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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 April 28, 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 May 1, 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 April 28, 2012 and January 28, 2012

     3   

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended April 28, 2012 and April 30, 2011

     4   

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended April  28, 2012 and April 30, 2011

     5   

Notes to Unaudited Condensed Consolidated Financial Statements

     6   

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

     19   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     28   

Item 4. Controls and Procedures

     30   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     31   

Item 1A. Risk Factors

     31   

Item 6. Exhibits

     31   

SIGNATURE PAGE

     32   

Ex-31.1 Section 302 Certification of Interim Co-CEO

  

Ex-31.2 Section 302 Certification of Interim Co-CEO

  

Ex-31.3 Section 302 Certification of CFO

  

Ex-32.1 Section 906 Certification of Interim Co-CEO

  

Ex-32.2 Section 906 Certification of Interim Co-CEO

  

Ex-32.3 Section 906 Certification of CFO

  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

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

ASSETS

   

Current assets:

   

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

  $ 169,704      $ 174,374   

Inventories

    150,360        142,104   

Prepaid expenses

    21,754        20,010   

Other current assets

    26,826        25,423   
 

 

 

   

 

 

 

Total current assets

    368,644        361,911   
 

 

 

   

 

 

 

Property and equipment:

   

Furniture, fixtures and equipment

    212,549        207,620   

Leasehold improvements

    290,517        281,774   
 

 

 

   

 

 

 
    503,066        489,394   

Less accumulated depreciation and amortization

    (296,983     (281,874
 

 

 

   

 

 

 
    206,083        207,520   
 

 

 

   

 

 

 

Leased property under capital lease:

   

Land and building

    18,055        18,055   

Less accumulated depreciation and amortization

    (2,031     (1,805
 

 

 

   

 

 

 
    16,024        16,250   
 

 

 

   

 

 

 

Goodwill

    1,550,056        1,550,056   

Intangible assets, net of accumulated amortization of $52,041 and $49,270, respectively

    547,455        549,768   

Deferred financing costs, net of accumulated amortization of $62,954 and $55,818, respectively

    36,266        33,025   

Other assets

    45,556        44,495   
 

 

 

   

 

 

 
    2,179,333        2,177,344   
 

 

 

   

 

 

 

Total assets

  $ 2,770,084      $ 2,763,025   
 

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

   

Current liabilities:

   

Trade accounts payable

  $ 69,825      $ 60,704   

Income taxes payable

    7,829        10,228   

Accrued interest payable

    46,678        31,859   

Accrued expenses and other current liabilities

    98,089        104,525   
 

 

 

   

 

 

 

Total current liabilities

    222,421        207,316   
 

 

 

   

 

 

 

Long-term debt

    2,398,111        2,386,382   

Obligation under capital lease

    17,274        17,290   

Deferred tax liability

    120,053        120,452   

Deferred rent expense

    29,409        28,861   

Unfavorable lease obligations and other long-term liabilities

    22,351        25,020   
 

 

 

   

 

 

 
    2,587,198        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

    619,524        619,453   

Accumulated other comprehensive loss, net of tax

    (1,740     (4,351

Accumulated deficit

    (657,319     (637,398
 

 

 

   

 

 

 
    (39,535     (22,296
 

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

  $ 2,770,084      $ 2,763,025   
 

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

3


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands)

 

     Three Months     Three Months  
     Ended     Ended  
     April 28, 2012     April 30, 2011  

Net sales

   $ 340,617      $ 346,446   

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

     174,003        171,359   
  

 

 

   

 

 

 

Gross profit

     166,614        175,087   
  

 

 

   

 

 

 

Other expenses:

    

Selling, general and administrative

     118,582        126,722   

Depreciation and amortization

     16,715        17,054   

Severance and transaction-related costs

     53        343   

Other expense, net

     431        5,311   
  

 

 

   

 

 

 
     135,781        149,430   
  

 

 

   

 

 

 

Operating income

     30,833        25,657   

Loss (gain) on early debt extinguishment

     4,602        (249

Interest expense, net

     47,022        46,235   
  

 

 

   

 

 

 

Loss before income tax benefit

     (20,791     (20,329

Income tax benefit

     (870     (732
  

 

 

   

 

 

 

Net loss

   $ (19,921   $ (19,597
  

 

 

   

 

 

 

Net loss

   $ (19,921   $ (19,597

Other comprehensive income, net of tax:

    

Foreign currency translation adjustments

     500        4,464   

Net gain on intra-entity foreign currency transactions, net of tax of $276 and $938

     1,752        14,264   

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

     359        (297
  

 

 

   

 

 

 

Other comprehensive income

     2,611        18,431   
  

 

 

   

 

 

 

Comprehensive loss

   $ (17,310   $ (1,166
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Three Months     Three Months  
     Ended     Ended  
     April 28, 2012     April 30, 2011  

Cash flows from operating activities:

    

Net loss

   $ (19,921   $ (19,597

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     16,715        17,054   

Amortization of lease rights and other assets

     817        785   

Amortization of debt issuance costs

     3,106        5,899   

Payment of in kind interest expense

     —          9,035   

Foreign currency exchange net loss on Euro Loan

     —          3,292   

Net unfavorable accretion of lease obligations

     (90     (275

Loss on sale/retirement of property and equipment, net

     23        48   

Loss (gain) on early debt extinguishment

     4,602        (249

Stock compensation expense

     71        974   

(Increase) decrease in:

    

Inventories

     (7,501     6,683   

Prepaid expenses

     (1,352     (11,840

Other assets

     (2,977     (709

Increase (decrease) in:

    

Trade accounts payable

     10,266        3,693   

Income taxes payable

     (2,048     (3,847

Accrued interest payable

     14,819        12,396   

Accrued expenses and other liabilities

     (6,609     (21,884

Deferred income taxes

     (2,142     (1,029

Deferred rent expense

     289        214   
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,068        643   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of property and equipment, net

     (13,944     (15,792

Acquisition of intangible assets/lease rights

     (11     (1,347

Changes in restricted cash

     —          (300
  

 

 

   

 

 

 

Net cash used in investing activities

     (13,955     (17,439
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments of Credit facility

     (489,750     (438,940

Proceeds from Notes

     501,500        450,000   

Repurchases of Notes

     —          (24,014

Payment of debt issuance costs

     (10,970     (10,152
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     780        (23,106
  

 

 

   

 

 

 

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

     437        4,168   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (4,670     (35,734

Cash and cash equivalents, at beginning of period

     170,024        255,902   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     165,354        220,168   

Restricted cash, at end of period

     4,350        25,966   
  

 

 

   

 

 

 

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

   $ 169,704      $ 246,134   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Income taxes paid

   $ 3,601      $ 4,223   

Interest paid

     29,062        18,912   

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

5


Table of Contents

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 statement of the results for the interim periods presented have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended 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, retirement and other post-retirement benefits, stock-based compensation, derivative and hedging activities, residual values and other items. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, 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 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 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.

 

6


Table of Contents

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 April 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

   $ (1,799   $ —         $ (1,799   $ —     

 

           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   $ —     

 

7


Table of Contents

The fair value of the Company’s interest rate swaps represent the estimated amounts the Company would receive or pay to terminate those contracts at the reporting date based upon pricing or valuation models applied to current market information. The interest rate swaps are 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 are based on an expectation of future interest rates derived from observed market interest rate curves. The interest rate swap entered into on July 28, 2010 is collateralized by cash and thus the Company does 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 $2.16 billion at April 28, 2012, compared to a carrying value of $2.40 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.

 

4.   Debt

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

 

     April 28, 2012      January 28, 2012  

Long-term debt:

     

Senior secured term loan facility due 2014

   $ 664,560       $ 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)

     501,479         —     

Senior secured second lien notes due 2019

     450,000         450,000   
  

 

 

    

 

 

 
     2,398,111         2,386,382   

Less: current portion of long-term debt

     —           —     
  

 

 

    

 

 

 

Long-term debt

   $ 2,398,111       $ 2,386,382   
  

 

 

    

 

 

 

 

(1) Amount includes unamortized premium of $1,479 as of April 28, 2012.

 

8


Table of Contents

See Note 3 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. 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 by a first-priority lien on substantially all of the assets of the Company and its subsidiary guarantors, subject to certain exceptions and permitted liens. The liens securing the Senior Secured First Lien Notes rank equally to the liens securing the Credit Facility. The Company used the proceeds of the offering of the Senior Secured First Lien Notes to reduce $489.8 million of indebtedness under the Company’s senior secured term loan Credit Facility, and to pay $11.0 million in financing costs which have been recorded as Deferred Financing Costs, Net in the accompanying Unaudited Condensed Consolidated Balance Sheets.

Note Repurchases

The following is a summary of the Company’s debt repurchase activity for the three months ended April 30, 2011 (in thousands). There was no debt repurchase activity for the three months ended April 28, 2012.

 

     Three Months Ended April 30, 2011  
     Principal      Repurchase      Recognized  

Notes Repurchased

   Amount      Price      Gain (Loss) (1)  

Senior Fixed Rate Notes

   $ 10,000       $ 9,930       $ (98

Senior Toggle Notes

     14,155         14,084         347   
  

 

 

    

 

 

    

 

 

 
   $ 24,155       $ 24,014       $ 249   
  

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $168 for the Senior Fixed Rate Notes and $179 for the Senior Toggle Notes, and accrued interest write-off of $455 for the Senior Toggle Notes.

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 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.

 

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None of these covenants, however, require the Company to maintain any particular financial ratio or other measure of financial performance. As of April 28, 2012, we were in compliance with the covenants under our 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 income (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 months ended April 28, 2012 and April 30, 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.

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 July 28, 2010, the Company entered into an interest rate swap agreement (the “Swap”) to manage exposure to fluctuations in interest rate changes related to a portion of the senior secured term loan facility. The Swap has been designated and accounted for as a cash flow hedge and expires on July 30, 2013. The Swap represents a contract to exchange floating rate for fixed interest rates periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covers an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility and has a fixed rate of 1.2235%. The interest rate Swap results in the Company paying a fixed rate plus the applicable margin then in effect for LIBOR borrowings resulting in an all-in fixed interest rate of 3.97% at April 28, 2012, on a notional amount of $200.0 million of the senior secured term loan facility.

 

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The Company does not make any credit-related valuation adjustments to the Swap entered into on July 28, 2010 because it is collateralized by cash, the balance of which is $4.4 million at April 28, 2012. The collateral requirement increases for declines in the three year LIBOR rate below 1.2235%. As of April 28, 2012, the three year LIBOR rate was 0.52% and each further 10 basis point decline in rate would result in an additional collateral requirement of $0.3 million. Any subsequent increases in the three year LIBOR rate will result in a release of the collateral.

At April 28, 2012 and January 28, 2012, the estimated fair values of the Company’s derivative financial instruments designated as interest rate cash flow hedges were liabilities of approximately $1.8 million and $2.2 million, respectively, which were recorded in “Accrued expenses and other current liabilities” in the Unaudited Condensed Consolidated Balance Sheets. Each of these amounts were also recorded, net of tax of approximately $5.7 million, respectively, as a component in “Accumulated other comprehensive loss, net of tax” 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 the Company’s derivative financial instruments designated as interest rate cash flow hedges during the three months ended April 28, 2012 and April 30, 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  
     April 28,
2012
     April 30,
2011
         April 28,
2012
    April 30,
2011
 

Interest rate swaps

   $ 359       $ (297  

Interest expense, net

   $ (341   $ (465

 

(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.

Over the next twelve months, the Company expects to reclassify net losses on the Company’s interest rate swaps recognized within “Accumulated other comprehensive loss, net of tax” of $1.5 million to interest expense.

 

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.

 

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7.   Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the three months ended April 28, 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

     47,375      $ 10.00      

Options exercised

     —          

Options forfeited

     (258,705   $ 10.00      

Options expired

     (86,188   $ 10.00      
  

 

 

      

Outstanding at April 28, 2012

     6,046,238      $ 10.00         3.4   
  

 

 

      

Options vested and expected to vest at April 28, 2012

     5,904,531      $ 10.00         3.3   
  

 

 

      

Exercisable at April 28, 2012

     2,744,230      $ 10.00         2.2   
  

 

 

      

The weighted average grant date fair value of options granted during the three months ended April 28, 2012 and April 30, 2011 was $2.44 and $2.81, respectively.

During the three months ended April 28, 2012 and April 30, 2011, the Company recorded stock-based compensation expense and additional paid-in capital relating to stock-based compensation of approximately $0.1 million and $1.0 million, respectively. Stock-based compensation expense is recorded in “Selling, general and administrative” expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

8.   Income Taxes

The effective income tax rate was 4.2% for the three months ended April 28, 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 months ended April 28, 2012 by the Company’s U.S. operations.

The effective income tax rate was 3.6% for the three months ended April 30, 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 months ended April 30, 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 Company owned by a family member of one of the Company’s 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

 

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and Comprehensive Loss. For the three months ended April 28, 2012 and April 30, 2011, the Company paid fees of approximately $0.6 million and $0.5 million, respectively. This arrangement was approved by the Audit Committee of the Board of Directors.

The initial purchasers of the Senior Secured First Lien Notes were J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC, Goldman Sachs & Co., 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 were Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Goldman Sachs & Co., and 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.

 

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 expense (income), 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 (loss) for the three months ended April 28, 2012 and April 30, 2011 are as follows (in thousands):

 

     Three Months     Three Months  
     Ended     Ended  
     April 28, 2012     April 30, 2011  

Net sales:

    

North America

   $ 221,575      $ 224,188   

Europe

     119,042        122,258   
  

 

 

   

 

 

 

Total net sales

     340,617        346,446   
  

 

 

   

 

 

 

Depreciation and amortization:

    

North America

     9,859        10,405   

Europe

     6,856        6,649   
  

 

 

   

 

 

 

Total depreciation and amortization

     16,715        17,054   
  

 

 

   

 

 

 

Operating income (loss) for reportable segments:

    

North America

     34,673        30,624   

Europe

     (3,787     (4,624
  

 

 

   

 

 

 

Total operating income for reportable segments

     30,886        26,000   

Severance and transaction-related costs

     53        343   
  

 

 

   

 

 

 

Net consolidated operating income

     30,833        25,657   

Loss (gain) on early debt extinguishment

     4,602        (249

Interest expense, net

     47,022        46,235   
  

 

 

   

 

 

 

Net consolidated loss before income tax benefit

   $ (20,791   $ (20,239
  

 

 

   

 

 

 

 

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Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $0 and $0.1 million for the three months ended April 28, 2012 and April 30, 2011, respectively.

Excluded from operating loss for the Europe segment are severance and transaction-related costs of approximately $0.1 million and $0.2 million for the three months ended April 28, 2012 and April 30, 2011.

 

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, the Issuer issued $400.0 million aggregate principal amount of Senior Secured First Lien Notes, and on March 12, 2012, issued an additional $100.0 million 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 Europe, Canadian and Asian subsidiaries (the “Non-Guarantors”), are not guarantors of these Notes.

The tables in the following pages present the 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

April 28, 2012

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents and restricted cash (1)

   $ 100,405      $ 5,174      $ 64,125      $ —        $ 169,704   

Inventories

     —          90,070        60,290        —          150,360   

Prepaid expenses

     667        2,094        18,993        —          21,754   

Other current assets

     —          17,641        9,185        —          26,826   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     101,072        114,979        152,593        —          368,644   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     4,879        131,105        76,565        —          212,549   

Leasehold improvements

     1,073        154,588        134,856        —          290,517   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,952        285,693        211,421        —          503,066   

Less accumulated depreciation and amortization

     (3,013     (183,151     (110,819     —          (296,983
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,939        102,542        100,602        —          206,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —          18,055        —          —          18,055   

Less accumulated depreciation and amortization

     —          (2,031     —          —          (2,031
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          16,024        —          —          16,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —          269,379        —          (269,379     —     

Investment in subsidiaries

     2,156,550        (60,674     —          (2,095,876     —     

Goodwill

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

Intangible assets, net

     286,012        5,423        256,020        —          547,455   

Deferred financing costs, net

     36,266        —          —          —          36,266   

Other assets

     129        4,187        41,240        —          45,556   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,478,957        1,453,966        611,665        (2,365,255     2,179,333   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,582,968      $ 1,687,511      $ 864,860      $ (2,365,255   $ 2,770,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Trade accounts payable

   $ 1,478      $ 28,508      $ 39,839      $ —        $ 69,825   

Income taxes payable

     —          (46     7,875        —          7,829   

Accrued interest payable

     46,678        —          —          —          46,678   

Accrued expenses and other current liabilities

     14,530        35,787        47,772        —          98,089   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     62,686        64,249        95,486        —          222,421   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     161,706        —          107,673        (269,379     —     

Long-term debt

     2,398,111        —          —          —          2,398,111   

Obligation under capital lease

     —          17,274        —          —          17,274   

Deferred tax liability

     —          106,692        13,361        —          120,053   

Deferred rent expense

     —          17,843        11,566        —          29,409   

Unfavorable lease obligations and other long-term liabilities

     —          21,646        705        —          22,351   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,559,817        163,455        133,305        (269,379     2,587,198   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —          367        2        (369     —     

Additional paid in capital

     619,524        1,435,909        797,816        (2,233,725     619,524   

Accumulated other comprehensive income (loss), net of tax

     (1,740     4,428        (10,938     6,510        (1,740

Retained earnings (accumulated deficit)

     (657,319     19,103        (150,811     131,708        (657,319
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (39,535     1,459,807        636,069        (2,095,876     (39,535
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 2,582,968      $ 1,687,511      $ 864,860      $ (2,365,255   $ 2,770,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents

Condensed Consolidating Balance Sheet

January 28, 2012

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     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 income (loss), 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”

 

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Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Three Months Ended April 28, 2012

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ 205,890      $ 134,727      $ —        $ 340,617   

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

     1,291        97,703        75,009        —          174,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (1,291     108,187        59,718        —          166,614   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     4,387        60,875        53,320        —          118,582   

Depreciation and amortization

     252        8,743        7,720        —          16,715   

Severance and transaction-related costs

     5        —          48        —          53   

Other (income) expense

     (2,334     (1,509     4,274        —          431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,310        68,109        65,362        —          135,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3,601     40,078        (5,644     —          30,833   

Loss on early debt extinguishment

     4,602        —          —          —          4,602   

Interest expense, net

     45,905        542        575        —          47,022   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (54,108     39,536        (6,219     —          (20,791

Income tax expense (benefit)

     —          (1,652     782        —          (870
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (54,108     41,188        (7,001     —          (19,921

Equity in earnings (loss) of subsidiaries

     34,187        (1,173     —          (33,014     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (19,921     40,015        (7,001     (33,014     (19,921

Foreign currency translation adjustments

     500        144        (962     818        500   

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

     1,752        609        1,804        (2,413     1,752   

Unrealized gain on interest rate swap, net of tax

     359        —          —          —          359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     2,611        753        842        (1,595     2,611   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (17,310   $ 40,768      $ (6,159   $ (34,609   $ (17,310
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Three Months Ended April 30, 2011

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ 209,024      $ 137,422      $ —        $ 346,446   

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

     1,595        98,449        71,315        —          171,359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (1,595     110,575        66,107        —          175,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     8,188        62,392        56,142        —          126,722   

Depreciation and amortization

     181        9,478        7,395        —          17,054   

Severance and transaction-related costs

     133        —          210        —          343   

Other (income) expense

     (3,648     436        8,523        —          5,311   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,854        72,306        72,270        —          149,430   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (6,449     38,269        (6,163     —          25,657   

Gain on early debt extinguishment

     249        —          —          —          249   

Interest expense, net

     44,230        531        1,474        —          46,235   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (50,430     37,738        (7,637     —          (20,329

Income tax expense (benefit)

     —          (1,112     380        —          (732
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (50,430     38,850        (8,017     —          (19,597

Equity in earnings (loss) of subsidiaries

     30,833        (917     —          (29,916     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (19,597     37,933        (8,017     (29,916     (19,597

Foreign currency translation adjustments

     4,464        258        425        (683     4,464   

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

     14,264        1,490        14,537        (16,027     14,264   

Unrealized loss on interest rate swap, net of tax

     (297     —          —          —          (297
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     18,431        1,748        14,962        (16,710     18,431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (1,166   $ 39,681      $ 6,945      $ (46,626   $ (1,166
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Three Months Ended April 28, 2012

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (19,921   $ 40,015      $ (7,001   $ (33,014   $ (19,921

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

          

Equity in (earnings) loss of subsidiaries

     (34,187     1,173        —          33,014        —     

Depreciation and amortization

     252        8,743        7,720        —          16,715   

Amortization of lease rights and other assets

     —          —          817        —          817   

Amortization of debt issuance costs

     2,512        —          594        —          3,106   

Net accretion of favorable (unfavorable) lease obligations

     —          (223     133        —          (90

Loss on sale/retirement of property and equipment, net

     —          23        —          —          23   

Loss on early debt extinguishment

     4,602        —          —          —          4,602   

Stock compensation expense (benefit)

     17        (28     82        —          71   

(Increase) decrease in:

          

Inventories

     —          (5,462     (2,039     —          (7,501

Prepaid expenses

     9        (564     (797     —          (1,352

Other assets

     —          (2,210     (767     —          (2,977

Increase (decrease) in:

          

Trade accounts payable

     11        4,376        5,879        —          10,266   

Income taxes payable

     —          (810     (1,238     —          (2,048

Accrued interest payable

     14,819        —          —          —          14,819   

Accrued expenses and other liabilities

     (1     (3,971     (2,637     —          (6,609

Deferred income taxes

     —          (1,621     (521     —          (2,142

Deferred rent expense

     —          163        126        —          289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (31,887     39,604        351        —          8,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment, net

     (340     (6,227     (7,377     —          (13,944

Acquisition of intangible assets/lease rights

     (11     —          —          —          (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (351     (6,227     (7,377     —          (13,955
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Payments of Credit facility

     (489,750     —          —          —          (489,750

Proceeds from Notes

     501,500        —          —          —          501,500   

Payment of debt issuance costs

     (10,970     —          —          —          (10,970

Intercompany activity, net

     24,598        (34,522     9,924        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     25,378        (34,522     9,924        —          780   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —          1,411        (974     —          437   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (6,860     266        1,924        —          (4,670

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     96,055        5,174        64,125        —          165,354   

Restricted cash, at end of period

     4,350        —          —          —          4,350   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 100,405      $ 5,174      $ 64,125      $ —        $ 169,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Three Months Ended April 30, 2011

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (19,597   $ 37,933      $ (8,017   $ (29,916   $ (19,597

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

          

Equity in (earnings) loss of subsidiaries

     (30,833     917        —          29,916        —     

Depreciation and amortization

     181        9,478        7,395        —          17,054   

Amortization of lease rights and other assets

     —          —          785        —          785   

Amortization of debt issuance costs

     5,751        —          148        —          5,899   

Payment of in kind interest expense

     9,035        —          —          —          9,035   

Foreign currency exchange net loss on Euro Loan

     —          —          3,292        —          3,292   

Net accretion of favorable (unfavorable) lease obligations

     —          (430     155        —          (275

Loss on sale/retirement of property and equipment, net

     —          32        16        —          48   

Gain on early debt extinguishment

     (249     —          —          —          (249

Stock compensation expense

     785        —          189        —          974   

(Increase) decrease in:

          

Inventories

     —          5,445        1,238        —          6,683   

Prepaid expenses

     417        (13,491     1,234        —          (11,840

Other assets

     (11     (575     (123     —          (709

Increase (decrease) in:

          

Trade accounts payable

     (207     (1,121     5,021        —          3,693   

Income taxes payable

     —          (1,001     (2,846     —          (3,847

Accrued interest payable

     12,470        —          (74     —          12,396   

Accrued expenses and other liabilities

     (10,825     (2,483     (8,576     —          (21,884

Deferred income taxes

     —          (1,116     87        —          (1,029

Deferred rent expense

     —          16        198        —          214   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (33,083     33,604        122        —          643   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment, net

     (208     (4,598     (10,986     —          (15,792

Acquisition of intangible assets/lease rights

     —          (7     (1,340     —          (1,347

Changes in restricted cash

     (300     —          —          —          (300
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (508     (4,605     (12,326     —          (17,439
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Payments of Credit facility

     (438,940     —          —          —          (438,940

Proceeds from Note

     450,000        —          —          —          450,000   

Repurchases of Notes

     (24,014     —          —          —          (24,014

Payment of debt issuance costs

     (10,085     —          (67     —          (10,152

Intercompany activity, net

     37,742        (44,629     6,887        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     14,703        (44,629     6,820        —          (23,106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —          4,041        127        —          4,168   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (18,888     (11,589     (5,257     —          (35,734

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     157,191        (8,002     70,979        —          220,168   

Restricted cash, at end of period

     3,750        —          22,216        —          25,966   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 160,941      $ (8,002   $ 93,195      $ —        $ 246,134   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

We include a store in the calculation of same store sales once it has been in operation sixty weeks after its initial opening. A store which is temporarily closed, such as for remodeling, is removed from the same store sales computation if it is closed for nine consecutive weeks. The removal is effective prospectively upon the completion of the ninth consecutive week of closure. A store which is closed permanently, such as upon termination of the lease, is immediately removed from the same store sales computation. We compute same store sales on a local currency basis, which eliminates any impact for changes in foreign currency rates.

 

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Business Overview

We are one of the world’s leading specialty retailers of fashionable accessories and jewelry at affordable prices for young women, teens, tweens, and girls ages 3 to 27. We are organized based on our geographic markets, which include our North America division and our Europe division. As of April 28, 2012, we operated a total of 3,074 stores, of which 1,944 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North America division) and 1,130 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®, on a global basis, and Icing®, in North America.

As of April 28, 2012, we also franchised or licensed 375 stores in Japan, the Middle East, Turkey, Russia, Greece, Guatemala, Malta, Ukraine, Mexico and India. 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), or referred to as our Young, Younger and Youngest target customer groups.

Our second brand in North America is Icing, which targets a single edit point customer represented by a 23 year old young woman just graduating from college and entering the work force who dresses consistent with the current fashion influences. We believe this niche strategy enables us to create a well defined merchandise point of view and attract a broad group of customers from 19 to 27 years of age.

We believe that we are the leading accessories and jewelry destination for our target customers, which is embodied in our mission statement – to be a fashion authority and fun destination offering a compelling, focused assortment of value-priced accessories, jewelry and other emerging fashion categories targeted to the lifestyles of kids, tweens, teens and young women. In addition to age segmentation, we use multiple lifestyle aesthetics to further differentiate our merchandise assortments for our Young and Younger target customer groups.

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

 

   

Accessories – includes fashion accessories for year-round use, including legwear, headwear, attitude glasses, scarves, armwear and belts, and seasonal use, including sunglasses, hats, fall footwear, sandals, scarves, gloves, boots, slippers and earmuffs; and other accessories, including hairgoods, handbags, and small leather goods, as well as cosmetics

 

   

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

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

 

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Current Market Conditions

Continued distress in the financial markets has resulted in declines in consumer confidence and spending, extreme volatility in securities prices, and has had a negative impact on credit availability and declining valuations of certain investments. We have assessed the implications of these factors on our current business and have responded with pursuit of cost reduction opportunities and are proceeding cautiously to support increased sales. If the national, or global, economies or credit market conditions in general were to deteriorate further in the future, it is possible that such deterioration could put additional negative pressure on consumer spending and negatively affect our cash flows or cause a tightening of trade credit that may negatively affect our liquidity.

Consolidated Results of Operations

A summary of our consolidated results of operations for the three months ended April 28, 2012 and April 30, 2011 are as follows (dollars in thousands):

 

     Three Months
Ended
April 28, 2012
    Three Months
Ended
April 30, 2011
 

Net sales

   $ 340,617      $ 346,446   

(Decrease) increase in same store sales

     (3.0 )%      3.2

Gross profit percentage

     48.9     50.5

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

     34.8     36.6

Depreciation and amortization as a percentage of net sales

     4.9     4.9

Operating income

   $ 30,833      $ 25,657   

Loss (gain) on early debt extinguishment

   $ 4,602      $ (249

Net loss

   $ (19,921   $ (19,597

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

     3,074        3,000   

 

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

Net sales

Net sales for the three months ended April 28, 2012 decreased $5.8 million, or 1.7%, from the three months ended April 30, 2011. The decrease was attributable to a decrease in same store sales, the effect of store closures and foreign currency translation effect of our foreign location’s sales, partially offset by new store sales. Net sales would have decreased 0.1% excluding the impact from foreign currency rate changes.

For the three months ended April 28, 2012, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 8.3%, partially offset by an increase in average transaction value of 4.4%.

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

 

     Percentage of Total  

Product Category

   Three Months
Ended
April 28, 2012
     Three Months
Ended
April 30, 2011
 

Accessories

     50.2         52.4   

Jewelry

     49.8         47.6   
  

 

 

    

 

 

 
     100.0         100.0   
  

 

 

    

 

 

 

 

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Gross profit

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

During the three months ended April 28, 2012, gross profit percentage decreased 160 basis points to 48.9% compared to 50.5% during the three months ended April 30, 2011. The decrease in gross profit percentage consisted of a 120 basis point increase in occupancy rate and a 40 basis point decrease in merchandise margin. The increase in occupancy rate resulted primarily from the deleveraging effect of a reduction in same store sales. The decrease in merchandise margin resulted primarily from an increase in markdowns, partially offset by an improvement in initial markups.

Selling, general and administrative expenses

During the three months ended April 28, 2012, selling, general and administrative expenses decreased $8.1 million, or 6.4%, compared to the three months ended April 30, 2011. As a percentage of net sales, selling, general and administrative expenses decreased 180 basis points compared to the three months ended April 30, 2011. Excluding a favorable $2.2 million foreign currency translation effect, selling, general and administrative expenses would have decreased $5.9 million. The majority of the remaining decrease is primarily due to lower compensation-related expenses, such as bonus, salaries and non-cash stock compensation, and a reduction in marketing costs.

Depreciation and amortization expense

During the three months ended April 28, 2012, depreciation and amortization expense decreased $0.4 million to $16.7 million compared to $17.1 million for the three months ended April 30, 2011. Excluding a favorable $0.3 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $0.1 million.

Other expense, net

The following is a summary of other expense activity for the three months ended April 28, 2012 and April 30, 2011 (in thousands):

 

     Three Months
Ended
April 28, 2012
    Three Months
Ended
April 30, 2011
 

Foreign currency exchange loss, net

   $ 858      $ 5,949   

Royalty income

     (427     (389

Other income

     —          (249
  

 

 

   

 

 

 
   $ 431      $ 5,311   
  

 

 

   

 

 

 

During the three months ended April 28, 2012, foreign currency exchange loss, net decreased primarily from a reduction of a $3.3 million net charge recorded in the prior fiscal quarter to remeasure the Euro Loan at the period end foreign exchange rate.

 

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Loss (gain) on early debt extinguishment

During the first quarter of fiscal 2012, we recognized a $4.6 million loss on early debt extinguishment attributed to the write-off of unamortized debt issuance costs associated with the early repayment of $489.8 million of indebtedness under our senior secured term loan Credit Facility.

The following is a summary of the Company’s debt repurchase activity for the three months ended April 30, 2011 (in thousands). There was no debt repurchase activity for the three months ended April 28, 2012.

 

     Three Months Ended April 30, 2011  

Notes Repurchased

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

Senior Fixed Rate Notes

   $ 10,000       $ 9,930       $ (98

Senior Toggle Notes

     14,155         14,084         347   
  

 

 

    

 

 

    

 

 

 
   $ 24,155       $ 24,014       $ 249   
  

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $168 for the Senior Fixed Rate Notes and $179 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 April 28, 2012, net interest expense aggregated $47.0 million compared to $46.2 million for the three months ended April 30, 2011. The increase of $0.8 million is primarily due to interest on the $500.0 million Senior Secured First Lien Notes, partially offset by lower outstanding balances under our senior secured term loan Credit Facility, Senior Fixed Rate Notes and Senior Toggle Notes.

Income taxes

The effective income tax rate for the three months ended April 28, 2012 was 4.2% compared to 3.6% for the three months ended April 30, 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 generated primarily from operating losses in the three months ended April 28, 2012 and April 30, 2011, respectively, by our U.S. operations.

Segment Operations

We are organized into two business segments – North America and Europe. The following is a discussion of results of operations by business segment.

 

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North America

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

 

     Three Months
Ended
April 28, 2012
    Three Months
Ended
April 30, 2011
 

Net sales

   $ 221,575      $ 224,188   

(Decrease) increase in same store sales

     (1.7 )%      4.8

Gross profit percentage

     52.0     52.5

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

     1,944        1,960   

 

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

During the three months ended April 28, 2012, net sales in North America decreased $2.6 million, or 1.2%, from the three months ended April 30, 2011. The decrease was attributable to a decrease in same store sales, the effect of store closures and foreign currency translation effect of our Canadian operations’ sales, partially offset by new store sales. Sales would have decreased 1.0% excluding the impact from foreign currency rate changes.

For the three months ended April 28, 2012, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 8.5%, partially offset by an increase in average transaction value of 6.7%.

During the three months ended April 28, 2012, gross profit percentage decreased 50 basis points to 52.0% compared to 52.5% during the three months ended April 30, 2011. The decrease in gross profit percentage consisted of a 70 basis point increase in occupancy rate, partially offset by a 10 basis point increase in merchandise margin and a 10 basis point decrease in buying and buying-related costs. The increase in occupancy rate resulted primarily from the deleveraging effect of a reduction in same store sales.

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

 

     Percentage of Total  

Product Category

   Three Months
Ended
April 28, 2012
     Three Months
Ended
April 30, 2011
 

Accessories

     45.9         46.7   

Jewelry

     54.1         53.3   
  

 

 

    

 

 

 
     100.0         100.0   
  

 

 

    

 

 

 

Europe

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

 

     Three Months
Ended
April 28, 2012
    Three Months
Ended
April 30, 2011
 

Net sales

   $ 119,042      $ 122,258   

(Decrease) increase in same store sales

     (5.5 )%      0.1

Gross profit percentage

     43.2     47.0

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

     1,130        1,040   

 

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

 

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During the three months ended April 28, 2012, net sales in Europe decreased $3.2 million, or 2.6%, from the three months ended April 30, 2011. The decrease was attributable to a decrease in same store sales, foreign currency translation effect of our foreign location’s sales and the effect of store closures, partially offset by new store sales. Sales would have increased 1.6% excluding the impact from foreign currency rate changes.

For the three months ended April 28, 2012, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 9.6%, partially offset by an increase in average transaction value of 2.0%.

During the three months ended April 28, 2012, gross profit percentage decreased 380 basis points to 43.2% compared to 47.0% during the three months ended April 30, 2011. The decrease in gross profit percentage consisted of a 220 basis point increase in occupancy rate, a 150 basis point decrease in merchandise margin and a 10 basis point increase in buying and buying-related costs. The increase in occupancy rate resulted primarily from the deleveraging effect of a reduction in same store sales. The decrease in merchandise margin resulted from an increase in markdowns, partially offset by an improvement in initial markups.

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

 

     Percentage of Total  

Product Category

   Three Months
Ended
April 28, 2012
     Three Months
Ended
April 30, 2011
 

Accessories

     57.9         62.5   

Jewelry

     42.1         37.5   
  

 

 

    

 

 

 
     100.0         100.0   
  

 

 

    

 

 

 

Liquidity and Capital Resources

A summary of cash flows provided by (used in) operating, investing and financing activities for the three months ended April 28, 2012 and April 30, 2011 is outlined in the table below (in thousands):

 

     Three Months
Ended
April 28, 2012
    Three Months
Ended
April 30, 2011
 

Operating activities

   $ 8,068      $ 643   

Investing activities

     (13,955     (17,439

Financing activities

     780        (23,106

Cash flows from operating activities

For the three months ended April 28, 2012, cash provided by operations increased $7.4 million compared to the prior year period. The primary reason for the increase was a decrease in working capital and other items, excluding cash and cash equivalents and restricted cash, of $16.2 million, partially offset by an increase in interest payments of $10.2 million.

Cash flows from investing activities

For the three months ended April 28, 2012, cash used in investing activities was $14.0 million and primarily consisted of $13.9 million for capital expenditures. For the three months ended April 30, 2011, cash used in investing activities was $17.4 and primarily consisted of $15.8 million for capital expenditures, and, to a lesser extent, acquisition of lease rights and an increase in restricted cash. During the remainder of Fiscal 2012, we expect to fund between $60.0 million and $65.0 million of capital expenditures.

 

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Cash flows from financing activities

For the three months ended April 28, 2012, cash provided by financing activities was $0.8 million which consisted primarily of net proceeds of $501.5 million from the issuance of Senior Secured First Lien Notes used to repay $489.8 million of indebtedness under the senior secured term loan Credit Facility and pay $11.0 million in financing costs. Cash used in financing activities was $23.1 million for the three months ended April 30, 2011 which consisted primarily of note repurchases of $24.0 million to retire $10.0 million of Senior Fixed Rate Notes and $14.2 million of Senior Toggle notes and net proceeds from the issuance of $450.0 million senior secured second lien notes used to reduce the entire $194.0 million outstanding under the Revolver and repay $244.9 million of indebtedness under the senior secured term loan Credit Facility.

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

Cash Position

As of April 28, 2012, we had cash and cash equivalents and restricted cash of $169.7 million and all cash equivalents were maintained in one money market fund invested exclusively in U.S. Treasury Securities.

As of April 28, 2012, our foreign subsidiaries held cash and cash equivalents of $64.1 million. During the three months ended April 28, 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 April 28, 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, we 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, we 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. 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 our existing and future direct or indirect wholly-owned domestic subsidiaries. The Senior Secured First Lien Notes and related guarantees are secured by a first-priority lien on substantially all of our and our subsidiary guarantor’s assets, subject to certain exceptions and permitted liens. The liens securing the Senior Secured First Lien Notes rank equally to the liens securing the Credit Facility. We used the net proceeds of the offering of the Senior Secured First Lien Notes to reduce $489.8 million of indebtedness under the senior secured term loan Credit Facility, and to pay $11.0 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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Credit Facility

An affiliate of Lehman Brothers was part of the syndicate of financial institutions which committed to extend credit to us under our Revolver. During the three months ended April 28, 2012, we determined that as a result of the Lehman Brothers Chapter 11 Plan of Reorganization such affiliate of Lehman Brothers is no longer obligated to extend credit to us under our Revolver. Although we have no current intent to draw upon the Revolver, up to $33.0 million of borrowing capacity may not be available unless one or more other financial institutions agree to fund the Lehman Brothers’ $33.0 million commitment. At April 28, 2012, we had $4.5 million of letters of credit outstanding which reduces the borrowing availability under the Revolver.

Europe Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.2 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. At April 28, 2012, the entire amount of $2.2 million was available for borrowing by us, subject to a reduction of $2.2 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 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. As of April 28, 2012, we were in compliance with the covenants under our Credit Facility and Notes.

Critical Accounting Policies and Estimates

Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Fiscal 2011 Annual Report on Form 10-K, filed on April 4, 2012, in the Notes to Consolidated Financial Statements, Note 2 – Summary of Significant Accounting Policies, and the Critical Accounting Policies and Estimates section contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations therein.

 

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Recent Accounting Pronouncements

See Note 2 – Recent Accounting Pronouncements, in the Notes to the Unaudited Condensed Consolidated Financial Statements.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

We and our representatives may from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in our press releases and reports we issue publicly. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our future financial performance, business strategy, planned capital expenditures, ability to service our debt, and new store openings for future periods, are forward-looking statements. The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and operating performance, and we assume no obligation to update any forward-looking statement. Forward-looking statements involve known or unknown risks, uncertainties and other factors, including changes in estimates and judgments discussed under “Critical Accounting Policies and Estimates” which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecasts” and similar expressions. Some of these risks, uncertainties and other factors are as follows: changes in consumer preferences and consumer spending; competition; our level of indebtedness; general economic conditions; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; uncertainties generally associated with the specialty retailing business, such as decreases in mall traffic due to high gasoline prices or other general economic conditions; disruptions in our supply of inventory; inability to increase same store sales; inability to renew, replace or enter into new store leases on favorable terms; increases in the cost of our merchandise; significant increases in our merchandise markdowns; inability to grow our store base in Europe or expand our international franchising operations; inability to design and implement new information systems or disruptions in adapting our information systems to allow for expansion into new geographic markets or grow our

e-commerce sales; delays in anticipated store openings or renovations; results from any future asset impairment analysis; changes in applicable laws, rules and regulations, including changes in federal, state or local regulations governing the sale of our products, particularly regulations relating to the content in our products, general employment laws, including laws relating to overtime pay and employee benefits, health care laws, tax laws and import laws; product recalls; data or security breaches of confidential information; loss of key members of management; increases in the cost of labor; labor disputes; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; increases in the cost of borrowings; unavailability of additional debt or equity capital; and the impact of our substantial indebtedness on our operating income and our ability to grow. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. In addition, we typically earn a disproportionate share of our operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. Additional discussion of these and other risks and uncertainties is contained elsewhere in this Item 2, in Item 3, “Quantitative and Qualitative Disclosures About Market Risk” and in our Form 10-K for Fiscal 2011 under “Statement Regarding Forward-Looking Disclosures” and “Risk Factors.”

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Cash and Cash Equivalents

We have significant amounts of cash and cash equivalents, excluding restricted cash, at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions, we cannot be assured that we will not experience losses on our deposits. We mitigate this risk by investing in money market funds that are invested exclusively in U.S. Treasury securities, maintaining bank accounts with a group of credit worthy financial institutions and limiting the cash balance in any one bank account. As of April 28, 2012, all cash equivalents, excluding restricted cash, were maintained in one money market fund that was invested exclusively in U.S. Treasury securities and our restricted cash was deposited with significant and credit worthy financial institutions.

 

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Interest Rates

On July 28, 2010, we entered into an interest rate swap agreement (the “Swap”) to manage exposure to fluctuations in interest rates. The Swap expires on July 30, 2013. The Swap represents a contract to exchange floating rate for fixed interest rates periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covers an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rate of the Swap is 1.2235% and has been designated and accounted for as a cash flow hedge. At April 28, 2012, the estimated fair value of the Swap was a liability of approximately $1.8 million and was recorded, net of tax, as a component of “Accumulated other comprehensive income (loss), net of tax” in our Unaudited Condensed Consolidated Balance Sheets.

At April 28, 2012, we had fixed rate debt of $1,750.8 million and variable rate debt of $664.6 million. Based on our variable rate debt balance (less $200.0 million for the interest rate swap) as of April 28, 2012, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $4.6 million, net.

Foreign Currency

We are exposed to market risk from foreign currency exchange rate fluctuations on the United States dollar (“USD” or “dollar”) value of foreign currency denominated transactions and our investments in foreign subsidiaries. We manage this exposure to market risk through our regular operating and financing activities, and may from time to time, use foreign currency options. Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling, and financing activities in currencies other than local currencies and to the carrying value of our net investments in foreign subsidiaries. At April 28, 2012, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive loss” are $2.3 million and $18.7 million, net of tax, reflecting the unrealized gain on foreign currency translations and intra-entity foreign currency transactions during the three months ended April 28, 2012 and April 30, 2011, respectively.

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

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

 

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General Market Risk

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

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting have been made during the quarter ended April 28, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K for the year ended January 28, 2012.

 

Item 6. Exhibits

 

  4.14    Indenture, dated as of February 28, 2012, by and between Claire’s Escrow II Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee and Collateral Agent.(2)
  4.15    Supplemental Indenture, dated as of March 2, 2012, by and among Claire’s Stores, Inc., the Guarantors and The Bank of New York Mellon Trust Company, N.A., as Trustee and Collateral Agent.(2)
  4.16    Form of 9.00% Senior Secured First Lien Notes due 2019 (included in the Indenture filed as Exhibit 4.14 hereto.(2)
10.24    Collateral Agreement, dated as of March 2, 2012, by and among Claire’s Stores, Inc., the Guarantors and The Bank of New York Mellon Trust Company, N.A., as Collateral Agent.(2)
10.25    Intercreditor Agreement, dated as of March 2, 2012, by and among Claire’s Stores, Inc., Claire’s, Inc., the Guarantors, The Bank of New York Mellon Trust Company, N.A. and Credit Suisse AG, Cayman Islands Branch (f/k/a Credit Suisse, Cayman Islands Branch), as Bank Collateral Agent.(2)
10.26    Trademark Security Agreement, dated as of March 2, 2012, by and between CBI Distributing Corp. and The Bank of New York Mellon Trust Company, as Collateral Agent.(2)
10.27   

Joinder Agreement to the Second Lien Intercreditor Agreement, dated as of March 2, 2012 by and among Claire’s Stores, Inc., Claire’s Inc., the Guarantors, The Bank of New York Mellon Trust Company, N.A., as Trustee under the Company’s outstanding 8.875% Senior Secured Second Lien Notes and Credit Suisse AG, Cayman Islands Branch (f/k/a Credit Suisse, Cayman Islands Branch), as Credit Agreement Agent.(2)

10.28    Amendment, dated as of March 2, 2012, to the Collateral Agreement, dated as of March 4, 2011, by and among Claire’s Stores, Inc., Claire’s Inc., the Guarantors and The Bank of New York Mellon Trust Company, N.A., as Trustee and Collateral Agent.(2)
10.29    Second Supplemental Indenture, dated as of March 12, 2012, by and among Claire’s Stores, Inc., the Guarantors and The Bank of New York Mellon Trust Company, N.A., as Trustee and Collateral Agent.(3)
  31.1    Certification of Interim Co-Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).(1)
  31.2    Certification of Interim Co-Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).(1)
  31.3    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).(1)
  32.1    Certification of Interim Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
  32.2    Certification of Interim Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
  32.3    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

 

(1) 

Filed herewith.

(2) 

Filed previously as exhibit to Form 8-K by the Company on March 5, 2012.

(3) 

Filed previously as exhibit to Form 8-K by the Company on March 14, 2012.

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

 

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Table of Contents

SIGNATURES

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

 

    CLAIRE’S STORES, INC.
May 25, 2012   By:  

/s/ James G. Conroy

   

James G. Conroy, Interim Co-Chief Executive Officer

(principal executive officer)

May 25, 2012   By:  

/s/ Jay Friedman

   

Jay Friedman, Interim Co-Chief Executive Officer

(principal executive officer)

May 25, 2012   By:  

/s/ J. Per Brodin

    J. Per Brodin, Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

 

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Table of Contents

INDEX TO EXHIBITS

 

EXHIBIT
NO.
   DESCRIPTION
  31.1    Certification of Interim Co-Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
  31.2    Certification of Interim Co-Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
  31.3    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
  32.1    Certification of Interim Co-Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Interim Co-Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.3    Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

33