and rings, as well as ear piercing
 
In North America, our stores are located primarily in shopping malls. The differentiation of our Claire’s and Icing brands allows us to operate multiple store locations within a single mall. In Europe our stores are located primarily on high streets, in shopping malls and in high traffic urban areas.
 
Our Competitive Strengths
 
Strong Claire’s Name Brand Recognition Across the Globe.  A Claire’s store is located in approximately 90% of all major U.S. shopping malls and in 32 countries outside of the U.S., including stores that we franchise or license. This global presence provides us with strong brand recognition of the Claire’s brand within our target customer base. The focus of our website is to showcase the merchandise, provide a platform for the brand and to create an interactive environment for our target customer groups in order to build greater awareness and increase customer engagement. Claire’s brand name is also featured in editorial coverage, press clips in relevant fashion periodicals, and on the internet, reinforcing our message to our target customers.
 
Diversification Across Geographies and Merchandise Categories.  As of April 30, 2011, we operated a total of 3,000 stores, of which 1,960 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American division). As of April 30, 2011, we also operated 1,040 stores located in the United Kingdom, France, Switzerland, Spain, Ireland, Austria, Germany, Netherlands, Portugal, Belgium, Poland, Czech Republic and Hungary (our European division), 391 stores in 18 countries outside of Europe and North America through franchise or license arrangements.
 
During the three months ended April 30, 2011, Fiscal 2010 and Fiscal 2009, we generated approximately 65%, 64% and 63%, respectively, of our net sales from the North American division with the balance being delivered by our European division. Our net sales are not dependent on any one category, product or style and are diversified across approximately 8,000 ongoing stock-keeping units (SKUs) in our stores. This multi-classification approach allows us to capitalize on many fashion trends, ideas and merchandise concepts, while not being dependent on any one of them.
 
Cost-Efficient Global Sourcing Capabilities.  Our merchandising strategy is supported by efficient, low-cost global sourcing capabilities diversified across approximately 700 suppliers located primarily outside the United States. Our contracts with vendors are short-term in nature and do not require a significant lead time. A significant portion of our product offering is developed by our product development team as well as our vertically-integrated global buying and sourcing group based in Hong Kong, enabling us to buy and source merchandise rapidly and cost effectively. Approximately 90% of our merchandise offering is proprietary.
 
Improved Cost Structure and Streamlined Operations.  Our cost conscious culture serves as the basis for the improvements we have made to the cost structure since the acquisition. Through our Cost Savings Initiative (“CSI”), which we began in late fiscal 2008 and completed in fiscal 2009, we were able to achieve $60 million of annual cost reductions. CSI primarily focused on implementing a new field management structure and global store labor planning model while improving our centralization and simplifying processes across functions. In addition to CSI, we have successfully renegotiated over 700 leases and closed over 200 underperforming stores which enhanced the profitability of our store portfolio. We also completed our Pan-European Transformation project in 2008 and it is the underpinning for the way we operate across Europe. We consolidated three regional distribution centers into a single European distribution center co-located with a centralized Buying and Planning office for Europe.


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Substantial Free Cash Flow Generation.  We generate substantial free cash flow, which we believe is driven by our strong gross margins, efficient operating structure, low annual maintenance capital expenditures and flexible growth capital expenditure initiatives. Our minimal working capital requirements result from high merchandise margins, low unit cost of our merchandise and the limited seasonality of our business. Over the past three fiscal years, no single quarter represented less than 22% or more than 31% of annual net sales for the respective year.
 
Strong and Experienced Senior Management Team.  We have a strong and experienced senior management team with extensive retail experience. Gene Kahn, our Chief Executive Officer (“CEO”), has over 36 years of experience in the retail industry, including positions of Chairman, CEO and President of The May Department Stores. Jim Conroy, our Corporate President, collaborates with the CEO to oversee the Global business and has direct responsibility for Global Merchandise and the International Division. Mr. Conroy has over 19 years of retail experience, including positions as a management consultant and retail executive. Jay Friedman, President of our North American Division, has over 25 years of experience in operating and managing major divisions of several large-scale, multi-unit retail and apparel businesses, including, most recently, Jones Apparel Group, and, previously Etienne Aigner, Foot Locker, Dayton Hudson Corporation, May Company and Macy’s. J. Per Brodin, our Executive Vice President and Chief Financial Officer, has over 20 years of financial accounting and management experience within and outside of the retail industry. Mr. Brodin has responsibility for Finance and Information Technology. In addition, we have added 16 seasoned executives to key roles since the Merger (as defined below).
 
Business Strategy
 
Our business strategy is built on two key components:
 
Drive organic growth through our merchandise, stores, and customer offense.  In order to maximize our organic growth potential, drive same store sales improvement and sustain margins, our efforts are focused on three foundational areas of the business:
 
  •  Merchandise:  We continue to enhance the fashion-orientation and quality of our product offering to deliver a unique, proprietary assortment that is highly relevant to our target customers, particularly the Claire’s Young (teenage) customer. We continue to focus on our multi-classification Accessories assortment, while maintaining our market leadership position in Jewelry, to capitalize on the evolving largest market opportunities. We are enabling these improvements through investments in fashion and trend forecasting, global product design and development, and in the enhancement of our Hong Kong-based sourcing capabilities to leverage our global purchasing economy of scale. Simultaneously, we are identifying product source alternatives.
 
  •  Stores:  In our almost 3,400 stores worldwide, our objective is to provide a consistent, engaging, and brand-right customer experience. We are continually improving our in-store presentation of merchandise and marketing collateral through a rigorous planning and communication process, resulting in improved execution and increased consistency across the chain and, ultimately, a superior shopping experience. We are also commencing efforts to heighten the selling orientation of our store teams specific to each brand and country.
 
  •  Customer:  In the past year, we have made significant strides to build deeper customer relationships and support our brands. We launched a new, innovative claires.com website that uses customer-generated content, conveys a real-life interaction with our customers, and presents an authoritative fashion position. We further drive brand awareness and relevance with our ongoing social media, email, and text campaigns, which leverage our Facebook fan base and proprietary customer database. Lastly, in parallel with our digital efforts, we have significantly upgraded our in-store marketing collateral in order to present a much more fashionable brand image that appeals to our target customers.


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Increase our global reach through new store expansion (owned and franchise) and new distribution channels.  We believe significant opportunities exist to grow our distribution worldwide. Our Claire’s concept has proven to be portable across diverse geographies and approximately 95% of our stores worldwide are cash flow positive. In addition, the moderate up-front investment requirements per store enable us to achieve an attractive return on investment.
 
We will extend our global reach in four primary ways:
 
  •  Build New Company-owned Claire’s Stores:  We opened 82 new stores in 2010; 69 in Europe and 13 in North America. In addition, we have plans to open approximately 140 new stores in 2011, the majority of which will be in Europe.
 
  •  Build New Company-owned Icing Stores:  As we refine the Icing brand concept, we believe there is significant opportunity to increase the store penetration in North America, as well as to roll out the concept on a global basis to markets where we can leverage the existing Claire’s infrastructure.
 
  •  Open New International Markets with Franchise Partners:  Building on our refined franchising model, which is present in multiple geographies worldwide, we will pursue high potential “white space” opportunities in new markets globally. In 2011, we intend to enter Mexico, India and possibly Australia. We are currently studying our brand entrance strategy for China and Southeast Asia for the ensuing years.
 
  •  Add Alternative Distribution Channels:  We will seek new opportunities globally to market and distribute our brands, beginning with the launch of E-Commerce in the Claire’s North America Division which is targeted to debut in mid-2011.
 
This business strategy will allow us to maximize our sales opportunities, while driving our earnings with commensurate flow through and cash flow.
 
Acquisition of the Company by Apollo Management VI, L.P. in 2007
 
In May 2007, we were acquired by Apollo Management VI, L.P., together with certain affiliated co-investment partnerships (the “Sponsors”), through a merger (the “Merger”) and Claire’s Stores, Inc. became a wholly-owned subsidiary of Claire’s Inc.
 
The Merger was financed by the issuance of $250.0 million of 9.25% senior notes due 2015 (the “Senior Fixed Rate Notes”), $350.0 million of 9.625%/10.375% senior toggle notes due 2015 (the “Senior Toggle Notes” and together with the Senior Fixed Rate Notes, the “Senior Notes”), and $335.0 million of 10.50% senior subordinated notes due 2017 (the “Senior Subordinated Notes” and together with the Senior Notes, the “Existing Notes”).
 
As a result of the Merger there was a significant change in our capital structure, including:
 
  •  the closing of the offering of the Existing Notes;
 
  •  the closing of our $1.65 billion senior secured credit facility (the “Credit Facility”); and
 
  •  the equity investment of approximately $595.7 million by Apollo Management VI, L.P. on behalf of certain affiliated co-investment partnerships.
 
We refer to aforementioned transactions, including the Merger and our payment of any costs related to these transactions, collectively herein as the “Transactions.” In connection with the Transactions, we incurred significant indebtedness and became highly leveraged.
 
Apollo Management, L.P., an affiliate of the Sponsors, was founded in 1990 and is a leading global alternative asset manager with offices in New York, Los Angeles, London, Frankfurt, Luxembourg, Singapore, Hong Kong and Mumbai. As of March 31, 2011, Apollo (as defined below) had assets under management of approximately $70.0 billion in its private equity, capital markets and real estate businesses.


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Apollo and its affiliates have extensive experience investing in retail-oriented companies. Apollo’s current retail portfolio includes an investment in CKE Restaurants and Smart & Final. Apollo’s past successful retail investments include General Nutrition Centers, Zale Corporation, AMC Entertainment, Rent-A-Center, Dominick’s Supermarkets, Ralphs Grocery Company and Proffitt’s Department Stores.
 
Corporate Information
 
Claire’s Stores, Inc. was incorporated on October 25, 1961 as a Delaware corporation. On June 30, 2000, we completed our reincorporation from the State of Delaware to the State of Florida through a merger transaction with one of our wholly owned subsidiaries.
 
Our principal executive offices are located at 2400 West Central Road, Hoffman Estates, Illinois 60192. Our telephone number at that address is (847) 765-1100 and our corporate website is www.clairestores.com. Our website and the information contained on our website are not part of this prospectus.
 
Certain of the titles and logos referenced in this prospectus are our trademarks and service marks. All other trademarks, service marks and trade names referred to in this prospectus are the property of their respective owners.


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Summary of the Terms of the Exchange Offer
 
The following summary contains basic information about the exchange offer. It does not contain all the information that may be important to you. For a more complete description of the exchange offer, you should read “The Exchange Offer” section of this prospectus.
 
Exchange Notes $450.0 million aggregate principal amount of 8.875% Senior Secured Second Lien Notes due 2019. The terms of the exchange notes are substantially identical to those of the old notes, except that the transfer restrictions and registration rights relating to the old notes will not apply to the exchange notes, and the exchange notes will not provide for the payment of additional interest in the event of a registration default. In addition, the exchange notes bear a different CUSIP number than the old notes.
 
Old Notes $450.0 million aggregate principal amount of 8.875% Senior Secured Second Lien Notes due 2019, which were issued in a private placement on March 4, 2011.
 
The Exchange Offer In the exchange offer, we will exchange old 8.875% Senior Secured Second Lien Notes due 2019 for registered 8.875% Senior Secured Second Lien Notes due 2019.
 
We will accept any and all old notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on August 16, 2011. Holders may tender some or all of their old notes pursuant to the exchange offer. However, old notes may be tendered only in denominations of $2,000 and integral multiples of $1,000.
 
In order to be exchanged, an outstanding old note must be properly tendered and accepted. All old notes that are validly tendered and not withdrawn will be exchanged. As of the date of this prospectus, there are $450.0 million aggregate principal amount of 8.875% Senior Secured Second Lien Notes due 2019 outstanding. We will issue exchange notes promptly after the expiration of the exchange offer. See “The Exchange Offer — Terms of the Exchange Offer.”
 
Registration Rights Agreement In connection with the private placement of the old notes, we entered into a registration rights agreement with Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Goldman, Sachs & Co. and Morgan Joseph TriArtisan LLC, as initial purchasers. Under the registration rights agreement, if eligible, you are entitled to exchange your old notes for exchange notes with substantially identical terms. This exchange offer is intended to satisfy these rights. After the exchange offer is complete, except as set forth in the next paragraph, you will no longer be entitled to any exchange or registration rights with respect to your old notes.
 
The registration rights agreement requires us to file a registration statement for a continuous offering in accordance with Rule 415 under the Securities Act for your benefit if you would not receive freely tradable exchange notes in the exchange offer or you are ineligible to participate in the exchange offer, provided that you indicate that you wish to have your old notes registered under the Securities Act.
 
Resales of the Exchange Notes We believe that the exchange notes issued in the exchange offer may be offered for resale, resold or otherwise transferred by you


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without compliance with the registration and prospectus delivery requirements of the Securities Act as long as:
 
(1) you are acquiring the exchange notes in the ordinary course of your business;
 
(2) you are not engaging in and do not intend to engage in a distribution of the exchange notes;
 
(3) you do not have an arrangement or understanding with any person or entity to participate in the distribution of the exchange notes; and
 
(4) you are not our “affiliate” as that term is defined in Rule 405 under the Securities Act.
 
Our belief is based on interpretations by the staff of the SEC, as set forth in no-action letters issued to third parties unrelated to us. We have not asked the staff for a no-action letter in connection with this exchange offer, however, and we cannot assure you that the staff would make a similar determination with respect to the exchange offer.
 
If you are an affiliate of ours, or are engaging in or intend to engage in or have any arrangement or understanding with any person to participate in the distribution of the exchange notes:
 
• you cannot rely on the applicable interpretations of the staff of the SEC;
 
• you will not be entitled to participate in the exchange offer; and
 
• you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.
 
Each broker-dealer that receives exchange notes for its own account in the exchange offer for old notes that were acquired as a result of market-making or other trading activities must acknowledge that it will comply with the prospectus delivery requirements of the Securities Act in connection with any offer to resell or other transfer of the exchange notes issued in the exchange offer.
 
Furthermore, any broker-dealer that acquired any of its old notes directly from us, in the absence of an exemption therefrom,
 
• may not rely on the applicable interpretation of the staff of the SEC’s position contained in Exxon Capital Holdings Corp., SEC no-action letter (April 13, 1988), Morgan, Stanley & Co. Inc., SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1993); and
 
• must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes.
 
See “Plan of Distribution.”
 
Expiration Date The exchange offer will expire at 5:00 p.m., New York City time, on August 16, 2011, unless we decide to extend the exchange offer. We do not intend to extend the exchange offer, although we reserve the right to do so.


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Conditions to the Exchange Offer The exchange offer is subject to customary conditions, including that it not violate any applicable law or any applicable interpretation of the staff of the SEC. The exchange offer is not conditioned upon any minimum principal amount of private notes being tendered for exchange. See “The Exchange Offer — Conditions.”
 
Procedures for Tendering Old Notes The old notes were issued as global securities in fully registered form without coupons. Beneficial interests in the old notes that are held by direct or indirect participants in The Depository Trust Company (“DTC”) through certificateless depositary interests are shown on, and transfers of the old notes can be made only through, records maintained in book-entry form by DTC with respect to its participants.
 
If you wish to exchange your old notes for exchange notes pursuant to the exchange offer, you must transmit to The Bank of New York Mellon Trust Company, N.A., as exchange agent, on or prior to the expiration of the exchange offer, either:
 
• a computer-generated message transmitted through DTC’s Automated Tender Offer Program system (“ATOP”) and received by the exchange agent and forming a part of a confirmation of book-entry transfer in which you acknowledge and agree to be bound by the terms of the letter of transmittal; or
 
• a properly completed and duly executed letter of transmittal, which accompanies this prospectus, or a facsimile of the letter of transmittal, together with your old notes and any other required documentation, to the exchange agent at its address listed in this prospectus and on the front cover of the letter of transmittal.
 
If you cannot satisfy either of these procedures on a timely basis, then you should comply with the guaranteed delivery procedures described below.
 
By delivering a computer-generated message through DTC’s ATOP system, you will represent to us, as set forth in the letter of transmittal, among other things, that:
 
• you are acquiring the exchange notes in the exchange offer in the ordinary course of your business;
 
• you are not engaging in and do not intend to engage in a distribution of the exchange notes;
 
• you do not have an arrangement or understanding with any person or entity to participate in the distribution of the exchange notes; and
 
• you are not our affiliate.
 
Special Procedures for Beneficial Owners
If you are the beneficial owner of old notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender your old notes in the exchange offer, you should promptly contact the person in whose name your old notes are registered and instruct that person to tender on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your notes, either make appropriate arrangements to


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register ownership of the old notes in your name or obtain a properly completed bond power from the person in whose name your old notes are registered. The transfer of registered ownership may take considerable time. See “The Exchange Offer — Procedures for Tendering.”
 
Guaranteed Delivery Procedures If you wish to tender your old notes and time will not permit the documents required by the letter of transmittal to reach the exchange agent before the expiration date for the exchange offer, or the procedure for book-entry transfer cannot be completed on a timely basis, you must tender your old notes according to the guaranteed delivery procedures described in this prospectus under the heading “The Exchange Offer — Guaranteed Delivery Procedures.”
 
Acceptance of Old Notes and Delivery of Exchange Notes
Except under the circumstances summarized above under “Conditions to the Exchange Offer,” we will accept for exchange any and all old notes that are properly tendered in the exchange offer prior to 5:00 p.m., New York City time, on the expiration date for the exchange offer. The exchange notes to be issued to you in an exchange offer will be delivered promptly following the expiration of the exchange offer. See “The Exchange Offer — Terms of the Exchange Offer.”
 
Withdrawal Rights You may withdraw any tender of your old notes at any time prior to 5:00 p.m., New York City time, on the expiration date of the exchange offer. We will return to you any old notes not accepted for exchange for any reason without expense to you as promptly as we can after the expiration or termination of the exchange offer. See “The Exchange Offer — Withdrawal Rights.”
 
Exchange Agent The Bank of New York Mellon Trust Company, N.A., the trustee under the indenture governing the notes, is serving as the exchange agent in connection with the exchange offer.
 
Consequences of Failure to Exchange If you do not participate or properly tender your old notes in the exchange offer:
 
• you will retain old notes that are not registered under the Securities Act and that will continue to be subject to restrictions on transfer that are described in the legend on the old notes;
 
• you will not be able, except in very limited instances, to require us to register your old notes under the Securities Act;
 
• you will not be able to offer to resell or transfer your old notes unless they are registered under the Securities Act or unless you offer to resell or transfer them pursuant to an exemption under the Securities Act; and
 
• the trading market for your old notes will become more limited to the extent that other holders of old notes participate in the exchange offer.
 
Certain United Stated Federal Income Tax Considerations
Your exchange of old notes for exchange notes in the exchange offer will not result in any gain or loss to you for U.S. federal income tax purposes. See “Certain United States Federal Income Tax Considerations.”


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Summary of the Terms of the Exchange Notes
 
The summary below describes the principal terms of the exchange notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The “Description of Exchange Notes” section of this prospectus contains a more detailed description of the terms and conditions of the exchange notes.
 
Issuer and Guarantors Claire’s Stores, Inc. is the obligor of the exchange notes, which are guaranteed by the guarantors as described under “Description of Exchange Notes — Guarantees.”
 
Notes Offered $450.0 million aggregate principal amount of 8.875% Senior Secured Second Lien Notes due 2019.
 
Maturity Date The exchange notes will mature on March 15, 2019.
 
Interest March 15 and September 15 of each year, beginning September 15, 2011. Interest began to accrue on March 4, 2011.
 
Guarantees The exchange notes are jointly and severally and fully and unconditionally guaranteed on a second-priority senior secured basis by all of our existing and future direct or indirect wholly-owned domestic subsidiaries that guarantee our Credit Facility or that incur or guarantee certain other indebtedness.
 
Ranking The exchange notes are our senior secured obligations and:
 
• rank equally in right of payment with all of our existing and future senior indebtedness;
 
• are effectively senior to our unsecured senior indebtedness to the extent of the value of the assets securing the notes;
 
• rank senior to any of our future senior subordinated indebtedness and subordinated indebtedness; and
 
• are effectively subordinated to our secured indebtedness that is secured by a prior lien on the collateral for the notes, including the obligations under our Credit Facility.
 
The guarantees by our subsidiaries are their senior secured obligations and:
 
• rank equally in right of payment with all of the existing and future senior indebtedness of such subsidiaries;
 
• are effectively senior to the unsecured senior indebtedness of such subsidiaries to the extent of the value of the assets securing the guarantees;
 
• rank senior to any of the future senior subordinated indebtedness and subordinated indebtedness of such subsidiaries; and
 
• are effectively subordinated to the secured indebtedness of such subsidiaries that is secured by a prior lien on the collateral for the guarantees, including the obligations under our Credit Facility.
 
In addition, the exchange notes and the related guarantees are effectively subordinated to all of the liabilities of our subsidiaries that do not guarantee the exchange notes. As of April 30, 2011,


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our non-guarantor subsidiaries had total liabilities of approximately $261.3 million.
 
As of April 30, 2011, we had outstanding on a consolidated basis:
 
• $1,684.4 million of senior secured indebtedness;
 
• $580.9 million of unsecured senior indebtedness; and
 
• $259.6 million of unsecured senior subordinated indebtedness.
 
Security The exchange notes and the related guarantees are secured by a second-priority lien on substantially all of the assets that secure our and our subsidiary guarantors’ obligations under our Credit Facility, subject to certain exceptions and permitted liens. See “Description of Exchange Notes — Security.”
 
The value of collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. The liens on the collateral may be released without the consent of the holders of the exchange notes if collateral is disposed of in a transaction that complies with the indenture governing the exchange notes and the related security documents or in accordance with the provisions of the intercreditor agreement entered into relating to the collateral securing the notes and our Credit Facility. See “Risk Factors — Risks Relating to the Exchange Notes — It may be difficult to realize the value of the collateral securing the exchange notes,” “Description of Exchange Notes — Security” and “Description of Exchange Notes — Security — Security Documents and Intercreditor Agreement.”
 
Intercreditor Agreement The trustee and collateral agent for the exchange notes and the collateral agent under our Credit Facility entered into an intercreditor agreement regarding the relative priorities of their respective security interests in the assets securing the exchange notes and related guarantees and borrowings under the Credit Facility and certain other matters relating to the administration of security interests. See “Description of Exchange Notes — Security — Security Documents and Intercreditor Agreement.”
 
Optional Redemption We may redeem some or all of the exchange notes at any time on or after March 15, 2015 at a redemption price set forth under “Description of Exchange Notes — Optional Redemption.” On or prior to March 15, 2014, we may redeem up to 35% of the exchange notes with the proceeds of certain sales of our equity or contributions to our equity, at the prices set forth under “Description of Exchange Notes — Optional Redemption.” On or prior to March 15, 2015, we may, at our option redeem some or all of the exchange notes at the “make whole” prices set forth under “Description of Exchange Notes — Optional Redemption.”
 
Change of Control If a change of control occurs, we must give holders of the exchange notes an opportunity to sell to us their exchange notes at a purchase price of 101% of the principal amount of such exchange notes, plus accrued and unpaid interest and additional interest, if any, to the date of purchase. See “Description of Exchange Notes — Certain Definitions — Change of Control.”


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Certain Covenants The indenture governing the exchange notes contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries (as described in “Description of Exchange Notes”) to:
 
• incur or guarantee additional indebtedness;
 
• create or incur certain liens;
 
• pay dividends or other restricted payments;
 
• incur restrictions on the payment of dividends or other distributions from our restricted subsidiaries;
 
• make certain investments;
 
• transfer or sell assets;
 
• engage in transactions with affiliates; or
 
• merge or consolidate with other companies or transfer all or substantially all of our assets.
 
These covenants are subject to a number of important limitations and exceptions described under “Description of Exchange Notes — Certain Covenants.”
 
If the notes are assigned investment grade ratings by both Moody’s and Standard & Poor’s and no default or event of default has occurred and is continuing, certain covenants will be suspended. See “Description of Exchange Notes — Certain Covenants.”
 
Risk Factors You should carefully consider all of the information contained in this prospectus and, in particular, you should evaluate the specific factors under “Risk Factors.”


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Summary Historical Consolidated Financial Information
 
The following table sets forth our summary historical consolidated financial and operating data.
 
The summary historical consolidated financial and operating data for Fiscal 2010, Fiscal 2009 and Fiscal 2008, and the summary historical balance sheet data as of the end of Fiscal 2010 and Fiscal 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.
 
The unaudited summary historical consolidated financial and operating data for the three months ended April 30, 2011 and May 1, 2010, and the summary historical balance sheet data as of April 30, 2011 and May 1, 2010 have been derived from our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus, and have been prepared on a basis consistent with our annual audited consolidated financial statements. In the opinion of management, such unaudited financial data reflects all adjustments necessary for a fair presentation of the results for such periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.
 
Our historical results included below are not necessarily indicative of our future performance. This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus.
 
                                         
                Fiscal Year
    Fiscal Year
    Fiscal Year
 
    Three Months Ended     Ended
    Ended
    Ended
 
    April 30,
    May 1,
    January 29,
    January 30,
    January 31.
 
    2011     2010     2011(1)     2010(1)     2009(1)  
    (In thousands, except for ratios and store data)  
 
Statement of Operations Data:
                                       
Net sales
  $ 346,446     $ 322,077     $ 1,426,397     $ 1,342,389     $ 1,412,960  
Cost of sales, occupancy and buying expenses
    171,359       158,751       685,111       663,269       724,832  
                                         
Gross profit
    175,087       163,326       741,286       679,120       688,128  
Other expenses:
                                       
Selling, general and administrative
    126,722       118,019       498,212       465,706       513,752  
Depreciation and amortization
    17,054       16,366       65,198       71,471       85,093  
Impairment of assets
                12,262       3,142       498,490  
Severance and transaction-related costs
    343       102       741       921       15,928  
Other expense (income), net
    5,311       1,230       411       (4,234 )     (4,499 )
                                         
      149,430       135,717       576,824       537,006       1,108,764  
                                         
Operating income (loss)
    25,657       27,609       164,462       142,114       (420,636 )
Gain on early debt extinguishment
    249       4,487       13,388       36,412        
Impairment of equity investment
                6,030             25,500  
Interest expense (income), net
    46,235       42,763       157,706       177,418       195,947  
                                         
Income (loss) from continuing operations before income taxes
    (20,329 )     (10,667 )     14,114       1,108       (642,083 )
Income tax expense (benefit)
    (732 )     1,633       9,791       11,510       1,509  
                                         
Income (loss) from continuing operations
  $ (19,597 )   $ (12,300 )   $ 4,323     $ (10,402 )   $ (643,592 )
                                         
Other Financial Data:
                                       
Capital expenditures:
                                       
New stores and remodels
    14,027       6,267       39,022       16,557       36,270  
Other
    1,765       1,951       9,689       8,395       23,135  
Total capital expenditures
    15,792       8,218       48,711       24,952       59,405  
Cash interest expense(2)
    18,912       17,838       108,923       126,733       168,567  


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                Fiscal Year
    Fiscal Year
    Fiscal Year
 
    Three Months Ended     Ended
    Ended
    Ended
 
    April 30,
    May 1,
    January 29,
    January 30,
    January 31.
 
    2011     2010     2011(1)     2010(1)     2009(1)  
    (In thousands, except for ratios and store data)  
 
Store Data:
                                       
Number of stores (at period end) North America
    1,960       1,990       1,972       1,993       2,026  
Europe
    1,040       965       1,009       955       943  
Total number of stores (at period end)
    3,000       2,955       2,981       2,948       2,969  
Total gross square footage (000’s) (at period end)
    3,018       2,987       3,012       2,982       3,011  
Net sales per store (000’s)(3)
    487       463       481       454       461  
Net sales per square foot(4)
    483       457       476       448       453  
Balance Sheet Data (at period end)
                                       
Cash and cash equivalents and restricted cash(5)
    246,134       220,011       279,766       198,708       204,574  
Total assets
    2,861,712       2,828,167       2,866,449       2,834,105       2,881,095  
Total debt
    2,524,865       2,523,745       2,524,286       2,521,878       2,581,772  
Total stockholders’ equity (deficit)
    (26,708 )     (48,244 )     (26,515 )     (34,642 )     (55,843 )
 
 
(1) Fiscal 2010, Fiscal 2009 and Fiscal 2008 were each fifty-two week periods.
 
(2) Cash interest expense does not include amortization of debt issuance costs or interest expense paid in kind.
 
(3) Net sales per store are calculated based on trailing twelve months net sales and the average number of stores during the period.
 
(4) Net sales per square foot are calculated based on trailing twelve months net sales and the average gross square feet during the period.
 
(5) At April 30, 2011 and January 29, 2011, included restricted cash of $26.0 million and $23.9 million, respectively.

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RISK FACTORS
 
You should carefully consider the risks described below as well as the other information contained in this prospectus before tendering your old notes in the exchange offer. These risks could have a material adverse effect on our business, financial position or results of operations. The following risk factors may not include all of the important factors that could affect our business or our industry or that could cause our future financial results to differ materially from historic or expected results. If any of the following risks occur, you could lose all or part of your investment in, and the expected return on, the notes.
 
Risks Relating to Economic Conditions
 
Economic conditions may adversely impact demand for our merchandise, reduce access to credit and cause our customers and others with whom we do business to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition and cash flows.
 
Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. Some of the factors impacting discretionary consumer spending include general economic conditions, wages and employment, consumer debt, the availability of customer credit, currency exchange rates, taxation, fuel and energy prices, interest rates, consumer confidence and other macroeconomic factors. Downturns in the economy typically affect consumer purchases of merchandise and could adversely impact our results of operations and continued growth.
 
The distress in the financial markets experienced in the last several years resulted in volatility in security prices and has had a negative impact on credit availability, and there can be no assurance that our liquidity will not be affected by future changes in the financial markets and the global economy or that our capital resources will at all times be sufficient to satisfy our liquidity needs. Distress in the financial markets also had a negative impact on businesses around the world, and the future impact to our suppliers cannot be predicted. The inability of our suppliers to access liquidity or trade credit could lead to delays or failures in delivery of merchandise to us.
 
We have significant amounts of cash and cash equivalents at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions, we cannot be assured that we will not experience losses on our deposits.
 
Risks Relating to Our Company
 
Fluctuations in consumer preference may adversely affect the demand for our products and result in a decline in our sales.
 
Our retail fashion accessories and jewelry business fluctuates according to changes in consumer preferences. If we are unable to anticipate, identify or react to changing styles or trends, our sales may decline, and we may be faced with excess inventories. If this occurs, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow moving inventory, which could have a material adverse effect on our results of operations and adversely affect our gross margins. In addition, if we miscalculate customer tastes and our customers come to believe that we are no longer able to offer merchandise that appeals to them, our brand image may suffer.
 
Advance purchases of our merchandise make us vulnerable to changes in consumer preferences and pricing shifts and may negatively affect our results of operations.
 
Fluctuations in the demand for retail accessories and jewelry especially affect the inventory we sell because we order our merchandise in advance of the applicable season and sometimes before trends are identified or evidenced by customer purchases. In addition, the cyclical nature of the retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we and other retailers generally build up inventory levels. We must enter into contracts for the purchase and manufacture of merchandise with our suppliers in advance of the applicable selling season. As a result, we are vulnerable to


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demand and pricing shifts and it is more difficult for us to respond to new or changing customer needs. Our financial condition could be materially adversely affected if we are unable to manage inventory levels and respond to short-term shifts in client demand patterns. Inventory levels in excess of client demand may result in excessive markdowns and, therefore, lower than planned margins. If we underestimate demand for our merchandise, on the other hand, we may experience inventory shortages resulting in missed sales and lost revenues. Either of these events could negatively affect our operating results and brand image.
 
A disruption of imports from our foreign suppliers may increase our costs and reduce our supply of merchandise.
 
We do not own or operate any manufacturing facilities. We purchased merchandise from approximately 700 suppliers in Fiscal 2010. Approximately 86% of our Fiscal 2010 merchandise was purchased from suppliers outside the United States, including approximately 69% purchased from China. Any event causing a sudden disruption of imports from China or other foreign countries, including political and financial instability, would likely have a material adverse effect on our operations. We cannot predict whether any of the countries in which our products currently are manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes and customs restrictions, on merchandise that we purchase could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition and results of operations. The United States has previously imposed trade quotas on specific categories of goods and apparel imported from China, and may impose additional quotas in the future. There has been increased international pressure on China regarding revaluation of the Chinese yuan, including U.S. Federal legislation to impose tariffs on imports from China unless the Chinese government revalues the Chinese yuan.
 
Fluctuations in foreign currency exchange rates could negatively impact our results of operations.
 
Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars. As a result, our sourcing operations may be adversely affected by significant fluctuation in the value of the U.S. dollar against foreign currencies. We are also exposed to the gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of operating results and financial position of our foreign subsidiaries. We purchased approximately 69% of our merchandise from China in Fiscal 2010. During Fiscal 2010, the Chinese yuan strengthened against the U.S. dollar, and this trend may continue in Fiscal 2011. An increase in the Chinese yuan against the dollar means that we will have to pay more in U.S. dollars for our purchases from China. 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 operating results.
 
Our business depends on the willingness of vendors and service providers to supply us with goods and services pursuant to customary credit arrangements which may not be available to us in the future.
 
Like most companies in the retail sector, we purchase goods and services from trade creditors pursuant to customary credit arrangements. If we are unable to maintain or obtain trade credit from vendors and service providers on terms favorable to us, or at all, or if vendors and service providers are unable to obtain trade credit or factor their receivables, then we may not be able to execute our business plan, develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse affect on our business. In addition, the tightening of trade credit could limit our available liquidity.
 
The failure to grow our store base in Europe or expand our international franchising may adversely affect our business.
 
Our growth plans include expanding our store base in Europe. Our ability to grow successfully outside of North America depends in part on determining a sustainable formula to build customer loyalty and gain


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market share in certain especially challenging international retail environments. Additionally, the integration of our operations in foreign countries presents certain challenges not necessarily presented in the integration of our North American operations.
 
We plan to expand into new countries through organic growth and by entering into franchising and licensing agreements with unaffiliated third parties who are familiar with the local retail environment and have sufficient retail experience to operate stores in accordance with our business model, which requires strict adherence to the guidelines established by us in our franchising agreements. Failure to identify appropriate franchisees or negotiate acceptable terms in our franchising and licensing agreements that meet our financial targets would adversely affect our international expansion goals, and could have a material adverse effect on our operating results and impede our strategy of increasing our net sales through expansion.
 
Our cost of doing business could increase as a result of changes in federal, state, local and international regulations regarding the content of our merchandise.
 
The Consumer Product Safety Improvement Act of 2008 (“CPSIA”), in general, bans the sale of children’s products containing lead in excess of certain maximum standards, and imposes other restrictions and requirements on the sale of children’s products, including importing, testing and labeling requirements. Accordingly, merchandise covered by the CPSIA that is sold to our Younger and Youngest customers is subject to the CPSIA. In addition, various states, from time to time, propose or enact legislation regarding heavy metals or chemicals in products that differ from federal laws. We are also subject to various other health and safety rules and regulations, such as the Federal Food Drug and Cosmetic Act and the Federal Hazardous Substance Act. Our inability to comply with these regulatory requirements, or other existing or newly adopted regulatory requirements, could increase our cost of doing business or result in significant fines or penalties that could have a material adverse effect on our business, results of operations, financial condition and cash flows.
 
In addition to regulations governing the sale of our merchandise in the United States and Canada, we are also subject to regulations governing the sale of our merchandise in our European stores. The European Union “REACH” legislation requires identification and disclosure of chemicals in consumer products, including chemicals that might be in the merchandise that we sell. Over time, this regulation, among other items, may require us to substitute certain chemicals contained in our products with substances the EU considers safer. Our failure to comply with this European Union legislation could result in significant fines or penalties and increase our cost of doing business.
 
Recalls, product liability claims, and government, customer or consumer concerns about product safety could harm our reputation, increase costs or reduce sales.
 
We are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities, and our products could be subject to involuntary recalls and other actions by these authorities. Concerns about product safety, including but not limited to concerns about the safety of products manufactured in China (where most of our products are manufactured), could lead us to recall selected products. Recalls and government, customer or consumer concerns about product safety could harm our reputation, increase costs or reduce sales, any of which could have a material adverse effect on our financial results.
 
If we are unable to renew or replace our store leases or enter into leases for new stores on favorable terms, or if any of our current leases are terminated prior to the expiration of their stated term and we cannot find suitable alternate locations, our growth and profitability could be adversely harmed.
 
All of our stores are leased. Our ability to renew any expired lease or, if such lease cannot be renewed, our ability to lease a suitable alternate location, and our ability to enter into leases for new stores on favorable terms will depend on many factors which are not within our control, such as conditions in the local real estate market, competition for desirable properties, our relationships with current and prospective landlords, and negotiating acceptable lease terms that meet our financial targets. Our ability to operate stores on a profitable


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basis depends on various factors, including whether we have to take additional merchandise markdowns due to excessive inventory levels compared to sales trends, whether we can reduce the number of under-performing stores which have a higher level of fixed costs in comparison to net sales, and our ability to maintain a proportion of new stores to mature stores that does not harm existing sales. If we are unable to renew existing leases or lease suitable alternate locations, enter into leases for new stores on favorable terms, or increase our same store sales, our growth and our profitability could be adversely affected.
 
Natural disasters or unusually adverse weather conditions or potential emergence of disease or pandemic could adversely affect our net sales or supply of inventory.
 
Unusually adverse weather conditions, natural disasters, potential emergence of disease or pandemic or similar disruptions, especially during peak holiday selling seasons, but also at other times, could significantly reduce our net sales. In addition, these disruptions could also adversely affect our supply chain efficiency and make it more difficult for us to obtain sufficient quantities of merchandise from suppliers, which could have a material adverse effect on our financial position, earnings, and cash flow.
 
Information technology systems changes may disrupt our supply of merchandise.
 
Our success depends, in large part, on our ability to source and distribute merchandise efficiently. We continue to evaluate and leverage the best of both our North American and European information systems to support our product supply chain, including merchandise planning and allocation, inventory and price management. We also continue to evaluate and implement modifications and upgrades to our information technology systems. Modifications involve replacing legacy systems with successor systems or making changes to the legacy systems and our ability to maintain effective internal controls. We are also modifying our information systems to allow for e-commerce sales in Fiscal 2011. We are aware of inherent risks associated with replacing and changing these core systems, including accurately capturing data, and possibly encountering supply chain disruptions. There can be no assurances that we will successfully launch these new systems as planned or that they will occur without disruptions to our operations. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.
 
If we experience a data security breach and confidential customer information is disclosed, we may be subject to penalties and experience negative publicity, which could affect our customer relationships and have a material adverse effect on our business.
 
We and our customers could suffer harm if customer information were accessed by third parties due to a security failure in our systems. The collection of data and processing of transactions require us to receive and store a large amount of personally identifiable data. This type of data is subject to legislation and regulation in various jurisdictions. Data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislative proposals addressing data privacy and security. We may become exposed to potential liabilities with respect to the data that we collect, manage and process, and may incur legal costs if our information security policies and procedures are not effective or if we are required to defend our methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to our methods of handling personal data could adversely affect our business, results of operations, financial condition and cash flows due to the costs and negative market reaction relating to such developments.
 
Changes in the anticipated seasonal business pattern could adversely affect our sales and profits and our quarterly results may fluctuate due to a variety of factors.
 
Our business typically follows a seasonal pattern, peaking during the Christmas, Easter and back-to-school periods. Seasonal fluctuations also affect inventory levels, because we usually order merchandise in advance of peak selling periods. Our quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the time of store openings, the amount of revenue contributed by new stores, the timing


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and level of markdowns, the timing of store closings, expansions and relocations, competitive factors and general economic conditions.
 
A decline in number of people who go to shopping malls, particularly in North America, could reduce the number of our customers and reduce our net sales.
 
Substantially all of our North American stores are located in shopping malls. Our North American sales are derived, in part, from the high volume of traffic in those shopping malls. We benefit from the ability of the shopping mall’s “anchor” tenants, generally large department stores and other area attractions, to generate consumer traffic around our stores. We also benefit from the continuing popularity of shopping malls as shopping destinations for girls and young women. Sales volume and shopping mall traffic may be adversely affected by economic downturns in a particular area, competition from non-shopping mall retailers, other shopping malls where we do not have stores and the closing of anchor tenants in a particular shopping mall. In addition, a decline in the popularity of shopping malls among our target customers that may curtail customer visits to shopping malls, could result in decreased sales that would have a material adverse affect on our business, financial condition and results of operations.
 
Our industry is highly competitive.
 
The specialty retail business is highly competitive. We compete with international, national and local department stores, specialty and discount store chains, independent retail stores, e-commerce services, digital content and digital media devices, web services, direct marketing to consumers and catalog businesses that market similar lines of merchandise. Many of our competitors are companies with substantially greater financial, marketing and other resources. Given the large number of companies in the retail industry, we cannot estimate the number of our competitors. Although we are developing an e-commerce site that we intend to launch in 2011, a significant shift in customer buying patterns to purchasing fashionable accessories and jewelry at affordable prices through channels other than traditional shopping malls, such as e-commerce, could have a material adverse effect on our financial results.
 
Adoption of new or revised employment and labor laws and regulations could make it easier for our employees to obtain union representation and our business could be adversely impacted.
 
Currently, none of our employees in North America are represented by unions. However, our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union. If some or all of our workforce were to become unionized and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could increase our costs and adversely impact our profitability. Any changes in regulations, the imposition of new regulations, or the enactment of new legislation could have an adverse impact on our business, to the extent it becomes easier for workers to obtain union representation.
 
Higher health care costs and labor costs could adversely affect our business.
 
With the passage in 2010 of the U.S. Patient Protection and Affordable Care Act, we will be required to amend our health care plans to, among other things, provide affordable coverage, as defined in the Act, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the Act: cover adult children of our employees to age 26; delete lifetime limits; and delete pre-existing condition limitations. Many of these requirements, some of which have been challenged on legal grounds, will be phased in over a period of time. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care and insurance costs could have a material adverse effect on our business, financial condition and results of operations. In addition, changes in the federal or state minimum wage or living wage requirements or changes in other workplace regulations could adversely affect our ability to meet our financial targets.


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Our profitability could be adversely affected by high petroleum prices.
 
The profitability of our business depends to a certain degree upon the price of petroleum products, both as a component of the transportation costs for delivery of inventory from our vendors to our stores and as a raw material used in the production of our merchandise. We are unable to predict what the price of crude oil and the resulting petroleum products will be in the future. We may be unable to pass along to our customers the increased costs that would result from higher petroleum prices. Therefore, any such increase could have a material adverse impact on our business and profitability.
 
The possibility of war and acts of terrorism could disrupt our information or distribution systems and increase our costs of doing business.
 
A significant act of terrorism could have a material adverse impact on us by, among other things, disrupting our information or distributions systems, causing dramatic increases in fuel prices, thereby increasing the costs of doing business and affecting consumer spending, or impeding the flow of imports or domestic products to us.
 
We depend on our key personnel.
 
Our ability to anticipate and effectively respond to changing trends and consumer preferences depends in part on our ability to attract and retain key personnel in our design, merchandising, marketing and other functions. We cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. The loss of services of key members of our senior management team or of certain other key employees could also negatively affect our business. Mr. Wilson, President of our European Division, has resigned his position effective the end of November 2011. We are in the process of seeking a replacement for Mr. Wilson through an external recruitment process.
 
Litigation matters incidental to our business could be adversely determined against us.
 
We are involved from time to time in litigation incidental to our business. Management believes that the outcome of current litigation will not have a material adverse effect on our results of operations or financial condition. Depending on the actual outcome of pending litigation, charges would be recorded in the future that may have an adverse effect on our operating results.
 
Goodwill and indefinite-lived intangible assets comprise a significant portion of our total assets. We must test goodwill and indefinite-lived intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable; which could result in a material, non-cash write-down of goodwill or indefinite-lived intangible assets and could have a material adverse impact on our results of operations.
 
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. Our principal intangible assets, other than goodwill, are tradenames, franchise agreements, and leases that existed at date of acquisition with terms that were favorable to market at that date. We may be required to recognize additional impairment charges in the future. Additional impairment losses could have a material adverse impact on our results of operations and stockholders’ equity (deficit).
 
There are factors that can affect our provision for income taxes.
 
We are subject to income taxes in numerous jurisdictions, including the United States, individual states and localities, and internationally. Our provision for income taxes in the future could be adversely affected by numerous factors including, but not limited to, the mix of income and losses from our foreign and domestic operations that may be taxed at different rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact earnings in future periods. In addition, the estimates we make regarding domestic and foreign taxes are based on tax positions that we believe are supportable, but could potentially be subject to successful challenge


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by the Internal Revenue Service or other authoritative agencies. If we are required to settle matters in excess of our established accruals for uncertain tax positions, it could result in a charge to our earnings.
 
If our independent manufacturers, franchisees or licensees do not use ethical business practices or comply with applicable laws and regulations, our brand name could be harmed due to negative publicity and our results of operations could be adversely affected.
 
While our internal and vendor operating guidelines promote ethical business practices, we do not control our independent manufacturers, franchisees or licensees, or their business practices. Accordingly, we cannot guarantee their compliance with our guidelines. Violation of labor or other laws, such as the Foreign Corrupt Practices Act, by our independent manufacturers, franchisees or licensees, or the divergence from labor practices generally accepted as ethical in the United States, could diminish the value of our brand and reduce demand for our merchandise if, as a result of such violation, we were to attract negative publicity. As a result, our results of operations could be adversely affected.
 
We rely on third parties to deliver our merchandise and if these third parties do not adequately perform this function, our business would be disrupted.
 
The efficient operation of our business depends on the ability of our third party carriers to ship merchandise directly to our distribution facilities and individual stores. These carriers typically employ personnel represented by labor unions and have experienced labor difficulties in the past. Due to our reliance on these parties for our shipments, interruptions in the ability of our vendors to ship our merchandise to our distribution facilities or the ability of carriers to fulfill the distribution of merchandise to our stores could adversely affect our business, financial condition and results of operations.
 
We depend on single North American, European and International distribution facilities.
 
We handle merchandise distribution for all of our North American stores from a single facility in Hoffman Estates, Illinois, a suburb of Chicago, Illinois. We handle merchandise distribution for all of our European operations from a single facility in Birmingham, United Kingdom. We handle merchandise distribution for all of our international franchise operations from a single facility in Hong Kong. Independent third party transportation companies deliver our merchandise to our stores and our clients. Any significant interruption in the operation of our distribution facilities or the domestic transportation infrastructure due to natural disasters, accidents, inclement weather, system failures, work stoppages, slowdowns or strikes by employees of the transportation companies, or other unforeseen causes could delay or impair our ability to distribute merchandise to our stores, which could result in lower sales, a loss of loyalty to our brands and excess inventory and would have a material adverse effect on our business, financial condition and results of operations.
 
We may be unable to protect our tradenames and other intellectual property rights.
 
We believe that our tradenames and service marks are important to our success and our competitive position due to their name recognition with our customers. There can be no assurance that the actions we have taken to establish and protect our tradenames and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the tradenames, service marks and proprietary rights of others. The laws of some foreign countries may not protect proprietary rights to the same extent as do the laws of the United States, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in these countries. Also, others may assert rights in, or ownership of, our tradenames and other proprietary rights, and we may be unable to successfully resolve those types of conflicts to our satisfaction.
 
Our success depends on our ability to maintain the value of our brands.
 
Our success depends on the value of our Claire’s and Icing brands. The Claire’s and Icing names are integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brands will depend largely on the success of our design,


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merchandising, and marketing efforts and our ability to provide a consistent, enjoyable quality client experience. Our brands could be adversely affected if we fail to achieve these objectives for one or both of these brands and our public image and reputation could be tarnished by negative publicity. Any of these events could negatively impact sales.
 
We may be unable to rely on liability indemnities given by foreign vendors which could adversely affect our financial results.
 
The quality of our globally sourced products may vary from our expectations and sources of our supply may prove to be unreliable. In the event we seek indemnification from our suppliers for claims relating to the merchandise shipped to us, our ability to obtain indemnification may be hindered by the supplier’s lack of understanding of U.S. and European product liability laws. Our ability to successfully pursue indemnification claims may also be adversely affected by the financial condition of the supplier. Any of these circumstances could have a material adverse effect on our business and financial results.
 
We are controlled by affiliates of Apollo, and its interests as an equity holder may conflict with the interest of our creditors.
 
We are controlled by affiliates of Apollo Global Management, LLC and its subsidiaries, including Apollo Management (collectively, “Apollo”), and Apollo has the ability to elect all of the members of our board of directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payments of dividends, if any, on our common stock, the incurrence of debt by us, amendments to our articles of incorporation and bylaws and the entering into of extraordinary transactions. The interests of Apollo may not in all cases be aligned with the interests of our creditors. For example, if we encounter financial difficulties or are unable to pay our indebtedness as it matures, the interests of Apollo as an equity holder might conflict with the interests of our creditors. In addition, Apollo may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investments, even though such transactions might involve risks to our creditors. Furthermore, Apollo may in the future own businesses that directly or indirectly compete with us. Apollo also may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Apollo continues to own a significant amount of our combined voting power, even if such amount is less than 50%, it will continue to be able to strongly influence or effectively control our decisions. Because our equity securities are not registered under the Exchange Act and are not listed on any U.S. securities exchange, we are not subject to any of the corporate governance requirements of any U.S. securities exchange.
 
Risks Relating to Our Indebtedness
 
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the Credit Facility, the Existing Notes and the exchange notes.
 
We are significantly leveraged. As of April 30, 2011, our total debt, including the current portion, was approximately $2.52 billion, consisting of borrowings under our Credit Facility, the Existing Notes, the exchange notes, short-term note payable and a capital lease obligation. In March 2011, we issued the old notes and used the net proceeds from such offering to reduce the entire $194.0 million outstanding under our revolving credit facility (without terminating the commitment) and $244.9 million of indebtedness under our senior secured term loan. As a result of our prepayment under the senior secured term loan, we are no longer required to make any quarterly payments through the maturity date. Our revolving credit facility matures in May 2013 and our senior secured term loan matures in May 2014. We cannot assure you that we will have the financial resources required, or that the conditions of the capital markets will support, any future refinancing or restructuring of those facilities or other indebtedness.
 
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the Credit Facility,


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the Existing Notes and the exchange notes. Our high degree of leverage could have important consequences, including:
 
  •  increasing our vulnerability to adverse economic, industry or competitive developments;
 
  •  requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
 
  •  exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our Credit Facility, will be at variable rates of interest;
 
  •  making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the exchange notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indentures governing the Existing Notes and the exchange notes and the agreements governing such other indebtedness;
 
  •  restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
 
  •  limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and
 
  •  limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.
 
Despite our high indebtedness level, we and our subsidiaries are still able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
 
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the indentures governing the Existing Notes and the exchange notes and the Credit Facility each contain restrictions on the incurrence of additional indebtedness, however, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. Accordingly, we and our subsidiaries may be able to incur substantial additional indebtedness in the future. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we now face would increase. In addition, the indentures governing the Existing Notes and the exchange notes do not prevent us from incurring obligations that do not constitute indebtedness under those agreements.
 
On May 14, 2008, we notified the holders of the Senior Toggle Notes of our intent to elect the “payment in kind” (PIK) interest option to satisfy interest payment obligations. The PIK election was in effect through June 1, 2011, and had the effect of increasing the amount of Senior Toggle Notes. This election, net of reductions for note repurchases, increased the principal amount of our Senior Toggle Notes by $106.7 million, $98.1 million and $62.4 million as of April 30, 2011, January 29, 2011 and January 30, 2010, respectively. The accrued payment in kind interest is included in “Long-term debt” in our consolidated balance sheets.
 
Our debt agreements contain restrictions that limit our flexibility in operating our business.
 
Our Credit Facility and the indentures governing the Existing Notes and the exchange notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our, our parent’s and our restricted subsidiaries’ ability to, among other things:
 
  •  incur additional indebtedness or issue certain preferred shares;
 
  •  pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;


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  •  make certain investments;
 
  •  transfer or sell certain assets;
 
  •  create liens;
 
  •  consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
 
  •  enter into certain transactions with our affiliates.
 
A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions, and, in the case of our revolving Credit Facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our Credit Facility, the lenders could elect to declare all amounts outstanding under our Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our Credit Facility could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our Credit Facility. Our obligations under the exchange notes are secured by a second-priority lien on substantially all of the assets pledged as collateral under the Credit Facility. If the lenders under our Credit Facility accelerate the repayment of borrowings, we may not have sufficient assets to repay our Credit Facility as well as our other indebtedness, including the Existing Notes and the exchange notes.
 
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
 
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.
 
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the exchange notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. Our Credit Facility and the terms of the indentures governing the Existing Notes and the exchange notes and or any future debt instruments that we may enter into may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
 
Repayment of our debt is dependent on cash flow generated by our subsidiaries.
 
Our subsidiaries own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our indebtedness is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indentures governing the Existing Notes and the exchange notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.


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To service our debt obligations, we may need to increase the portion of the income of our foreign subsidiaries that is expected to be remitted to the United States, which could increase our income tax expense.
 
The amount of the income of our foreign subsidiaries that we expect to remit to the United States may significantly impact our U.S. federal income tax expense. We record U.S. federal income taxes on that portion of the income of our foreign subsidiaries that is expected to be remitted to the United States and be taxable. In order to service our debt obligations, we may need to increase the portion of the income of our foreign subsidiaries that we expect to remit to the United States, which may significantly increase our income tax expense. Consequently, our income tax expense has been, and will continue to be, impacted by our strategic initiative to make substantial capital investments outside the United States.
 
If we default on our obligations to pay our other indebtedness, the holders of our debt could exercise rights that could have a material effect on us.
 
If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default,
 
  •  the holders of such indebtedness may be able to cause all of our available cash flow to be used to pay such indebtedness and, in any event, could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest;
 
  •  the lenders under our Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and
 
  •  we could be forced into bankruptcy or liquidation.
 
If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our Credit Facility to avoid being in default. If we breach our covenants under our Credit Facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our Credit Facility, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
 
Risks Relating to the Exchange Notes
 
The collateral securing the exchange notes is subject to control by creditors with first-priority liens and subject to the terms of the intercreditor agreement. If there is a default, the value of the collateral may not be sufficient to repay both the first-priority creditors and the holders of the exchange notes and the other second-priority creditors.
 
The exchange notes are secured on a second-priority basis by substantially all of our assets and the assets of our subsidiaries that secure the Credit Facility (subject to certain exceptions described herein; see “Description of Exchange Notes — Security”). Under the terms of the indenture governing the exchange notes, we are permitted in the future to incur additional indebtedness and other obligations that, in certain circumstances, may share in the second-priority liens on the collateral securing the exchange notes and in the first-priority liens on the collateral securing the Credit Facility and under certain circumstances we will be permitted to contribute cash or other assets held by us or our restricted subsidiaries to unrestricted subsidiaries.
 
The holders of obligations secured by the first-priority liens on the collateral will be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before the holders of the exchange notes and any other obligations secured by second-priority liens will be entitled to any recovery from the collateral. We cannot assure you that, in the event of a foreclosure, the proceeds from the sale of all of such collateral would be sufficient to satisfy the amounts outstanding under the exchange notes and other obligations secured by the second-priority liens, if any, after payment in full of all obligations secured by the first-priority liens on the collateral. If such proceeds were not sufficient to repay amounts outstanding under


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the exchange notes, then holders of the exchange notes (to the extent not repaid from the proceeds of the sale of the collateral) would only have an unsecured claim against us and the guarantors of the exchange notes, which claim will rank equal in priority to the unsecured claims with respect to any unsatisfied portion of the obligations secured by the first-priority liens or other second-priority liens and our other unsecured senior indebtedness. As of April 30, 2011, we had funded indebtedness of $1,234.4 million of first-lien senior secured indebtedness, $450.0 million of second-lien senior secured indebtedness, $580.9 million of unsecured senior indebtedness and $259.6 million of unsecured senior subordinated indebtedness. In addition, we had undrawn availability under the senior secured revolving credit facility of $195.2 million, all of which would be senior to the exchange notes. Under the indenture governing the exchange notes, we can also incur additional indebtedness secured by first-priority liens and second-priority liens so long as such first and second-priority liens are securing indebtedness permitted to be incurred by the covenants described under “Description of Exchange Notes” and certain other conditions are met. Our ability to designate future debt as either first-priority secured or second-priority secured and, in either event, to enable the holders thereof to share in the collateral on either a priority basis or a pari passu basis with holders of the exchange notes and the Credit Facility, may have the effect of diluting the ratio of the value of such collateral to the aggregate amount of the obligations secured by the collateral.
 
The capital stock of each of our subsidiaries that has been pledged to secure the exchange notes will be automatically released from the collateral for the notes to the extent that the pledge would require the preparation and filing of separate audited financial statements of such subsidiary under Rule 3-16 of Regulation S-X under the Securities Act.
 
Pursuant to the terms of the indenture governing the exchange notes, a portion (or, if necessary, all) of the capital stock of each of our subsidiaries that has been pledged to secure the exchange notes will be automatically released from the collateral for the exchange notes to the extent that the pledge would require the preparation and filing of separate audited financial statements of such subsidiary under Rule 3-16 of Regulation S-X under the Securities Act. As a result, the collateral securing the exchange notes includes the capital stock of each such subsidiary only to the extent that the applicable value of such capital stock (on a subsidiary-by-subsidiary basis) is less than 20% of the aggregate principal amount of the outstanding exchange notes. See “Description of Exchange Notes — Security — Limitations on Stock Collateral.”
 
Holders of exchange notes do not control decisions regarding collateral.
 
Pursuant to the intercreditor agreement, the collateral agent representing the holders of the First-Priority Lien Obligations (as defined in “Description of Exchange Notes”) controls substantially all matters related to the collateral securing the obligations under the Credit Facility and the exchange notes. The holders of the First-Priority Lien Obligations may cause the collateral agent to dispose of, release or foreclose on, or take other actions with respect to the shared collateral with which holders of the exchange notes may disagree or that may be contrary to the interests of holders of the exchange notes. To the extent shared collateral is released from securing the First-Priority Lien Obligations, the liens securing the exchange notes will also be automatically released (other than in the case of the Discharge of Senior Lender Claims (as defined in “Description of Exchange Notes”) during the continuation of an event of default with respect to the exchange notes or other second lien indebtedness). In addition, the security documents generally provide that, so long as the First-Priority Lien Obligations are in effect, the lenders under the Credit Facility may change, waive, modify or vary the security documents without the consent of the holders of the notes, provided that any such change, waiver or modification does not materially adversely affect the rights of the holders of the exchange notes and not the other secured creditors in a like or similar manner. Except under limited circumstances, if at any time the First-Priority Lien Obligations cease to be in existence, the liens securing the exchange notes will also be released and the exchange notes will become unsecured senior obligations. See “Description of Exchange Notes — Security.”


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It may be difficult to realize the value of the collateral securing the exchange notes.
 
The collateral securing the exchange notes is subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the trustee for the exchange notes and any other creditors that also have the benefit of first liens on the collateral securing the exchange notes from time to time, whether on or after the date the exchange notes are issued. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the collateral securing the exchange notes, as well as the ability of the trustee, as collateral agent for the exchange notes, to realize or foreclose on such collateral.
 
No appraisals of any collateral have been prepared in connection with this offering. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. We cannot assure you that the fair market value of the collateral as of the date of this prospectus exceeds the principal amount of the debt secured thereby. The value of the assets pledged as collateral for the exchange notes could be impaired in the future as a result of changing economic conditions, our failure to implement our business strategy, competition and other future trends. In the event that a bankruptcy case is commenced by or against us, if the value of the collateral is less than the amount of principal and accrued and unpaid interest on the exchange notes and all other senior secured obligations, interest may cease to accrue on the exchange notes from and after the date the bankruptcy petition is filed.
 
The security interest of the trustee, as collateral agent for the exchange notes, is subject to practical problems generally associated with the realization of security interests in collateral. For example, the trustee, as collateral agent for the exchange notes, may need to obtain the consent of a third party to obtain or enforce a security interest in a contract. We cannot assure you that the collateral agent will be able to obtain any such consent. We also cannot assure you that the consents of any third parties will be given when required to facilitate a foreclosure on such assets. Accordingly, the trustee, as collateral agent for the exchange notes, may not have the ability to foreclose upon those assets and the value of the collateral may significantly decrease.
 
There are circumstances other than repayment or discharge of the exchange notes under which collateral could be released automatically without the consent of the holders of the exchange notes, which could be adverse to holders of exchange notes.
 
Under various circumstances, all or a portion of the collateral may be released, including:
 
  •  to enable the sale, transfer or other disposal of such collateral in a transaction not prohibited under the indenture, including the sale of any entity in its entirety that owns or holds such collateral;
 
  •  with respect to collateral held by a guarantor, upon the release of such guarantor from its guarantee; and
 
  •  without the consent of holders of the exchange notes if the collateral ceases to secure First-Priority Lien Obligations.
 
Our wholly-owned domestic restricted subsidiaries that guarantee the Credit Facility or incur or guarantee certain other indebtedness are required to be subsidiary guarantors and guarantee the exchange notes. The guarantee of any subsidiary guarantor will be released in connection with a sale of such subsidiary guarantor in a transaction not prohibited by the indenture governing the exchange notes. Such indenture also permits us to designate one or more of our restricted subsidiaries that is a guarantor of the exchange notes as an unrestricted subsidiary. If we designate a subsidiary guarantor as an unrestricted subsidiary, all of the liens on any collateral owned by such subsidiary or any of its subsidiaries and any guarantees of the exchange notes by such subsidiary or any of its subsidiaries will be released under the indenture governing the exchange notes. Designation of an unrestricted subsidiary will reduce the aggregate value of the collateral with respect to the exchange notes to the extent that liens on the assets of the unrestricted subsidiary and its subsidiaries are released. In addition, the creditors of the unrestricted subsidiary and its subsidiaries will have a senior claim on the assets of such unrestricted subsidiary and its subsidiaries. See “Description of Exchange Notes.”


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Your rights in the collateral may be adversely affected by the failure to perfect security interests in collateral.
 
Applicable law provides that a security interest in certain tangible and intangible assets can only be properly perfected and its priority retained through certain actions undertaken by the secured party. The liens in the collateral securing the exchange notes may not be perfected with respect to the claims of such exchange notes if the trustee, as collateral agent for the exchange notes, is not able to take the actions necessary to perfect any of these liens on or prior to the date of the indenture governing such exchange notes. In addition, applicable law provides that certain property and rights acquired after the grant of a general security interest, such as real property, equipment subject to a certificate and certain proceeds, can only be perfected at the time such property and rights are acquired and identified. The guarantors have limited obligations to perfect the noteholders’ security interest in specified collateral. There can be no assurance that the trustee, as collateral agent for the exchange notes, will monitor, or that we will inform the trustee of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired collateral. The trustee, as collateral agent for the exchange notes, has no obligation to monitor the acquisition of additional property or rights that constitute collateral or the perfection of any security interest. Such failure may result in the loss of the security interest in the collateral or the priority of the security interest in favor of the trustee, as collateral agent for the exchange notes, as applicable, against third parties.
 
Bankruptcy laws may limit your ability to realize value from the collateral.
 
The right of the trustee, as collateral agent for the exchange notes, to repossess and dispose of the collateral upon the occurrence of an event of default under the indenture governing the exchange notes is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy case were to be commenced by or against us before the trustee, as collateral agent for the exchange notes, repossessed and disposed of the collateral. Upon the commencement of a case under the U.S. Bankruptcy Code (the “Bankruptcy Code”), a secured creditor such as the trustee, as the collateral agent for the exchange notes, is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, without bankruptcy court approval, which may not be given. Moreover, the Bankruptcy Code permits the debtor to continue to retain and use collateral even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the collateral as of the commencement of the bankruptcy case and may include cash payments or the granting of additional security if and at such times as the bankruptcy court in its discretion determines that the value of the secured creditor’s interest in the collateral is declining during the pendency of the bankruptcy case. A bankruptcy court may determine that a secured creditor may not require compensation for a diminution in the value of its collateral if the value of the collateral exceeds the debt it secures.
 
In view of the lack of a precise definition of the term “adequate protection” and the broad discretionary power of a bankruptcy court, it is impossible to predict:
 
  •  how long payments under the exchange notes could be delayed following commencement of a bankruptcy case;
 
  •  whether or when the trustee, as collateral agent for the exchange notes, could repossess or dispose of the collateral;
 
  •  the value of the collateral at the time of the bankruptcy petition; or
 
  •  whether or to what extent holders of the exchange notes would be compensated for any delay in payment or loss of value of the collateral through the requirement of “adequate protection.”
 
Any disposition of the collateral during a bankruptcy case would also require permission from the bankruptcy court.


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In addition, with respect to the exchange notes, the intercreditor agreement provides that, in the event of a bankruptcy, the trustee, as collateral agent for the exchange notes, may not object to a number of important matters following the filing of a bankruptcy petition so long as any first lien debt is outstanding. After such a filing, the value of the collateral securing the exchange notes could materially deteriorate and holders of exchange notes would be unable to raise an objection.
 
The right of the holders of obligations secured by first-priority liens on the collateral to foreclose upon and sell the collateral upon the occurrence of an event of default also would be subject to limitations under applicable bankruptcy laws if we or any of our subsidiaries become subject to a bankruptcy proceeding.
 
In the event of a bankruptcy of us or any of the guarantors, holders of the exchange notes may be deemed to have an unsecured claim to the extent that our obligations in respect of the exchange notes exceed the fair market value of the collateral securing the exchange notes.
 
In any bankruptcy proceeding with respect to us or any of the guarantors, it is possible that the bankruptcy trustee, the debtor-in-possession or competing creditors will assert that the fair market value of the collateral with respect to the exchange notes on the date of the bankruptcy filing was less than the then-current principal amount of the exchange notes. Upon a finding by the bankruptcy court that the exchange notes are under-collateralized, the claims in the bankruptcy proceeding with respect to the notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the collateral. Other consequences of a finding of under-collateralization would be, among other things, a lack of entitlement on the part of the exchange notes to receive post-petition interest and a lack of entitlement on the part of the unsecured portion of the exchange notes to receive other “adequate protection” under federal bankruptcy laws. In addition, if any payments of post-petition interest had been made at the time of such a finding of under-collateralization, those payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the exchange notes.
 
The value of the collateral securing the exchange notes may not be sufficient to secure post-petition interest.
 
In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us, holders of the exchange notes will only be entitled to post-petition interest under the Bankruptcy Code to the extent that the value of their security interest in the collateral is greater than their pre-bankruptcy claim. Holders of the exchange notes that have a security interest in collateral with a value equal or less than their pre-bankruptcy claim will not be entitled to post-petition interest under the Bankruptcy Code. No appraisal of the fair market value of the collateral has been prepared in connection with this offering and we therefore cannot assure you that the value of the noteholders’ interest in the collateral equals or exceeds the principal amount of the exchange notes.
 
Any future pledge of collateral might be avoidable in bankruptcy.
 
Any future pledge of collateral in favor of the trustee, as collateral agent for the exchange notes, for the holders of the exchange notes, including pursuant to security documents delivered after the date of the indenture governing the exchange notes, might be avoidable by the pledgor (as debtor in possession) or by its trustee in bankruptcy if certain events or circumstances exist or occur, including, among others, if the pledgor is insolvent at the time of the pledge, the pledge permits the holders of the exchange notes to receive a greater recovery than if the pledge had not been given and a bankruptcy proceeding in respect of the pledgor is commenced within 90 days following the pledge, or, in certain circumstances, a longer period.
 
The exchange notes are structurally subordinated to all liabilities of our non-guarantor subsidiaries.
 
The exchange notes are structurally subordinated to the indebtedness and other liabilities of our current and future subsidiaries that do not guarantee the exchange notes. These non-guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to


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the exchange notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. These non-guarantor subsidiaries accounted for approximately 39.7% and 41% of our net sales for the three months ended April 30, 2011 and Fiscal 2010, respectively. Any right that we or the subsidiary guarantors have to receive any assets of these non-guarantor subsidiaries and any future non-guarantor subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of exchange notes to realize proceeds from the sale of any of those subsidiaries’ assets, will be effectively subordinated to the claims of those subsidiaries’ creditors, including trade creditors and holders of preferred equity interests of those subsidiaries. Accordingly, in the event of a bankruptcy, liquidation or reorganization of this non-guarantor subsidiary and any future non-guarantor subsidiaries, such non-guarantor subsidiaries will pay the holders of their debts, holders of preferred equity interests and their trade creditors before they will be able to distribute any of their assets to us.
 
Federal and state fraudulent transfer laws permit a court, under certain circumstances, to void the exchange notes, guarantees and security interests, and, if that occurs, you may not receive any payments on the exchange notes.
 
The issuance of the exchange notes and the guarantees may be subject to review under federal and state fraudulent transfer and conveyance statutes if a bankruptcy, liquidation or reorganization case or a lawsuit, including under circumstances in which bankruptcy is not involved, were commenced at some future date by us, by the guarantors or on behalf of our unpaid creditors or the unpaid creditors of a guarantor. While the relevant laws may vary from state to state, the incurrence of the obligations in respect of the exchange notes and the guarantees, and the granting of the security interests in respect thereof, will generally be a fraudulent conveyance if (i) the consideration was paid with the intent of hindering, delaying or defrauding creditors or (ii) we or any of our subsidiary guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for issuing either the exchange notes or a guarantee, and, in the case of (ii) only, one of the following is also true:
 
  •  we or any of our subsidiary guarantors were or was insolvent or rendered insolvent by reason of issuing the exchange notes or the guarantees;
 
  •  payment of the consideration left us or any of our subsidiary guarantors with an unreasonably small amount of capital to carry on the business; or
 
  •  we or any of our subsidiary guarantors intended to, or believed that we or it would, incur debts beyond our or its ability to pay as they mature.
 
If a court were to find that the issuance of the exchange notes or a guarantee was a fraudulent conveyance, the court could void the payment obligations under the exchange notes or such guarantee or further subordinate the exchange notes or such guarantee to presently existing and future indebtedness of ours or such subsidiary guarantor, require the holders of the exchange notes to repay any amounts received with respect to the exchange notes or such guarantee or void or otherwise decline to enforce the security interests and related security agreements in respect thereof. In the event of a finding that a fraudulent conveyance occurred, you may not receive any repayment on the exchange notes. Further, the voidance of the exchange notes could result in an event of default with respect to our other debt and that of our subsidiary guarantors that could result in acceleration of such debt.
 
The measures of insolvency for purposes of fraudulent conveyance laws vary depending upon the law of the jurisdiction that is being applied. Generally, an entity would be considered insolvent if, at the time it incurred indebtedness:
 
  •  the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets;
 
  •  the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts and liabilities, including contingent liabilities, as they become absolute and mature; or
 
  •  it could not pay its debts as they become due.


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We cannot be certain as to the standards a court would use to determine whether or not we or the subsidiary guarantors were solvent at the relevant time, or regardless of the standard used, that the issuance of the exchange notes and the guarantees would not be subordinated to our or any subsidiary guarantor’s other debt.
 
If the guarantees were legally challenged, any guarantee could also be subject to the claim that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the subsidiary guarantor, the obligations of the applicable subsidiary guarantor were incurred for less than fair consideration. Therefore, a court could void the obligations under the guarantees, subordinate them to the applicable subsidiary guarantor’s other debt or take other action detrimental to the holders of the exchange notes. In addition, a recent bankruptcy court decision in Florida questioned the validity of a customary savings clause in a guarantee.
 
Because each guarantor’s liability under its guarantees may be reduced to zero, avoided or released under certain circumstances, you may not receive any payments from some or all of the guarantors.
 
You have the benefit of the guarantees of the guarantors. However, the guarantees by the guarantors are limited to the maximum amount that the guarantors are permitted to guarantee under applicable law. As a result, a guarantor’s liability under its guarantee could be reduced to zero, depending on the amount of other obligations of such guarantor. Further, under the circumstances discussed more fully above, a court under Federal or state fraudulent conveyance and transfer statutes could void the obligations under a guarantee or further subordinate it to all other obligations of the guarantor. In addition, you will lose the benefit of a particular guarantee if it is released under certain circumstances described under “Description of Exchange Notes — Guarantees.”
 
We may not be able to repurchase the exchange notes upon a change of control.
 
Upon a change of control as defined in the indenture governing the exchange notes, we will be required to make an offer to repurchase all outstanding exchange notes at 101% of their principal amount plus accrued and unpaid interest, unless we have previously given notice of our intention to exercise our right to redeem the exchange notes or unless such obligation is suspended. See “Description of Exchange Notes — Change of Control.” We may not have sufficient financial resources to purchase all of the exchange notes that are tendered upon a change of control offer or, if then permitted under the indenture governing the exchange notes, to redeem the exchange notes. A failure to make the applicable change of control offer or to pay the applicable change of control purchase price when due would result in a default under the indenture. The occurrence of a change of control would also constitute an event of default under the Credit Facility. The terms of our Credit Facility and the indentures governing the exchange notes and the Existing Notes limit our right to purchase or redeem certain indebtedness. In the event any purchase or redemption is prohibited, we may seek to obtain waivers from the required lenders under our Credit Facility or holders of the exchange notes to permit the required repurchase or redemption, but the required holders of such indebtedness have no obligation to grant, and may refuse to grant such a waiver. A change of control is defined in the indenture governing the exchange notes and would not include all transactions that could involve a change of control of our day-to-day operations, including a transaction involving the Management Group as defined in the indenture governing the exchange notes. See “Description of Exchange Notes — Change of Control.”
 
During any period in which the exchange notes are rated investment grade, certain covenants contained in the indenture will not be applicable, however there is no assurance that the exchange notes will be rated investment grade.
 
The indenture governing the exchange notes provides that certain covenants will not apply to us during any period in which the exchange notes are rated investment grade (with a stable outlook) from each of Standard & Poor’s and Moody’s and no default has otherwise occurred and is continuing under the indenture. The covenants that would be suspended include, among others, limitations on and our restricted subsidiaries’ ability to pay dividends, incur indebtedness, sell certain assets and enter into certain other transactions. Any actions that we take while these covenants are not in force will be permitted even if the exchange notes are subsequently downgraded below investment grade and such covenants are subsequently reinstated. There can


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be no assurance that the exchange notes will ever be rated investment grade, or that if they are rated investment grade, the exchange notes will maintain such ratings. See “Description of Exchange Notes — Certain Covenants.”
 
The market price for the notes may be volatile.
 
Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the exchange notes. The market for the exchange notes, if any, may be subject to similar disruptions. Any such disruptions may adversely affect the value of your exchange notes. In addition, subsequent to their initial issuance, the exchange notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar exchange notes, our performance and other factors.
 
Risks Relating to the Exchange Offer
 
If you fail to exchange your old notes, they will continue to be restricted securities and may become less liquid.
 
Notes that you do not tender or that we do not accept will, following the exchange offer, continue to be restricted securities, and you may not offer to sell them except under an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We will issue the exchange notes in exchange for the old notes in the exchange offer only following the satisfaction of the procedures and conditions set forth in “The Exchange Offer — Procedures for Tendering.” Because we anticipate that most holders of the old notes will elect to exchange their outstanding notes, we expect that the liquidity of the market for the old notes remaining after the completion of the exchange offer will be substantially limited. Any old notes tendered and exchanged in the exchange offer will reduce the aggregate principal amount of the outstanding old notes at maturity. Further, following the exchange offer, if you did not tender your old notes, you generally will not have any further registration rights, and such notes will continue to be subject to certain transfer restrictions.
 
You may find it difficult to sell your exchange notes because there is no existing trading market for the exchange notes.
 
The exchange notes are being offered to the holders of the old notes. The old notes were issued on March 4, 2011, primarily to a small number of institutional investors. There is no existing trading market for the exchange notes and there can be no assurance regarding the future development of a market for the exchange notes, or the ability of the holders of the exchange notes to sell their exchange notes or the price at which such holders may be able to sell their exchange notes. If such a market were to develop, the exchange notes could trade at prices that may be higher or lower than the initial offering price of the old notes depending on many factors, including prevailing interest rates, our financial position, operating results and the market for similar securities. We do not intend to apply for listing or quotation of the exchange notes on any exchange and we do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. The initial purchasers of the old notes are not obligated to make a market in the exchange notes, and any market-making may be discontinued at any time without notice. Therefore, there can be no assurance as to the liquidity of any trading market for the exchange notes or that an active market for the exchange notes will develop. As a result, the market price of the exchange notes, as well as your ability to sell the exchange notes, could be adversely affected.
 
Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of such securities. There can be no assurance that the market for the exchange notes will not be subject to similar disruptions. Any such disruptions may have an adverse effect on holders of the exchange notes.


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Broker-dealers may become subject to the registration and prospectus delivery requirements of the Securities Act, and any profit on the resale of the exchange notes may be deemed to be underwriting compensation under the Securities Act.
 
Any broker-dealer that acquires exchange notes in the exchange offer for its own account in exchange for old notes that it acquired through market-making or other trading activities must acknowledge that it will comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction by that broker-dealer. Any profit on the resale of the exchange notes and any commission or concessions received by a broker-dealer may be deemed to be underwriting compensation under the Securities Act.
 
You may not receive the exchange notes in the exchange offer if the exchange offer procedures are not properly followed.
 
We will issue the exchange notes in exchange for your old notes only if you properly tender such notes before expiration of the exchange offer. Neither we nor the exchange agent is under any duty to give notification of defects or irregularities with respect to the tenders of the old notes for exchange. If you are the beneficial holder of old notes that are held through your broker, dealer, commercial bank, trust company or other nominee, and you wish to tender such notes in the exchange offer, you should promptly contact the person through whom your old notes are held and instruct that person to tender on your behalf.


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THE EXCHANGE OFFER
 
Purpose and Effect of the Exchange Offer
 
We issued the old notes in a private placement on March 4, 2011. The old notes were issued, and the exchange notes will be issued, under an indenture, dated as of March 4, 2011, between us and The Bank of New York Mellon Trust Company, N.A., as trustee. In connection with the private placement, we entered into a registration rights agreement, which requires that we file this registration statement under the Securities Act with respect to the exchange notes to be issued in the exchange offer and, upon the effectiveness of this registration statement, offer to you the opportunity to exchange your old notes for a like principal amount of exchange notes. The exchange notes will be issued without a restrictive legend and, except as set forth below, you may reoffer and resell them without registration under the Securities Act. After we complete the exchange offer, our obligation to register the exchange of exchange notes for old notes will terminate. A copy of the registration rights agreement has been filed as an exhibit to the registration statement of which this prospectus is a part.
 
Based on interpretations by the staff of the SEC set forth in no-action letters issued to third parties unrelated to us, if you are not our “affiliate” within the meaning of Rule 405 under the Securities Act or a broker-dealer referred to in the next paragraph, we believe that you may reoffer, resell or otherwise transfer the exchange notes issued to you in the exchange offer without compliance with the registration and prospectus delivery requirements of the Securities Act. This interpretation, however, is based on your representation to us that:
 
  •  you are acquiring the exchange notes in the ordinary course of your business;
 
  •  you are not engaging in and do not intend to engage in a distribution of the exchange notes;
 
  •  you do not have an arrangement or understanding with any person or entity to participate in the distribution of the exchange notes; and
 
  •  you are not our “affiliate” as that term is defined in Rule 405 under the Securities Act.
 
If you tender old notes in the exchange offer for the purpose of participating in a distribution of the exchange notes to be issued to you in the exchange offer, you cannot rely on this interpretation by the staff of the SEC. Under those circumstances, you must comply with the registration and prospectus delivery requirements of the Securities Act in order to reoffer, resell or otherwise transfer your exchange notes. Each broker-dealer that receives exchange notes for its own account in the exchange offer for old notes that were acquired as a result of market-making or other trading activities must acknowledge that it will comply with the prospectus delivery requirements of the Securities Act in connection with any offer to resell or other transfer of the exchange notes issued in the exchange offer. See “Plan of Distribution.” Broker-dealers who acquired old notes directly from us and not as a result of market making or other trading activities may not rely on the staff’s interpretations discussed above or participate in the exchange offer, and must comply with the prospectus delivery requirements of the Securities Act in order to sell the private notes.
 
If you will not receive freely tradeable exchange notes in the exchange offer or are not eligible to participate in the exchange offer, you can elect to have your old notes registered on a “shelf” registration statement pursuant to Rule 415 under the Securities Act. In the event that we are obligated to file a shelf registration statement, we will be required to keep the shelf registration statement effective for a period of two years following the date of original issuance of the old notes or such shorter period that will terminate when all of the old notes covered by the shelf registration statement have been sold pursuant to the shelf registration statement. Other than as set forth in this paragraph, you will not have the right to require us to register your old notes under the Securities Act. See “— Procedures for Tendering” below.
 
Consequences of Failure to Exchange
 
If you do not participate or properly tender your old notes in this exchange offer:
 
  •  you will retain old notes that are not registered under the Securities Act and that will continue to be subject to restrictions on transfer that are described in the legend on the old notes;


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  •  you will not be able to require us to register your old notes under the Securities Act unless, as set forth above, you do not receive freely tradable exchange notes in the exchange offer or are not eligible to participate in the exchange offer, and we are obligated to file a shelf registration statement;
 
  •  you will not be able to offer to resell or transfer your old notes unless they are registered under the Securities Act or unless you offer to resell or transfer them pursuant to an exemption under the Securities Act; and
 
  •  the trading market for your old notes will become more limited to the extent that other holders of old notes participate in the exchange offer.
 
Terms of the Exchange Offer
 
Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept any and all old notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the expiration date of the exchange offer. You may tender some or all of your old notes pursuant to the exchange offer; however, old notes may be tendered only in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. We will issue $1,000 principal amount of the exchange notes in exchange for each $1,000 principal amount of the old notes accepted in the exchange offer.
 
The form and terms of the exchange notes are substantially identical to those of the old notes, except that the transfer restrictions and registration rights relating to the old notes will not apply to the exchange notes, and the exchange notes will not provide for the payment of additional interest in the event of a registration default. In addition, the exchange notes bear a different CUSIP number than the old notes. The exchange notes will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the outstanding old notes.
 
As of the date of this prospectus, $450.0 million aggregate principal amount of the old notes were outstanding and registered in the name of Cede & Co., as nominee for DTC. This prospectus, together with the letter of transmittal, is being sent to the registered holder and to others believed to have beneficial interests in the private notes. We intend to conduct the exchange offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the SEC promulgated under the Exchange Act.
 
We will be deemed to have accepted validly tendered old notes if and when we have given oral (any such oral notice to be promptly confirmed in writing) or written notice of our acceptance to The Bank of New York Mellon Trust Company, N.A., the exchange agent for the exchange offer. The exchange agent will act as our agent for the purpose of receiving from us the exchange notes for the tendering noteholders. If we do not accept any tendered old notes because of an invalid tender, the occurrence of certain other events set forth in this prospectus or otherwise, we will return certificates, if any, for any unaccepted old notes, without expense, to the tendering noteholder as promptly as practicable after the expiration date of the exchange offer.
 
You will not be required to pay brokerage commissions or fees or transfer taxes, except as set forth below under “— Transfer Taxes,” with respect to the exchange of your old notes in the exchange offer. We will pay all charges and expenses, other than certain applicable taxes, in connection with the exchange offer. See “— Fees and Expenses” below.
 
Expiration Date; Amendment
 
The expiration date for the exchange offer will be 5:00 p.m., New York City time, on August 16, 2011, unless we determine, in our sole discretion, to extend the exchange offer, in which case it will expire at the later date and time to which it is extended. We do not intend to extend the exchange offer, however, although we reserve the right to do so. If we extend the exchange offer, we will give oral (any such oral notice to be promptly confirmed in writing) or written notice of the extension to the exchange agent and give each registered holder of old notes notice by means of a press release or other public announcement of any extension prior to 9:00 a.m., New York City time, on the next business day after the scheduled expiration date.


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We also reserve the right, in our sole discretion:
 
  •  to accept tendered notes after the expiration of the exchange offer and the settlement of the exchange offer with respect to tendered notes, and/or extend the exchange offer with respect to untendered notes, subject to applicable legal requirements;
 
  •  to delay accepting any old notes or, if any of the conditions set forth below under “— Conditions” have not been satisfied or waived, to terminate the exchange offer by giving oral (any such oral notice to be promptly confirmed in writing) or written notice of such delay or termination to the exchange agent; or
 
  •  to amend the terms of the exchange offer in any manner by complying with Rule 14e-l(d) under the Exchange Act, to the extent that rule applies.
 
We will notify you as promptly as we can of any extension, termination or amendment. In addition, we acknowledge and undertake to comply with the provisions of Rule 14e-l(c) under the Exchange Act, which requires us to pay the consideration offered, or return the old notes surrendered for exchange, promptly after the termination or withdrawal of the exchange offer.
 
Procedures for Tendering
 
Only a holder of old notes may tender the old notes in the exchange offer. Except as set forth under “— Book-Entry Transfer,” to tender in the exchange offer a holder must complete, sign and date the letter of transmittal, or a copy of the letter of transmittal, have the signatures on the letter of transmittal guaranteed if required by the letter of transmittal and mail or otherwise deliver the letter of transmittal or copy to The Bank of New York Mellon Trust Company, N.A., as the exchange agent, prior to the expiration date. In addition:
 
  •  the certificates representing your old notes must be received by the exchange agent prior to the expiration date;
 
  •  a timely confirmation of book-entry transfer of such old notes into the exchange agent’s account at DTC pursuant to the procedure for book-entry transfers described below under “— Book-Entry Transfer” must be received by the exchange agent prior to the expiration date; or
 
  •  you must comply with the guaranteed delivery procedures described below.
 
If you hold old notes through a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your old notes, you should contact the registered holder of your old notes promptly and instruct the registered holder to tender on your behalf.
 
If you tender an old note and you do not properly withdraw the tender prior to the expiration date, you will have made an agreement with us to participate in the exchange offer in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal.
 
Signatures on a letter of transmittal or a notice of withdrawal must be guaranteed by an eligible institution unless:
 
  •  old notes tendered in the exchange offer are tendered either by a registered holder who has not completed the box titled “Special Registration Instructions” or “Special Delivery Instructions” on the holder’s letter of transmittal or for the account of an eligible institution; and
 
  •  the box titled “Special Registration Instructions” on the letter of transmittal has not been completed.
 
If signatures on a letter of transmittal or a notice of withdrawal are required to be guaranteed, the guarantee must be by a financial institution, which includes most banks, savings and loan associations and brokerage houses, that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Program or the Stock Exchanges Medallion Program.
 
If the letter of transmittal is signed by a person other than you, your old notes must be endorsed or accompanied by a properly completed bond power and signed by you as your name appears on those old notes.


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If the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, those persons should so indicate when signing. Unless we waive this requirement, in this instance you must submit with the letter of transmittal proper evidence satisfactory to us of their authority to act on your behalf.
 
We will determine, in our sole discretion, all questions regarding the validity, form, eligibility, including time of receipt, acceptance and withdrawal of tendered old notes. Our determination will be final and binding. We reserve the absolute right to reject any and all old notes not properly tendered or any old notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to certain old notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties.
 
You must cure any defects or irregularities in connection with tenders of your old notes within the time period that we determine unless we waive that defect or irregularity. Although we intend to notify you of defects or irregularities with respect to your tender of old notes, neither we, the exchange agent nor any other person will incur any liability for failure to give this notification. Your tender will not be deemed to have been made and your old notes will be returned to you if:
 
  •  you improperly tender your old notes;
 
  •  you have not cured any defects or irregularities in your tender; and
 
  •  we have not waived those defects, irregularities or improper tender.
 
The exchange agent will return your old notes, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration of the exchange offer.
 
In addition, we reserve the right in our sole discretion to:
 
  •  purchase or make offers for, or offer exchange notes for, any old notes that remain outstanding subsequent to the expiration of the exchange offer;
 
  •  terminate the exchange offer; and
 
  •  to the extent permitted by applicable law, purchase notes in the open market, in privately negotiated transactions or otherwise.
 
The terms of any of these purchases or offers could differ from the terms of the exchange offer.
 
In all cases, the issuance of exchange notes for old notes that are accepted for exchange in the exchange offer will be made only after timely receipt by the exchange agent of certificates for your old notes or a timely book-entry confirmation of your old notes into the exchange agent’s account at DTC, a properly completed and duly executed letter of transmittal or a computer-generated message instead of the letter of transmittal, and all other required documents. If any tendered old notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if old notes are submitted for a greater principal amount than you desire to exchange, the unaccepted or non-exchanged old notes, or old notes in substitution therefor, will be returned without expense to you. In addition, in the case of old notes tendered by book-entry transfer into the exchange agent’s account at DTC pursuant to the book-entry transfer procedures described below, the non-exchanged old notes will be credited to your account maintained with DTC, as promptly as practicable after the expiration or termination of the exchange offer.
 
Book-Entry Transfer
 
The old notes were issued as global securities in fully registered form without interest coupons. Beneficial interests in the global securities, held by direct or indirect participants in DTC, are shown on, and transfers of these interests are effected only through, records maintained in book-entry form by DTC with respect to its participants.


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The exchange agent will make a request to establish an account with respect to the old notes at DTC for purposes of the exchange offer within two business days after the date of this prospectus, and any financial institution that is a participant in DTC’s systems may make book-entry delivery of old notes being tendered by causing DTC to transfer such old notes into the exchange agent’s account at DTC in accordance with DTC’s procedures for transfer.
 
The DTC’s ATOP system is the only method of processing exchange offers through DTC. To accept the exchange offer through ATOP, participants in DTC must send electronic instructions to DTC through DTC’s communication system instead of sending a signed, hard copy letter of transmittal. DTC is obligated to communicate those electronic instructions to the exchange agent. To tender old notes through ATOP, the electronic instructions sent to DTC and transmitted by DTC to the exchange agent must contain the character by which the participant acknowledges its receipt of, and agrees to be bound by, the letter of transmittal.
 
If you hold your old notes in the form of book-entry interests and you wish to tender your old notes in exchange for exchange notes, you must instruct a participant in DTC to transmit to the exchange agent on or prior to the expiration date for the exchange offer a computer-generated message transmitted by means of ATOP and received by the exchange agent and forming a part of a confirmation of book-entry transfer, in which you acknowledge and agree to be bound by the terms of the letter of transmittal.
 
In addition, in order to deliver old notes held in the form of book-entry interests:
 
  •  a timely confirmation of book-entry transfer of such notes into the exchange agent’s account at DTC pursuant to the procedure for book-entry transfers described above must be received by the exchange agent prior to the expiration date; or
 
  •  you must comply with the guaranteed delivery procedures described below.
 
Guaranteed Delivery Procedures
 
If you wish to tender your old notes and your old notes are not immediately available, or time will not permit your old notes or other required documents to reach the exchange agent prior to 5:00 p.m., New York City time, on the expiration date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if:
 
  •  you tender through an eligible financial institution;
 
  •  on or prior to 5:00 p.m., New York City time, on the expiration date, the exchange agent receives from an eligible institution, a written or facsimile copy of a properly completed and duly executed letter of transmittal and notice of guaranteed delivery, substantially in the form provided by us; and
 
  •  the certificates for all certificated old notes, in proper form for transfer, or a book-entry confirmation, and all other documents required by the letter of transmittal, are received by the exchange agent within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery.
 
The notice of guaranteed delivery may be sent by facsimile transmission, mail or hand delivery. The notice of guaranteed delivery must set forth:
 
  •  your name and address;
 
  •  the amount of old notes you are tendering;
 
  •  a statement that your tender is being made by the notice of guaranteed delivery and that you guarantee that within three New York Stock Exchange trading days after the execution of the notice of guaranteed delivery, the eligible institution will deliver the following documents to the exchange agent;
 
  •  the certificates for all certificated old notes being tendered, in proper form, for transfer or a book-entry confirmation of tender;


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  •  a written or facsimile copy of the letter of transmittal or a book-entry confirmation instead of the letter of transmittal; and
 
  •  any other documents required by the letter of transmittal.
 
Withdrawal Rights
 
You may withdraw tenders of your old notes at any time prior to 5:00 p.m., New York City time, on the expiration date of the exchange offer.
 
For your withdrawal to be effective, the exchange agent must receive a written or facsimile transmission of or, for DTC participants, an electronic ATOP transmission of, the notice of withdrawal at its address set forth below under “— Exchange Agent” prior to 5:00 p.m., New York City time, on the expiration date.
 
The notice of withdrawal must:
 
  •  state your name;
 
  •  identify the specific old notes to be withdrawn, including the certificate number or numbers and the principal amounts of the old notes to be withdrawn;
 
  •  be signed by you in the same manner as you signed the letter of transmittal when you tendered your old notes, including any required signature guarantees, or be accompanied by documents of transfer sufficient for the exchange agent to register the transfer of the old notes into your name; and
 
  •  specify the name in which the old notes are to be registered, if different from yours.
 
We will determine all questions regarding the validity, form and eligibility, including time of receipt, of withdrawal notices. Our determination will be final and binding on all parties. Any old notes withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any old notes that have been tendered for exchange but that are not exchanged for any reason will be returned to you without cost as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn old notes may be retendered by following one of the procedures described under “— Procedures for Tendering” above at any time on or prior to 5:00 p.m., New York City time, on the expiration date.
 
Conditions
 
Notwithstanding any other provision of the exchange offer, and subject to our obligations under the related registration rights agreement, we will not be required to accept for exchange, or to issue exchange notes in exchange for, any old notes and may terminate or amend the exchange offer, if at any time before the acceptance of any old notes for exchange any one of the following events occurs:
 
  •  any injunction, order or decree has been issued by any court or any governmental agency that would prohibit, prevent or otherwise materially impair our ability to proceed with the exchange offer; or
 
  •  the exchange offer violates any applicable law or any applicable interpretation of the staff of the SEC.
 
These conditions are for our sole benefit and we may assert them regardless of the circumstances giving rise to them, subject to applicable law. We also may waive in whole or in part at any time and from time to time any particular condition in our sole discretion. If we waive a condition, we may be required in order to comply with applicable securities laws, to extend the expiration date of the exchange offer. Our failure at any time to exercise any of the foregoing rights will not be deemed a waiver of these rights and these rights will be deemed ongoing rights which may be asserted at any time and from time to time.
 
In addition, we will not accept for exchange any old notes tendered, and no exchange notes will be issued in exchange for any tendered old notes, if, at the time the notes are tendered, any stop order is threatened by the SEC or in effect with respect to the registration statement of which this prospectus is a part or the qualification of the indenture under the Trust Indenture Act of 1939, as amended.


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The exchange offer is not conditioned on any minimum principal amount of old notes being tendered for exchange.
 
Exchange Agent
 
We have appointed The Bank of New York Mellon Trust Company, N.A. as exchange agent for the exchange offer.
 
You should direct questions and requests for assistance with respect to exchange offer procedures and requests for additional copies of this prospectus to the exchange agent addressed as follows:
 
The Bank of New York Mellon Trust Company, N.A., as exchange agent
c/o The Bank of New York Mellon Corporation
Corporate Trust Operations — Reorganization Unit
101 Barclay Street, Floor 7 East
New York, NY 10286
Attention: Mr. William Buckley — Processor
Telephone: 212-815-5788
Facsimile: 212-298-1915
 
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
 
The exchange agent also acts as trustee under the indenture governing the exchange notes.
 
Fees and Expenses
 
We will not pay brokers, dealers or others soliciting acceptances of the exchange offer. The principal solicitation is being made by mail. Additional solicitations, however, may be made in person or by telephone by our officers and employees.
 
We will pay the estimated cash expenses to be incurred in connection with the exchange offer. These are estimated in the aggregate to be approximately $275,000, which includes fees and expenses of the exchange agent and accounting, legal, printing and related fees and expenses.
 
Transfer Taxes
 
You will not be obligated to pay any transfer taxes in connection with a tender of your old notes unless you instruct us to register exchange notes in the name of, or request that old notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder of old notes, in which event the registered tendering holder will be responsible for the payment of any applicable transfer tax.
 
Accounting Treatment
 
The exchange notes will be recorded at the same carrying value as the old notes as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes upon the consummation of the exchange offer. We will amortize the expense of the exchange offer over the term of the exchange notes in accordance with accounting principles generally accepted in the United States of America.


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USE OF PROCEEDS
 
We will not receive any cash proceeds from the issuance of the exchange notes pursuant to the exchange offer. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange a like principal amount of outstanding old notes, the terms of which are substantially identical to the exchange notes. The outstanding old notes surrendered in exchange for the exchange notes will be retired and cancelled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any change in our capitalization. We have agreed to bear the expenses of the exchange offer. No underwriter is being used in connection with the exchange offer.


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CAPITALIZATION
 
The following table sets forth our capitalization as of April 30, 2011, on a historical basis and as adjusted to give effect to the exchange offer (assuming that all holders exchange their notes). You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness” and our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus. The issuance of the exchange notes will not result in any change in our capitalization.
 
                 
    As of April 30, 2011  
    Actual     As Adjusted  
    Unaudited  
    (In thousands)  
 
Cash and cash equivalents and restricted cash(1):
  $ 246,134     $ 246,134  
                 
Debt:
               
Senior Secured Term Loan Facility due May 2014
  $ 1,154,310     $ 1,154,310  
Old Notes (Senior Secured Second Lien Notes due 2019)
    450,000        
Exchange Notes (Senior Secured Second Lien Notes due 2019)
          450,000  
9.25% Senior Fixed Rate Notes due 2015
    226,000       226,000  
9.625% / 10.375% Senior Toggle Notes due 2015
    354,857       354,857  
10.5% Senior Subordinated Notes due 2017
    259,612       259,612  
Note payable to bank due 2012
    62,796       62,796  
Capital lease obligation
    17,290       17,290  
                 
Total debt
    2,524,865       2,524,865  
                 
Total stockholders’ equity
    (26,708 )     (26,708 )
                 
Total capitalization
  $ 2,498,157     $ 2,498,157  
                 
 
 
(1) Includes restricted cash of $25,966.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
 
The following table sets forth our selected historical consolidated financial and operating data.
 
The selected historical consolidated financial and operating data for Fiscal 2010, Fiscal 2009 and Fiscal 2008, and the summary historical balance sheet data as of the end of Fiscal 2010 and Fiscal 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated financial and operating data for Fiscal 2007 and 2006, and the summary historical balance sheet data as of the end of Fiscal 2008, Fiscal 2007 and Fiscal 206 have been derived from our audited consolidated financial statements, which are not included in this prospectus.
 
The unaudited summary historical consolidated financial and operating data for the three months ended April 30, 2011 and May 1, 2010 and the summary historical balance sheet data as of April 30, 2011 and May 1, 2010 have been derived from our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus, and have been prepared on a basis consistent with our annual audited consolidated financial statements. In the opinion of management, such unaudited financial data reflects all adjustments necessary for a fair presentation of the results for such periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.
 
Our historical results included below are not necessarily indicative of our future performance. This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus.
 
As a result of the consummation of the Transactions, the Company is sometimes referred to as the “Successor Entity” for periods on or after May 29, 2007, and the “Predecessor Entity” for periods prior to May 29, 2007. The Consolidated Financial Statements for the period on or after May 29, 2007 are presented on a different basis than for the periods before May 29, 2007, as a result of the application of purchase accounting as of May 29, 2007 and therefore are not comparable. The acquisition of Claire’s Stores, Inc. was accounted for as a business combination using the purchase method of accounting, whereby the purchase price was allocated to the assets and liabilities based on the estimated fair market values at the date of acquisition.
 
                                                                   
    Successor Entity       Predecessor Entity  
                Fiscal Year
    Fiscal Year
    Fiscal Year
    May 29, 2007
      Feb. 4, 2007
    Fiscal Year
 
    Three Months Ended     Ended
    Ended
    Ended
    through
      through
    Ended
 
    April 30,
    May 1,
    January 29,
    January 30,
    January 31,
    Feb. 2,
      May 28,
    February 3,
 
    2011     2010     2011(1)     2010(1)     2009(1)     2008       2007     2007(1)  
                (In thousands, except for ratios and store data)                
Statement of Operations Data:
                                                                 
Net sales
  $ 346,446     $ 322,077     $ 1,426,397     $ 1,342,389     $ 1,412,960     $ 1,085,932       $ 424,899     $ 1,480,987  
Cost of sales, occupancy and buying expenses
    171,359       158,751       685,111       663,269       724,832       521,384         206,438       691,646  
                                                                   
Gross profit
    175,087       163,326       741,286       679,120       688,128       564,548         218,461       789,341  
Other expenses:
                                                                 
Selling, general and administrative
    126,722       118,019       498,212       465,706       513,752       354,875         154,409       481,979  
Depreciation and amortization
    17,054       16,366       65,198       71,471       85,093       61,451         19,652       56,771  
Impairment of assets
                12,262       3,142       498,490       3,478         73        
Severance and transaction-related costs
    343       102       741       921       15,928       7,319         72,672        


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    Successor Entity       Predecessor Entity  
                Fiscal Year
    Fiscal Year
    Fiscal Year
    May 29, 2007
      Feb. 4, 2007
    Fiscal Year
 
    Three Months Ended     Ended
    Ended
    Ended
    through
      through
    Ended
 
    April 30,
    May 1,
    January 29,
    January 30,
    January 31,
    Feb. 2,
      May 28,
    February 3,
 
    2011     2010     2011(1)     2010(1)     2009(1)     2008       2007     2007(1)  
                (In thousands, except for ratios and store data)                
Other expense (income), net
    5,311       1,230       411       (4,234 )     (4,499 )     (3,088 )       (1,476 )     (3,484 )
                                                                   
      149,430       135,717       576,824       537,006       1,108,764       424,035         245,330       535,266  
                                                                   
Operating income (loss)
    25,657       27,609       164,462       142,114       (420,636 )     140,513         (26,869 )     254,075  
Gain on early debt extinguishment
    249       4,487       13,388       36,412                            
Impairment of equity investment
                6,030             25,500                      
Interest expense (income), net
    46,235       42,763       157,706       177,418       195,947       147,892         (4,876 )     (14,575 )
                                                                   
Income (loss) from continuing operations before income taxes
    (20,329 )     (10,667 )     14,114       1,108       (642,083 )     (7,379 )       (21,993 )     268,650  
Income tax expense (benefit)
    (732 )     1,633       9,791       11,510       1,509       (8,020 )       21,779       79,888  
                                                                   
Income (loss) from continuing operations
  $ (19,597 )   $ (12,300 )   $ 4,323     $ (10,402 )   $ (643,592 )   $ 641       $ (43,772 )   $ 188,762  
                                                                   
Other Financial Data:
                                                                 
Capital expenditures:
                                                                 
New stores and remodels
    14,027       6,267       39,022       16,557       36,270       46,225         24,231       77,021  
Other
    1,765       1,951       9,689       8,395       23,135       12,259         3,757       18,171 (2)
Total capital expenditures
    15,792       8,218       48,711       24,952       59,405       58,484         27,988       95,192  
Cash interest expense(3)
    18,912       17,838       108,923       126,733       168,567       123,620         86       118  
Ratio of earnings to fixed charges(4)
                1.1 x     1.0 x                         5.2 x
Store Data:
                                                                 
Number of stores (at period end) North America
    1,960       1,990       1,972       1,993       2,026       2,135         2,124       2,133  
Europe
    1,040       965       1,009       955       943       905         879       859  
Total number of stores (at period end)
    3,000       2,955       2,981       2,948       2,969       3,040         3,003       2,992  
Total gross square footage (000’s) (at period end)
    3,018       2,987       3,012       2,982       3,011       3,105         3,043       3,021  
Net sales per store (000’s)(5)
    487       463       481       454       461       359         142       504  
Net sales per square foot(6)
    483       457       476       448       453       353         140       500  
Balance Sheet Data (at period end)
                                                                 
Cash and cash equivalents and restricted cash(7)
    246,134       220,011       279,766       198,708       204,574       85,974         350,476       340,877  
Total assets
    2,861,712       2,828,167       2,866,449       2,834,105       2,881,095       3,348,497         1,119,047       1,091,266  
Total debt
    2,524,865       2,523,745       2,524,286       2,521,878       2,581,772       2,377,750                
Total stockholders’ equity (deficit)
    (26,708 )     (48,244 )     (26,515 )     (34,642 )     (55,843 )     605,200         792,071       847,662  
 
 
(1) Fiscal 2006 was a fifty-three week period and Fiscal 2010, Fiscal 2009, Fiscal 2008 and Fiscal 2007 were fifty-two week periods.
 
(2) Includes management information system expenditures of $5.2 million in Fiscal 2006 for strategic projects of POS, merchandising systems, business intelligence, technology and the logistics system for the new distribution center in the Netherlands.

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(3) Cash interest expense does not include amortization of debt issuance costs or interest expense paid in kind.
 
(4) For purposes of calculating the ratio of earnings to fixed charges, earnings represent income from continuing operations before income taxes plus fixed charges. Fixed charges include interest expense, including amortization of debt issuance costs, and the portion of rental expense which management believes is representative of the interest component of rental expense. Due to the Company’s loss during the three months ended April 30, 2011 and May 1, 2010, Fiscal 2008 and the combined period from May 29, 2007 through February 2, 2008 and February 4, 2007 through May 28, 2007, the ratio coverage was less than 1:1. The Company must generate additional earnings of $20.3 million, $9.6 million, $642.4 million, $7.5 million and $22.7 million during the three months ended April 30, 2011 and May 1, 2010, Fiscal 2008, the period from May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007, respectively, to achieve coverage of 1:1.
 
(5) Net sales per store are calculated based on trailing twelve months net sales and the average number of stores during the period.
 
(6) Net sales per square foot are calculated based on trailing twelve months net sales and the average gross square feet during the period.
 
(7) At April 30, 2011 and January 29, 2011, included restricted cash of $26.0 million and $23.9 million, respectively.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus 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. This section should be read in conjunction with our audited and unaudited consolidated financial statements and related notes thereto contained elsewhere in this prospectus.
 
Our fiscal year ends on the Saturday closest to January 31, and we refer to the fiscal year by the calendar year in which it began. Our fiscal year ended January 29, 2011 (“Fiscal 2010”), January 30, 2010 (“Fiscal 2009”) and January 31, 2009 (“Fiscal 2008”) consisted of 52 weeks, respectively.
 
We include a store in the calculation of same store sales once it has been in operation sixty weeks after its initial opening. A store which is temporarily closed, such as for remodeling, is removed from the same store sales computation if it is closed for nine consecutive weeks. The removal is effective prospectively upon the completion of the ninth consecutive 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.
 
Overview
 
We are one of the world’s leading specialty retailers of fashionable accessories and jewelry at affordable prices for young women, teens, tweens, and girls ages 3 to 27. We are organized based on our geographic markets, which include our North American division and our European division. As of April 30, 2011, we operated a total of 3,000 stores, of which 1,960 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American division) and 1,040 stores were located in the United Kingdom, France, Switzerland, Spain, Ireland, Austria, Germany, Netherlands, Portugal, Belgium, Poland, Czech Republic and Hungary (our European division). We operate our stores under two brand names: Claire’s®, on a global basis, and Icing®, in North America.
 
As of April 30, 2011, we also franchised or licensed 391 stores in Japan, the Middle East, Turkey, Russia, Greece, South Africa, Guatemala, Malta and Ukraine. 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 Consolidated Statements of Operations and Comprehensive Income (Loss). The franchise fees we charge under the franchising agreements are reported in “Other expense (income), net” in our Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Until September 2, 2010, we operated stores in Japan through our former Claire’s Nippon 50:50 joint venture with Aeon Co., Ltd. We accounted for the results of operations of Claire’s Nippon under the equity method and included the results within “Other expense (income), net” in our Consolidated Statements of Operations and Comprehensive Income (Loss). Beginning September 2, 2010, these stores began to operate as licensed stores. Our primary brand in North America and exclusively in Europe is Claire’s. Our Claire’s customers are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6), or referred to as our Young, Younger and Youngest target customer groups.
 
Our second brand in North America is Icing, which targets a single edit point customer represented by a 23 year old young woman just graduating from college and entering the work force who dresses consistent with the current fashion influences. We believe this niche strategy enables us to create a well defined merchandise point of view and attract a broad group of customers from 19 to 27 years of age.
 
We believe that we are the leading accessories and jewelry destination for our target customers, which is embodied in our mission statement — to be a fashion authority and fun destination offering a compelling, focused assortment of value-priced accessories, jewelry and other emerging fashion categories targeted to the lifestyles of kids, tweens, teens and young women. In addition to age segmentation, we use multiple lifestyle aesthetics to further differentiate our merchandise assortments for our Young and Younger target customer groups.


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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:
 
  •  Accessories — includes fashion accessories for year-round use, including legwear, headwear, attitude glasses, scarves, armwear and belts, and seasonal use, including sunglasses, hats, fall footwear, sandals, scarves, gloves, boots, slippers and earmuffs; and other accessories, including hairgoods, handbags, and small leather goods, as well as cosmetics
 
  •  Jewelry — includes earrings, necklaces, bracelets, body jewelry and rings, as well as ear piercing
 
In North America, our stores are located primarily in shopping malls. The differentiation of our Claire’s and Icing brands allows us to operate multiple store locations within a single mall. In Europe our stores are located primarily on high streets, in shopping malls and in high traffic urban areas.
 
Current Market Conditions
 
Continued distress in the financial markets has resulted in declines in consumer confidence and spending, extreme volatility in securities prices, and has had a negative impact on credit availability and declining valuations of certain investments. We have assessed the implications of these factors on our current business and have responded with pursuit of cost reduction opportunities and are proceeding cautiously to support increased sales. If the national, or global, economies or credit market conditions in general were to deteriorate further in the future, it is possible that such deterioration could put additional negative pressure on consumer spending and negatively affect our cash flows or cause a tightening of trade credit that may negatively affect our liquidity.
 
Acquisition of the Company by Apollo Management VI, L.P. in 2007
 
As a result of the Merger there was a significant change in our capital structure, including:
 
  •  the closing of the offering of the Existing Notes;
 
  •  the closing of our $1.65 billion Credit Facility; and
 
  •  the equity investment of approximately $595.7 million by Apollo Management VI, L.P. on behalf of certain affiliated co-investment partnerships.
 
The purchase of the Company and the related fees and expenses were financed through the issuance of the Existing Notes, borrowing under the Credit Facility, equity investment by the Sponsors, and cash on hand at the Company.
 
The acquisition of Claire’s Stores, Inc. was accounted for as a business combination using the purchase method of accounting, whereby the purchase price was allocated to the assets and liabilities based on the estimated fair market values at the date of acquisition.
 
See Note 1 — Nature of Operations and Acquisition of Claire’s Stores, Inc. and Note 5 — Debt, respectively, in the Notes to our audited consolidated financial statements for details of the acquisition and current indebtedness.
 
Results of Consolidated Operations
 
Management overview
 
We are one of the world’s leading specialty retailers of fashionable accessories and jewelry at affordable prices for young women, teens, tweens, and girls ages 3 to 27. 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 owned stores throughout the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (North American segment) and the United Kingdom, Switzerland, Austria, Germany, France, Ireland, Spain, Portugal, Netherlands, Belgium, Poland, Czech Republic and Hungary (European segment). Until


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September 2, 2010, the Company operated stores in Japan through a 50:50 joint venture. Beginning September 2, 2010, these stores began to operate as licensed stores.
 
Consolidated Results of Operations
 
For the Three Months Ended April 30, 2011 and May 1, 2010
 
A summary of our consolidated results of operations for the three months ended April 30, 2011 and May 1, 2010 are as follows (dollars in thousands):
 
                 
    Three Months
  Three Months
    Ended
  Ended
    April 30, 2011   May 1, 2010
 
Net sales
  $ 346,446     $ 322,077  
Increase in same store sales
    3.2 %     7.6 %
Gross profit percentage
    50.5 %     50.7 %
Selling, general and administrative expenses as a percentage of net sales
    36.6 %     36.6 %
Depreciation and amortization as a percentage of net sales
    4.9 %     5.1 %
Operating income
  $ 25,657     $ 27,609  
Gain on early debt extinguishment
  $ 249     $ 4,487  
Net loss
  $ (19,597 )   $ (12,300 )
Number of stores at the end of the period(1)
    3,000       2,955  
 
 
(1) Number of stores excludes stores operated under franchise and licensing agreements.
 
Net sales
 
Net sales for the three months ended April 30, 2011 increased $24.4 million, or 7.6%, from the three months ended May 1, 2010. This increase was attributable to new stores sales, an increase in same store sales, favorable foreign currency translation effect of our foreign locations’ sales and increases in shipments to franchisees, partially offset by the effect of store closures. Net sales would have increased 5.3% excluding the impact from foreign currency rate changes.
 
For the three months ended April 30, 2011, the increase in same store sales was primarily attributable to an increase in average transaction value of 5.5%, partially offset by a decrease in average number of transactions per store of 1.8%.
 
The following table compares our sales of each product category for each of the periods presented:
 
                 
    Percentage of Total  
    Three Months
    Three Months
 
    Ended
    Ended
 
Product Category
  April 30, 2011     May 1, 2010  
 
Accessories
    52.4       52.1  
Jewelry
    47.6       47.9  
                 
      100.0       100.0  
                 
 
Gross profit
 
In calculating gross profit and gross profit percentages, we exclude the costs related to our distribution center. These costs are included instead in “Selling, general and administrative” expenses in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Other retail companies may include these costs in cost of sales, so our gross profit percentages may not be comparable to those retailers.


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During the three months ended April 30, 2011, gross profit percentage decreased 20 basis points to 50.5% compared to 50.7% during the three months ended May 1, 2010. The decrease in gross profit percentage consisted of an 80 basis point decrease in merchandise margin and a 10 basis point increase in buying and buying-related costs, partially offset by a 70 basis point decrease in occupancy costs. The decrease in merchandise margin was primarily due to a higher mix of clearance merchandise, markdowns and freight expense. The improvement in occupancy rate is due to the leveraging effect of higher sales.
 
Selling, general and administrative expenses
 
During the three months ended April 30, 2011, selling, general and administrative expenses increased $8.7 million, or 7.4%, compared to the three months ended May 1, 2010. As a percentage of net sales, selling, general and administrative expenses remained unchanged at 36.6% compared to the three months ended May 1, 2010. The majority of the expense increase, in dollars, was for store-related expenses resulting from increased sales. Excluding an unfavorable $2.6 million foreign currency translation effect, the net increase in selling, general and administrative expenses would have been $6.1 million.
 
Depreciation and amortization expense
 
During the three months ended April 30, 2011, depreciation and amortization expense increased $0.7 million to $17.1 million compared to $16.4 million for the three months ended May 1, 2010. The majority of this increase is due to the effect of asset additions during fiscal 2010 and the first quarter of fiscal 2011.
 
Gain on early debt extinguishment
 
The following is a summary of the Company’s debt repurchase activity for the three months ended April 30, 2011 and May 1, 2010 (in thousands):
 
                         
    Three Months Ended April 30, 2011  
                Recognized
 
    Principal
    Repurchase
    Gain
 
Notes Repurchased
  Amount     Price     (Loss)(1)  
 
Senior Notes
  $ 10,000     $ 9,930     $ (98 )
Senior Toggle Notes
    14,155       14,084       347  
                         
    $ 24,155     $ 24,014     $ 249  
                         
 
 
(1) Net of deferred issuance cost write-offs of $168 for the Senior Notes and $179 for the Senior Toggle Notes, and accrued interest write-off of $455 for the Senior Toggle Notes.
 
                         
    Three Months Ended May 1, 2010  
    Principal
    Repurchase
    Recognized
 
Notes Repurchased
  Amount     Price     Gain(1)  
 
Senior Toggle Notes
  $ 6,000     $ 4,985     $ 1,087  
Senior Subordinated Notes
    15,625       11,864       3,400  
                         
    $ 21,625     $ 16,849     $ 4,487  
                         
 
 
(1) Net of deferred issuance cost write-offs of $104 and $361 for the Senior Toggle Notes and Senior Subordinated Notes, respectively, and accrued interest write-off of $176 for the Senior Toggle Notes.


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Other expense (income), net
 
The following is a summary of other expense (income) activity for the three months ended April 30, 2011 and May 1, 2010 (in thousands):
 
                 
    Three Months
    Three Months
 
    Ended
    Ended
 
    April 30, 2011     May 1, 2010  
 
Foreign currency exchange loss, net
  $ 5,949     $ 785  
Equity loss
          1,116  
Royalty income
    (389 )     (191 )
Other income
    (249 )     (480 )
                 
    $ 5,311     $ 1,230  
                 
 
During the three months ended April 30, 2011, foreign currency exchange loss, net increased primarily from a $3.3 million net charge to remeasure the Euro Loan at the period end foreign exchange rate. Equity loss decreased due to the Company converting its equity ownership interest in a former joint venture into a licensing agreement.
 
Interest expense, net
 
During the three months ended April 30, 2011, net interest expense aggregated $46.2 million compared to $42.8 million for the three months ended May 1, 2010. The increase of $3.5 million is primarily due to interest on the $450.0 million Senior Secured Second Lien Notes and Euro Loan and an accelerated reduction of deferred financing costs, partially offset by lower outstanding balances under our Revolving Credit Facility and Senior Notes.
 
Income taxes
 
The effective income tax rate for the three months ended April 30, 2011 was 3.6% compared to (15.3)% for the three months ended May 1, 2010. These effective income tax rates differed from the statutory federal tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three months ended April 30, 2011 and May 1, 2010, respectively, by our U.S. operations.
 
Segment Operations
 
We are organized into two business segments — North America and Europe. The following is a discussion of results of operations by business segment.
 
North America
 
Key statistics and results of operations for our North American division are as follows (dollars in thousands):
 
                 
    Three Months
  Three Months
    Ended
  Ended
    April 30, 2011   May 1, 2010
 
Net sales
  $ 224,188     $ 212,599  
Increase in same store sales
    4.8 %     8.9 %
Gross profit percentage
    52.5 %     51.7 %
Number of stores at the end of the period(1)
    1,960       1,990  
 
 
(1) Number of stores excludes stores operated under franchise and licensing agreements.
 
During the three months ended April 30, 2011, net sales in North America increased $11.6 million, or 5.5%, from the three months ended May 1, 2010. This increase was attributable to an increase in same store


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sales, an increase in shipments to franchisees, new store sales and a favorable foreign currency translation effect of our Canadian operations’ sales, partially offset by the effect of store closures. Sales would have increased 5.1% excluding the impact from foreign currency rate changes.
 
For the three months ended April 30, 2011, the increase in same store sales was primarily attributable to an increase in average transaction value of 6.2%, partially offset by a decrease in average number of transactions per store of 0.7%.
 
During the three months ended April 30, 2011, gross profit percentage increased 80 basis points to 52.5% compared to 51.7% during the three months ended May 1, 2010. The increase in gross profit percentage consisted of a 110 basis point decrease in occupancy costs, partially offset by a 20 basis point decrease in merchandise margin and a 10 basis point increase in buying and buying-related costs. The improvement in occupancy rate is due to the leveraging effect of higher sales.
 
The following table compares our sales of each product category in North America for each of the periods presented:
 
                 
    Percentage of Total  
    Three Months
    Three Months
 
    Ended
    Ended
 
Product Category
  April 30, 2011     May 1, 2010  
 
Accessories
    46.7       47.3  
Jewelry
    53.3       52.7  
                 
      100.0       100.0  
                 
 
Europe
 
Key statistics and results of operations for our European division are as follows (dollars in thousands):
 
                 
    Three Months
  Three Months
    Ended
  Ended
    April 30, 2011   May 1, 2010
 
Net sales
  $ 122,258     $ 109,478  
Increase in same store sales
    0.1 %     5.0 %
Gross profit percentage
    47.0 %     48.8 %
Number of stores at the end of the period(1)
    1,040       965  
 
 
(1) Number of stores excludes stores operated under franchise and licensing agreements.
 
During the three months ended April 30, 2011, net sales in Europe increased $12.8 million, or 11.7%, from the three months ended May 1, 2010. This increase was attributable to new store sales, favorable foreign currency translation of our European operations’ sales, and an increase in same store sales, partially offset by the effect of store closures. Sales would have increased 5.7% excluding the impact from foreign currency rate changes.
 
For the three months ended April 30, 2011, the increase in same store sales was primarily attributable to an increase in average transaction value of 4.6%, partially offset by a decrease in average number of transactions per store of 4.3%.
 
During the three months ended April 30, 2011, gross profit percentage decreased 180 basis points to 47.0% compared to 48.8% during the three months ended May 1, 2010. The decrease in gross profit percentage consisted of a 200 basis point decrease in merchandise margin, partially offset by a 10 basis point decrease in occupancy costs and a 10 basis point decrease in buying and buying-related costs. The decrease in merchandise margin was primarily due to a higher mix of clearance merchandise, markdowns and freight expense. The improvement in occupancy rate is due to the leveraging effect of higher sales.


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The following table compares our sales of each product category in Europe for each of the periods presented:
 
                 
    Percentage of Total  
    Three Months
    Three Months
 
    Ended
    Ended
 
Product Category
  April 30, 2011     May 1, 2010  
 
Accessories
    62.5       61.3  
Jewelry
    37.5       38.7  
                 
      100.0       100.0  
                 
 
Fiscal 2010, Fiscal 2009 and Fiscal 2008
 
Financial highlights for 2010 include the following:
 
  •  Same store sales performance:
 
         
    Fiscal 2010
 
Consolidated
    6.5 %
North America
    7.8 %
Europe
    4.3 %
 
  •  Operating income increase of $22.3 million or 15.7% to $164.5 million.
 
  •  Net income increase of $14.7 million to $4.3 million from $(10.4) million.
 
  •  Cash flow from operating activities increase of $75.8 million or 100.4% to $151.3 million.
 
  •  Paid $79.9 million to retire $93.8 million of Notes.
 
  •  Cash and cash equivalents and restricted cash increase to $279.8 million.
 
In March 2011, after our fiscal year end, we issued $450.0 million aggregate principal amount of the Senior Secured Second Lien Notes and the net proceeds were used to pay down existing indebtedness under our senior secured Credit Facility.
 
Operational highlights for 2010 include the following:
 
  •  Opened 82 new company-owned stores including stores in three new markets
 
  •  Reacquired exclusive territory rights for all of Asia, outside of Japan
 
  •  Executed license agreement with former joint venture partner to operate Claire’s Nippon stores as licensed stores in Japan
 
  •  Increased the average transaction value and average number of transactions per store
 
  •  Increased sales mix of our “accessories” product category
 
  •  Attained positive operating cash flow in approximately 95% of our stores.


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A summary of our consolidated results of operations is as follows (dollars in thousands):
 
                         
    Fiscal 2010   Fiscal 2009   Fiscal 2008
 
Net sales
  $ 1,426,397     $ 1,342,389     $ 1,412,960  
Increase (decrease) in same store sales
    6.5 %     (1.7 )%     (6.9 )%
Gross profit percentage
    52.0 %     50.6 %     48.7 %
Selling, general and administrative expenses as a percentage of net sales
    34.9 %     34.7 %     36.4 %
Depreciation and amortization as a percentage of net sales
    4.6 %     5.3 %     6.0 %
Severance and transaction-related costs as percentage of net sales
    0.1 %     0.1 %     1.1 %
Impairment of assets
  $ 12,262     $ 3,142     $ 498,490  
Operating income (loss)
  $ 164,462     $ 142,114     $ (420,636 )
Gain on early debt extinguishment
  $ 13,388     $ 36,412     $  
Impairment of equity investment
  $ 6,030     $     $ 25,500  
Net income (loss)
  $ 4,323     $ (10,402 )   $ (643,592 )
Number of stores at the end of the period(1)
    2,981       2,948       2,969  
 
 
(1) Number of stores excludes stores operated under franchise and license agreements.
 
Net sales
 
Net sales in Fiscal 2010 increased $84.0 million, or 6.3%, from Fiscal 2009. This increase was attributable to an increase in same store sales of $84.8 million, or 6.5%, and new store sales of $27.2 million, partially offset by an unfavorable $14.8 million of foreign currency translation effect of our foreign locations’ sales, a decrease of $11.2 million due to the effect of store closures and reduced shipments to franchisees of $2.0 million. Sales would have increased 7.4% excluding the impact from foreign currency rate changes.
 
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 0.9%.
 
Net sales in Fiscal 2009 decreased $70.6 million, or 5.0%, from Fiscal 2008. This decrease was attributable to an unfavorable $33.5 million of foreign currency translation effect of our foreign locations’ sales, a decrease of $31.0 million due to the effect of store closures in North America and Europe at the end of Fiscal 2008 and the first half of Fiscal 2009, a decrease in same store sales of $22.2 million, or 1.7%, and decreases in shipments to franchisees of $2.9 million, partially offset by new store sales of $19.0 million.
 
The decrease in same store sales was primarily attributable to a decrease in the average number of transactions per store of 6.7%, partially offset by an increase in average transaction value of 4.7%.
 
The following table compares our sales of each product category for the last three fiscal years:
 
                         
    Percentage of Total  
Product Category
  Fiscal 2010     Fiscal 2009     Fiscal 2008  
 
Accessories
    54.5       53.6       48.4  
Jewelry
    45.5       46.4       51.6  
                         
      100.0       100.0       100.0  
                         
 
Gross profit
 
In calculating gross profit and gross profit percentages, we exclude our distribution center costs. These costs are included instead in “Selling, general and administrative” expenses in our Consolidated Statements of Operations and Comprehensive Income (Loss). Other retail companies may include these costs in cost of sales, so our gross profit percentages may not be comparable to those retailers.


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In Fiscal 2010, gross profit percentage increased 140 basis points to 52.0% compared to the prior fiscal year of 50.6%. This increase consisted of a 30 basis point improvement in merchandise margin and a 130 basis point decrease in occupancy costs, offset by a 20 basis point increase in buying and buying-related costs. Merchandise margin benefited by 30 basis points from reduced inventory shrink. Occupancy costs increased approximately $0.6 million, but increased approximately $3.5 million including foreign currency translation effect.
 
In Fiscal 2009, gross profit percentage increased 190 basis points to 50.6% compared to the prior fiscal year of 48.7%. The increase consisted of a 200 basis point improvement in merchandise margin and a 10 basis point decrease in buying and buying-related costs, offset by a 20 basis point increase in occupancy costs. The improvement in merchandise margin was due to increased initial mark-up on purchases, reduced markdowns and decreased freight costs. Occupancy costs decreased approximately $13.3 million primarily due to foreign currency translation effects, but increased as a percentage of sales due to the deleveraging effect of lower sales. Fiscal 2008 included $3.1 million of PET project costs, in buying and buying-related costs, that did not recur in Fiscal 2009, accounting for 20 basis points of the improvement in gross margin.
 
Selling, general and administrative expenses
 
In Fiscal 2010, selling, general and administrative expenses increased $32.5 million, or 7.0%, over the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses increased 20 basis points compared to the prior year. The majority of this increase was for store-related expenses resulting from increased sales and increases in foreign currency transaction losses. Excluding a favorable $5.6 million foreign currency translation effect, the net increase in selling, general and administrative expenses would have been $38.1 million, or 8.3%.
 
In Fiscal 2009, selling, general and administrative expenses decreased $48.0 million, or 9.4%, over the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses decreased 170 basis points compared to the prior year. Excluding a favorable $13.2 million foreign currency translation effect and a decrease of $10.0 million of non-recurring CSI and PET project costs, the net decrease in selling, general and administrative expenses would have been $24.8 million, or 5.1%, compared to the prior fiscal year. Excluding the foreign currency translation effect and non-recurring CSI and PET project costs, selling, general and administrative expenses as a percentage of net sales decreased 90 basis points compared to the prior year.
 
Depreciation and amortization expense
 
Depreciation and amortization expense decreased $6.3 million to $65.2 million during Fiscal 2010 compared to Fiscal 2009. The majority of this decrease is due to a favorable foreign currency translation effect and the effect of assets becoming fully depreciated or amortized.
 
Depreciation and amortization expense decreased $13.6 million to $71.5 million during Fiscal 2009 compared to Fiscal 2008. The majority of this decrease is due to a favorable foreign currency translation effect and the effect of assets becoming fully depreciated or amortized.
 
Impairment charges
 
During the fourth quarter of Fiscal 2010, management performed a strategic review of its franchising business. The inability of certain franchisees’ to achieve store development expectations in select markets prompted us to reevaluate our franchise development strategy and to perform a valuation of the franchise agreements, which are definite-lived intangible assets. We utilized a discounted cash flow model and determined the franchise agreements intangible assets were impaired. This resulted in us recording a non-cash impairment charge of $12.3 million in Fiscal 2010, which was included in “Impairment of assets” on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).
 
During the second quarter of Fiscal 2010, we recorded a non-cash impairment charge related to the investment in Claire’s Nippon of $6.0 million. The joint venture’s continuing operating losses prompted us to perform a valuation of our investment in Claire’s Nippon.


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The deterioration in the economy and resulting effect on consumer confidence and discretionary spending that occurred during Fiscal 2009 and Fiscal 2008 had a significant impact on the retail industry. We performed our tests for goodwill, intangible assets, property and equipment and other asset impairment following relevant accounting standards pertaining to the particular asset being tested. The impairment testing conducted in Fiscal 2009 resulted in the recognition of non-cash impairment charges of $3.1 million related to property and equipment. The testing conducted in Fiscal 2008 resulted in the recognition of non-cash impairment charges of $297.0 million for goodwill and $227.0 million for intangible and other assets. See Note 3 — Impairment Charges in the Notes to our audited consolidated financial statements for further discussion of the impairment charges.
 
Severance and transaction-related costs
 
Since 2007, we have incurred various transaction-related costs. These costs consisted primarily of financial advisory fees, legal fees and change in control payments to employees. We incurred $0.7 million of such costs in Fiscal 2010, $0.9 million in Fiscal 2009 and $3.5 million in Fiscal 2008. In connection with our CSI and PET projects in Fiscal 2008, we incurred severance costs of $12.4 million for terminated employees.
 
Gain on early debt extinguishment
 
The following is a summary of our note repurchase activity during Fiscal 2010 and Fiscal 2009 (in thousands):
 
                         
    Fiscal 2010  
    Principal
    Repurchase
    Recognized
 
Notes Repurchased
  Amount     Price     Gain(1)  
 
Senior Notes
  $ 14,000     $ 12,268     $ 1,467  
Senior Toggle Notes
    57,173       49,798       7,612  
Senior Subordinated Notes
    22,625       17,799       4,309  
                         
    $ 93,798     $ 79,865     $ 13,388  
                         
 
 
(1) Net of deferred issuance cost write-offs of $265 for the Senior Notes, $922 for the Senior Toggle Notes and $517 for the Senior Subordinated Notes, and accrued interest write-off of $1,159 for the Senior Toggle Notes.
 
                         
    Fiscal 2009  
    Principal
    Repurchase
    Recognized
 
Notes Repurchased
  Amount     Price     Gain(1)  
 
Senior Toggle Notes
  $ 30,500     $ 19,744     $ 11,297  
Senior Subordinated Notes
    52,763       26,347       25,115  
                         
    $ 83,263     $ 46,091     $ 36,412  
                         
 
 
(1) Net of deferred issuance cost write-offs of $603 and $1,301 for the Senior Toggle Notes and Senior Subordinated Notes, respectively, and accrued interest write-off of $1,144 for the Senior Toggle Notes.


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Other expense (income), net
 
The following is a summary of other expense (income) activity for Fiscal 2010, Fiscal 2009 and Fiscal 2008 (in thousands):
 
                         
    Fiscal 2010     Fiscal 2009     Fiscal 2008  
 
Equity loss (income)
  $ 2,529     $ 1,014     $ (320 )
Franchise fees
    (1,638 )     (1,943 )     (2,309 )
Gain on sale of assets
          (1,935 )     (1,287 )
Other income
    (480 )     (1,370 )     (583 )
                         
    $ 411     $ (4,234 )   $ (4,499 )
                         
 
Interest expense (income), net
 
Interest expense for Fiscal 2010 aggregated $157.9 million, a decrease of $19.8 million compared to the prior year. This decrease is primarily the result of Note repurchases. Included in interest expense for Fiscal 2010 is approximately $10.0 million of amortization of deferred debt issuance costs and $36.9 million of paid in kind interest.
 
Interest expense for Fiscal 2009 aggregated $177.6 million, a decrease of $19.8 million compared to the prior year. This decrease is primarily the result of reductions in interest rates on the floating portion of our debt and Note purchases. Included in interest expense for Fiscal 2009 is approximately $10.4 million of amortization of deferred debt issuance costs and $39.0 million of interest paid in kind.
 
See Note 5 — Debt in the Notes to our audited consolidated financial statements for components of interest expense (income), net.
 
Income taxes
 
In Fiscal 2010, our income tax expense was $9.8 million and our effective income tax rate was 69.4%. Our effective income tax rate for Fiscal 2010 reflects tax expense of $0.4 million on the repatriation of foreign earnings, plus tax expense of $12.7 million related to the effect of changes to our valuation allowance on deferred tax assets, plus tax expense of $2.6 million relating to other permanent items, offset by tax benefits of $11.6 million on income in our foreign jurisdictions that are taxed at lower rates. In Fiscal 2010, we made net cash income tax payments of $6.3 million.
 
In Fiscal 2009, our income tax expense was $11.5 million and our effective income tax rate was 1,038.8%. Our effective income tax rate for Fiscal 2009 reflects tax expense of $18.6 million on the repatriation of foreign earnings, plus tax expense of $17.5 million related to the effect of changes to our valuation allowance on deferred tax assets, offset by tax benefits of $21.4 million on income in our foreign jurisdictions that are taxed at lower rates, and $4.7 million relating to other permanent tax benefits. In Fiscal 2009, we made net cash income tax payments of $3.2 million.
 
In Fiscal 2008, our income tax expense was $1.5 million and our effective tax rate was (0.2)%. Our effective income tax rate for Fiscal 2008 reflected the non-deductible nature of the goodwill and joint venture impairment charges aggregating $322.5 million, as well an increase of $95.8 million to our valuation allowance on deferred tax assets generated by our U.S. operations. We increased our valuation allowance due to a lack of sufficient accounting evidence that it was more likely than not that our deferred tax assets would be realized. In Fiscal 2008, we made net cash income tax payments of $14.2 million.
 
See Note 11 — Income Taxes in the Notes to our audited consolidated financial statements for further details.
 
Segment Operations
 
We are organized into two business segments — North America and Europe. The following is a discussion of results of operations by business segment.


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North America
 
Key statistics and results of operations for our North American division are as follows (dollars in thousands):
 
                         
    Fiscal 2010   Fiscal 2009   Fiscal 2008
 
Net sales
  $ 914,149     $ 850,313     $ 907,486  
Increase (decrease) in same store sales
    7.8 %     (3.2 )%     (9.2 )%
Gross profit percentage
    52.1 %     50.0 %     47.9 %
Number of stores at the end of the period(1)
    1,972       1,993       2,026  
 
 
(1) Number of stores excludes stores operated under franchise and licensing agreements.
 
Net sales
 
Net sales in North America during Fiscal 2010 increased $63.8 million, or 7.5%, from Fiscal 2009. This increase was attributable to an increase in same store sales of $64.8 million, or 7.8%, a favorable foreign currency translation effect of our Canadian operations’ sales of $4.9 million and new store sales of $3.6 million, partially offset by a decrease of $6.8 million due to the effect of store closures and reduced shipments to franchisees of $2.7 million.
 
The increase in same store sales was primarily attributable to an increase in average transaction value of 5.8% and an increase in average number of transactions per store of 2.9%.
 
Net sales in North America during Fiscal 2009 decreased $57.2 million, or 6.3%, from Fiscal 2008. This decrease was attributable to a decrease of $29.8 million due to the effect of store closures in North America at the end of Fiscal 2008, decrease in same store sales of $27.2 million, or 3.2%, an unfavorable foreign currency translation effect of our Canadian operations of $1.2 million, and decreases in shipments to franchisees of $2.9 million, partially offset by new store revenue of $3.9 million.
 
The decrease in same store sales was primarily attributable to a decrease in the average number of transactions per store of 8.1%, partially offset by an increase in average transaction value of 4.2%.
 
Gross profit
 
In Fiscal 2010, gross profit percentage increased 210 basis points to 52.1% compared to the gross profit percentage for Fiscal 2009 of 50.0%. This increase consisted of a 90 basis point improvement in merchandise margin and a 150 basis point decrease in occupancy costs, partially offset by a 30 basis point increase in buying and buying-related costs. Merchandise margin benefited by 30 basis points from reduced inventory shrink. The 150 basis point improvement in occupancy costs is due to the leveraging effect of higher sales partially offset by an unfavorable foreign currency translation effect.
 
In Fiscal 2009, gross profit percentage increased 210 basis points to 50.0% compared to the gross profit percentage for Fiscal 2008 of 47.9%. This increase included a 230 basis point improvement in merchandise margin and a 20 basis point decrease in buying and buying-related costs, partially offset by a 40 basis point increase in occupancy costs. Fiscal 2008 included $1.1 million of non-recurring PET project costs, which were included in buying and buying-related costs and accounted for 20 basis points of the improvement in gross margin.
 
The following table compares our sales of each product category for the last three fiscal years:
 
                         
    Percentage of Total  
Product Category
  Fiscal 2010     Fiscal 2009     Fiscal 2008  
 
Accessories
    49.8       48.5       43.3  
Jewelry
    50.2       51.5       56.7  
                         
      100.0       100.0       100.0  
                         


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Europe
 
Key statistics and results of operations for our European division are as follows (dollars in thousands):
 
                         
    Fiscal 2010   Fiscal 2009   Fiscal 2008
 
Net sales
  $ 512,248     $ 492,076     $ 505,474  
Increase (decrease) in same store sales
    4.3 %     1.1 %     (2.5 )%
Gross profit percentage
    51.7 %     51.7 %     50.1 %
Number of stores at the end of the period(1)
    1,009       955       943  
 
 
(1) Number of stores excludes stores operated under franchise and licensing agreements.
 
Net sales
 
Net sales in our European division during Fiscal 2010 increased $20.2 million, or 4.1%, from Fiscal 2009. This increase was attributable to new store sales of $23.6 million, an increase in same store sales of $20.0 million, or 4.3%, and an increase in shipments to franchisees of $0.7 million, partially offset by an unfavorable foreign currency translation of our European operations’ sales of $19.6 million and a decrease of $4.5 million due to the effect of store closures.
 
The increase in same store sales was primarily attributable to an increase in average transaction value of 7.8% partially offset by a decrease in average number of transaction per store of 2.4%.
 
Net sales in our European division during Fiscal 2009 decreased $13.4 million, or 2.7%, from Fiscal 2008. This decrease was attributable to a decrease of $32.3 million resulting from an unfavorable foreign currency translation of our European operations and a decrease of $1.2 million due to the effect of store closures, partially offset by new store sales of $15.1 million and increases in same store sales of $5.0 million, or 1.1%.
 
The increase in same store sales was primarily attributable to an increase in average transaction value of 6.6%, partially offset by a decrease in average number of transactions per store of 5.2%.
 
Gross profit
 
In Fiscal 2010, gross profit percentage remained consistent with Fiscal 2009 at 51.7%. Although the gross profit percentage did not change, our European division saw an 80 basis point decrease in occupancy costs and a 10 basis point decrease in buying and buying-related costs, offset by a 90 basis point decrease in merchandise margin. The 80 basis point improvement in occupancy costs is due to the leveraging effect of higher sales and a favorable foreign currency translation effect.
 
In Fiscal 2009, gross profit percentage increased 160 basis points to 51.7% compared to the gross profit percentage for Fiscal 2008 of 50.1%. This increase was comprised of a 140 basis point improvement in merchandise margin and a 30 basis point decrease in occupancy costs, partially offset by a 10 basis point increase in buying and buying-related costs. Fiscal 2008 included $2.1 million of non-recurring PET project costs, which were included in buying and buying-related costs, and accounted for 40 basis points of the improvement in gross margin.
 
The following table compares our sales of each product category for the last three fiscal years:
 
                         
    Percentage of Total  
Product Category
  Fiscal 2010     Fiscal 2009     Fiscal 2008  
 
Accessories
    62.7       62.2       57.3  
Jewelry
    37.3       37.8       42.7  
                         
      100.0       100.0       100.0  
                         


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Liquidity and Capital Resources
 
Our operating liquidity requirements are funded through internally generated cash flow from net sales and cash on hand. Our primary uses of cash are working capital requirements, new store expenditures, and debt service requirements. Cash outlays for the payment of interest are significantly higher in the three months ended April 30, 2011 and May 1, 2010 and Fiscal 2010, Fiscal 2009 and Fiscal 2008 than in prior periods as a result of the Credit Facility, the issuance of the Existing Notes in connection with the Transactions described below and the issuance of the notes. Our current capital structure generates tax losses in our U.S. operations because of debt service requirements. Accordingly, we expect to pay minimal cash taxes in the U.S. in the near term, while our foreign cash taxes are less affected by our capital structure and debt service requirements. We anticipate that the existing cash and cash equivalents and cash generated from operations will be sufficient to meet our future working capital requirements, new store expenditures, and debt service requirements as they become due. However, our ability to fund future operating expenses and capital expenditures and our ability to make scheduled payments of interest on, to pay principal on, or refinance indebtedness and to satisfy any other present or future debt obligations will depend on future operating performance. Our future operating performance and liquidity may also be adversely affected by general economic, financial, and other factors beyond our control, including those disclosed in the “Risk Factors” section of this prospectus.
 
Short-term Debt
 
On January 24, 2011, we entered into a Euro (“€”) denominated loan (the “Euro Loan”) in the amount of €42.4 million that is due on January 24, 2012. The Euro Loan bears interest at the three month Euro Interbank Offered Rate (“EURIBOR”) rate plus 8.00% per year and is payable quarterly. As of April 30, 2011, there was €42.4 million, or the equivalent of $62.8 million, outstanding under the Euro Loan. The net proceeds of the borrowing were used for general corporate purposes.
 
The obligations under the Euro Loan are secured by a cash deposit in the amount of €15.0 million, or the equivalent of $22.2 million at April 30, 2011, and a perfected first lien security interest in all of the issued and outstanding equity interest of one of our international subsidiaries, Claire’s Holdings S.a.r.l. The cash deposit is classified as “Cash and cash equivalents and restricted cash” in our Unaudited Condensed Consolidated Balance Sheets.
 
Credit Facility
 
Our Credit Facility provides senior secured financing of up to $1.65 billion, consisting of a $1.45 billion senior secured term loan facility and a $200.0 million senior secured revolving credit facility. On May 29, 2007, upon closing of the Transactions, we borrowed $1.45 billion under our senior secured term loan facility and were issued a $4.5 million letter of credit. The letter of credit was subsequently increased to $6.0 million. As of April 30, 2011, we were in compliance with the covenants in our Credit Facility.
 
Borrowings under our Credit Facility bear interest at a rate equal to, at our option, either (a) an alternate base rate determined by reference to the higher of (1) prime rate in effect on such day and (2) the federal funds effective rate plus 0.50% or (b) a LIBOR rate, with respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the London Interbank Market for the interest period relevant to such borrowing, adjusted for certain additional costs, in each case plus an applicable margin. The initial applicable margin for borrowings under our Credit Facility is 1.75% per annum with respect to the alternate base rate borrowing and 2.75% per annum in the case of any LIBOR borrowings. The applicable margin for our revolving credit loans under our Credit Facility will be subject to one or more stepdowns, in each case based upon the ratio of our net senior secured debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the period of four consecutive fiscal quarters most recently ended as of such date (the “Total Net Secured Leverage Ratio”).
 
On July 28, 2010, we entered into an interest rate swap agreement (the “Swap”) to manage exposure to fluctuations in interest rate changes related to the senior secured term loan facility. The Swap has been designated and accounted for as a cash flow hedge and expires on July 30, 2013. The Swap represents a contract to exchange floating rate for fixed interest payments periodically over the life of the Swap without


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exchange of the underlying notional amount. The Swap covers an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility and has a fixed rate of 1.2235%. The interest rate Swap results in the Company paying a fixed rate plus the applicable margin then in effect for LIBOR borrowings resulting in an interest rate of 3.97% at January 29, 2011, on a notional amount of $200.0 million of the senior secured term loan.
 
We entered into three interest rate swap agreements in July 2007 (the “Swaps”) to manage exposure to fluctuations in interest rate changes related to the senior secured term loan facility. The Swaps were designated and accounted for as cash flow hedges and expired on June 30, 2010. The Swaps covered an aggregate notional amount of $435.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rates of the three Swaps ranged from 4.96% to 5.25%.
 
In addition to paying interest on outstanding principal under our Credit Facility, we are required to pay a commitment fee, initially 0.50% per annum, in respect of the revolving credit commitments thereunder. The commitment fee will be subject to one stepdown, based upon our Total Net Secured Leverage Ratio. We must also pay customary letter of credit fees and agency fees. At January 29, 2011, the weighted average interest rate for borrowings outstanding under our Credit Facility was 2.98% per annum. Any principal amount outstanding of the loans under our senior secured revolving credit facility, plus interest accrued and unpaid thereon, will be due and payable in full at maturity on May 29, 2013.
 
All obligations under our Credit Facility are unconditionally guaranteed by (i) Claire’s Inc., our parent, prior to an initial public offering of Claire’s Stores, Inc. stock, and (ii) certain of our existing and future wholly-owned domestic subsidiaries, subject to certain exceptions.
 
All obligations under our Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by (i) all of Claire’s Stores, Inc. capital stock, prior to an initial public offering of Claire’s Stores, Inc. stock, and (ii) substantially all of our material owned assets and the material owned assets of subsidiary guarantors, including:
 
  •  a perfected pledge of all the equity interests held by us or any subsidiary guarantor, which pledge, in the case of any foreign subsidiary, is limited to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us and the subsidiary guarantors; and
 
  •  perfected security interests in, and mortgages on, substantially all material tangible and intangible assets owned by us and each subsidiary guarantor, subject to certain exceptions.
 
Our Credit Facility contains customary provisions relating to mandatory prepayments, voluntary payments, affirmative and negative covenants, and events of default; however, it does not contain any covenants that require the Company to maintain any particular financial ratio or other measure of financial performance.
 
Although we did not need to do so, during the quarter ended November 1, 2008, we drew down the remaining $194.0 million available under our Revolving Credit Facility (“Revolver”). An affiliate of Lehman Brothers is a member of the facility syndicate, and so immediately after Lehman Brothers filed for bankruptcy, in order to preserve the availability of the commitment, we drew down the full available amount under the Revolver. We received the entire $194.0 million, including the remaining portion of Lehman Brothers affiliate’s commitment of $33 million. We were not required to repay any of the Revolver until the due date of May 29, 2013, therefore, the Revolver was classified as a long-term liability in the accompanying Consolidated Balance Sheet as of January 29, 2011. The interest rate on the Revolver on January 29, 2011 was 2.5%. Subsequent to January 29, 2011, we paid down the entire $194.0 million of the Revolver (without terminating the commitment) and $241.0 million of indebtedness under the senior secured term loan with the net proceeds from the offering of the old notes. As a result of our prepayment under the senior secured term loan facility, we are no longer required to make any quarterly payments and have a final payment of $1,154 million due May 29, 2014. See Senior Secured Second Lien Notes below and Note 16 — Subsequent Events in the Notes to unaudited consolidated financial statements. At April 30, 2011, we had $4.8 million of letters of credit outstanding against the Revolver and had available $195.2 million to fund operations under our Revolver, if needed. As a result of our prepayment under the senior secured term loan facility, we are no longer required to make any quarterly payments and have a final payment due May 29, 2014.


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Senior Notes and Senior Subordinated Notes
 
In connection with the Transactions, we also issued a series of notes.
 
Our senior notes were issued in two series: (1) $250.0 million of 9.25% senior notes due 2015; and (2) $350.0 million of 9.625%/10.375% senior toggle notes due 2015. The $250.0 million senior notes are unsecured obligations, mature on June 1, 2015 and bear interest at a rate of 9.25% per annum. The $350.0 million senior toggle notes are senior obligations and will mature on June 1, 2015. For any interest period through June 1, 2011, we may, at our option, elect to pay interest on the senior toggle notes (i) entirely in cash, (ii) entirely by increasing the principal amount of the outstanding senior toggle notes or by issuing payment in kind (PIK) Notes, or (iii) 50% as cash interest and 50% as PIK interest. After June 1, 2011, we will make all interest payments on the senior toggle notes in cash. Cash interest on the senior toggle notes will accrue at the rate of 9.625% per annum and be payable in cash. PIK interest on the senior toggle notes will accrue at the cash interest rate per annum plus 0.75% and be payable by issuing PIK notes. When we make a PIK interest election, our debt increases by the amount of such interest and we issue PIK notes on the scheduled semi-annual payment dates.
 
We also issued 10.50% senior subordinated notes due 2017 in an initial aggregate principal amount of $335.0 million. The senior subordinated notes are senior subordinated obligations, will mature on June 1, 2017 and bear interest at a rate of 10.50% per annum.
 
Interest on the notes is payable semi-annually to holders of record at the close of business on May 15 or November 15 immediately preceding the interest payment date on June 1 and December 1 of each year, commencing December 1, 2007. The notes are also subject to certain redemption and repurchase rights as described in Note 5 — Debt in the Notes to our audited consolidated financial statements.
 
Our Senior Notes, Senior Toggle Notes, Senior Subordinated Notes and Senior Secured Second Lien Notes (collectively, the “Existing Notes”) contain certain covenants that, among other things, and subject to certain exceptions and other basket amounts, restrict our ability and the ability of our subsidiaries to:
 
  •  incur additional indebtedness;
 
  •  pay dividends or distributions on our capital stock, repurchase or retire our capital stock and redeem, repurchase or defease any subordinated indebtedness;
 
  •  make certain investments;
 
  •  create or incur certain liens;
 
  •  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.
 
Certain of these covenants, such as limitations on our ability to make certain payments such as dividends, or incur debt, will no longer apply if our 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 Existing Notes in May 2007, the Existing Notes have not received investment grade ratings from Moody’s or S&P. Accordingly, all of the covenants under the Existing Notes currently apply to us. None of these covenants, however, require us to maintain any particular financial ratio or other measure of financial performance. As of April 30, 2011, we were in compliance with the covenants under the Existing Notes.
 
We elected to pay interest in kind on our 9.625%/10.375% Senior Toggle Notes for the interest periods beginning June 2, 2008 through June 1, 2011. This election, net of reductions for note repurchases, increased the principal amount on the Senior Toggle Notes by $106.7 million, $98.1 million and $62.4 million as of


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April 30, 2011, January 29, 2011 and January 30, 2010, respectively. The accrued payment in kind interest is included in “Long-term debt” in the Consolidated Balance Sheets.
 
European Credit Facilities
 
Our non-U.S. subsidiaries have bank credit facilities totaling $2.8 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. At April 30, 2011, the entire amount of $2.8 million was available for borrowing by us, subject to a reduction of $2.7 million for outstanding bank guarantees.
 
Analysis of Consolidated Financial Condition
 
Three Months Ended April 30, 2011 and May 1, 2010
 
A summary of cash flows provided by (used in) operating, investing and financing activities for the three months ended April 30, 2011 and May 1, 2010 is outlined in the table below (in thousands):
 
                 
    Three Months
  Three Months
    Ended
  Ended
    April 30, 2011   May 1, 2010
 
Operating activities
  $ 643     $ 35,905  
Investing activities
    (17,439 )     8,358  
Financing activities
    (23,106 )     (21,239 )
 
Cash flows from operating activities
 
Cash provided by operating activities decreased $35.3 million for the three months ended April 30, 2011 compared to the prior year period. The decrease was due to a change in working capital items primarily resulting from a decrease of $21.9 million in accrued expenses and other liabilities and an increase of $13.3 million in prepaid expenses.
 
Cash flows from investing activities
 
Cash used in investing activities was $17.4 million for the three months ended April 30, 2011 and primarily consisted of capital expenditures for the remodeling of existing stores, new store openings, improvements to technology systems, acquisition of lease rights and, to a lesser extent, an increase in restricted cash. Cash provided by investing activities was $8.4 million for the three months ended May 1, 2010 and primarily consisted of proceeds received from our sale-leaseback transaction partially offset by capital expenditures for the remodeling of existing stores, new store openings, improvements to technology systems and acquisition of lease rights. During the remainder of Fiscal 2011, we expect to fund between $58.0 million and $63.0 million of capital expenditures.
 
Cash flows from financing activities
 
Cash used in financing activities increased $1.9 million for the three months ended April 30, 2011 compared to the prior year period. In the three months ended April 30, 2011, we received $450.0 million in proceeds from our Senior Secured Second Lien Notes offering and paid down (without terminating the commitment) the entire $194.0 million of the revolving credit facility (“Revolver”), repaid $244.9 million of indebtedness under the senior secured term loan and paid $10.1 million of debt financing costs. We also paid $24.0 million to retire $10.0 million of Senior Notes and $14.2 million of Senior Toggle Notes. In the three months ended May 1, 2010, we paid $3.6 million for the scheduled principal payments on our Credit Facility, $16.8 million to retire $6.0 million of Senior Toggle Notes and $15.6 million of Senior Subordinated Notes and $0.8 million in capital lease payments.
 
We elected to pay interest in kind on our Senior Toggle Notes for the interest periods beginning June 2, 2008 through June 1, 2011.


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We or our affiliates have purchased and may, from time to time, purchase portions of our indebtedness. All of our purchases have been privately-negotiated, open market transactions.
 
Cash Position
 
As of April 30, 2011, we had cash and cash equivalents and restricted cash of $246.1 million and substantially all of the cash equivalents consisted of money market funds invested in U.S. Treasury Securities.
 
We anticipate that cash generated from operations will be sufficient to meet our future working capital requirements, capital expenditures, and debt service requirements for at least the next twelve months. However, our ability to fund future operating expenses and capital expenditures and our ability to make scheduled payments of interest on, to pay principal on, or refinance indebtedness and to satisfy any other present or future debt obligations will depend on future operating performance. Our future operating performance and liquidity may also be adversely affected by general economic, financial, and other factors beyond the Company’s control, including those disclosed in the “Risk Factors” section included elsewhere in this prospectus.
 
Fiscal 2010 and Fiscal 2009
 
A summary of cash flows provided by (used in) operating, investing and financing activities is outlined in the table below (in thousands):
 
                         
    Fiscal 2010   Fiscal 2009   Fiscal 2008
 
Operating activities
  $ 151,259     $ 75,476     $ 1,373  
Investing activities
    (56,952 )     (21,259 )     (60,756 )
Financing activities
    (38,139 )     (60,591 )     179,500  
 
Our working capital at the end of Fiscal 2010 was $195.9 million compared to $188.6 million at the end of Fiscal 2009, an increase of $7.3 million. The increase in working capital mainly reflects the increase in inventories of $25.8 million, partially offset by the decrease in prepaid expenses of $11.4 million and the increase in trade accounts payable of $12.2 million.
 
Cash flows from operating activities
 
In Fiscal 2010, cash provided by operating activities increased $75.8 million compared to Fiscal 2009. The primary reasons for the increase were an increase in operating income before impairment of assets and depreciation and amortization expense of $25.2 million; a decrease in working capital, excluding cash and cash equivalents and restricted cash, of $34.8 million; and lower cash interest payments of $17.8 million; partially offset by higher cash tax payments of $3.2 million.
 
In Fiscal 2009, cash provided by operating activities increased $74.1 million compared to Fiscal 2008. The primary reasons for the increase were lower cash interest payments of $41.8 million, lower cash tax payments of $11.1 million, and an increase in operating income before impairment of assets and depreciation and amortization expense of $53.8 million, partially offset by an increase in working capital, excluding cash and cash equivalents and restricted cash, of $22.8 million, an increase in other assets of $4.6 million and a decrease in deferred rent expense of $5.8 million.
 
Cash flows from investing activities
 
In Fiscal 2010, cash used in investing activities increased $35.7 million compared to Fiscal 2009. In Fiscal 2010, restricted cash increased $23.9 million for deposits securing certain debt obligations. In February 2010, we completed a sale-leaseback transaction that generated proceeds of approximately $16.8 million, offset by increased capital expenditures of $24.4 million for the remodeling of existing stores, new store openings, and improvements to technology systems. In Fiscal 2009, we received $1.8 million from the sale of property and $2.4 million from the sale of intangible assets.


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In Fiscal 2009, cash used in investing activities decreased $39.5 million compared to Fiscal 2008. The primary reasons for the decrease were lower capital expenditures of $35.9 million due to fewer store openings and increased proceeds of $1.7 million from the sale of property and $1.9 million from the sale of intangible assets. We reduced capital expenditures during 2009 to preserve cash in response to the distress in the financial markets which has resulted in declines in consumer confidence and spending.
 
Capital expenditures were $49.8 million, $25.5 million and $61.4 million in Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively, primarily to remodel existing stores, open new stores and to improve technology systems. In Fiscal 2011, we currently expect to incur approximately $75.0 million to $80.0 million of capital expenditures to open new stores, remodel existing stores and to improve technology systems.
 
Cash flows from financing activities
 
In Fiscal 2010, cash used in financing activities decreased $22.5 million compared to Fiscal 2009. In Fiscal 2010, we received $57.5 million from a short-term bank loan and paid $0.5 million of debt issuance costs. In both Fiscal 2010 and Fiscal 2009, we paid $14.5 million for the scheduled principal payments on our Credit Facility. In Fiscal 2010, we paid $79.9 million to retire $14.0 million of Senior Notes, $57.2 million of Senior Toggle Notes and $22.6 million of Senior Subordinated Notes. We also paid $0.7 million in capital lease payments during Fiscal 2010. During Fiscal 2009, we paid $46.1 million to retire $30.5 million of Senior Toggle Notes and $52.8 million of Senior Subordinated Notes.
 
During Fiscal 2008, we drew down the remaining $194.0 million available under our Revolving Credit Facility and paid $14.5 million for the scheduled principal payments on our Credit Facility.
 
We or our affiliates have purchased and may, from time to time, purchase portions of our indebtedness. All of our purchases have been privately-negotiated, open market transactions.
 
Cash position
 
As of January 29, 2011, we had cash and cash equivalents and restricted cash of $279.8 million and substantially all of the cash equivalents consisted of money market funds invested in U.S. Treasury Securities.
 
Critical Accounting Policies and Estimates
 
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us 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, retirement and other post-retirement benefits, stock-based compensation, derivative and hedging activities, residual values and other items. These estimates and assumptions are based on our best estimates and judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquidity in credit markets, volatility in each of the 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.
 
Inventory Valuation
 
Our inventories in North America are valued at the lower of cost or market, with cost determined using the retail method. Inherent in the retail inventory calculation are certain significant management judgments and estimates including, among others, merchandise markups, markdowns and shrinkage, which impact the


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ending inventory valuation at cost as well as resulting gross margins. The methodologies used to value merchandise inventories include the development of the cost-to-retail ratios, the groupings of homogeneous classes of merchandise, development of shrinkage reserves and the accounting for retail price changes. Our inventories in Europe are accounted for under the lower of cost or market method, with cost determined using the average cost method at an individual item level. Market is determined based on the estimated net realizable value, which is generally the merchandise selling price. Inventory valuation is impacted by the estimation of slow moving goods, shrinkage and markdowns. Management monitors merchandise inventory levels to identify slow-moving items and uses markdowns to clear such inventories. Changes in consumer demand of our products could affect our retail prices, and therefore impact the retail method and lower of cost or market valuations.
 
Valuation of Long-Lived Assets
 
We evaluate the carrying value of long-lived assets whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has occurred if the projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of the asset in operations. When a potential impairment has occurred, an impairment charge is recorded if the carrying value of the long-lived asset exceeds its fair value. Fair value is measured based on a projected discounted cash flow model using a discount rate we feel is commensurate with the risk inherent in our business. A prolonged decrease in consumer spending would require us to modify our models and cash flow estimates, and could create a risk of an impairment triggering event in the future. Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives of assets. Actual results may differ, which could materially impact our impairment assessment.
 
During Fiscal 2010, we recorded a non-cash impairment charge of $6.0 million related to our former investment in our joint venture, Claire’s Nippon. During Fiscal 2008, the Company recorded a non-cash impairment charge of $25.5 million for its former investment in Claire’s Nippon.
 
During Fiscal 2009, an impairment charge of approximately $3.1 million was recorded related to our central buying and store operations offices and the North American distribution center located in Hoffman Estates, Illinois. During Fiscal 2008, an impairment charge of approximately $2.5 million was recorded related to store asset impairment.
 
Goodwill Impairment
 
We continually evaluate whether events and changes in circumstances warrant recognition of an impairment of goodwill. The conditions that would trigger an impairment assessment of goodwill include a significant, sustained negative trend in our operating results or cash flows, a decrease in demand for our products, a change in the competitive environment, and other industry and economic factors. We conduct our annual impairment test to determine whether an impairment of the value of goodwill has occurred in accordance with the guidance set forth in Accounting Standards Codification (“ASC”) Topic 350, Intangibles — Goodwill and Other. ASC Topic 350 requires a two-step process for determining goodwill impairment. The first step in this process compares the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess. We have two reporting units as defined under ASC Topic 350. These reporting units are our North American segment and our European segment.
 
Fair value is determined using appropriate valuation techniques. All valuation methodologies applied in a valuation of any form of property can be broadly classified into one of three approaches: the asset approach, the market approach and the income approach. We rely on the income approach using discounted cash flows


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and market approach using comparable public company entities in deriving the fair values of our reporting units. The asset approach is not used as our reporting units have significant intangible assets, the value of which is dependent on cash flow.
 
The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was based on a three-fourths weighting of a discounted cash flow analysis under the income approach using forward-looking projections of estimated future operating results and a one-fourth weighting of a guideline company methodology under the market approach using earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Our determination of the fair value of each reporting unit incorporates multiple assumptions and contains inherent uncertainties, including significant estimates relating to future business growth, earnings projections, and the weighted average cost of capital used for purposes of discounting. Decreases in revenue growth, decreases in earnings projections and increases in the weighted average cost of capital will all cause the fair value of the reporting unit to decrease, which could require us to modify future models and cash flow estimates, and could result in an impairment triggering event in the future.
 
We have weighted the valuation of our reporting units at three-fourths using the income approach and one-fourth using the market based approach. We believe that this weighting is appropriate since it is difficult to find other comparable publicly traded companies that are similar to our reporting units’ heavy penetration of jewelry and accessories sales and margin structure. It is our view that the future discounted cash flows are more reflective of the value of the reporting units.
 
The projected cash flows used in the income approach cover the periods consisting of the fourth quarter fiscal 2010 and the fiscal years 2011 through 2015. Beyond fiscal year 2015, a terminal value was calculated using the Gordon Growth Model. We developed the projected cash flows based on estimates of forecasted same store sales, new store openings, operating margins and capital expenditures. Due to the inherent judgment involved in making these estimates and assumptions, actual results could differ from those estimates. The projected cash flows reflect projected same store sales increases representative of the Company’s past performance post-recession.
 
A weighted average cost of capital reflecting the risk associated with the projected cash flows was calculated for each reporting unit and used to discount each reporting unit’s cash flows and terminal value. Key assumptions made in calculating a weighted average cost of capital include the risk-free rate, market risk premium, volatility relative to the market, cost of debt, specific company premium, small company premium, tax rate and debt-to-equity ratio.
 
The calculation of fair value is significantly impacted by the reporting unit’s projected cash flows and the discount interest rates used. Accordingly, any sustained volatility in the economic environment could impact these assumptions and make it reasonably possible that another impairment charge could be recorded some time in the future. However, since the terminal value is a significant portion of each reporting unit’s fair value, the impact of any such near-term volatility on our fair value would be lessened.
 
Our annual impairment analysis did not result in any impairment of goodwill during Fiscal 2010 and Fiscal 2009. We recognized a non-cash impairment charge of $297.0 million in Fiscal 2008. The excess of fair value over carrying value for each of our reporting units as of October 30, 2010, the annual testing date for Fiscal 2010, ranged from approximately $420.0 million to approximately $508.0 million. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit. This hypothetical 10% decrease would result in excess fair value over carrying value ranging from approximately $210.0 million to approximately $388.0 million for each of our reporting units.
 
Intangible Asset Impairment
 
Intangible assets include tradenames, franchise agreements, lease rights, non-compete agreements and leases that existed at the date of acquisition with terms that were favorable to market at that date. We continually evaluate whether events and changes in circumstances warrant revised estimates of the useful lives, residual values or recognition of an impairment loss for intangible assets. Future adverse changes in market


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and legal conditions or poor operating results of underlying assets could result in losses or an inability to recover the carrying value of the intangible asset, thereby possibly requiring an impairment charge in the future.
 
We evaluate the market value of the intangible assets periodically and record an impairment charge when we believe the carrying amount of the asset is not recoverable. Indefinite-lived intangible assets are tested for impairment annually or more frequently when events or circumstances indicate that impairment may have occurred. Definite-lived intangible assets are tested for impairment when events or circumstances indicate that the carrying amount may not be recoverable. We estimate the fair value of these intangible assets primarily utilizing a discounted cash flow model. The forecasted cash flows used in the model contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins and cost of capital. Changes in any of the assumptions utilized could affect the fair value of the intangible assets and result in an impairment triggering event. A prolonged decrease in consumer spending would require us to modify our models and cash flow estimates, with the risk of an impairment triggering event in the future. During Fiscal 2010, we recorded a non-cash impairment charge of $12.3 million related to certain franchise agreements which are definite-lived intangible assets. We did not recognize any impairment charge during Fiscal 2009. We recognized a non-cash impairment charge of $199.0 million in Fiscal 2008.
 
Income Taxes
 
We are subject to income taxes in many jurisdictions, including the United States, individual states and localities and internationally. Our annual consolidated provision for income taxes is determined based on our income, statutory tax rates and the tax implications of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items to be included in the tax return at different times than the items are reflected on the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. We establish deferred tax assets and liabilities as a result of these temporary differences.
 
Our judgment is required in determining any valuation allowance recorded against deferred tax assets, specifically net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that may reduce taxable income in future periods. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income and tax planning opportunities. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.
 
During Fiscal 2010, we reported a decrease of $11.8 million in valuation allowance against our U.S. deferred tax assets, and an increase of $1.5 million in valuation allowance against our foreign deferred tax assets. The foreign increase primarily relates to foreign jurisdictions that have a history of losses. Our conclusion regarding the need for a valuation allowance against U.S. and foreign deferred tax assets could change in the future based on improvements in operating performance, which may result in the full or partial reversal of the valuation allowance.
 
During Fiscal 2009, we reported an increase of $18.3 million in valuation allowance against our U.S. deferred tax assets, and an increase of $2.1 million in valuation allowance against our foreign deferred tax assets. The foreign increase primarily relates to foreign jurisdictions that have a history of losses.
 
In the fourth quarter of Fiscal 2008, we recorded a charge of $95.8 million, respectively, to establish a valuation allowance against our deferred tax assets in the U.S. We concluded that such a valuation allowance was appropriate in light of the significant negative evidence, which was objective and verifiable, such as the cumulative losses in recent fiscal years in our U.S. operations. While our long-term financial outlook in the U.S. remains positive, we concluded that our ability to rely on our long-term outlook as to future taxable income was limited due to the relative weight of the negative evidence from our recent U.S. cumulative losses.


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We establish accruals for uncertain tax positions in our Consolidated Financial Statements based on tax positions that we believe are supportable, but are potentially subject to successful challenge by the taxing authorities. We believe these accruals are adequate for all open audit years based on our assessment of many factors including past experience, progress of ongoing tax audits and interpretations of tax law. If changing facts and circumstances cause us to adjust our accruals, or if we prevail in tax matters for which accruals have been established, or we are required to settle matters in excess of established accruals, our income tax expense for a particular period will be affected.
 
Income tax expense also reflects our best estimate and assumptions regarding, among other things, the geographic mix of income and losses from our foreign and domestic operations, interpretation of tax laws and regulations of multiple jurisdictions, earnings repatriation plans, and resolution of tax audits. Our effective income tax rates in future periods could be impacted by changes in the geographic mix of income and losses from our foreign and domestic operations that may be taxed at different rates, changes in tax laws, repatriation of foreign earnings, and the resolution of unrecognized tax benefits for amounts different from our current estimates. Given our capital structure, we will continue to experience volatility in our effective tax rate over the near term.
 
Stock-Based Compensation
 
We issue stock options and other stock-based awards to executive management, key employees and directors under our stock-based compensation plans.
 
On January 29, 2006, we adopted ASC Topic 718, Compensation — Stock Compensation, using the modified prospective method. The calculation of stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility and pre-vesting forfeitures. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we were to use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate forfeitures based on our historical experience of stock-based awards granted, exercised and cancelled, as well as considering future expected behavior. If the actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be different from what we have recorded in the current period.
 
Under ASC Topic 718, time-vested stock awards are accounted for at fair value at date of grant. The compensation expense is recorded over the requisite service period. Stock-based compensation expense for time-vested stock awards granted in Fiscal 2010, Fiscal 2009 and Fiscal 2008 was recorded over the requisite service period using the graded-vesting method for the entire award.
 
Performance-vested awards, which qualified as equity plans under ASC Topic 718, were accounted for based on fair value at date of grant. The stock-based compensation expense was based on the number of shares expected to be issued when it became probable that performance targets required to receive the award would be achieved. The expense was recorded over the requisite service period.
 
BOGO options, which are immediately vested and exercisable upon issuance, are accounted for at fair value at date of grant. The compensation expense is recognized over a four year period due to the terms of the option requiring forfeiture in certain cases including the grantee’s voluntary resignation from the Company’s employ prior to May 2011.
 
The fair value of time-vested stock options and the buy one, get one (“BOGO”) options granted during Fiscal 2010, Fiscal 2009 and Fiscal 2008 were determined using the Black-Scholes option-pricing model. The fair value of performance based stock options issued during Fiscal 2010, Fiscal 2009 and Fiscal 2008 was based on the Monte Carlo model. Both models incorporate various assumptions such as expected dividend yield, risk-free interest rate, expected life of the options and expected stock price volatility.
 
Our estimates of stock price volatility, interest rate, grant date fair value and expected term of options and restricted stock are affected by illiquid credit markets, consumer spending and current and future economic


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conditions. As future events and their effects cannot be determined with precision, actual results could differ significantly from our estimates. See Note 9 — Stock Options and Stock-Based Compensation in the Notes to our audited consolidated financial statements.
 
Derivatives and Hedging
 
We account for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging. In accordance with ASC Topic 815, we report all derivative financial instruments on our Consolidated Balance Sheet at fair value. We formally designate and document the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction. We formally assess both at inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. We measure the effectiveness of our cash flow hedges by evaluating the following criteria: (i) the re-pricing dates of the derivative instrument match those of the debt obligation; (ii) the interest rates of the derivative instrument and the debt obligation are based on the same interest rate index and tenor; (iii) the variable interest rate of the derivative instrument does not contain a floor or cap, or other provisions that cause a basis difference with the debt obligation; and (iv) the likelihood of the counterparty not defaulting is assessed as being probable.
 
We primarily employ derivative financial instruments to manage our exposure to market risk from interest rate changes and to limit the volatility and impact of interest rate changes on earnings and cash flows. We do not enter into derivative financial instruments for trading or speculative purposes. We face credit risk if the counterparties to the financial instruments are unable to perform their obligations. However, we seek to mitigate credit derivative risk by entering into transactions with counterparties that are significant and creditworthy financial institutions. We monitor the credit ratings of the counterparties.
 
For derivatives that qualify as cash flow hedges, we report the effective portion of the change in fair value as a component of “Accumulated other comprehensive income (loss), net of tax” in the Consolidated Balance Sheets and reclassifies it into earnings in the same periods in which the hedged item affects earnings, and within the same income statement line item as the impact of the hedged item. The ineffective portion of the change in fair value of a cash flow hedge is recognized into income immediately. For derivative financial instruments which do not qualify as cash flow hedges, any changes in fair value would be recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss). We adopted ASC Topic 820, Fair Value Measurements and Disclosures, on February 3, 2008, which required the Company to include credit valuation adjustment risk in the calculation of fair value.
 
We may at our discretion terminate or change the designation of any such hedging instrument agreements prior to maturity. At that time, any gains or losses previously reported in accumulated other comprehensive income (loss) on termination would amortize into interest expense or interest income to correspond to the recognition of interest expense or interest income on the hedged debt. If such debt instrument was also terminated, the gain or loss associated with the terminated derivative included in accumulated other comprehensive income (loss) at the time of termination of the debt would be recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) at that time.
 
Contractual Obligations and Off Balance Sheet Arrangements
 
We finance certain equipment through transactions accounted for as non-cancelable operating leases. As a result, the rental expense for this equipment is recorded during the term of the lease contract in our consolidated financial statements, generally over four to seven years. In the event that we, or our landlord, terminate a real property lease prior to its scheduled expiration, we will be required to accrue all future rent payments under any non-cancelable operating lease with respect to leasehold improvements or equipment


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located thereon. The following table sets forth our contractual obligations requiring the use of cash as of January 31, 2011:
 
                                         
    Payments Due by Period  
                2-3
    4-5
    More than 5
 
Contractual Obligations
  Total     1 Year     Years     Years     Years  
    (In millions)  
 
Recorded Contractual Obligations:
                                       
Debt(1)
  $ 2,519.0     $ 76.2     $ 223.0     $ 1,960.3 (2)   $ 259.5  
Capital lease obligation
    48.7       2.2       4.5       4.6       37.4  
Unrecorded Contractual Obligations:
                                       
Operating lease obligations(3)
    1,053.9       202.2       338.7       246.9       266.1  
Interest(4)
    584.2       122.8       265.5       155.0       40.9  
Letters of credit
    7.1       7.1                    
                                         
Total
  $ 4,212.9     $ 410.5     $ 831.7     $ 2,366.8     $ 603.9  
                                         
 
 
(1) Represents debt expected to be paid and does not assume any note repurchases or prepayments other than scheduled debt payments under our Credit Facility.
 
 
(2) Includes $1,351.8 million under our senior secured term loan facility, $372.5 million under our Senior Toggle Notes and $236.0 million under our Senior Subordinated Notes.
 
 
(3) Operating lease obligations consists of future minimum lease commitments related to store operating leases, distribution center leases, office leases and equipment leases. Operating lease obligations do not include common area maintenance (“CAM”), contingent rent, insurance, marketing or tax payments for which the Company is also obligated.
 
 
(4) Represents interest expected to be paid on our debt and does not assume any note repurchases or prepayments, other than scheduled debt payments under our Credit Facility. Projected interest on variable rate debt is calculated using the applicable interest rate at January 29, 2011, and the effect of the interest rate swap through July 2013 as discussed in Note 6 — Derivatives and Hedging Activities in the Notes to our audited consolidated financial statements.
 
We have no material off-balance sheet arrangements (as such term is defined in Item 303(a) (4) (ii) under Regulation S-K of the Securities Exchange Act) other than disclosed herein.
 
Seasonality and Quarterly Results
 
Sales of each category of merchandise vary from period to period depending on current trends. We experience traditional retail patterns of peak sales during the Christmas, Easter and back-to-school periods. Sales as a percentage of total sales in each of the four quarters of Fiscal 2010 were 23%, 23%, 24% and 30%, respectively. See Note 13 — Selected Quarterly Financial Data in the Notes to our unaudited consolidated financial statements for our quarterly results of operations.
 
Impact of Inflation
 
Inflation impacts our operating costs including, but not limited to, cost of goods and supplies, occupancy costs and labor expenses. We seek to mitigate these effects by passing along inflationary increases in costs through increased sales prices of our products where competitively practical or by increasing sales volumes.
 
Recent Accounting Pronouncements
 
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements (amendments to ASC Topic 820, Fair Value Measurements and Disclosures). ASU 2010-06 amends the disclosure requirements related to recurring and nonrecurring measurements. The guidance requires new disclosures on the transfer of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of


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the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We adopted this guidance during our first fiscal quarter of Fiscal 2010 and it did not have a material impact on our financial position, results of operations or cash flow.
 
In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements (amendments to ASC Topic 855, Subsequent Events). ASU 2010-09 clarifies that subsequent events should be evaluated through the date the financial statements are issued. In addition, this update no longer requires a filer to disclose the date through which subsequent events have been evaluated. This guidance is effective for financial statements issued subsequent to February 24, 2010. We adopted this guidance on this date. This guidance did not have a material impact on our financial position, results of operations or cash flows.
 
There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Cash and Cash Equivalents
 
We have significant amounts of cash and cash equivalents, excluding restricted cash, at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions, we cannot be assured that we will not experience losses on our deposits. We mitigate this risk by investing in two money market funds that are invested exclusively in U.S. Treasury securities and limiting the cash balance in any one bank account. As of April 30, 2011, all cash equivalents, excluding restricted cash, were maintained in two money market funds that were invested exclusively in U.S. Treasury securities and our restricted cash was deposited with significant and credit worthy financial institutions.
 
Interest Rates
 
On July 28, 2010, we entered into an interest rate swap agreement (the “Swap”) to manage exposure to fluctuations in interest rates. The Swap expires on July 30, 2013. The Swap represents a contract to exchange floating rate for fixed interest payments periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covers an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rate of the Swap is 1.2235% and has been designated and accounted for as a cash flow hedge. At April 30, 2011, the estimated fair value of the Swap was a liability of approximately $1.5 million and was recorded, net of tax, as a component of “Accumulated other comprehensive income (loss), net of tax” in our unaudited condensed consolidated balance sheets.
 
We entered into three interest rate swap agreements in July 2007 (the “2007 Swaps”) to manage exposure to fluctuations in interest rates. Those 2007 Swaps expired on June 30, 2010. The 2007 Swaps represented contracts to exchange floating rate for fixed interest payments periodically over the lives of the 2007 Swaps without exchange of the underlying notional amount. The 2007 Swaps covered an aggregate notional amount of $435.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rates of the 2007 Swaps ranged from 4.96% to 5.25%. The 2007 Swaps were designated and accounted for as cash flow hedges.
 
At April 30, 2011, we had fixed rate debt of $1,307.8 million and variable rate debt of $1,217.1 million. Based on our variable rate debt balance (less $200.0 million for the interest rate swap) as of April 30, 2011, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $10.2 million, net.


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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 options. Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling, and financing activities in currencies other than local currencies and to the carrying value of our net investments in foreign subsidiaries. At April 30, 2011, 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 income (loss)” are $18.7 million and $(7.7) million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations during the three months ended April 30, 2011 and May 1, 2010, respectively.
 
Certain of our subsidiaries make significant USD purchases from Asian suppliers, particularly in China. Until July 2005, the Chinese government pegged its currency, the yuan renminbi (“RMB”), to the USD, adjusting the relative value only slightly and on infrequent occasion. Many people viewed this practice as leading to a substantial undervaluation of the RMB relative to the USD and other major currencies, providing China with a competitive advantage in international trade. China now allows the RMB to float to a limited degree against a basket of major international currencies, including the USD, the euro and the Japanese yen. The official exchange rate has historically remained stable; however, there are no assurances that this currency exchange rate will continue to be as stable in the future due to the Chinese government’s adoption of a floating rate with respect to the value of the RMB against foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on China to adopt an even more flexible and more market-oriented currency policy that allows a greater fluctuation in the exchange rate between the RMB and the USD. This floating exchange rate, and any appreciation of the RMB that may result from such rate, could have various effects on our business, which include making our purchases of Chinese products more expensive. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher costs of sales, which could have a material adverse effect on our results of operations.
 
The results of operations of our foreign subsidiaries, when translated into U.S. dollars, reflect the average foreign currency exchange rates for the months that comprise the periods presented. As a result, if foreign currency exchange rates fluctuate significantly from one period to the next, results in local currency can vary significantly upon translation into U.S. dollars. Accordingly, fluctuations in foreign currency exchange rates, most notably the strengthening of the dollar against the euro, could have a material impact on our revenue growth in future periods.
 
General Market Risk
 
Our competitors include department stores, specialty stores, mass merchandisers, discount stores and other retail and internet channels. Our operations are impacted by consumer spending levels, which are affected by general economic conditions, consumer confidence, employment levels, availability of consumer credit and interest rates on credit, consumer debt levels, consumption of consumer staples including food and energy, consumption of other goods, adverse weather conditions and other factors over which the Company has 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, sustained recession in the U.S. 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.


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BUSINESS
 
The Company
 
We are one of the world’s leading specialty retailers of fashionable accessories and jewelry at affordable prices for young women, teens, tweens, and girls ages 3 to 27. We are organized based on our geographic markets, which include our North American division and our European division. As of April 30, 2011, we operated a total of 3,000 stores, of which 1,960 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American division) and 1,040 stores were located in the United Kingdom, France, Switzerland, Spain, Ireland, Austria, Germany, Netherlands, Portugal, Belgium, Poland, Czech Republic and Hungary (our European division). We operate our stores under two brand names: Claire’s®, on a global basis, and Icing®, in North America.
 
As of April 30, 2011, we also franchised or licensed 391 stores in Japan, the Middle East, Turkey, Russia, Greece, South Africa, Guatemala, Malta and Ukraine. 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 Consolidated Statements of Operations and Comprehensive Income (Loss). The franchise fees we charge under the franchising agreements are reported in “Other expense (income), net” in our Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Until September 2, 2010, we operated stores in Japan through our former Claire’s Nippon 50:50 joint venture with Aeon Co., Ltd. We accounted for the results of operations of Claire’s Nippon under the equity method and included the results within “Other expense (income), net” in our Consolidated Statements of Operations and Comprehensive Income (Loss). Beginning September 2, 2010, these stores began to operate as licensed stores. Our primary brand in North America and exclusively in Europe is Claire’s. Our Claire’s customers are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6), or referred to as our Young, Younger and Youngest target customer groups.
 
Our second brand in North America is Icing, which targets a single edit point customer represented by a 23 year old young woman just graduating from college and entering the work force who dresses consistent with the current fashion influences. We believe this niche strategy enables us to create a well defined merchandise point of view and attract a broad group of customers from 19 to 27 years of age.
 
We believe that we are the leading accessories and jewelry destination for our target customers, which is embodied in our mission statement — to be a fashion authority and fun destination offering a compelling, focused assortment of value-priced accessories, jewelry and other emerging fashion categories targeted to the lifestyles of kids, tweens, teens and young women. In addition to age segmentation, we use multiple lifestyle aesthetics to further differentiate our merchandise assortments for our Young and Younger target customer groups.
 
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:
 
  •  Accessories — includes fashion accessories for year-round use, including legwear, headwear, attitude glasses, scarves, armwear and belts, and seasonal use, including sunglasses, hats, fall footwear, sandals, scarves, gloves, boots, slippers and earmuffs; and other accessories, including hairgoods, handbags, and small leather goods, as well as cosmetics
 
  •  Jewelry — includes earrings, necklaces, bracelets, body jewelry and rings, as well as ear piercing
 
In North America, our stores are located primarily in shopping malls. The differentiation of our Claire’s and Icing brands allows us to operate multiple store locations within a single mall. In Europe our stores are located primarily on high streets, in shopping malls and in high traffic urban areas.
 
Our Competitive Strengths
 
Strong Claire’s Name Brand Recognition Across the Globe.  A Claire’s store is located in approximately 90% of all major U.S. shopping malls and in 32 countries outside of the U.S., including stores that we


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franchise or license. This global presence provides us with strong brand recognition of the Claire’s brand within our target customer base. The focus of our website is to showcase the merchandise, provide a platform for the brand and to create an interactive environment for our target customer groups in order to build greater awareness and increase customer engagement. Claire’s brand name is also featured in editorial coverage, press clips in relevant fashion periodicals, and on the internet, reinforcing our message to our target customers.
 
Diversification Across Geographies and Merchandise Categories.  As of April 30, 2011, we operated a total of 3,000 stores, of which 1,960 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American division). As of April 30, 2011, we also operated 1,040 stores located in the United Kingdom, France, Switzerland, Spain, Ireland, Austria, Germany, Netherlands, Portugal, Belgium, Poland, Czech Republic and Hungary (our European division), 391 stores in 18 countries outside of Europe and North America through franchise or license arrangements.
 
During the three months ended April 30, 2011, Fiscal 2010 and Fiscal 2009, we generated approximately 65%, 64% and 63%, respectively, of our net sales from the North American division with the balance being delivered by our European division. Our net sales are not dependent on any one category, product or style and are diversified across approximately 8,000 ongoing stock-keeping units (SKUs) in our stores. This multi-classification approach allows us to capitalize on many fashion trends, ideas and merchandise concepts, while not being dependent on any one of them.
 
Cost-Efficient Global Sourcing Capabilities.  Our merchandising strategy is supported by efficient, low-cost global sourcing capabilities diversified across approximately 700 suppliers located primarily outside the United States. Our contracts with vendors are short-term in nature and do not require a significant lead time. A significant portion of our product offering is developed by our product development team as well as our vertically-integrated global buying and sourcing group based in Hong Kong, enabling us to buy and source merchandise rapidly and cost effectively. Approximately 90% of our merchandise offering is proprietary.
 
Improved Cost Structure and Streamlined Operations.  Our cost conscious culture serves as the basis for the improvements we have made to the cost structure since the acquisition. Through our Cost Savings Initiative (“CSI”), which we began in late fiscal 2008 and completed in fiscal 2009, we were able to achieve $60 million of annual cost reductions. CSI primarily focused on implementing a new field management structure and global store labor planning model while improving our centralization and simplifying processes across functions. In addition to CSI, we have successfully renegotiated over 700 leases and closed over 200 underperforming stores which enhanced the profitability of our store portfolio. We also completed our Pan-European Transformation project in 2008 and it is the underpinning for the way we operate across Europe. We consolidated three regional distribution centers into a single European distribution center co-located with a centralized Buying and Planning office for Europe.
 
Substantial Free Cash Flow Generation.  We generate substantial free cash flow, which we believe is driven by our strong gross margins, efficient operating structure, low annual maintenance capital expenditures and flexible growth capital expenditure initiatives. Our minimal working capital requirements result from high merchandise margins, low unit cost of our merchandise and the limited seasonality of our business. Over the past three fiscal years, no single quarter represented less than 22% or more than 31% of annual net sales for the respective year.
 
Strong and Experienced Senior Management Team.  We have a strong and experienced senior management team with extensive retail experience. Gene Kahn, our Chief Executive Officer (“CEO”), has over 36 years of experience in the retail industry, including positions of Chairman, CEO and President of The May Department Stores. Jim Conroy, our Corporate President, collaborates with the CEO to oversee the Global business and has direct responsibility for Global Merchandise and the International Division. Mr. Conroy has over 19 years of retail experience, including positions as a management consultant and retail executive. Jay Friedman, President of our North American Division, has over 25 years of experience in operating and managing major divisions of several large-scale, multi-unit retail and apparel businesses, including, most recently, Jones Apparel Group, and, previously Etienne Aigner, Foot Locker, Dayton Hudson Corporation, May Company and Macy’s. J. Per Brodin, our Executive Vice President and Chief Financial Officer, has over 20 years of financial accounting and management experience within and outside of the retail industry.


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Mr. Brodin has responsibility for Finance and Information Technology. In addition, we have added 16 seasoned executives to key roles since the Merger (as defined below).
 
Business Strategy
 
Our business strategy is built on two key components:
 
Drive organic growth through our merchandise, stores, and customer offense.  In order to maximize our organic growth potential, drive same store sales improvement and sustain margins, our efforts are focused on three foundational areas of the business:
 
  •  Merchandise:  We continue to enhance the fashion-orientation and quality of our product offering to deliver a unique, proprietary assortment that is highly relevant to our target customers, particularly the Claire’s Young (teenage) customer. We continue to focus on our multi-classification Accessories assortment, while maintaining our market leadership position in Jewelry, to capitalize on the evolving largest market opportunities. We are enabling these improvements through investments in fashion and trend forecasting, global product design and development, and in the enhancement of our Hong Kong-based sourcing capabilities to leverage our global purchasing economy of scale. Simultaneously, we are identifying product source alternatives.
 
  •  Stores:  In our almost 3,400 stores worldwide, our objective is to provide a consistent, engaging, and brand-right customer experience. We are continually improving our in-store presentation of merchandise and marketing collateral through a rigorous planning and communication process, resulting in improved execution and increased consistency across the chain and, ultimately, a superior shopping experience. We are also commencing efforts to heighten the selling orientation of our store teams specific to each brand and country.
 
  •  Customer:  In the past year, we have made significant strides to build deeper customer relationships and support our brands. We launched a new, innovative claires.com website that uses customer-generated content, conveys a real-life interaction with our customers, and presents an authoritative fashion position. We further drive brand awareness and relevance with our ongoing social media, email, and text campaigns, which leverage our Facebook fan base and proprietary customer database. Lastly, in parallel with our digital efforts, we have significantly upgraded our in-store marketing collateral in order to present a much more fashionable brand image that appeals to our target customers.
 
Increase our global reach through new store expansion (owned and franchise) and new distribution channels.  We believe significant opportunities exist to grow our distribution worldwide. Our Claire’s concept has proven to be portable across diverse geographies and approximately 95% of our stores worldwide are cash flow positive. In addition, the moderate up-front investment requirements per store enable us to achieve an attractive return on investment.
 
We will extend our global reach in four primary ways:
 
  •  Build New Company-owned Claire’s Stores:  We opened 82 new stores in 2010; 69 in Europe and 13 in North America. In addition, we have plans to open approximately 140 new stores in 2011, the majority of which will be in Europe.
 
  •  Build New Company-owned Icing Stores:  As we refine the Icing brand concept, we believe there is significant opportunity to increase the store penetration in North America, as well as to roll out the concept on a global basis to markets where we can leverage the existing Claire’s infrastructure.
 
  •  Open New International Markets with Franchise Partners:  Building on our refined franchising model, which is present in multiple geographies worldwide, we will pursue high potential “white space” opportunities in new markets globally. In 2011, we intend to enter Mexico, India and possibly Australia. We are currently studying our brand entrance strategy for China and Southeast Asia for the ensuing years.


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  •  Add Alternative Distribution Channels:  We will seek new opportunities globally to market and distribute our brands, beginning with the launch of E-Commerce in the Claire’s North America Division which is targeted to debut in mid-2011.
 
This business strategy will allow us to maximize our sales opportunities, while driving our earnings with commensurate flow through and cash flow.
 
Fiscal 2011 Priorities
 
For Fiscal 2011, we have developed seven priorities that are designed to help advance our global business objectives. These seven priorities are as follows:
 
Deliver An Exceptional Highly Relevant Assortment for the Young Customer.  We define the Young customer as girls between the ages of 13 and 18. During Fiscal 2011, we will continue to focus our efforts on delivering a fashion-right merchandise assortment that appeals to this important customer demographic that offers significant sales growth opportunities and enhances our brand perception.
 
Sustain Merchandise Margin.  We have achieved significant merchandise margin improvement since 2007. During Fiscal 2011, we will leverage our global merchandise function to help drive performance, create greater consistency and establish product leadership globally. We intend to sustain our merchandise margin improvements while simultaneously pursuing select opportunities to further improve margin. We will focus our attention on reducing markdowns through improvements in merchandise selection, store allocation and replenishment as well as rationalizing our SKU count on an on-going basis. In addition, we will continue to pursue lower cost of merchandise purchases.
 
Enhance the In-Store Experience, Especially for the Young Customer.  We intend to sharpen the focus of our planograms globally which should yield an even more consistent in-store presentation and an improved visually appealing product placement within the store. We intend to redefine the selling orientation of our store associates, particularly towards the Young customer. The redefined selling orientation, together with our pursuit of flawless in-store execution, will facilitate an improved customer experience.
 
Heighten Brand Relevance.  We intend to further build our brand relevance through increasing the fashion orientation of all marketing and expanding our digital/interactive presence. We also intend to launch an E-Commerce site beginning with our North America Claire’s brand and continue to pursue selective partnerships with relevant, high-profile media and entertainment personalities and properties.
 
Extend Global Reach.  During Fiscal 2011, we intend to significantly expand our company-owned store network in Europe and, in North America, selectively pursue additional new store locations, including potential new or understored markets as well as top-tier malls. We plan to position the “Icing” brand for global growth by revising the brand strategy and testing a new store environment to better appeal to the Icing customer. Internationally, we intend to pursue franchise partners for expansion into new non-owned markets.
 
Maintain Strong Financial Discipline.  We will remain focused on prudent expense discipline. We intend to continue to invest selectively to propel growth while rigorously pursuing ongoing cost control. Such investments include infrastructure for global web presence, E-Commerce and our International division.
 
Develop our Team Members into a Top Performing Global Organization.  During Fiscal 2011, we will work with the strong executive team in place to foster greater team spirit, an improved sense of community and focus on executive leadership development capabilities.
 
In summary, we believe these seven priorities serve as the basis for individual division goals that translate to specific objectives that focus on the achievement of division specific metrics that support the Company’s global financial objectives.


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Stores
 
Our stores in North America are located primarily in shopping malls and average approximately 970 square feet of selling space. Our stores in Europe are located primarily on high streets, in shopping malls and in high traffic urban locations and average approximately 638 square feet of selling space. Our store hours are dictated by shopping mall operators and our stores are typically open from 10:00 a.m. to 9:00 p.m. Monday through Saturday and, where permitted by law, from noon to 5:00 p.m. on Sunday. Approximately 76% of our sales in Fiscal 2010 were made in cash (including checks and debit card transactions), with the balance made by credit cards. We permit, with restrictions on certain items, returns for exchange or refund.
 
Store Management
 
Our stores are organized and controlled on a district level. We employ District Managers, each of whom supervises store managers and the business in their respective geographic area and report to Regional Managers.
 
In North America, each Regional Manager reports to Territorial Vice Presidents, who report to the Senior Vice President of Stores. Each store is typically staffed by a Manager, an Assistant Manager and one or more part-time employees.
 
In Europe, District Sales Managers report to Regional Sales Managers who report to either Country Managers or directly to two Managing Sales Directors. We now have four operating zones within Europe: (Zone 1) United Kingdom and Ireland; (Zone 2) France, Spain, Portugal and Belgium; (Zone 3) Switzerland, Austria, Netherlands and Germany; and (Zone 4) Poland, Czech Republic and Hungary.
 
Store Openings, Closings and Future Growth
 
In Fiscal 2010, we opened 82 stores and closed 49 underperforming stores, for a net increase of 33 stores. In Europe, we increased our store count by 54 stores, net, resulting in a total of 1,009 stores. In North America, we decreased our store count by 21 stores, net, to 1,972 stores. “Stores, net” refers to stores opened, net of closings.
 
                         
    January 29,
    January 30,
    January 31,
 
Store Count as of:
  2011     2010     2009  
 
North America
    1,972       1,993       2,026  
Europe
    1,009       955       943  
                         
Subtotal Company-Owned
    2,981       2,948       2,969  
                         
Joint Venture
          211       214  
Franchise and License
    395       195       196  
Subtotal Non-Owned
    395       406       410  
                         
Total
    3,376       3,354       3,379  
                         
 
We plan to open approximately 140 Company-owned stores globally in Fiscal 2011. We also plan to continue opening stores when suitable locations are found and satisfactory lease negotiations are concluded. Our initial investment in new stores opened during Fiscal 2010, which includes leasehold improvements and fixtures, averaged approximately $215,000 per store globally. In addition to the investment in leasehold improvements and fixtures, we may also purchase intangible assets or incur initial direct costs for leases relating to certain store locations in our European operations.
 
Purchasing and Distribution
 
We purchased our merchandise from approximately 700 suppliers in Fiscal 2010. Approximately 86% of our merchandise in Fiscal 2010 was purchased from vendors based outside the United States, including approximately 69% purchased from China. We are not dependent on any single supplier for merchandise purchased. Merchandise for our North American stores is shipped from our distribution facility in Hoffman


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Estates, Illinois, a suburb of Chicago. Our distribution facility in Birmingham, United Kingdom services all of our stores in Europe. We distribute merchandise to our franchisees and licensee from a third party operated distribution center in Hong Kong. Merchandise is shipped from our distribution centers by common carrier to our individual store locations. To keep our assortment fresh and exciting, we typically ship merchandise to our stores three to five times a week.
 
Trademarks and Service Marks
 
We are the owner in the United States of various marks, including “Claire’s,” “Claire’s Accessories,” “Icing,” and “Icing by Claire’s.” We have also registered these marks outside of the United States. We currently license certain of our marks under franchising and licensing arrangements in Japan, the Middle East, Turkey, Russia, South Africa, Greece, Guatemala, Malta and Ukraine. We believe our rights in our marks are important to our business and intend to maintain our marks and the related registrations.
 
Information Technology
 
Information technology is important to our business success. Our information and operational systems use a broad range of both purchased and internally developed applications to support our retail operations, financial, real estate, merchandising, inventory management and marketing processes. Sales information is generally collected from point of sale terminals in our stores on a daily basis. We have developed proprietary software to support key decisions in various areas of our business including merchandising, allocation and operations. We periodically review our critical systems to evaluate disaster recovery plans and the security of our systems.
 
Competition
 
The specialty retail business is highly competitive. We compete on a global, national, regional, and local level with other specialty and discount store chains and independent retail stores. Our competition also includes Internet, direct marketing to consumer, and catalog businesses. We also compete with department stores, mass merchants, and other chain store concepts. We cannot estimate the number of our competitors because of the large number of companies in the retail industry that fall into one of these categories. We believe the main competitive factors in our business are brand recognition, merchandise assortments for each target customer, compelling value, store location and the shopping experience.
 
Seasonality
 
Sales of each category of merchandise vary from period to period depending on current trends. We experience traditional retail patterns of peak sales during the Christmas, Easter, and back-to-school periods. Sales as a percentage of total sales in each of the four quarters of Fiscal 2010 were 23%, 23%, 24% and 30%, respectively.
 
Employees
 
On April 30, 2011, we employed approximately 17,400 employees, 60% of whom were part-time. Part-time employees typically work up to 20 hours per week. We do not have collective bargaining agreements with any labor unions, and we consider employee relations to be good.
 
Properties
 
Our stores are located in all 50 states of the United States, Puerto Rico, Canada, the Virgin Islands, the United Kingdom, Ireland, France, Spain, Portugal, Belgium, Switzerland, Austria, Netherlands, Germany, Poland, Czech Republic and Hungary. We lease all of our 3,000 store locations, generally for terms ranging from five to approximately 10 years. Under the terms of the leases, we pay a fixed minimum rent and/or rentals based on a percentage of net sales. We also pay certain other expenses (e.g., common area maintenance charges and real estate taxes) under the leases. The internal layout and fixtures of each store are designed by management and third parties and constructed by external contractors.


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Most of our stores in North American and the European divisions are located in enclosed shopping malls, while other stores are located within central business districts, power centers, lifestyle centers, “open-air” outlet malls or “strip centers.” Our criteria for opening new stores includes geographic location, demographic aspects of communities surrounding the store site, quality of anchor tenants, advantageous location within a mall or central business district, appropriate space availability, and rental rates. We believe that sufficient desirable locations are available to accommodate our expansion plans. We refurbish our existing stores on a regular basis.
 
The following table sets forth the location, use and size of our distribution, sourcing, buying, merchandising, and corporate facilities as of April 30, 2011. The properties are leased with the leases expiring at various times through 2030, subject to renewal options.
 
             
        Approximate
        Square
Location
 
Use
  Footage
 
Hoffman Estates, Illinois
  Corporate and North America management and distribution center     538,000 (1)
Birmingham, United Kingdom
  Europe management and distribution center     105,600 (2)
Pembroke Pines, Florida
  Accounting and finance     36,000  
Hong Kong
  Sourcing and buying     11,100  
Paris, France
  Zone support     8,800 (3)
Zurich, Switzerland
  Zone support     3,800 (3)
 
 
(1) On February 19, 2010, we sold the Property to a third party. Contemporaneously with the sale of the Property, we entered into a lease agreement that provides for (a) an initial expiration date of February 28, 2030 with two (2) five (5) year renewal periods, each at our option, and (b) basic rent of $2.1 million per annum (subject to annual increases). This transaction is accounted for as a capital lease. Prior to February 19, 2010, we owned central buying and store operations offices and the North American distribution center located in Hoffman Estates, Illinois (the “Property”) which is on approximately 28.4 acres of land. The Property has buildings with approximately 538,000 total square feet of space, of which 373,000 square feet is devoted to receiving and distribution and 165,000 square feet is devoted to office space.
 
(2) Our subsidiary, Claire’s Accessories UK Ltd., or “Claire’s UK,” leases distribution and office space in Birmingham, United Kingdom. The facility consists of approximately 23,900 square feet of office space and approximately 81,700 square feet of distribution space. The lease expires in December 2024, and Claire’s UK has the right to assign or sublet this lease at any time during the term of the lease, subject to landlord approval. The Birmingham, United Kingdom distribution center currently services our owned stores in Europe.
 
(3) We maintain our human resource and select operating functions for these countries.
 
In addition, we have contracted a third party vendor in Hong Kong to provide distribution center services for our franchise stores.
 
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. Accordingly, the consequences of these matters cannot be finally determined by management. However, in the opinion of management, we believe that current pending litigation will not have a material adverse effect on our consolidated financial results.


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MANAGEMENT
 
Our current executive officers and directors, and their ages and positions, are as follows:
 
             
Name
 
Age
 
Position
 
Eugene S. Kahn
    61     Chief Executive Officer and Director
James G. Conroy
    41     President of Claire’s Stores
Jay K. Friedman
    59     President of Claire’s North America
Kenneth Wilson
    44     President of Claire’s Europe
J. Per Brodin
    49     Executive Vice President and Chief Financial Officer
Peter P. Copses
    52     Non-Executive Chairman of our Board of Directors
Robert J. DiNicola
    62     Director
George G. Golleher
    63     Director
Rohit Manocha
    52     Director
Ron Marshall
    57     Director
Lance A. Milken
    35     Director
 
Eugene S. Kahn has served as the Company’s Chief Executive Officer and as a member of the Company’s board of directors since May 2007. From May 2001 to January 2005, Mr. Kahn was Chairman of the board of directors and Chief Executive Officer, and from May 1998 to April 2001 was President and Chief Executive Officer, of The May Department Stores Company. Mr. Kahn joined May Department Stores in 1990 and, in addition to the positions listed above, held various other positions including, President and Chief Executive Officer of G. Fox, President and Chief Executive Officer of Filene’s, both divisions of May Department Stores, Vice Chairman and Executive Vice Chairman. Mr. Kahn’s extensive experience and knowledge of the Company’s operations, competitive challenges and opportunities gained through his position as Chief Executive Officer of the Company and his prior executive leadership and business experience, which includes almost 40 years of experience in the retail industry, has led the board to believe that Mr. Kahn should serve as a director of the Company.
 
James G. Conroy was promoted to President of Claire’s in April 2009, having previously served as our Executive Vice President since December 2007. Mr. Conroy worked as a full-time consultant to Claire’s from May 2007 to December 2007. Prior to joining Claire’s, Mr. Conroy had 17 years of retail experience, including as a management consultant from July 2001 to December 2007, with positions as a principal of Kurt Salmon Associates and a senior manager of Deloitte Consulting, and as a retail executive with responsibility for strategic planning, merchandising and supply chain management.
 
Jay K. Friedman became our President of North America in January 2011. From 2006 to 2010, Mr. Friedman served in various capacities with Jones Apparel Group, including President and Chief Executive Officer of Jones Retail Corporation, Nine West Group from 2006 to 2010, and Group President of Wholesale Footwear from 2006 to 2007. During his tenure as President and CEO of Jones Retail Corporation, Nine West Group, Mr. Friedman had responsibility for a 1,000 store division that operated nine retail concepts and three web businesses. Prior to joining Claire’s, Mr. Friedman had over 25 years of experience in operating and managing major divisions of several large-scale, multi-unit retail and apparel businesses, including, most recently, Jones Apparel Group, and, previously Etienne Aigner, Foot Locker, Dayton Hudson Corporation, May Company and Macy’s.
 
Kenneth Wilson became our President of Europe in January 2009. Mr. Wilson has resigned his position effective the end of November 2011. From June 1990 to January 2009, Mr. Wilson served in various capacities with Levi Strauss Europe, including President of Levi’s Brand Europe from November 2001 to October 2005 and Senior Vice President Commercial Operations from November 2005 until January 2009. During his tenure with Levi’s, Mr. Wilson expanded the European Division of the Levi’s business and opened in excess of 250 new stores.
 
J. Per Brodin became our Senior Vice President and Chief Financial Officer in February 2008 and was promoted to Executive Vice President and Chief Financial Officer in May 2010. From November 2005 until joining the Company, Mr. Brodin served in various capacities with Centene Corporation, including Senior Vice


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President and Chief Financial Officer and Vice President and Chief Accounting Officer. From March 2002 to November 2005, Mr. Brodin served as Vice President, Accounting and Reporting for The May Department Stores Company. From 1989 to February 2002, Mr. Brodin was with the Audit and Business Advisory Practice of Arthur Andersen, LLP, serving as Senior Manager with their Professional Standards Group from February 2000 until February 2002.
 
Peter P. Copses became Chairman of the Company’s board of directors in May 2007 upon consummation of the Merger. Mr. Copses co-founded Apollo Management in 1990. Prior to joining Apollo Management, Mr. Copses was an investment banker at Drexel Burnham Lambert Incorporated, and subsequently at Donaldson, Lufkin, & Jenrette Securities, concentrating on the structuring, financing and negotiation of mergers and acquisitions. Mr. Copses has served as a director of RBS Global, Inc., a diversified, multi-platform industrial company, since July 2006. In addition, since July 2010, Mr. Copses has served as the chairman of the board of directors of CKE Restaurants, Inc. (“CKE”), an owner, operator, franchisor and licensor of quick service restaurants. Mr. Copses also served as a director of Linens ’n Things, Inc. (“LNT”), a retailer of home textiles, housewares and decorative home accessories, from February 2006 until February 2010. Mr. Copses also served as a director of Rent-A-Center, Inc., the nation’s largest operator of rent-to-own stores, from August 1998 to December 2007. Over the course of the past 20 years, Mr. Copses has served on the board of directors of several other retail businesses, including General Nutrition Centers, Inc. and Zale Corporation. In light of our ownership structure and Mr. Copses’ position with Apollo Management, his knowledge of the retail industry and his extensive financial and business experience, including his background as an investment banker, the board believes it is appropriate for Mr. Copses to serve as a director of the Company.
 
Robert J. DiNicola became a member of the Company’s board of directors in May 2007 following the consummation of the Merger. Mr. DiNicola has also served as a director of CKE since July 2010 and serves as the Senior Retail Advisor for Apollo Management. Mr. DiNicola served as Chief Executive Officer and Chairman of the Board of LNT from February 2006 until May 2008, when LNT and its parent company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code, which was converted to a Chapter 7 liquidation in February 2010. Mr. DiNicola served as Executive Chairman of General Nutrition Centers, Inc. (“GNC”) from December 2004 to March 2007, and as the interim CEO and Chairman of GNC from December 2004 to June 2005. Mr. DiNicola also held numerous positions with Zale Corporation, including Chief Executive Officer from April 1994 to 2002, and Chairman of the Board from April 1994 to 2004. Prior to joining Zale Corporation, Mr. DiNicola served as the Chairman and Chief Executive Officer of the Bon Marché, a division of Federated Department Stores. Beginning his retail career in 1972, Mr. DiNicola has also worked for Macy’s and The May Department Stores Company. In light of our ownership structure and Mr. DiNicola’s knowledge of the retail industry and the competitive challenges and opportunities facing the Company gained through his executive leadership and management experience in the retail industry, the board believes it is appropriate for Mr. DiNicola to serve as a director of the Company.
 
George G. Golleher became a member of the Company’s board of directors in May 2007 following the consummation of the Merger. Since May 2007, Mr. Golleher has served as Chairman and Chief Executive Officer of Smart & Final Inc., an operator of warehouse grocery stores. In addition, Mr. Golleher has served as a director of CKE since July 2010. Mr. Golleher was a director of Simon Worldwide, Inc., a promotional marketing company, from September 1999 to April 2006, and was also its Chief Executive Officer from March 2003 to April 2006. From March 1998 to May 1999, Mr. Golleher served as President, Chief Operating Officer and director of Fred Meyer, Inc., a food and drug retailer. Prior to joining Fred Meyer, Inc., Mr. Golleher served for 15 years with Ralphs Grocery Company until March 1998, ultimately as the Chief Executive Officer and Vice Chairman of the Board. From 2002 until April 2009, Mr. Golleher served as a director of Rite Aid Corporation, one of the largest retail drugstore chains in the United States. Mr. Golleher has also been a business consultant and private equity investor since June 1999. In light of our ownership structure and Mr. Golleher’s knowledge of the retail industry and the competitive challenges and opportunities facing the Company gained through his executive leadership and management experience in the retail industry, the board believes it is appropriate for Mr. Golleher to serve as a director of the Company.


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Rohit Manocha became a member of the Company’s board of directors in May 2007 following the consummation of the Merger. Mr. Manocha is a co-founding Partner of Tri-Artisan Capital Partners, LLC (“Tri-Artisan”). Mr. Manocha is also co-President of Morgan Joseph TriArtisan Group, Inc., an affiliate of TriArtisan. Tri-Artisan is a New York and London based merchant banking firm, founded in 2002, that invests, on behalf of its investors, in private equity transactions and provides investment banking services. Prior to joining Tri-Artisan, Mr. Manocha was a senior banker at Thomas Weisel Partners, ING Barings and Lehman Brothers. In light of our ownership structure and Mr. Manocha’s position with Tri-Artisan and his extensive financial and business experience, the board believes it is appropriate for Mr. Manocha to serve as a director of the Company.
 
Ron Marshall has served as a member of the Company’s board of directors since December 2007. Mr. Marshall has served as President and Chief Executive Officer of The Great Atlantic & Pacific Tea Company from February 2010 through July 2010. From January 2009 until January 2010, Mr. Marshall was President and Chief Executive Officer, and director of Borders Group Inc. (“Borders”), a national bookseller. In February 2011, Borders voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. From 1998 to 2006, he served as Chief Executive Officer of Nash Finch Company and was a member of its board of directors. Prior to joining Nash Finch, Mr. Marshall served as Chief Financial Officer of Pathmark Stores, Inc., Dart Group Corporation, Barnes & Noble Bookstores, Inc., NBI’s The Office Place and Jack Eckerd Corporation. Mr. Marshall has also been a principal of Wildridge Capital Management since 2006. Mr. Marshall is a certified public accountant. In light of our ownership structure and Mr. Marshall’s knowledge of the retail industry and the competitive challenges and opportunities facing the Company gained through his executive leadership and management experience in the retail industry, the board believes it is appropriate for Mr. Marshall to serve as a director of the Company.
 
Lance A. Milken became a member of the Company’s board of directors in May 2007. Mr. Milken is a Partner at Apollo Management, where he has worked since 1998. In addition, Mr. Milken has served as a director of CKE since July 2010. Mr. Milken also serves as a member of the Milken Institute board of trustees. In light of our ownership structure and Mr. Milken’s position with Apollo Management and his extensive financial and business experience, including his experience in leveraged finance, the board believes it is appropriate for Mr. Milken to serve as a director of the Company.
 
Board Composition
 
The Company’s board of directors is composed of seven directors. Each director serves for annual terms and until his or her successor is elected and qualified. Apollo Management indirectly controls a majority of the common stock of our Parent and, as such, Apollo Management has the ability to elect all of the members of our board of directors. Apollo Management has agreed to elect to our board of directors the designee of an affiliate of Tri-Artisan Capital Partners, LLC (“Tri-Artisan”). Tri-Artisan has invested in one of Apollo Management’s co-investment vehicles that was used to consummate the Merger. Rohit Manocha is the current designee of Tri-Artisan. We are a privately held company. Accordingly, we have no nominating committee nor do we have written procedures by which security holders may recommend nominees to our board of directors. In addition, we do not currently have a policy with respect to the consideration of diversity in identifying director nominees.
 
Board Committees
 
The board of directors has the authority to appoint committees to perform certain management and administration functions. The board of directors has currently appointed an audit committee and a compensation committee. The members of the audit committee are Peter Copses (Chairman), Lance Milken, Rohit Manocha, and Ron Marshall. The audit committee is responsible for reviewing and monitoring our accounting controls and internal audit functions and recommending to the board of directors the engagement of our outside auditors. The board of directors has determined that Mr. Copses is an “audit committee financial expert” within the meaning of SEC regulations. The members of the compensation committee are Peter Copses (Chairman), Lance Milken and Rohit Manocha. The compensation committee is responsible for establishing and administering our executive


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compensation program, which includes reviewing and approving the annual salaries, stock option grants, and other compensation of our executive officers and, upon recommendation and consultation with our CEO, for employees other than our CEO. The compensation committee, or the full board of directors, also provides assistance and recommendations with respect to our general compensation policies and practices and assists with the administration of our compensation plans. The audit and compensation committees are not required to, and do not, meet the independence requirements of Nasdaq or the New York Stock Exchange. See “Certain Relationships and Related Transactions.”
 
Code of Ethics
 
The board of directors has adopted a Code of Ethics that applies to the Company’s chief executive officer and senior financial officers. A waiver from any provision of the code of ethics may only be granted by the audit committee. In addition, Claire’s has adopted a Code of Business Conduct and Ethics applicable to all employees, officers and directors. Our Code of Ethics and Code of Business Conduct and Ethics are posted on our website at www.clairestores.com.


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EXECUTIVE COMPENSATION
 
Compensation Discussion and Analysis
 
Introduction
 
The board of directors appointed after the Merger, which at the time of the Merger did not include Eugene S. Kahn, our Chief Executive Officer, negotiated employment agreements and other arrangements with Mr. Kahn. In addition, on December 13, 2007, upon consultation with an independent compensation consultant with respect to the salary and bonus ranges of executives in comparable peer group companies, our board of directors approved an employment agreement with James Conroy, who was appointed Executive Vice President in December 2007, on terms substantially consistent with those provided to Mr. Kahn. In April 2009, Mr. Conroy was promoted to President of Claire’s Stores, and the Compensation Committee of the board of directors approved an amendment to Mr. Conroy’s employment agreement. An additional amendment to Mr. Conroy’s employment agreement was approved in May 2010. In February 2008, our board of directors approved compensation arrangements for J. Per Brodin, our then Senior Vice President and Chief Financial Officer. In May 2010, Mr. Brodin was promoted to Executive Vice President and Chief Financial Officer, and the compensation committee of the board of directors approved an amendment to Mr. Brodin’s compensation arrangements. In January 2009, we entered into an employment agreement with Kenneth Wilson, our President of Claire’s Europe. Mr. Wilson has resigned his position effective the end of November 2011. In January 2011, Jay K. Friedman became our President of North America and we entered into an employment agreement with Mr. Friedman.
 
This Compensation Disclosure and Analysis describes, among other things, the compensation objectives and the elements of the executive compensation program embodied by the foregoing agreements with Messrs. Kahn, Conroy, Wilson and Brodin (each, a named executive officers in Fiscal 2010), which form the core of the executive compensation program. For Fiscal 2010, Mr. Friedman, who joined the Company in January 2011, is the fifth named executive officer. However, because he worked for the Company for less than one month of Fiscal 2010, the following discussion of Fiscal 2010 compensation is not generally applicable to him.
 
During Fiscal 2010, the basic elements of compensation for our Chief Executive Officer and our other current named executive officers remained essentially unchanged.
 
Compensation Philosophy and Objectives
 
Our Compensation Committee developed an executive compensation program designed to reward the achievement of specific annual and long-term goals by the Company, and which is designed to align the executives’ interests with those of our stockholders by rewarding performance above established goals, with the ultimate objective of improving stockholder value. Our Compensation Committee evaluates both performance and compensation to ensure that the Company maintains its ability to attract, retain and motivate qualified employees in key positions and that compensation to key employees remains competitive relative to the compensation paid by similar sized companies. Our Compensation Committee believes that the executive compensation packages provided by the Company to the current named executive officers should include both cash and stock-based compensation that reward performance as measured against established goals.
 
In negotiating the initial employment agreements and arrangements with our current named executive officers, our board of directors and Compensation Committee, as the case may be, placed significant emphasis on aligning the management interests with those of Apollo Management. Our Chief Executive Officer made a significant equity investment in Parent common stock and our other current named executive officers received equity awards that included performance vesting options.


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Components of Executive Compensation
 
The principal components of compensation for our current named executive officers are base salary, annual performance bonus, management equity investments in Parent, stock option awards, and other benefits and perquisites.
 
Base Salary.  The Company provides our current named executive officers with base salary to compensate them for services rendered during the fiscal year. Base salaries for the current named executive officers are determined for each executive based on his position and scope of responsibility. The initial base salaries for our current named executive officers were established in their initial employment agreements or other written arrangements.
 
Bonus.  Our current named executive officers are eligible to receive annual cash performance bonuses in addition to their base salary. These bonuses are intended to motivate and reward achievement of annual financial objectives and to provide a competitive total compensation package to our executives.
 
Our Compensation Committee sets threshold, target and maximum numeric performance goals for each performance metric at or near the beginning of each annual performance period, with input from senior management. These performance goals are based on projected internal plan targets available to the Compensation Committee at that time. Performance metrics are further weighted based on the executive’s responsibility from a global, North American and European perspective. The Compensation Committee believed that these performance targets goals would be difficult to achieve, but could be achieved with significant effort on the part of its executives and that payment of the maximum amounts would occur only upon the achievement of results in excess of internal and general market expectations and our long-term strategic objectives.
 
In Fiscal 2010, cash bonuses for Mr. Kahn and Mr. Conroy were based on the following combined global and targeted weighted performance metrics: same store sales (36%), new store sales (8%), earnings before interest, taxes, depreciation and amortization (EBITDA), as adjusted (36%), and free cash flow (20%). In Fiscal 2010, the cash bonus for Mr. Brodin was based on the following combined global and targeted weighted performance metrics: same store sales (31%), new store sales (8%), earnings before interest, taxes, depreciation and amortization (EBITDA), as adjusted (31%), free cash flow (20%) and expense control (10%). For our European named executive officer, on a European division basis, we further weighted these performance factors and modified their corresponding performance goals.


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The performance bonuses earned for Fiscal 2010 were based on the named executive officer meeting or exceeding the following numeric performance goals established by our Compensation Committee at or near the beginning of Fiscal 2010.
 
Fiscal 2010 Performance Goals
 
                                         
                    Expense
                    Control
    Same Store Sales
  New Store
  Adjusted
      (% of
Bonus Level
  (%)(1)   Sales(2)   EBITDA(3)   Free Cash Flow   Sales)
        ($ in millions)   ($ in millions)   ($ in millions)    
 
Threshold
    2.00       24       245       176       59.1 %
Target
    4.20       25       261       192       58.4 %
Maximum
    6.40       26       277       208       57.8 %
 
 
(1) We include a store in the calculation of same store sales once it has been in operation 60 weeks after its initial opening.
 
(2) New store sales include sales from stores open less than 60 weeks.
 
(3) EBITDA represents income from continuing operations before provision (benefit) for income tax, interest income and expense and depreciation and amortization, as adjusted for certain non-recurring and non-cash expenses.
 
The following table indicates the threshold (minimum), target and maximum annual potential bonuses that our named executive officers were eligible to receive for Fiscal 2010, expressed as a dollar amount and as a percentage of the named executive officer’s Fiscal 2010 annual base salary, assuming that the numeric performance goals established by our Compensation Committee for each of the performance metrics applicable to the named executive officer at the threshold, target or maximum levels were achieved. The last column of the table reflects the actual performance bonus earned by the named executive officer for Fiscal 2010.
 
Fiscal Year 2010 Bonus Table
 
                                 
    Potential
  Potential
  Potential
   
Name
  Threshold   Target   Maximum   Actual
 
Eugene S. Kahn
  $ 500,000(50 )%   $ 1,000,000(100 )%   $ 1,500,000(150 )%   $ 1,400,205  
Chief Executive Officer
                               
James G. Conroy
  $ 332,500(50 )%   $ 665,000(100 )%   $ 997,500(150 )%   $ 931,137  
President
                               
Kenneth Wilson
  $ 309,773(50 )%   $ 619,545(100 )%   $ 929,318(150 )%   $ 388,624  
President of Claire’s Europe
                               
J. Per Brodin
  $ 147,000(30 )%   $ 294,000(60 )%   $ 441,000(90 )%   $ 399,456  
Executive Vice President and
                               
Chief Financial Officer
                               
 
Stock Option Awards.  On June 29, 2007, our board of directors and the stockholders of Parent adopted the Claire’s Inc. Amended and Restated Incentive Plan. In May 2011, the Compensation Committee approved certain amendments to the Plan (as amended, the “Incentive Plan”). At the same time, conforming amendments were made to outstanding stock options, including those held by the named executive officers. The Incentive Plan provides employees, directors or consultants who were previously employed by Parent or its affiliates who are in a position to contribute to the long-term success of these entities with shares of common stock or stock options to aid in attracting, retaining and motivating individuals of outstanding ability. The Incentive Plan provides for the grant of shares of common stock, incentive stock options, and non-qualified stock options. The aggregate number of shares currently reserved for issuance under the Incentive Plan is 8,200,000.
 
The Incentive Plan is administered by our Compensation Committee, which has the authority to determine who should be awarded options or shares, the number of shares to be granted or to be subject to an option, the


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exercise price or purchase price of such awards, and other applicable terms and conditions. Our Compensation Committee has delegated to our Chief Executive Officer the authority to grant options under the Incentive Plan to employees at certain non-senior levels that replace former non-senior employees and also seeks input from our Chief Executive Officer on option grants to employees, other than our Chief Executive Officer. Our board of directors or our Compensation Committee has the power and authority to construe and interpret the Incentive Plan, and their acts are final, conclusive, and binding on all parties.
 
Stock option grants granted under the Incentive Plan are divided between time options, performance options and stretch performance options. The stock options generally expire seven years after the date of grant. The time options become vested and exercisable in four equal installments based on the anniversary of the date of grant or the anniversary of a designated date, subject to acceleration in the event of a change in control (as defined in the option grant letter). The performance options provide that if on any “Measurement Date,” the “Value Per Share” equals or exceeds the “Target Stock Price,” then the performance options will vest and become exercisable. The stretch performance options provide that if on any “Measurement Date,” the “Value Per Share” equals or exceeds the “Stretch Stock Price,” then the stretch performance options will vest and become exercisable. Prior to an initial public offering, a Measurement Date is the end of a fiscal quarter beginning with or following the last day of the second quarter of our 2009 fiscal year. Prior to an initial public offering, Value Per Share is Parent’s “Net Equity Value” divided by the number of fully diluted shares. Net Equity Value is calculated as (1) 8.5 times Parent’s EBITDA for the four fiscal quarters ending on the Measurement Date, plus (2) the sum of all cash and cash equivalents and the aggregate exercise price of all outstanding options or warrants to purchase shares of Parent’s common stock as of the Measurement Date, less (3) the sum of Parent’s debt and capital leases as of the Measurement Date. Upon a defined liquidity event, Value Per Share is the price per share realized by Parent’s principal stockholders. The Target Stock Price means $10.00 compounded at an annual rate of 22.5% from May 29, 2007 to the Measurement Date, and the Stretch Stock Price means $10.00, compounded at an annual rate of 32% from May 29, 2007 to the Measurement Date. In addition, effective May 2011, the performance options and certain of the stretch performance options will also vest if prior to the end of Parent’s Fiscal 2012, an initial public offering is consummated at a price at least equal to a specified “target IPO price” (as defined in the Incentive Plan) and if during any four fiscal quarter period prior to or concurrent with the end of Parent’s Fiscal 2012 year certain EBITDA and leverage-based performance targets are achieved (the “2012 Vesting Events”).
 
Unless the term of a vested option would otherwise terminate earlier, all vested options generally terminate on the 91st day following an individual’s termination for any reason (other than death or disability, in which case such option will terminate on the 181st day following termination). The exercise price of options may be paid in the form of cash, a certified check, bank draft, or any other form of payment permitted by the board of directors or Compensation Committee of our board of directors. In addition, in certain circumstances, a grantee may exercise his or her options on a cashless basis by using shares (including shares to be delivered on option exercises) to pay the exercise price and withholding taxes.
 
Common stock issued under the Incentive Plan is subject to various restrictions. During the one-year period following the grantee’s termination of employment (or the date of exercise, if later), Parent or its principal stockholders may repurchase any or all of the shares purchased pursuant to an option. Such shares may be purchased for fair market value; however, the purchase price may be less depending upon the circumstances surrounding the grantee’s termination of employment. In addition, if Parent’s principal stockholders sell a majority of Parent, they may require a grantee to participate in the sale, or a grantee may require such principal stockholders to allow it to participate in the sale, in either case under the same terms and conditions as applicable to the principal stockholders. Shares acquired pursuant to an award generally may not otherwise be transferred until an initial public offering, and certain investors have voting proxy on all shares of common stock issued pursuant to the Incentive Plan.
 
In the event any recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, repurchase, exchange or issuance of shares or other securities, any stock dividend or other special and nonrecurring dividend or distribution (whether in the form of cash, securities or other property), liquidation, dissolution, or other similar transactions or events, affects the shares, our board of directors or Compensation Committee of our board of directors will make appropriate equitable adjustments in order to prevent dilution


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or enlargement of a grantee’s rights under the Incentive Plan. Such adjustments may be applicable to the number and kind of shares available for grant of awards; the number and kind of shares which may be delivered with respect to outstanding awards; and the exercise price. In addition, in recognition of any unusual or nonrecurring events, our board of directors or Compensation Committee of our board of directors may adjust any terms and conditions applicable to outstanding awards, which may include cancellation of outstanding options in exchange for the in-the-money value, if any, of the vested portion.
 
The board of directors or Compensation Committee of our board of directors may amend or terminate the Incentive Plan or any award issued thereunder; however, in general, no such amendment or termination may adversely affect the rights of a grantee.
 
Management Equity Investments.  Our board of directors awards certain management employees the opportunity to purchase or acquire Parent common stock at a price of $10.00 per share, the estimated fair market value of the Company’s common stock after the closing of the Merger. With each share received, the management employee is granted an option to purchase an additional share of Parent common stock at an exercise price of $10.00 per share. These options expire in seven years. There were no management equity investments by our current named executive officers in Fiscal 2010. In May 2011, an amended offer under substantially similar terms was made to management employees. This offer, which expired May 20, 2011, superseded all previously pending offers. The terms of this offer included that the 2012 Vesting Events described above will apply (pro rata based on the number of new shares purchased) to a portion of the stretch performance options held by each offeree who holds such stretch performance options and who accepts the offer to subscribe for shares of the Parent. The 2012 vesting events apply to all of the stretch options granted to Mr. Kahn.
 
The shares of Parent common stock acquired by the current named executive officers are subject to restrictions on transfer, repurchase rights and other limitations.
 
Benefits Programs.  The current named executive officers participate in a variety of retirement, health and welfare, and paid time-off benefits designed to enable us to attract and retain our workforce in a competitive marketplace. Health and welfare and paid time-off benefits helped ensure that we have a productive and focused workforce through reliable and competitive health and other benefits.
 
Retirement Plans.  The Company maintains the Claire’s Stores, Inc. 401(k) Savings and Retirement Plan (the “401(k) Plan”) to enable eligible employees to save for retirement through a tax-advantaged combination of elective employee contributions and our matching contributions, and provide employees the opportunity to directly manage their retirement plan assets through a variety of investment options. The 401(k) Plan allowed eligible employees to elect to contribute from 1% to 50% of their eligible compensation to an investment trust on a pre-tax basis, up to the maximum dollar amounts permitted by law. Eligible compensation generally means all wages, salaries and fees for services. Prior to April 2009, matching contributions under the 401(k) Plan were 50% of the first 4% of eligible compensation that each eligible participant elected to be contributed to the 401(k) Plan on his or her behalf. The portion of an employee’s account under the 401(k) Plan that was attributable to matching contributions vested as follows: 20% after one year of service, 20% after two years of service, 20% after three years of service, 20% after four years of service and 20% after five years of service.
 
However, regardless of the number of years of service, an employee was fully vested in our matching contributions (and the earnings thereon) if the employee retired at age 65 or later, or terminated employment by reason of death or total and permanent disability. The 401(k) Plan was designed to provide for distributions in a lump sum or installments after termination of service. However, loans and in-service distributions under certain circumstances such as a hardship, attainment of age 591/2 or a disability, were permitted. The amounts, if any, of our matching contributions under the 401(k) Plan for Fiscal 2010 for each of the current named executive officers is included in the All Other Compensation column of the Summary Compensation Table. Effective April 2009, we no longer provide matching contributions for any of our employees under our 401(k) plan.
 
Perquisites.  While we believe that perquisites should not be a major part of executive compensation, we recognize the need to provide our current named executive officers with certain perquisites that are reasonable


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and consistent with our overall compensation program. Accordingly, certain of our current named executive officers receive customary expense reimbursement, relocation benefits, life insurance and an automobile allowance.
 
Severance Pay and Benefits upon Termination of Employment under Certain Circumstances.  Our Compensation Committee believes the severance pay and benefits payable to the current named executive officers aid in the attraction and retention of these executives as a competitive practice and is balanced by the inclusion of restrictive covenants (such as non-compete provisions) to protect the value of the Company and Parent following a termination of an executive’s employment. In addition, the Company believes the provision of these contractual benefits will keep the executives focused on the operation and management of the business.
 
Eugene S. Kahn.  Pursuant to his employment agreement, Mr. Kahn is entitled to specified severance compensation in the event of a termination of employment by the Company without cause or by the executive officer for good reason. In either case, subject to execution of a release of claims, Mr. Kahn is entitled to continued payments of base salary for the remainder of the term, but for no less than two years if the termination occurs during the eighteen-month period following a change in control (as defined in the employment agreement). Mr. Kahn is also entitled to reimbursement for premiums for continued health benefits for the severance period. In addition, Mr. Kahn will be entitled to an annual bonus, prorated for the period of employment during the year, based on actual performance of the Company for the year of termination. Upon such a termination, a portion of all restricted stock, time options, and performance options with respect to which the performance goals have been achieved will vest pro-rata based on the portion of the option which would have vested on the next vesting date and the number of days of employment since the most recent vesting date, and Mr. Kahn will generally be entitled to exercise vested options for a 180 day period unless they would have otherwise expired earlier. The agreement prohibits Mr. Kahn from engaging in competitive and similar activities and from soliciting clients and customers for the remainder of the period during which the executive is receiving payments, but for no less than one year following his termination of employment, and his agreement provides for customary protection of confidential information and intellectual property.
 
Upon termination of employment because of death or disability, Mr. Kahn (or his estate) will be entitled to an annual performance bonus, prorated for the period of employment during the year, based on actual performance of the Company for the year of termination, and unvested shares of restricted stock become fully vested. Time options that are not exercisable as of the date of termination because of death or disability and performance options with respect to which performance goals have been achieved will vest, and options which are exercisable as of such date will generally remain exercisable for one year, in the case of Mr. Kahn, unless they would have otherwise expired earlier.
 
Upon any other termination, other than for cause, stock options that are not exercisable as of the date of termination will expire, and options which are exercisable as of such date will generally remain exercisable for a 90 day period, unless they would otherwise expire earlier.
 
James G. Conroy.  Pursuant to his employment agreement, as amended, Mr. Conroy is entitled to specified severance compensation in the event of a termination of employment by the Company without cause, non-renewal of the employment agreement or by the executive officer for good reason. In any case, subject to execution of a release of claims, Mr. Conroy is entitled to continued payments of base salary for a twelve month period following such date of termination, but if the termination occurs during the eighteen-month period following a change in control (as defined in the employment agreement), then the payment of base salary shall continue for the longer of the period until the end of the then remaining term or 12 months. Mr. Conroy is also entitled to reimbursement for premiums for continued health benefits for the length of the severance period. In addition, Mr. Conroy will be entitled to an annual bonus, prorated for the period of employment during the year, based on actual performance of the Company for the year of termination. Upon such a termination, Mr. Conroy will generally be entitled to exercise vested options for a 90 day period, unless they would have otherwise expired earlier. The agreement prohibits Mr. Conroy from engaging in competitive and similar activities and from soliciting clients and customers for the remainder of the period during which


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the executive is receiving payments, but for no less than one year following his termination of employment, and his agreement provides for customary protection of confidential information and intellectual property.
 
Upon termination of employment because of death or disability, Mr. Conroy (or his estate) will be entitled to an annual performance bonus, prorated for the period of employment during the year, based on actual performance of the Company for the year of termination. Time options that are not exercisable as of the date of termination because of death or disability and performance options with respect to which performance goals have been achieved will vest pro-rata based on the portion of the option which would have vested on the next vesting date and the number of days of employment since the most recent vesting date, and options which are exercisable as of such date will generally remain exercisable for 180 days, unless they would have otherwise expired earlier.
 
Upon any other termination, other than for cause, stock options that are not exercisable as of the date of termination will expire, and options which are exercisable as of such date will generally remain exercisable for a 90 day period, unless they would otherwise expire earlier.
 
Jay Friedman.  Pursuant to Mr. Friedman’s employment agreement, either Mr. Friedman or Company may provide the other with a notice of termination, giving the other party 12 months’ written notice. Once notice is received, regardless of by whom it is provided, pursuant to the above, the Company may, at its sole discretion, terminate Mr. Friedman’s employment with immediate effect by paying his base salary and the value of or continuation of benefits (excluding bonus) in lieu of all or the balance of any unexpired period of notice, at the Company’s choice. The right of the Company to make a payment of base salary and benefits (excluding bonus) in lieu of all or part of a notice period does not give rise to any right to receive such a payment or the right to receive any other payment or benefit thereunder. Alternatively, Company may terminate the agreement with immediate effect and without any payment if Mr. Friedman commits gross negligence or a number of other serious breaches of his obligations, as outlined in the agreement. The agreement prohibits Mr. Friedman from engaging in competitive and similar activities and from soliciting clients and customers for up to one year following his termination of employment, and his agreement provides for customary protection of confidential information and intellectual property.
 
Upon termination, however arising, Mr. Friedman shall not be entitled to any compensation for the loss of any rights or benefits under any share option, bonus, long-term incentive plan or other profit sharing or equity scheme operated by the Company in which Mr. Friedman may participate, which rights and benefits shall at all times remain governed by the rules of the relevant plan(s), option agreement, and vesting schedule.
 
Kenneth Wilson.  Pursuant to Mr. Wilson’s employment agreement, either Mr. Wilson or Company may provide the other with a notice of termination, giving the other party 12 months’ written notice. Once notice is received, regardless of by whom it is provided, pursuant to the above, the Company may, at its sole discretion, terminate Mr. Wilson’s employment with immediate effect by paying his base salary and the value of or continuation of benefits (excluding bonus) in lieu of all or the balance of any unexpired period of notice, at the Company’s choice. The right of the Company to make a payment of base salary and benefits (excluding bonus) in lieu of all or part of a notice period does not give rise to any right to receive such a payment or the right to receive any other payment or benefit thereunder. Alternatively, Company may terminate the agreement with immediate effect and without any payment if Mr. Wilson commits gross negligence or a number of other serious breaches of his obligations, as outlined in the agreement. The agreement prohibits Mr. Wilson from engaging in competitive and similar activities and from soliciting clients and customers for up to one year following his termination of employment, and his agreement provides for customary protection of confidential information and intellectual property.
 
Upon termination, however arising, Mr. Wilson shall not be entitled to any compensation for the loss of any rights or benefits under any share option, bonus, long-term incentive plan or other profit sharing or equity scheme operated by the Company in which Mr. Wilson may participate, which rights and benefits shall at all times remain governed by the rules of the relevant plan(s), option agreement, and vesting schedule. Mr. Wilson has resigned his position effective the end of November 2011.


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J. Per Brodin.  Mr. Brodin is entitled to receive a severance payment equal to 12 months of his base salary, subject to reduction for amounts earned from other employment during the 12-month period, in the event his employment is terminated without cause. Mr. Brodin is subject to customary restrictive covenants, such as non-solicitation and non-disclosure covenants, for a period of 12 months following a termination of employment. Upon termination of employment, other than for cause, stock options that are not exercisable as of the date of termination will expire, and options which are exercisable as of such date will generally remain exercisable for a 90 day period, unless they would otherwise expire earlier.
 
Compensation Committee Interlocks and Insider Participation
 
Messrs. Copses, Manocha and Milken were the only members of the compensation committee during Fiscal 2010. No member of the compensation committee is now, or was during Fiscal 2010 or any time prior thereto, an officer or employee of the Company. None of our executive officers currently serves or ever has served as a member of the board of directors, the compensation committee, or any similar body, of any entity one of whose executive officers serves or served on our Board or our compensation committee.
 
Summary Compensation Table
 
The following table sets forth information concerning compensation awarded to, earned by or paid to our current named executive officers in Fiscal 2010, 2009, and 2008 for services rendered to us during that time.
 
                                                                 
                                  Non-Equity
             
Name and
                    Stock
    Option
    Incentive Plan
    All Other
       
Principal
  Fiscal
    Salary
    Bonus
    Awards
    Awards
    Compensation
    Compensation
    Total
 
Position
  Year     ($)     ($)(2)     ($)     ($)(1)     ($)     ($)(3)     ($)  
 
Eugene S. Kahn
    2010       1,000,000       1,400,205 (2)     0       0       0       219,185 (3)     2,619,390  
Chief Executive
    2009       1,000,000       983,650 (2)     0       0       0       142,229       2,125,879  
Officer
    2008       1,000,000       0 (2)     0       0       0       132,289       1,132,289  
James G. Conroy
    2010       648,750       931,137 (2)     0       0       0       10,200 (4)     1,590,087  
President
    2009       600,000       590,190 (2)     0       346,250       0       15,356       1,551,796  
      2008       598,846       225,000 (5)     0       0               77,483       901,329  
Jay Friedman(6)
    2010       34,615       150,000 (7)     0       1,030,317       0       850 (4)     1,215,782  
President
                                                               
North America
                                                               
Kenny Wilson(8)
    2010       577,613       388,621 (2)     0       0       0       40,275 (9)     1,006,510  
President Europe
    2009       575,108       769,993 (10)     0       972,800       0       165,156       2,483,057  
J. Per Brodin
    2010       477,500       399,456 (2)     0       0       0       219,332 (11)     1,096,288  
Executive Vice
    2009       440,000       302,714 (2)     0       0       0       6,600       749,314  
President and
    2008       431,538       0 (2)     0       502,200       0       6,600       940,338  
Chief Financial Officer
                                                               
 
 
(1) This column reflects the amounts recognized for financial statement reporting purposes for the portion of the fair value of option awards to purchase Parent common stock in accordance with ASC Topic 718,  — Stock Compensation (formerly, Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment). For a description of the assumptions used in calculating the fair value of option awards under ASC Topic 718, Compensation-Stock Compensation, see Note 9-Stock Options and Stock-Based Compensation of the Notes to our Consolidated Financial Statements included elsewhere in this prospectus. The amounts in this column reflect the accounting expense to the Company in connection with such option awards and do not reflect the amount of compensation actually received by the named executive officer during the respective fiscal year.
 
(2) Represents bonus paid in accordance with the annual numeric performance goals established by our Compensation Committee. See Components of Executive Compensation, Bonus.
 
(3) Includes (i) $198,330 for reimbursement of living expenses pursuant to Mr. Kahn’s employment agreement, grossed up for income tax purposes, (ii) $10,200 for automobile allowance, and (iii) $10,655 for life insurance reimbursement.


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(4) Represents automobile allowance.
 
(5) Represents one-time minimum guaranteed incentive bonus pursuant to Mr. Conroy’s employment agreement.
 
(6) Mr. Friedman became an executive officer on January 3, 2011 and the information included in the table reflects his compensation from that date until our fiscal year end.
 
(7) Represents one-time sign on bonus paid to Mr. Friedman pursuant to the terms of his employment agreement.
 
(8) Represents amounts in British pounds converted to U.S. dollars at applicable average exchange rates. Mr. Wilson has resigned his position effective the end of November 2011.
 
(9) Includes (i) automobile allowance of $26,158, and (ii) medical insurance expenses of $14,118.
 
(10) Includes (i) one-time sign-on bonus of $219,139 pursuant to Mr. Wilson’s employment agreement.
 
(11) Includes (i) relocation expenses of $212,732 and (ii) $6,600 for automobile allowance.
 
Employment Arrangements with our Executive Officers
 
Eugene S. Kahn
 
On April 19, 2007, in connection with the Merger, Parent entered into an employment agreement with our Chief Executive Officer, Eugene S. Kahn, containing the following terms: a base salary of $1,000,000; a bonus opportunity of 100% of base salary for achievement of target level of performance, with the opportunity to earn more or less than that for achievement above or below target (however, for Fiscal 2007, Mr. Kahn received a minimum bonus of 100% of base salary, prorated based upon the number of days during Fiscal 2007 following the closing of the Merger), a time option to purchase 477,440 shares of common stock of Parent at an exercise price of $10.00 per share; a target performance option to purchase 477,440 shares of common stock of Parent at an exercise price of $10.00 per share; a stretch performance option to purchase 298,400 shares of common stock of Parent at an exercise price of $10.00 per share; a grant of 75,000 shares of common stock of Parent that vest in four equal annual installments on May 29, 2008, 2009, 2010 and 2011, subject to acceleration in the event of a change in control (as defined in the employment agreement), and a loan from Parent to facilitate Mr. Kahn’s payment of taxes triggered by such grant of common stock that may be forgivable in whole or in part under certain circumstances. In addition, Mr. Kahn purchased 100,000 shares of common stock of Parent at a purchase price of $10.00 per share, and in return for such investment received an option to purchase an additional 100,000 fully-vested shares of common stock of Parent at an exercise price of $10.00 per share. Mr. Kahn is entitled to expense reimbursement and other customary employee benefits, as well as relocation and temporary housing expenses. Mr. Kahn has agreed not to engage in competitive and similar activities or solicit customers or clients until the later of one year following his termination of employment or the end of the period during which he is entitled to severance pay, and his agreement provides for customary protection of confidential information and intellectual property. The agreement sets forth a three-year term (terminating on May 29, 2010) and automatic renewal for successive one-year periods unless either Mr. Kahn or Parent provides notice of non-renewal.
 
Pursuant to his employment agreement, as described above, Mr. Kahn is entitled to specified severance compensation in the event of a termination of employment by the Company without cause or by Mr. Kahn for good reason.
 
James G. Conroy
 
On December 13, 2007, we entered into an employment agreement with our Executive Vice President, James Conroy, containing the following terms: a base salary of $585,000; a bonus opportunity of 75% of base salary for achievement of target level of performance, with the opportunity to earn more or less than that for achievement above or below target; a time option to purchase 175,000 shares of common stock of Parent at an exercise price of $10.00 per share; a target performance option to purchase 175,000 shares of common stock of Parent at an exercise price of $10.00 per share; and a stretch performance option to purchase 87,500 shares of common stock of Parent at an exercise price of $10.00 per share. In addition, Mr. Conroy has the


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opportunity to purchase up to an additional 30,000 shares of common stock of Parent at a purchase price of $10.00 per share, and in return for such investment will receive an option to purchase an equal number of fully-vested shares of common stock of Parent at an exercise price of $10.00 per share. Mr. Conroy is entitled to expense reimbursement and other customary employee benefits, as well as relocation, including a $150,000 relocation bonus, and temporary housing expenses. Mr. Conroy is also entitled to receive a guaranteed minimum annual bonus for Fiscal 2008 of $225,000. Mr. Conroy has agreed not to engage in competitive and similar activities or solicit customers or clients until the later of one year following his termination of employment or the end of the period during which he is entitled to severance pay, and his agreement provides for customary protection of confidential information and intellectual property. In March 2008, Mr. Conroy’s annual base salary was increased to $600,000. In April 2009, Mr. Conroy was promoted to President. Mr. Conroy’s Employment Agreement was amended in connection with such promotion, comprised of the following: (i) extension of the expiration of the initial two-year term of the Employment Agreement from February 28, 2010, to April 30, 2011, (ii) an increase from 75% to 100% for the bonus potential that can be earned under the Company’s Annual Incentive Plan for “target” bonus, (iii) an additional grant of options to purchase an aggregate of 125,000 shares of common stock of the parent of the Company at an exercise price of $10 per share, consisting of 50,000 time-vested options, 50,000 performance-vested options and 25,000 stretch-performance options, and (iv) eligibility to purchase up to an additional 20,000 shares of common stock of the parent of the Company at $10 per share, and to receive a matching option at an exercise price of $10 per share for each share of stock purchased. On May 25, 2010, Mr. Conroy’s employment agreement was further amended to provide for an annual base salary of $665,000, effective May 1, 2010, on the basis of his previous promotion to President in April 2009 and his Fiscal 2010 merit increase. The agreement provides for automatic renewals for successive one-year periods unless either Mr. Conroy or Parent provides notice of non-renewal.
 
Pursuant to his Employment Agreement, as described above, Mr. Conroy is entitled to specified severance compensation in the event of a termination of employment by the Company without cause or by Mr. Conroy for good reason.
 
Jay Friedman
 
Effective January 3, 2011, we entered into an employment agreement with our President of North America, Jay Friedman, containing the following terms: a base salary of $600,000; a bonus opportunity of 100% of base salary for achievement of target level of performance, with the opportunity to earn more or less than that for achievement above or below target; a time option to purchase 80,000 shares of common stock of Parent at an exercise price of $10.00 per share; and a target performance option to purchase 80,000 shares of common stock of Parent at an exercise price of $10.00 per share. In addition, Mr. Friedman has the opportunity to purchase up to an additional 30,000 shares of common stock of Parent at a purchase price of $10.00 per share, and in return for such investment will receive an option to purchase an equal number of fully-vested shares of common stock of Parent at an exercise price of $10.00 per share. Mr. Friedman is entitled to expense reimbursement and other customary employee benefits, as well as relocation, including a relocation allowance of $100,000, reimbursement up to $15,000 for professional fees incurred by executive in connection with negotiation and documentation of the agreement, and temporary housing expenses. Mr. Friedman is also entitled to receive a guaranteed minimum annual bonus for Fiscal 2011 of $300,000. Mr. Friedman was also entitled to receive a sign-on bonus of $150,000, which was paid to him in January 2011. Mr. Friedman has agreed not to engage in competitive and similar activities or solicit customers or clients until the later of one year following his termination of employment or the end of the period during which he is entitled to severance pay, and his agreement provides for customary protection of confidential information and intellectual property. The agreement sets forth a two-year term (terminating on February 2, 2013) and automatic renewal for successive one-year periods unless either Mr. Friedman or the Company provides notice of non-renewal.
 
Kenneth Wilson
 
Effective January 18, 2009, we entered into an employment agreement with our President of Europe, Kenneth Wilson, containing the following terms: a base salary of £365,000; a bonus opportunity of 100% of


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base salary for achievement of target level of performance, with the opportunity to earn more or less than that for achievement above or below target; a time option to purchase 160,000 shares of common stock of Parent at an exercise price of $10.00 per share; a target performance option to purchase 160,000 shares of common stock of Parent at an exercise price of $10.00 per share; and a stretch performance option to purchase 80,000 shares of common stock of Parent at an exercise price of $10.00 per share. In addition, Mr. Wilson has the opportunity to purchase up to an additional 30,000 shares of common stock of Parent at a purchase price of $10.00 per share, and in return for such investment will receive an option to purchase an equal number of fully-vested shares of common stock of Parent at an exercise price of $10.00 per share. Mr. Wilson is entitled to expense reimbursement and other customary employee benefits, as well as relocation, and temporary housing expenses. Mr. Wilson is also entitled to receive a guaranteed minimum annual bonus for Fiscal 2009 of £365,000. Mr. Wilson was also entitled to receive a conditional sign-on bonus of up to £200,000 of which £152,000 was paid to him in February 2009, upon satisfaction of the conditions agreed to by the Company. Mr. Wilson has agreed not to engage in competitive and similar activities or solicit customers or clients until the later of one year following his termination of employment or the end of the period during which he is entitled to severance pay, and his agreement provides for customary protection of confidential information and intellectual property. Mr. Wilson has resigned his position effective the end of November 2011.
 
J. Per Brodin
 
On February 11, 2008, Mr. Brodin was appointed to serve as the Company’s Senior Vice President and Chief Financial Officer. Mr. Brodin receives an annual base salary of $440,000 and an annual target bonus of 60% of his base salary. The actual amount of the bonus, which will range from 30% to 90% of Mr. Brodin’s base salary, will depend upon the achievement of certain annual performance objectives. At th