10-Q 1 d416400d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended October 27, 2012

OR

 

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

For the transition period from          to         

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

 

 

Claire’s Stores, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   59-0940416

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2400 West Central Road,

Hoffman Estates, Illinois

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

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

 

 

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

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

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

As of November 30, 2012, 100 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

 

 

 


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

INDEX

 

     PAGE NO.  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

     3   

Unaudited Condensed Consolidated Balance Sheets as of October 27, 2012 and January 28, 2012

     3   

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine months ended October 27, 2012 and October 29, 2011

     4   

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine months ended October  27, 2012 and October 29, 2011

     5   

Notes to Unaudited Condensed Consolidated Financial Statements

     6   

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

     23   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     35   

Item 4. Controls and Procedures

     37   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     38   

Item 1A. Risk Factors

     38   

Item 6. Exhibits

     38   

SIGNATURE PAGE

     39   

Ex-31.1 Section 302 Certification of CEO

  

Ex-31.2 Section 302 Certification of CFO

  

Ex-32.1 Section 906 Certification of CEO

  

Ex-32.2 Section 906 Certification of CFO

  

 

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PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     October 27, 2012     January 28, 2012  
     (In thousands, except share and per share amounts)  

ASSETS

    

Current assets:

    

Cash and cash equivalents and restricted cash of $0 and $4,350, respectively

   $ 62,673      $ 174,374   

Inventories

     192,417        142,104   

Prepaid expenses

     18,880        20,010   

Other current assets

     30,667        25,423   
  

 

 

   

 

 

 

Total current assets

     304,637        361,911   
  

 

 

   

 

 

 

Property and equipment:

    

Furniture, fixtures and equipment

     223,919        207,620   

Leasehold improvements

     302,709        281,774   
  

 

 

   

 

 

 
     526,628        489,394   

Less accumulated depreciation and amortization

     (317,103     (281,874
  

 

 

   

 

 

 
     209,525        207,520   
  

 

 

   

 

 

 

Leased property under capital lease:

    

Land and building

     18,055        18,055   

Less accumulated depreciation and amortization

     (2,483     (1,805
  

 

 

   

 

 

 
     15,572        16,250   
  

 

 

   

 

 

 

Goodwill

     1,550,056        1,550,056   

Intangible assets, net of accumulated amortization of $55,662 and $49,270, respectively

     543,840        549,768   

Deferred financing costs, net of accumulated amortization of $24,922 and $55,818, respectively

     43,249        33,025   

Other assets

     46,161        44,495   
  

 

 

   

 

 

 
     2,183,306        2,177,344   
  

 

 

   

 

 

 

Total assets

   $ 2,713,040      $ 2,763,025   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Trade accounts payable

   $ 68,716      $ 60,704   

Income taxes payable

     4,889        10,228   

Accrued interest payable

     48,149        31,859   

Accrued expenses and other current liabilities

     94,160        104,525   
  

 

 

   

 

 

 

Total current liabilities

     215,914        207,316   
  

 

 

   

 

 

 

Long-term debt

     2,373,906        2,386,382   

Obligation under capital lease

     17,249        17,290   

Deferred tax liability

     119,404        120,452   

Deferred rent expense

     29,759        28,861   

Unfavorable lease obligations and other long-term liabilities

     21,745        25,020   
  

 

 

   

 

 

 
     2,562,063        2,578,005   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s deficit:

    

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

     —          —     

Additional paid-in capital

     618,050        619,453   

Accumulated other comprehensive loss, net of tax

     (4,665     (4,351

Accumulated deficit

     (678,322     (637,398
  

 

 

   

 

 

 
     (64,937     (22,296
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 2,713,040      $ 2,763,025   
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(in thousands)

 

     Three Months
Ended
October 27, 2012
    Three Months
Ended
October 29, 2011
    Nine Months
Ended
October 27, 2012
    Nine Months
Ended
October 29, 2011
 

Net sales

   $ 363,388      $ 356,000      $ 1,063,622      $ 1,060,993   

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

     179,583        172,505        531,452        519,246   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     183,805        183,495        532,170        541,747   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

        

Selling, general and administrative

     121,211        123,378        360,122        380,309   

Depreciation and amortization

     16,042        17,129        48,232        50,535   

Severance and transaction-related costs

     (29     180        1,168        949   

Other (income) expense, net

     (3,234     (1,840     (2,654     2,290   
  

 

 

   

 

 

   

 

 

   

 

 

 
     133,990        138,847        406,868        434,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     49,815        44,648        125,302        107,664   

Gain (loss) on early debt extinguishment

     (5,105     3,986        (9,707     4,468   

Interest expense, net

     54,042        43,543        149,943        134,113   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

     (9,332     5,091        (34,348     (21,981

Income tax expense

     4,398        3,193        6,576        5,861   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (13,730   $ 1,898      $ (40,924   $ (27,842
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (13,730   $ 1,898      $ (40,924   $ (27,842

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments

     2,165        (2,541     (632     2,726   

Net gain (loss) on intra-entity foreign currency transactions, net of tax (benefit) of $485, $(394), $6 and $443

     6,499        (3,945     (1,841     5,469   

Unrealized (loss) gain on interest rate swap, net of tax of $0, $0, $0 and $0

     (153     167        375        (1,209

Reclassification adjustment of unrealized loss on termination of interest rate swap into net loss

     1,784        —          1,784        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     10,295        (6,319     (314     6,986   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (3,435   $ (4,421   $ (41,238   $ (20,856
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Nine Months
Ended
October 27, 2012
    Nine Months
Ended
October 29, 2011
 

Cash flows from operating activities:

    

Net loss

   $ (40,924   $ (27,842

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

    

Depreciation and amortization

     48,232        50,535   

Amortization of lease rights and other assets

     2,390        2,424   

Amortization of debt issuance costs

     7,389        11,155   

Payment of in kind interest expense

     —          11,831   

Foreign currency exchange net loss on Euro Loan

     —          1,485   

Net unfavorable accretion of lease obligations

     (536     (522

Loss on sale/retirement of property and equipment, net

     73        53   

Loss (gain) on early debt extinguishment

     9,707        (4,468

Loss on sale on intangible assets/lease rights

     117        —     

Stock compensation (benefit) expense

     (1,403     2,759   

(Increase) decrease in:

    

Inventories

     (50,430     (48,997

Prepaid expenses

     916        (12,534

Other assets

     (10,323     (7,776

Increase (decrease) in:

    

Trade accounts payable

     8,281        21,193   

Income taxes payable

     (4,830     (4,808

Accrued interest payable

     16,290        24,880   

Accrued expenses and other liabilities

     (8,075     (20,948

Deferred income taxes

     (899     (1,377

Deferred rent expense

     823        1,164   
  

 

 

   

 

 

 

Net cash used in operating activities

     (23,202     (1,793
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of property and equipment, net

     (46,396     (51,382

Acquisition of intangible assets/lease rights

     (2,077     (2,411

Changes in restricted cash

     4,350        (1,480
  

 

 

   

 

 

 

Net cash used in investing activities

     (44,123     (55,273
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments of Credit facility

     (1,154,310     (438,940

Proceeds from Notes

     1,142,125        450,000   

Repurchases of Notes

     —          (71,674

Payment of debt issuance costs

     (27,610     (10,751
  

 

 

   

 

 

 

Net cash used in financing activities

     (39,795     (71,365
  

 

 

   

 

 

 

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

     (231     2,246   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (107,351     (126,185

Cash and cash equivalents, at beginning of period

     170,024        255,902   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     62,673        129,717   

Restricted cash, at end of period

     —          26,153   
  

 

 

   

 

 

 

Cash and cash equivalents and restricted cash, at end of period

   $ 62,673      $ 155,870   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 126,346      $ 86,303   

Income taxes paid

     12,163        12,304   

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended January 28, 2012 filed with the Securities and Exchange Commission, including Note 2 to the Consolidated Financial Statements included therein which discusses principles of consolidation and summary of significant accounting policies.

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

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

2. Recent Accounting Pronouncements

In July 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If an entity can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity is not required to take further action. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. The Company does not expect adoption of ASU 2012-02 will have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income: Presentation of Comprehensive Income, which requires the presentation of the components of other comprehensive income with the components of net income in either a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of equity. This guidance was amended in December 2011 when the FASB issued ASU 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers the presentation on the face of the financial statements of the effects of reclassification adjustments out of accumulated other comprehensive income on the components of net income and other comprehensive income. The Company adopted this guidance in the first quarter of fiscal 2012 and it did not have any impact on the Company’s financial position, results of operations or cash flows.

 

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In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”), to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are similar between U.S. GAAP and IFRSs. This guidance changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements including the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed (e.g., a financial instrument that is measured at amortized cost in the statement of financial position but for which fair value is disclosed, such as debt). The Company adopted this guidance in the first quarter of fiscal 2012 and it did not have any impact on the Company’s financial position, results of operations or cash flows.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit. The amendments in this ASU are effective for interim and annual fiscal periods beginning after December 15, 2011 and early adoption is permitted. The Company adopted this guidance in the first quarter of fiscal 2012 and it did not have any impact on the Company’s financial position, results of operations or cash flows.

3. Fair Value Measurements

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

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

The following tables summarize the Company’s assets (liabilities) measured at fair value on a recurring basis segregated among the appropriate levels within the fair value hierarchy (in thousands):

 

           Fair Value Measurements at January 28, 2012 Using  
     Carrying Value     Quoted Prices in
Active Markets for
Identical Assets
(Liabilities)

(Level 1)
     Significant
Other Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Interest rate swap

   $ (2,159   $  —         $ (2,159   $ —     

 

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On September 20, 2012, the Company terminated the interest rate swap entered into on July 28, 2010 and settled the contract at the fair value of the liability as of September 20, 2012. As of January 28, 2012, the fair value of this interest rate swap represented the estimated amount the Company would receive or pay to terminate the contract at the reporting date based upon pricing or valuation models applied to current market information. The interest rate swap was valued using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts were based on an expectation of future interest rates derived from observed market interest rate curves. The interest rate swap was collateralized by cash and thus the Company did not make any credit-related valuation adjustments. The Company mitigates derivative credit risk by transacting with highly rated counterparties. The Company does not enter into derivative financial instruments for trading or speculative purposes.

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

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

Financial Instruments Not Measured at Fair Value

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

The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents. The Company’s cash equivalent instruments are valued using quoted market prices and are primarily U.S. Treasury securities. The estimated fair value of the Company’s long-term debt was approximately $2.23 billion at October 27, 2012, compared to a carrying value of $2.37 billion at that date. The estimated fair value of the Company’s long-term debt was approximately $2.03 billion at January 28, 2012, compared to a carrying value of $2.39 billion at that date. For publicly-traded debt, the fair value (estimated market value) is based on quoted market prices in less active markets. For non-publicly-traded debt, fair value is estimated based on quoted prices for similar instruments. If measured at fair value in the financial statements, long-term debt would be classified as Level 2 in the fair value hierarchy.

 

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4. Debt

Debt as of October 27, 2012 and January 28, 2012 included the following components (in thousands):

 

     October 27, 2012      January 28, 2012  

Long-term debt:

     

Senior secured term loan facility due 2014

   $ —         $ 1,154,310   

Senior fixed rate notes due 2015

     220,270         220,270   

Senior toggle notes due 2015

     302,190         302,190   

Senior subordinated notes due 2017

     259,612         259,612   

Senior secured first lien notes due 2019 (1)

     1,141,834         —     

Senior secured second lien notes due 2019

     450,000         450,000   
  

 

 

    

 

 

 
     2,373,906         2,386,382   

Less: current portion of long-term debt

     —           —     
  

 

 

    

 

 

 

Long-term debt

   $ 2,373,906       $ 2,386,382   
  

 

 

    

 

 

 

Obligation under capital lease

   $ 17,290       $ 17,290   
  

 

 

    

 

 

 

 

(1) Amount includes unamortized premium of $16,834 as of October 27, 2012.

See Note 3—Fair Value Measurements for related fair value disclosure on debt.

Senior Secured First Lien Notes

On February 28, 2012, the Company issued $400.0 million aggregate principal amount of 9.00% senior secured first lien notes that mature on March 15, 2019 (the “Senior Secured First Lien Notes”). The notes were issued at a price equal to 100.00% of the principal amount. On March 12, 2012, the Company issued an additional $100.0 million aggregate principal amount of the same series of Senior Secured First Lien Notes at a price equal to 101.50% of the principal amount. On September 20, 2012, the Company issued an additional $625.0 million aggregate principal amount of the same series of Senior Secured First Lien Notes at a price equal to 102.50% of the principal amount. Interest on the Senior Secured First Lien Notes is payable semi-annually to holders of record at the close of business on March 1 or September 1 immediately preceding the interest payment date on March 15 and September 15 of each year, commencing on September 15, 2012. The Senior Secured First Lien Notes are guaranteed on a first-priority senior secured basis by all of the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries. The Senior Secured First Lien Notes and related guarantees are secured, subject to certain exceptions and permitted liens, by a first priority lien on substantially all of the Company’s material owned assets and the material owned assets of subsidiary guarantors, limited in the case of equity interests held by the Company or any subsidiary guarantor in a foreign subsidiary, to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by the Company or a subsidiary guarantor. The liens securing the Senior Secured First Lien Notes rank equally to the liens securing the Company’s recently amended and restated senior secured credit facility. The Senior Secured First Lien Notes are subject to customary covenants, (described below), and events of default. The Company used the proceeds of the offerings of the Senior Secured First Lien Notes to reduce $1,154.3 million of indebtedness under the Company’s senior secured term loan Credit Facility, and to pay $27.6 million in financing costs which have been recorded as Deferred Financing Costs, Net in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 

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New Credit Facility

On September 20, 2012, the Company entered into an Amended and Restated Credit Agreement by and among Claire’s Inc. (“Parent”), the Company, Credit Suisse AG, as Administrative Agent, and the other Lenders named therein (the “New Credit Facility”), pursuant to which the Company replaced its existing $200.0 million senior secured revolving credit facility maturing May 29, 2013 with a $115.0 million five-year senior secured revolving credit facility.

Borrowings under the New Credit Facility will bear interest at a rate equal to, at the Company’s option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, 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 of 4.50% for LIBOR rate loans and 3.50% for alternate base rate loans. The Company will also pay a facility fee of 0.50% per annum of the committed amount of the New Credit Facility whether or not utilized.

All obligations under the New Credit Facility are unconditionally guaranteed by (i) Parent, prior to an initial public offering of the Company’s stock, and (ii) the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries, subject to certain exceptions.

All obligations under the New Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions and permitted liens, by a first priority lien on, (i) all of the Company’s capital stock, prior to an initial public offering of its stock, and (ii) substantially all of the Company’s material owned assets and the material owned assets of subsidiary guarantors, limited in the case of equity interests held by the Company or any subsidiary guarantor in a foreign subsidiary, to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by the Company or a subsidiary guarantor. The liens securing the New Credit Facility rank equally to the liens securing the Senior Secured First Lien Notes.

The New 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 except that so long as the revolving loans and letters of credit outstanding exceed $15 million, the Company will be required to comply with a maximum Total Net Secured Leverage Ratio of 5.5 to 1.0 based upon the ratio of its net senior secured debt to adjusted earnings before interest, taxes, depreciation and amortization for the period of four consecutive fiscal quarters most recently ended.

Note Repurchases

The following is a summary of the Company’s debt repurchase activity for the three and nine months ended October 29, 2011 (in thousands). There was no debt repurchase activity for the three and nine months ended October 27, 2012.

 

     Three Months Ended October 29, 2011      Nine Months Ended October 29, 2011  

Notes Repurchased

  

Principal
Amount

    

Repurchase
Price

    

Recognized
Gain (1)

    

Principal
Amount

    

Repurchase
Price

    

Recognized
Gain (2)

 

Senior Fixed Rate Notes

   $ 2,730       $ 2,343       $ 346       $ 15,730       $ 15,213       $ 260   

Senior Toggle Notes

     27,780         23,834         3,640         60,920         56,461         4,208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 30,510       $ 26,177       $ 3,986       $ 76,650       $ 71,674       $ 4,468   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $41 for the Senior Fixed Rate Notes and $306 for the Senior Toggle Notes.

 

(2) Net of deferred issuance cost write-offs of $257 for the Senior Fixed Rate Notes and $706 for the Senior Toggle Notes, and accrued interest write-off of $455 for the Senior Toggle Notes.

 

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Covenants

Our Senior Fixed Rate Notes, Senior Toggle Notes, Senior Subordinated Notes, Senior Secured First Lien Notes and Senior Secured Second Lien Notes (collectively, the “Notes”) and New Credit Facility 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.

None of these covenants, however, require the Company to maintain any particular financial ratio or other measure of financial performance except as previously disclosed herein for the New Credit Facility. As of October 27, 2012, we were in compliance with the covenants under our New Credit Facility and Notes.

5. Derivatives and Hedging Activities

The Company formally designates and documents 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. The Company formally assesses both at inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. The Company measures the effectiveness of its 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.

The Company primarily employs derivative financial instruments to manage its exposure to interest rate changes and to limit the volatility and impact of interest rate changes on earnings and cash flows. The Company does not enter into derivative financial instruments for trading or speculative purposes. The Company faces credit risk if the counterparties to the financial instruments are unable to perform their obligations. However, the Company seeks to mitigate derivative credit risk by entering into transactions with counterparties that are significant and creditworthy financial institutions. The Company monitors the credit ratings of the counterparties.

For derivatives that qualify as cash flow hedges, the Company reports the effective portion of the change in fair value as a component of “Accumulated other comprehensive loss, net of tax” in the Unaudited Condensed 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 in income immediately. No ineffective portion was recorded to earnings during the three and nine months ended October 27, 2012 and October 29, 2011, respectively, and all components of the derivative gain or loss were included in the assessment of hedge effectiveness. 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 Loss.

 

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The Company may at its discretion 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 Loss at that time.

On September 20, 2012, the Company terminated the interest rate swap entered into on July 28, 2010 (the “Swap”) and also extinguished the associated hedged debt instrument. Accordingly, the Company reclassified $1.8 million of unrealized loss associated with the Swap from “Accumulated other comprehensive loss, net of tax” in the Unaudited Condensed Consolidated Balance Sheets into “Interest expense, net” in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company previously entered into the Swap to manage exposure to fluctuations in interest rate changes related to a portion of the senior secured term loan facility. The Swap was designated and accounted for as a cash flow hedge and had an expiration date of July 30, 2013. The Swap represented a contract to exchange floating rate for fixed interest rates periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covered an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility and had a fixed rate of 1.2235%. The interest rate Swap resulted in the Company paying a fixed rate plus the applicable margin then in effect for LIBOR borrowings resulting in an all-in fixed interest rate of 3.97% on a notional amount of $200.0 million of the senior secured term loan facility.

The Company did not make any credit-related valuation adjustments to the Swap because it was previously collateralized by cash. The collateral requirement previously increased for declines in the three year LIBOR rate below 1.2235%. In connection with the termination of the Swap, the Company received a release of collateral in the amount of $4.1 million.

At January 28, 2012, the estimated fair value of the Swap was a liability of approximately $2.2 million, which was recorded in “Accrued expenses and other current liabilities” in the Unaudited Condensed Consolidated Balance Sheets. See Note 3 – Fair Value Measurements for fair value measurement of interest rate swaps.

The following tables provide a summary of the financial statement effect of Swap during the three and nine months ended October 27, 2012 and October 29, 2011 (in thousands):

 

Derivatives in Cash

Flow Hedging

Relationships

   Amount of Gain or (Loss)
Recognized in OCI on

Derivative
(Effective Portion)
     Location of Gain
or (Loss)
Reclassified from
Accumulated OCI

into Income
(Effective Portion)
     Amount of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income
(Effective Portion) (1)
 
     Three months ended             Three months ended  
     October 27, 2012     October 29, 2011             October 27, 2012 (2)     October 29, 2011  

Interest rate swap

   $ (153   $  167         Interest expense, net       $ (1,896   $ (491

 

(1) Represents reclassification of amounts from accumulated other comprehensive loss to earnings as interest expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges.
(2) Includes a reclassification amount of $1,784,000 from accumulated other comprehensive loss into interest expense resulting from the termination of the Swap.

 

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Derivatives in Cash

Flow Hedging

Relationships

   Amount of Gain or (Loss)
Recognized in OCI on Derivative

(Effective Portion)
    Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
into Income

(Effective  Portion)
     Amount of Gain or (Loss)
Reclassified from Accumulated OCI
into Income

(Effective Portion) (1)
 
     Nine months ended            Nine months ended  
     October 27, 2012      October 29, 2011            October 27, 2012 (2)     October 29, 2011  

Interest rate swap

   $  375       $ (1,209     Interest expense, net       $ (2,620   $ (1,437

 

(1) Represents reclassification of amounts from accumulated other comprehensive loss to earnings as interest expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges.
(2) Includes a reclassification amount of $1,784,000 from accumulated other comprehensive loss into interest expense resulting from the termination of the Swap.

6. Commitments and Contingencies

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

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

7. Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the nine months ended October 27, 2012:

 

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

Outstanding at January 28, 2012

     6,343,756      $ 10.00      

Options granted

     2,348,864      $ 10.00      

Options exercised

     —          

Options forfeited

     (2,924,063   $ 10.00      

Options expired

     (1,044,376   $ 10.00      
  

 

 

      

Outstanding at October 27, 2012

     4,724,181      $ 10.00         4.5   
  

 

 

      

Options vested and expected to vest at October 27, 2012

     4,265,316      $ 10.00         4.3   
  

 

 

      

Exercisable at October 27, 2012

     2,119,012      $ 10.00         2.2   
  

 

 

      

The weighted average grant date fair value of options granted during the nine months ended October 27, 2012 and October 29, 2011 was $1.58 and $2.90, respectively.

During the three and nine months ended October 27, 2012 and October 29, 2011, the Company recorded stock-based compensation (benefit) expense and additional paid-in capital relating to stock-based compensation of approximately $(0.5) million, $(1.4) million, $0.6 million and $2.8 million, respectively. During the three months ended October 27, 2012, the Company recorded a reversal of stock option expense of $0.9 million associated with the forfeitures of stock options, including $0.5 million for former executive officers. Stock-based compensation (benefit) expense is recorded in “Selling, general and administrative” expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

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Performance Based Stock Option Exchange Offer

On June 15, 2012, Claire’s Inc., the parent corporation (“Parent”), of the Company commenced an offer (the “Exchange Offer”) to exchange certain performance based stock options held by employees of the Company for new performance based stock options (the “New Options”) granted on a 1 for 2 basis. The Exchange Offer was completed on July 16, 2012. The New Options expire on July 16, 2019.

The New Options issued under the Exchange Offer provide for the following:

 

   

Vest in equal installments on the first two anniversaries after the first to occur of:

(i) the date of an initial public offering (“IPO) at a price of at least $25 per share,

(ii) any date following an IPO when the average stock price over the preceding 30 consecutive trading days exceeds $25, or

(iii) any date before an IPO where more than 25% of the outstanding shares of the Parent are sold for cash or marketable consideration having a value of at least $25 per share;

 

   

Vest immediately if, on or after the occurrence of an event described in (i), (ii) or (iii), but prior to the second anniversary thereof, there occurs a change of control of Parent.

The Exchange Offer resulted in $1.2 million in total incremental compensation cost that will be recognized when a performance condition occurs. The Exchange Offer affected approximately 125 employees.

8. Income Taxes

The effective income tax rate was (47.1)% and (19.1)% for the three and nine months ended October 27, 2012 . This effective income tax rate differed from the statutory federal income 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 and nine months ended October 27, 2012 by the Company’s U.S. operations.

The effective income tax rate was 62.7% and (26.7)% for the three and nine months ended October 29, 2011. This effective income tax rate differed from the statutory federal income 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 and nine months ended October 29, 2011 by the Company’s U.S. operations.

In April 2011, the Company received from the Canada Revenue Agency withholding tax assessments for 2003 through 2007 of approximately $5.5 million, including penalties and interest. In conjunction with these assessments, a security deposit will be required in the amount of approximately $5.5 million until such time a final decision is made by the tax authority. The Company is objecting to these assessments and believes it will prevail at the appeals level; therefore, an accrual has not been recorded for this item. The Company’s U.S. Federal income tax returns for Fiscal 2008 and 2009 are currently under review by the Internal Revenue Service.

9. Related Party Transactions

The Company paid store planning and retail design fees to a business owned by a family member of one of the Company’s former executive officers. These fees are included in “Furniture, fixtures and equipment” in the Company’s Unaudited Condensed Consolidated Balance Sheets and “Selling, general and administrative” expenses in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company paid fees of approximately $0.2 million for the three months ended October 29, 2011. During the time that the former executive officer was employed by the Company, the Company paid fees of approximately $0.8 million and $1.1 million for the nine months ended October 27, 2012 and October 29, 2011, respectively. This arrangement was approved by the Audit Committee of the Board of Directors.

 

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The initial purchasers of the Senior Secured First Lien Notes on February 28, 2012, included Apollo Global Securities, LLC and Morgan Joseph TriArtisan LLC. Apollo Global Securities, LLC is an affiliate of Apollo Management VI, L.P., which is the Company’s controlling stockholder. Apollo Management, LLC, an affiliate of Apollo Management VI, L.P., has a non-controlling interest in Morgan Joseph TriArtisan LLC and its affiliates. Additionally, a member of the Company’s Board of Directors is an executive of Morgan Joseph TriArtisan Inc., an affiliate of Morgan Joseph TriArtisan LLC. In connection with the issuance of the Senior Secured First Lien Notes, the Company paid fees of approximately $0.7 million to Apollo Global Securities, LLC and $0.1 million to Morgan Joseph TriArtisan LLC.

The initial purchasers of the Senior Secured Second Lien Notes on March 4, 2011, included Morgan Joseph TriArtisan LLC. In connection with the issuance of the Senior Secured Second Lien Notes, the Company paid a fee of approximately $0.3 million to Morgan Joseph TriArtisan LLC.

 

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10. Segment Information

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

Net sales, depreciation and amortization and operating income for the three and nine months ended October 27, 2012 and October 29, 2011 are as follows (in thousands):

 

     Three Months
Ended

October  27, 2012
    Three Months
Ended

October  29, 2011
     Nine Months
Ended

October 27, 2012
    Nine Months
Ended

October 29, 2011
 

Net sales:

         

North America

   $ 226,390      $ 221,825       $ 666,705      $ 663,070   

Europe

     136,998        134,175         396,917        397,923   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total net sales

     363,388        356,000         1,063,622        1,060,993   
  

 

 

   

 

 

    

 

 

   

 

 

 

Depreciation and amortization:

         

North America

     9,786        10,709         29,795        31,235   

Europe

     6,256        6,420         18,437        19,300   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total depreciation and amortization

     16,042        17,129         48,232        50,535   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income for reportable segments:

         

North America

     35,077        32,803         98,786        87,371   

Europe

     14,709        12,025         27,684        21,242   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating income for reportable segments

     49,786        44,828         126,470        108,613   

Severance and transaction-related costs

     (29     180         1,168        949   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net consolidated operating income

     49,815        44,648         125,302        107,664   

Gain (loss) on early debt extinguishment

     (5,105     3,986         (9,707     4,468   

Interest expense, net

     54,042        43,543         149,943        134,113   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net consolidated (loss) income before income tax expense

   $ (9,332   $ 5,091       $ (34,348   $ (21,981
  

 

 

   

 

 

    

 

 

   

 

 

 

Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $0 and $0 million for the three months ended October 27, 2012 and October 29, 2011, respectively, and $1.4 and $0.3 million for the nine months ended October 27, 2012 and October 29, 2011, respectively.

Excluded from operating income for the Europe segment are severance and transaction-related costs of approximately $0 million and $0.2 million for the three months ended October 27, 2012 and October 29, 2011, respectively, and $(0.2) million and $0.6 million for the nine months ended October 27, 2012 and October 29, 2011, respectively.

 

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11. Supplemental Financial Information

On May 29, 2007, Claire’s Stores, Inc. (the “Issuer”), issued $935.0 million in Senior Fixed Rate Notes, Senior Toggle Notes and Senior Subordinated Notes, (collectively, the “2007 Notes”). On March 4, 2011, the Issuer issued $450.0 million aggregate principal amount of Senior Secured Second Lien Notes, (collectively, the “2011 Notes”). On February 28, 2012, March 12, 2012 and September 20, 2012, the Issuer issued $400.0 million, $100.0 million and $625.0 million, respectively, aggregate principal amount of the same series of Senior Secured First Lien Notes (collectively, the “2012 Notes”). The 2007 Notes and the 2011 Notes are irrevocably and unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. that guarantee the Company’s Credit Facility. The 2012 Notes are unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. All guarantors are collectively referred to as the “Guarantors.” The Company’s other subsidiaries, principally its international subsidiaries including its European, Canadian and Asian subsidiaries (the “Non-Guarantors”), are not guarantors of these Notes.

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

 

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Condensed Consolidating Balance Sheet

October 27, 2012

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents and restricted cash (1)

   $ 15,243      $ 5,546      $ 41,884      $ —        $ 62,673   

Inventories

     —          111,855        80,562        —          192,417   

Prepaid expenses

     982        2,519        15,379        —          18,880   

Other current assets

     130        20,385        10,152        —          30,667   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     16,355        140,305        147,977        —          304,637   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     5,638        137,212        81,069        —          223,919   

Leasehold improvements

     1,073        161,497        140,139        —          302,709   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     6,711        298,709        221,208        —          526,628   

Less accumulated depreciation and amortization

     (3,530     (195,329     (118,244     —          (317,103
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,181        103,380        102,964        —          209,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —          18,055        —          —          18,055   

Less accumulated depreciation and amortization

     —          (2,483     —          —          (2,483
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          15,572        —          —          15,572   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —          304,905        —          (304,905     —     

Investment in subsidiaries

     2,238,396        (59,224     —          (2,179,172     —     

Goodwill

     —          1,235,651        314,405        —          1,550,056   

Intangible assets, net

     286,000        4,466        253,374        —          543,840   

Deferred financing costs, net

     43,249        —          —          —          43,249   

Other assets

     130        3,527        42,495        9        46,161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,567,775        1,489,325        610,274        (2,484,068     2,183,306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,587,311      $ 1,748,582      $ 861,215      $ (2,484,068   $ 2,713,040   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Trade accounts payable

   $ 1,385      $ 31,930      $ 35,401      $ —        $ 68,716   

Income taxes payable

     (43     (290     5,222        —          4,889   

Accrued interest payable

     48,149        —          —          —          48,149   

Accrued expenses and other current liabilities

     10,693        35,364        48,103        —          94,160   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     60,184        67,004        88,726        —          215,914   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     218,158        —          86,738        (304,896     —     

Long-term debt

     2,373,906        —          —          —          2,373,906   

Obligation under capital lease

     —          17,249        —          —          17,249   

Deferred tax liability

     —          106,584        12,820        —          119,404   

Deferred rent expense

     —          18,089        11,670        —          29,759   

Unfavorable lease obligations and other long-term liabilities

     —          21,197        548        —          21,745   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,592,064        163,119        111,776        (304,896     2,562,063   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —          367        2        (369     —     

Additional paid in capital

     618,050        1,435,909        796,316        (2,232,225     618,050   

Accumulated other comprehensive (loss) income, net of tax

     (4,665     3,754        (14,457     10,703        (4,665

Retained earnings (accumulated deficit)

     (678,322     78,429        (121,148     42,719        (678,322
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (64,937     1,518,459        660,713        (2,179,172     (64,937
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 2,587,311      $ 1,748,582      $ 861,215      $ (2,484,068   $ 2,713,040   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash and cash equivalents includes restricted cash of $0 for “Issuer”

 

18


Table of Contents

Condensed Consolidating Balance Sheet

January 28, 2012

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents and restricted cash (1)

   $ 107,265      $ 4,908      $ 62,201      $ —        $ 174,374   

Inventories

     —          84,608        57,496        —          142,104   

Prepaid expenses

     676        1,530        17,804        —          20,010   

Other current assets

     —          15,967        9,456        —          25,423   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     107,941        107,013        146,957        —          361,911   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     4,540        128,650        74,430        —          207,620   

Leasehold improvements

     1,071        151,891        128,812        —          281,774   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,611        280,541        203,242        —          489,394   

Less accumulated depreciation and amortization

     (2,761     (175,999     (103,114     —          (281,874
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,850        104,542        100,128        —          207,520   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —          18,055        —          —          18,055   

Less accumulated depreciation and amortization

     —          (1,805     —          —          (1,805
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          16,250        —          —          16,250   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —          234,828        —          (234,828     —     

Investment in subsidiaries

     2,138,159        (58,841     —          (2,079,318     —     

Goodwill

     —          1,235,651        314,405        —          1,550,056   

Intangible assets, net

     286,000        6,176        257,592        —          549,768   

Deferred financing costs, net

     32,432        —          593        —          33,025   

Other assets

     130        3,788        40,577        —          44,495   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,456,721        1,421,602        613,167        (2,314,146     2,177,344   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,567,512      $ 1,649,407      $ 860,252      $ (2,314,146   $ 2,763,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Trade accounts payable

   $ 1,468      $ 23,845      $ 35,391      $ —        $ 60,704   

Income taxes payable

     —          766        9,462        —          10,228   

Accrued interest payable

     31,859        —          —          —          31,859   

Accrued expenses and other current liabilities

     14,890        39,744        49,891        —          104,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     48,217        64,355        94,744        —          207,316   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     155,209        —          79,619        (234,828     —     

Long-term debt

     2,386,382        —          —          —          2,386,382   

Obligation under capital lease

     —          17,290        —          —          17,290   

Deferred tax liability

     —          106,825        13,627        —          120,452   

Deferred rent expense

     —          17,680        11,181        —          28,861   

Unfavorable lease obligations and other long-term liabilities

     —          24,217        803        —          25,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,541,591        166,012        105,230        (234,828     2,578,005   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —          367        2        (369     —     

Additional paid in capital

     619,453        1,435,909        815,866        (2,251,775     619,453   

Accumulated other comprehensive (loss) income, net of tax

     (4,351     3,675        (11,780     8,105        (4,351

Accumulated deficit

     (637,398     (20,911     (143,810     164,721        (637,398
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (22,296     1,419,040        660,278        (2,079,318     (22,296
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 2,567,512      $ 1,649,407      $ 860,252      $ (2,314,146   $ 2,763,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash and cash equivalents includes restricted cash of $4,350 for “Issuer”

 

19


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Three Months Ended October 27, 2012

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 207,010      $ 156,378      $ —        $ 363,388   

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

     446        101,828        77,309        —          179,583   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (446     105,182        79,069        —          183,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     7,135        61,992        52,084        —          121,211   

Depreciation and amortization

     268        8,702        7,072        —          16,042   

Severance and transaction-related costs

     45        —          (74     —          (29

Other (income) expense

     (2,847     (1,532     1,145        —          (3,234
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,601        69,162        60,227        —          133,990   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5,047     36,020        18,842        —          49,815   

Loss on early debt extinguishment

     (5,105     —          —          —          (5,105

Interest expense, net

     53,489        557        (4     —          54,042   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (63,641     35,463        18,846        —          (9,332

Income tax expense

     —          635        3,763        —          4,398   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (63,641     34,828        15,083        —          (13,730

Equity in earnings of subsidiaries

     49,911        1,129        —          (51,040     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (13,730     35,957        15,083        (51,040     (13,730

Foreign currency translation adjustments

     2,165        (36     1,838        (1,802     2,165   

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

     6,499        57        6,630        (6,687     6,499   

Unrealized loss on interest rate swap, net of tax

     (153     —          —          —          (153

Reclassification adjustment of unrealized loss on termination of interest rate swap into net loss

     1,784        —          —          —          1,784   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     10,295        21        8,468        (8,489     10,295   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (3,435   $ 35,978      $ 23,551      $ (59,529   $ (3,435
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Three Months Ended October 29, 2011

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 204,222      $ 151,778      $ —        $ 356,000   

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

     1,647        98,605        72,253        —          172,505   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (1,647     105,617        79,525        —          183,495   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     6,398        61,646        55,334        —          123,378   

Depreciation and amortization

     184        9,831        7,114        —          17,129   

Severance and transaction-related costs

     1        —          179        —          180   

Other (income) expense

     (2,752     (356     1,268        —          (1,840
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,831        71,121        63,895        —          138,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5,478     34,496        15,630        —          44,648   

Gain on early debt extinguishment

     3,986        —          —          —          3,986   

Interest expense, net

     41,508        539        1,496        —          43,543   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (43,000     33,957        14,134        —          5,091   

Income tax expense

     —          752        2,441        —          3,193   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (43,000     33,205        11,693        —          1,898   

Equity in earnings of subsidiaries

     44,898        1,637        —          (46,535     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,898        34,842        11,693        (46,535     1,898   

Foreign currency translation adjustments

     (2,541     (245     157        88        (2,541

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

     (3,945     (947     (4,153     5,100        (3,945

Unrealized gain on interest rate swap, net of tax

     167        —          —          —          167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (6,319     (1,192     (3,996     5,188        (6,319
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (4,421   $ 33,650      $ 7,697      $ (41,347   $ (4,421
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Nine months ended October 27, 2012

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 614,581      $ 449,041      $ —        $ 1,063,622   

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

     2,071        297,879        231,502        —          531,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (2,071     316,702        217,539        —          532,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     15,497        185,654        158,971        —          360,122   

Depreciation and amortization

     769        26,549        20,914        —          48,232   

Severance and transaction-related costs

     1,376        —          (208     —          1,168   

Other (income) expense

     (7,824     (2,578     7,748        —          (2,654
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     9,818        209,625        187,425        —          406,868   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (11,889     107,077        30,114        —          125,302   

Loss on early debt extinguishment

     (9,707     —          —          —          (9,707

Interest expense, net

     147,693        1,650        600        —          149,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (169,289     105,427        29,514        —          (34,348

Income tax expense (benefit)

     —          (276     6,852        —          6,576   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (169,289     105,703        22,662        —          (40,924

Equity in earnings (loss) of subsidiaries

     128,365        (231     —          (128,134     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (40,924     105,472        22,662        (128,134     (40,924

Foreign currency translation adjustments

     (632     (102     (799     901        (632

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

     (1,841     181        (1,878     1,697        (1,841

Unrealized gain on interest rate swap, net of tax

     375        —          —          —          375   

Reclassification adjustment of unrealized loss on termination of interest rate swap into net loss

     1,784        —          —          —          1,784   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (314     79        (2,677     2,598        (314
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (41,238   $ 105,551      $ 19,985      $ (125,536   $ (41,238
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Nine months ended October 29, 2011

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
     Eliminations     Consolidated  

Net sales

   $ —        $ 613,791      $ 447,202       $ —        $ 1,060,993   

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

     4,588        294,544        220,114         —          519,246   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit (deficit)

     (4,588     319,247        227,088         —          541,747   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other expenses:

           

Selling, general and administrative

     22,308        189,700        168,301         —          380,309   

Depreciation and amortization

     549        28,586        21,400         —          50,535   

Severance and transaction-related costs

     298        —          651         —          949   

Other (income) expense

     (9,737     1,503        10,524         —          2,290   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     13,418        219,789        200,876         —          434,083   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     (18,006     99,458        26,212         —          107,664   

Gain on early debt extinguishment

     4,468        —          —           —          4,468   

Interest expense, net

     128,021        1,611        4,481         —          134,113   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     (141,559     97,847        21,731         —          (21,981

Income tax expense

     —          398        5,463         —          5,861   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations

     (141,559     97,449        16,268         —          (27,842

Equity in earnings of subsidiaries

     113,717        1,412        —           (115,129     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

     (27,842     98,861        16,268         (115,129     (27,842

Foreign currency translation adjustments

     2,726        (15     2,117         (2,102     2,726   

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

     5,469        91        5,663         (5,754     5,469   

Unrealized loss on interest rate swap, net of tax

     (1,209     —          —           —          (1,209
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income

     6,986        76        7,780         (7,856     6,986   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

   $ (20,856   $ 98,937      $ 24,048       $ (122,985   $ (20,856
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

21


Table of Contents

Condensed Consolidating Statement of Cash Flows

Nine months ended October 27, 2012

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (40,924   $ 105,472      $ 22,662      $ (128,134   $ (40,924

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

          

Equity in (earnings) loss of subsidiaries

     (128,365     231        —          128,134        —     

Depreciation and amortization

     769        26,549        20,914        —          48,232   

Amortization of lease rights and other assets

     —          —          2,390        —          2,390   

Amortization of debt issuance costs

     6,795        —          594        —          7,389   

Net accretion of favorable (unfavorable) lease obligations

     —          (633     97        —          (536

Loss on sale/retirement of property and equipment, net

     —          71        2        —          73   

Loss on early debt extinguishment

     9,707        —          —          —          9,707   

Loss on sale of intangible asset/lease rights

     —          —          117          117   

Stock compensation expense (benefit)

     (886     (576     59        —          (1,403

(Increase) decrease in:

          

Inventories

     2        (27,247     (23,185     —          (50,430

Prepaid expenses

     (305     (989     2,210        —          916   

Other assets

     (128     (4,444     (5,751     —          (10,323

Increase (decrease) in:

          

Trade accounts payable

     (82     6,615        1,748        —          8,281   

Income taxes payable

     (43     (1,013     (3,774     —          (4,830

Accrued interest payable

     16,290        —          —          —          16,290   

Accrued expenses and other liabilities

     (2,048     (4,419     (1,608     —          (8,075

Deferred income taxes

     —          (690     (209     —          (899

Deferred rent expense

     —          409        414        —          823   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (139,218     99,336        16,680        —          (23,202
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment, net

     (1,101     (23,226     (22,069     —          (46,396

Acquisition of intangible assets/lease rights

     —          (70     (2,007     —          (2,077

Changes in restricted cash

     4,350        —          —          —          4,350   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     3,249        (23,296     (24,076     —          (44,123
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Payments of Credit facility

     (1,154,310     —          —          —          (1,154,310

Proceeds from Notes

     1,142,125        —          —          —          1,142,125   

Payment of debt issuance costs

     (27,610     —          —          —          (27,610

Intercompany activity, net

     88,094        (75,633     (12,461     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     48,299        (75,633     (12,461     —          (39,795
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (2     231        (460     —          (231
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (87,672     638        (20,317     —          (107,351

Cash and cash equivalents, at beginning of period

     102,915        4,908        62,201        —          170,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 15,243      $ 5,546      $ 41,884      $ —        $ 62,673   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Nine months ended October 29, 2011

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (27,842   $ 98,861      $ 16,268      $ (115,129   $ (27,842

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

          

Equity in (earnings) loss of subsidiaries

     (113,717     (1,412     —          115,129        —     

Depreciation and amortization

     549        28,586        21,400        —          50,535   

Amortization of lease rights and other assets

     —          —          2,424        —          2,424   

Amortization of debt issuance costs

     10,702        —          453        —          11,155   

Payment of in kind interest expense

     11,831        —          —          —          11,831   

Foreign currency exchange net loss on Euro Loan

     —          —          1,485        —          1,485   

Net accretion of favorable (unfavorable) lease obligations

     —          (928     406        —          (522

Loss on sale/retirement of property and equipment, net

     —          42        11        —          53   

Gain on early debt extinguishment

     (4,468     —          —          —          (4,468

Stock compensation expense

     2,333        —          426        —          2,759   

(Increase) decrease in:

          

Inventories

     —          (27,238     (21,759     —          (48,997

Prepaid expenses

     (169     (13,598     1,233        —          (12,534

Other assets

     —          (3,164     (4,612     —          (7,776

Increase (decrease) in:

          

Trade accounts payable

     605        7,305        13,283        —          21,193   

Income taxes payable

     —          (1,098     (3,710     —          (4,808

Accrued interest payable

     24,937        —          (57     —          24,880   

Accrued expenses and other liabilities

     (9,681     (2,393     (8,874     —          (20,948

Deferred income taxes

     —          (338     (1,039     —          (1,377

Deferred rent expense

     —          366        798        —          1,164   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (104,920     84,991        18,136        —          (1,793
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment, net

     (357     (18,751     (32,274     —          (51,382

Acquisition of intangible assets/lease rights

     —          (35     (2,376     —          (2,411

Changes in restricted cash

     (1,350     —          (130     —          (1,480
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,707     (18,786     (34,780     —          (55,273
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Payments of Credit facility

     (438,940     —          —          —          (438,940

Proceeds from Note

     450,000        —          —          —          450,000   

Repurchases of Notes

     (71,674     —          —          —          (71,674

Payment of debt issuance costs

     (10,661     —          (90     —          (10,751

Intercompany activity, net

     68,466        (67,905     (561     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (2,809     (67,905     (651     —          (71,365
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —          609        1,637        —          2,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (109,436     (1,091     (15,658     —          (126,185

Cash and cash equivalents, at beginning of period

     176,079        3,587        76,236        —          255,902   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     66,643        2,496        60,578        —          129,717   

Restricted cash, at end of period

     4,800        —          21,353        —          26,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents and restricted cash, at end of period

   $ 71,443      $ 2,496      $ 81,931      $ —        $ 155,870   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

We include sales from a store in the calculation of same store sales when it has been in operation sixty weeks after its initial opening and, effective in the third quarter of fiscal 2012, we include sales from e-commerce. A store that 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 that 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.

 

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Business Overview

We are one of the world’s leading specialty retailers of fashionable jewelry and accessories 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 America division and our Europe division. As of October 27, 2012, we operated a total of 3,088 stores, of which 1,939 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North America division) and 1,149 stores were located in the United Kingdom, France, Switzerland, Spain, Ireland, Austria, Germany, Netherlands, Portugal, Belgium, Poland, Czech Republic and Hungary (our Europe division). We operate our stores under two brand names: Claire’s® and Icing®.

As of October 27, 2012, we also franchised or licensed 381 stores in Japan, the Middle East, Turkey, Greece, Guatemala, Malta, Ukraine, Mexico, India, Dominican Republic, El Salvador, Venezuela, and Panama. 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 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 Loss.

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).

Our other 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 jewelry and accessories 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 teen and tween 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:

 

   

Jewelry – includes earrings, necklaces, bracelets, body jewelry and rings, as well as ear piercing

 

   

Accessories – fashion and seasonal accessories, including headwear, legwear, handbags and small leather goods, attitude glasses and sunglasses; and our beauty product offerings

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 on high streets, in shopping malls and in high traffic urban areas.

 

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Table of Contents

Consolidated Results of Operations

A summary of our consolidated results of operations for the three and nine months ended October 27, 2012 and October 29, 2011 are as follows (dollars in thousands):

 

     Three Months
Ended
October 27, 2012
    Three Months
Ended
October 29, 2011
 

Net sales

   $ 363,388      $ 356,000   

Increase (decrease) in same store sales (1)

     2.4     (2.2 )% 

Gross profit percentage

     50.6     51.5

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

     33.4     34.7

Depreciation and amortization as a percentage of net sales

     4.4     4.8

Operating income

   $ 49,815      $ 44,648   

Gain (loss) on early debt extinguishment

   $ (5,105   $ 3,986   

Net (loss) income

   $ (13,730   $ 1,898   

Number of stores at the end of the period (2)

     3,088        3,047   

 

(1) Includes e-commerce.
(2) Number of stores excludes stores operated under franchise and licensing agreements.

 

     Nine Months
Ended
October 27, 2012
    Nine Months
Ended
October 29, 2011
 

Net sales

   $ 1,063,622      $ 1,060,993   

Increase (decrease) in same store sales (1)

     0.3     (0.2 )% 

Gross profit percentage

     50.0     51.1

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

     33.9     35.8

Depreciation and amortization as a percentage of net sales

     4.5     4.8

Operating income

   $ 125,302      $ 107,664   

Gain (loss) on early debt extinguishment

   $ (9,707   $ 4,468   

Net loss

   $ (40,924   $ (27,842

Number of stores at the end of the period (2)

     3,088        3,047   

(1) Includes e-commerce.

(2) Number of stores excludes stores operated under franchise and licensing agreements.

Net sales

Net sales for the three months ended October 27, 2012 increased $7.4 million, or 2.1%, from the three months ended October 29, 2011. The increase was attributable to new store sales and an increase in same store sales, partially offset by the effect of store closures and foreign currency translation effect of our foreign locations’ sales. Net sales would have increased 4.4% excluding the impact from foreign currency rate changes.

For the three months ended October 27, 2012, the increase in same store sales was primarily attributable to an increase in average transaction value of 3.0%, partially offset by a decrease in average number of transactions per store of 0.2%.

Net sales for the nine months ended October 27, 2012 increased $2.6 million, or 0.2%, from the nine months ended October 29, 2011. The increase was attributable to new store sales and increase in same store sales, partially offset by foreign currency translation effect on foreign locations’ sales and the effect of store closures. Net sales would have increased 2.9% excluding the impact from foreign currency rate changes.

 

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Table of Contents

For the nine months ended October 27, 2012, the increase in same store sales was primarily attributable to an increase in average transaction value of 4.1%, partially offset by a decrease in average number of transactions per store of 3.5%.

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

 

     Percentage of Total      Percentage of Total  

Product Category

   Three Months
Ended
October 27, 2012
     Three Months
Ended
October 29, 2011
     Nine Months
Ended
October 27, 2012
     Nine Months
Ended
October 29, 2011
 

Jewelry

     50.0         47.0         50.2         47.6   

Accessories

     50.0         53.0         49.8         52.4   
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

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

During the three months ended October 27, 2012, gross profit percentage decreased 90 basis points to 50.6% compared to 51.5% during the three months ended October 29, 2011. The decrease in gross profit percentage consisted of a 110 basis point decrease in merchandise margin, partially offset by a 20 basis point decrease in occupancy rate. The decrease in merchandise margin resulted primarily from an increase in markdowns and lower initial markups. The decrease in occupancy rate resulted primarily from the leveraging effect of an increase in same store sales.

During the nine months ended October 27, 2012, gross profit percentage decreased 110 basis points to 50.0% compared to 51.1% during the nine months ended October 29, 2011. The decrease in gross profit percentage consisted of an 80 basis point decrease in merchandise margin and a 30 basis point increase in occupancy rate. The decrease in merchandise margin resulted primarily from an increase in markdowns and lower initial markups. The increase in occupancy rate resulted primarily from an increase in rent expense combined with essentially unchanged same store sales.

Selling, general and administrative expenses

During the three months ended October 27, 2012, selling, general and administrative expenses decreased $2.2 million, or 1.8%, compared to the three months ended October 29, 2011. As a percentage of net sales, selling, general and administrative expenses decreased 130 basis points compared to the three months ended October 29, 2011. Excluding a favorable $3.0 million foreign currency translation effect, selling, general and administrative expenses would have increased $0.8 million.

During the nine months ended October 27, 2012, selling, general and administrative expenses decreased $20.2 million, or 5.3%, compared to the nine months ended October 29, 2011. As a percentage of net sales, selling, general and administrative expenses decreased 190 basis points compared to the nine months ended October 29, 2011. Excluding a favorable $10.2 million foreign currency translation effect, selling, general and administrative expenses would have decreased $10.0 million. The majority of the remaining decrease was due to lower non-cash compensation expense and a reduction in digital marketing costs.

 

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Table of Contents

Depreciation and amortization expense

During the three months ended October 27, 2012, depreciation and amortization expense decreased $1.1 million to $16.0 million compared to $17.1 million for the three months ended October 29, 2011. Excluding a favorable $0.3 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $0.8 million.

During the nine months ended October 27, 2012, depreciation and amortization expense decreased $2.3 million to $48.2 million compared to $50.5 million for the nine months ended October 29, 2011. Excluding a favorable $1.1 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $1.2 million.

Other (income) expense, net

The following is a summary of other (income) expense activity for the three and nine months ended October 27, 2012 and October 29, 2011 (in thousands):

 

     Three Months
Ended
October 27, 2012
    Three Months
Ended
October 29, 2011
    Nine Months
Ended
October 27, 2012
    Nine Months
Ended
October 29, 2011
 

Foreign currency exchange (gain) loss, net

   $ (951   $ (1,354   $ 705      $ 4,011   

Royalty income

     (2,283     (486     (3,359     (1,472

Other income

     —          —          —          (249
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (3,234   $ (1,840   $ (2,654   $ 2,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three months ended October 27, 2012, foreign currency exchange gain, net decreased primarily from a reduction of a $(0.7) million net gain recorded in the comparable period of the prior fiscal year to remeasure the Euro Loan at the period end foreign exchange rate.

During the nine months ended October 27, 2012, foreign currency exchange loss, net decreased primarily from a reduction of a $1.5 million net charge recorded in the comparable period of the prior fiscal year to remeasure the Euro Loan at the period end foreign exchange rate.

 

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Table of Contents

Gain (loss) on early debt extinguishment

During the third quarter of fiscal 2012, we recognized $5.1 million loss on early debt extinguishment attributed to the write-off of unamortized debt issuance costs associated with the early repayment of $664.5 million indebtedness under our former senior secured term loan facility and replacement of our former $200.0 million senior secured revolving credit facility.

During the nine month ended October 27, 2012, we recognized a $9.7 million loss on early debt extinguishment attributed to the write-off of unamortized debt issuance costs associated with the early repayment of $1,154.3 million of indebtedness under our senior secured term loan facility and replacement of our former $200.0 million senior secured revolving credit facility.

The following is a summary of the Company’s debt repurchase activity for the three and nine months ended October 29, 2011 (in thousands). There was no debt repurchase activity for the three and nine months ended October 27, 2012.

 

     Three Months Ended October 29, 2011      Nine months ended October 29, 2011  

Notes Repurchased

   Principal
Amount
     Repurchase
Price
     Recognized
Gain (1)
     Principal
Amount
     Repurchase
Price
     Recognized
Gain (2)
 

Senior Fixed Rate Notes

   $ 2,730       $ 2,343       $ 346       $ 15,730       $ 15,213       $ 260   

Senior Toggle Notes

     27,780         23,834         3,640         60,920         56,461         4,208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 30,510       $ 26,177       $ 3,986       $ 76,650       $ 71,674       $ 4,468   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $41 for the Senior Fixed Rate Notes and $306 for the Senior Toggle Notes.
(2) Net of deferred issuance cost write-offs of $257 for the Senior Fixed Rate Notes and $706 for the Senior Toggle Notes, and accrued interest write-off of $455 for the Senior Toggle Notes.

Interest expense, net

During the three months ended October 27, 2012, net interest expense aggregated $54.0 million compared to $43.5 million for the three months ended October 29, 2011. The increase of $10.5 million was primarily due to interest on the Senior Secured First Lien Notes, partially offset by lower outstanding balances under our former senior secured term loan facility, Senior Toggle Notes and Senior Fixed Rate Notes.

During the nine months ended October 27, 2012, net interest expense aggregated $149.9 million compared to $134.1 million for the nine months ended October 29, 2011. The increase of $15.8 million was primarily due to interest on the Senior Secured First Lien Notes, partially offset by lower outstanding balances under our former senior secured term loan facility, Senior Toggle Notes and Senior Fixed Rate Notes.

Income taxes

The effective income tax rate for the three and nine months ended October 27, 2012 was (47.1)% and (19.1)% compared to 62.7% and (26.7)% for the three and nine months ended October 29, 2011. These effective income tax rates differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets resulting from operating losses in the three and nine months ended October 27, 2012 and October 29, 2011, respectively, by our U.S. operations.

 

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Table of Contents

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 America division are as follows (dollars in thousands):

 

     Three Months
Ended
October 27, 2012
    Three Months
Ended
October 29, 2011
    Nine Months
Ended
October 27, 2012
    Nine Months
Ended
October 29, 2011
 

Net sales

   $ 226,390      $ 221,825      $ 666,705      $ 663,070   

Increase in same store sales (1)

     2.0     0.8     0.2     2.5

Gross profit percentage

     51.5     52.2     51.6     52.1

Number of stores at the end of the period (2)

     1,939        1,959        1,939        1,959   

 

(1) Includes e-commerce.
(2) Number of stores excludes stores operated under franchise and licensing agreements.

During the three months ended October 27, 2012, net sales in North America increased $4.6 million, or 2.1%, from the three months ended October 29, 2011. The increase was attributable to new store sales and an increase in same store sales, partially offset by the effect of store closures. Sales would have increased 1.9% excluding the impact from foreign currency rate changes.

For the three months ended October 27, 2012, the increase in same store sales was primarily attributable to an increase in average transaction value of 4.0%, partially offset by a decrease in average number of transactions per store of 1.1%.

During the nine months ended October 27, 2012, net sales in North America increased $3.6 million, or 0.5%, from the nine months ended October 29, 2011. The increase was attributable to new store sales and an increase in same store sales, partially offset by the effect of store closures and foreign currency translation effect of our Canadian operation’ sales. Sales would have increased 0.7% excluding the impact from foreign currency rate changes.

For the nine months ended October 27, 2012, the increase in same store sales was primarily attributable to an increase in average transaction value of 5.7%, partially offset by a decrease in average number of transactions per store of 4.5%.

During the three months ended October 27, 2012, gross profit percentage decreased 70 basis points to 51.5% compared to 52.2% during the three months ended October 29, 2011. The decrease in gross profit percentage consisted of a 60 basis point decrease in merchandise margin and increase of 20 basis points in occupancy rate, partially offset by a 10 basis point decrease in buying and buying-related costs. The decrease in merchandise margin resulted primarily from an increase in markdowns.

During the nine months ended October 27, 2012, gross profit percentage decreased 50 basis points to 51.6% compared to 52.1% during the nine months ended October 29, 2011. The decrease in gross profit percentage consisted of a 40 basis point decrease in merchandise margin, a 30 basis point increase in occupancy rate, partially offset by a 20 basis point decrease in buying and buying-related costs. The decrease in merchandise margin resulted primarily from an increase in markdowns. The increase in occupancy rate resulted primarily from an increase in rent expense combined with essentially unchanged same store sales.

 

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

 

     Percentage of Total      Percentage of Total  

Product Category

   Three Months
Ended
October 27, 2012
     Three Months
Ended
October 29, 2011
     Nine Months
Ended
October 27, 2012
     Nine Months
Ended
October 29, 2011
 

Jewelry

     53.8         51.1         54.6         52.9   

Accessories

     46.2         48.9         45.4         47.1   
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe

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

 

     Three Months
Ended
October 27, 2012
    Three Months
Ended
October 29, 2011
    Nine Months
Ended
October 27, 2012
    Nine Months
Ended
October 29, 2011
 

Net sales

   $ 136,998      $ 134,175      $ 396,917      $ 397,923   

Increase (decrease) in same store sales

     3.2     (7.1)     0.6     (4.8)

Gross profit percentage

     49.1     50.5     47.4     49.3

Number of stores at the end of the period (1)

     1,149        1,088        1,149        1,088   

 

(1) Number of stores excludes stores operated under franchise and licensing agreements.

During the three months ended October 27, 2012, net sales in Europe increased $2.8 million, or 2.1%, from the three months ended October 29, 2011. The increase was attributable to new store sales and an increase in same store sales, partially offset by foreign currency translation effect of our foreign locations’ sales and the effect of store closures. Sales would have increased 8.6% excluding the impact from foreign currency rate changes.

For the three months ended October 27, 2012, the increase in same store sales was primarily attributable to an increase in average transaction value of 3.0%, partially offset by a decrease in average number of transactions per store of 0.5%.

During the nine months ended October 27, 2012, net sales in Europe decreased $1.0 million, or 0.3%, from the nine months ended October 29, 2011. The decrease was attributable to foreign currency translation effect of our foreign locations’ sales and the effect of store closures, partially offset by new store sales and an increase in same store sales. Sales would have increased 6.8% excluding the impact from foreign currency rate changes.

For the nine months ended October 27, 2012, the increase in same store sales was primarily attributable to an increase in average transaction value of 3.4%, partially offset by a decrease in average number of transactions per store of 3.9%.

During the three months ended October 27, 2012, gross profit percentage decreased 140 basis points to 49.1% compared to 50.5% during the three months ended October 29, 2011. The decrease in gross profit percentage consisted of a 200 basis point decrease in merchandise margin, a 20 basis point increase in buying and buying-related costs, partially offset by an 80 basis point decrease in occupancy rate. The decrease in merchandise margin resulted from a reduction in initial markups and an increase in inventory shrink. The decrease in occupancy rate resulted primarily from the leveraging effect of an increase in same store sales.

 

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During the nine months ended October 27, 2012, gross profit percentage decreased 190 basis points to 47.4% compared to 49.3% during the nine months ended October 29, 2011. The decrease in gross profit percentage consisted of a 160 basis point decrease in merchandise margin, a 20 basis point increase in buying and buying-related costs, and a 10 basis point increase in occupancy rate. The decrease in merchandise margin resulted from a reduction in initial markups and an increase in inventory shrink.

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

 

     Percentage of Total      Percentage of Total  

Product Category

   Three Months
Ended
October 27, 2012
     Three Months
Ended
October 29, 2011
     Nine Months
Ended
October 27, 2012
     Nine Months
Ended
October 29, 2011
 

Jewelry

     44.0         40.3         42.9         39.0   

Accessories

     56.0         59.7         57.1         61.0   
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liquidity and Capital Resources

A summary of cash flows used in operating, investing and financing activities for the nine months ended October 27, 2012 and October 29, 2011 is summarized in the table below (in thousands):

 

     Nine Months
Ended
October 27, 2012
    Nine Months
Ended
October 29, 2011
 

Operating activities

   $ (23,202   $ (1,793

Investing activities

     (44,123     (55,273

Financing activities

     (39,795     (71,365

Cash flows from operating activities

For the nine months ended October 27, 2012, cash used in operations increased $21.4 million compared to the prior year period. The primary reason for the increase was an increase in interest payments of $40.0 million; partially offset by an increase in operating income before depreciation and amortization expense, stock compensation expense (benefit) and foreign exchange loss on Euro Loan of $9.8 million and an increase in net working capital and other items, excluding cash and cash equivalents and restricted cash, of $8.8 million.

Cash flows from investing activities

For the nine months ended October 27, 2012, cash used in investing activities was $44.1 million, and primarily consisted of $46.4 million for capital expenditures, partially offset by $4.4 million decrease in restricted cash associated with the termination of the interest rate swap agreement. For the nine months ended October 29, 2011, cash used in investing activities was $55.3 million, and primarily consisted of $51.4 million for capital expenditures. During the remainder of Fiscal 2012, we expect to fund approximately $27.0 million of capital expenditures.

Cash flows from financing activities

For the nine months ended October 27, 2012, our primary financing activities consisted of the issuance of $1,142.1 million Senior Secured First Lien Notes used, together with cash on hand, to repay $1,154.3 million of indebtedness under the former senior secured term loan facility and to pay $27.6 million in financing costs. Cash used in financing activities was $71.4 million for the nine months ended October 29, 2011 which consisted primarily of note repurchases of $71.7 million to retire $15.7 million of Senior Notes and $60.9 million of Senior Toggle Notes and proceeds from the issuance of $450.0 million senior secured second lien notes used to reduce the entire $194.0 million outstanding under the former revolving credit facility and repay $244.9 million of indebtedness under the former senior secured term loan. 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.

 

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Cash Position

As of October 27, 2012, we had cash and cash equivalents of $62.7 million and all cash equivalents were maintained in one money market fund invested exclusively in U.S. Treasury Securities.

As of October 27, 2012, our foreign subsidiaries held cash and cash equivalents of $41.9 million. During the nine months ended October 27, 2012, we did not repatriate any cash held by foreign subsidiaries, but we expect a portion of our foreign subsidiaries’ future cash flow generation to be repatriated to the U.S. to meet certain liquidity needs. Based upon the amount of our remaining U.S. net operating loss carryforwards at October 27, 2012, we do not expect to pay U.S. income tax on fiscal 2012 repatriations. When our U.S. net operating loss carryforwards are no longer available, we would be required to accrue and pay U.S. income taxes, net of any foreign tax credit benefit, on any such repatriation.

We anticipate that cash generated from operations will be sufficient to meet our debt service requirements as they become due, new store expenditures, and future working capital requirements for at least the next twelve months. However, our ability to make scheduled payments of interest on, to pay principal on, or refinance indebtedness, to satisfy any other present or future debt obligations and our ability to fund future capital expenditures and operating expenses 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 “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

Senior Secured First Lien Notes

On February 28, 2012, the Company issued $400.0 million aggregate principal amount of 9.00% senior secured first lien notes that mature on March 15, 2019 (the “Senior Secured First Lien Notes”). The notes were issued at a price equal to 100.00% of the principal amount. On March 12, 2012, the Company issued an additional $100.0 million aggregate principal amount of the same series of Senior Secured First Lien Notes at a price equal to 101.50% of the principal amount. On September 20, 2012, the Company issued an additional $625.0 million aggregate principal amount of the same series of Senior Secured First Lien Notes at a price equal to 102.50% of the principal amount. Interest on the Senior Secured First Lien Notes is payable semi-annually to holders of record at the close of business on March 1 or September 1 immediately preceding the interest payment date on March 15 and September 15 of each year, commencing on September 15, 2012. The Senior Secured First Lien Notes are guaranteed on a first-priority senior secured basis by all of the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries. The Senior Secured First Lien Notes and related guarantees are secured, subject to certain exceptions and permitted liens, by a first priority lien on substantially all of the Company’s material owned assets and the material owned assets of subsidiary guarantors, limited in the case of equity interests held by the Company or any subsidiary guarantor in a foreign subsidiary, to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by the Company or a subsidiary guarantor. The liens securing the Senior Secured First Lien Notes rank equally to the liens securing the Company’s recently amended and restated senior secured credit facility. The Senior Secured First Lien Notes are subject to customary covenants, (described below), and events of default. The Company used the proceeds of the offerings of the Senior Secured First Lien Notes to reduce $1,154.3 million of indebtedness under the Company’s senior secured term loan Credit Facility, and to pay $27.6 million in financing costs which have been recorded as Deferred Financing Costs, Net in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 

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New Credit Facility

On September 20, 2012, the Company entered into an Amended and Restated Credit Agreement by and among Claire’s Inc. (“Parent”), the Company, Credit Suisse AG, as Administrative Agent, and the other Lenders named therein (the “New Credit Facility”), pursuant to which the Company replaced its existing $200.0 million senior secured revolving credit facility maturing May 29, 2013 with a $115.0 million five-year senior secured revolving credit facility.

Borrowings under the New Credit Facility will bear interest at a rate equal to, at the Company’s option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, 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 of 4.50% for LIBOR rate loans and 3.50% for alternate base rate loans. The Company will also pay a facility fee of 0.50% per annum of the committed amount of the New Credit Facility whether or not utilized.

All obligations under the New Credit Facility are unconditionally guaranteed by (i) Parent, prior to an initial public offering of the Company’s stock, and (ii) the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries, subject to certain exceptions.

All obligations under the New Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions and permitted liens, by a first priority lien on, (i) all of the Company’s capital stock, prior to an initial public offering of its stock, and (ii) substantially all of the Company’s material owned assets and the material owned assets of subsidiary guarantors, limited in the case of equity interests held by the Company or any subsidiary guarantor in a foreign subsidiary, to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by the Company or a subsidiary guarantor. The liens securing the New Credit Facility rank equally to the liens securing the Senior Secured First Lien Notes.

The New 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 except that so long as the revolving loans and letters of credit outstanding exceed $15 million, the Company will be required to comply with a maximum Total Net Secured Leverage Ratio of 5.5 to 1.0 based upon the ratio of its net senior secured debt to adjusted earnings before interest, taxes, depreciation and amortization for the period of four consecutive fiscal quarters most recently ended

At October 27, 2012, we had $4.5 million of letters of credit outstanding which reduces the borrowing availability under the New Credit Facility.

Europe Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.1 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 October 27, 2012, the entire amount of $2.1 million was available for borrowing by us, subject to a reduction of $2.1 million for outstanding bank guarantees.

Covenants

Our Senior Fixed Rate Notes, Senior Toggle Notes, Senior Subordinated Notes, Senior Secured Second Lien Notes and Senior Secured First Lien Notes (collectively, the “Notes”) and New Credit Facility 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:

 

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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;