Edgar Filing: CLAIRES STORES INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended October 27, 2012

¨	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.

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

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

CLAIRE’S STORES, INC. AND SUBSIDIARIES

INDEX


	PAGE NO.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		3

Unaudited Condensed Consolidated Balance Sheets as of October 27, 2012 and January 28, 2012		3

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine months ended October 27, 2012 and October 29, 2011		4

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine months ended October 27, 2012 and October 29, 2011		5

Notes to Unaudited Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3. Quantitative and Qualitative Disclosures About Market Risk		35

Item 4. Controls and Procedures		37

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		38

Item 1A. Risk Factors		38

Item 6. Exhibits		38

SIGNATURE PAGE		39

Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	October 27, 2012			January 28, 2012
	(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents and restricted cash of $0 and $4,350, respectively	$	62,673		$	174,374
Inventories		192,417			142,104
Prepaid expenses		18,880			20,010
Other current assets		30,667			25,423

Total current assets		304,637			361,911

Property and equipment:
Furniture, fixtures and equipment		223,919			207,620
Leasehold improvements		302,709			281,774

		526,628			489,394
Less accumulated depreciation and amortization		(317,103	)		(281,874	)

		209,525			207,520

Leased property under capital lease:
Land and building		18,055			18,055
Less accumulated depreciation and amortization		(2,483	)		(1,805	)

		15,572			16,250

Goodwill		1,550,056			1,550,056
Intangible assets, net of accumulated amortization of $55,662 and $49,270, respectively		543,840			549,768
Deferred financing costs, net of accumulated amortization of $24,922 and $55,818, respectively		43,249			33,025
Other assets		46,161			44,495

		2,183,306			2,177,344

Total assets	$	2,713,040		$	2,763,025

LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Trade accounts payable	$	68,716		$	60,704
Income taxes payable		4,889			10,228
Accrued interest payable		48,149			31,859
Accrued expenses and other current liabilities		94,160			104,525

Total current liabilities		215,914			207,316

Long-term debt		2,373,906			2,386,382
Obligation under capital lease		17,249			17,290
Deferred tax liability		119,404			120,452
Deferred rent expense		29,759			28,861
Unfavorable lease obligations and other long-term liabilities		21,745			25,020

		2,562,063			2,578,005

Commitments and contingencies
Stockholder’s deficit:
Common stock par value $0.001 per share; authorized 1,000 shares; issued and outstanding 100 shares		—			—
Additional paid-in capital		618,050			619,453
Accumulated other comprehensive loss, net of tax		(4,665	)		(4,351	)
Accumulated deficit		(678,322	)		(637,398	)

		(64,937	)		(22,296	)

Total liabilities and stockholder’s deficit	$	2,713,040		$	2,763,025

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(in thousands)


	Three Months Ended October 27, 2012			Three Months Ended October 29, 2011			Nine Months Ended October 27, 2012			Nine Months Ended October 29, 2011
Net sales	$	363,388		$	356,000		$	1,063,622		$	1,060,993
Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)		179,583			172,505			531,452			519,246

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

Other expenses:
Selling, general and administrative		121,211			123,378			360,122			380,309
Depreciation and amortization		16,042			17,129			48,232			50,535
Severance and transaction-related costs		(29	)		180			1,168			949
Other (income) expense, net		(3,234	)		(1,840	)		(2,654	)		2,290

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

Operating income		49,815			44,648			125,302			107,664
Gain (loss) on early debt extinguishment		(5,105	)		3,986			(9,707	)		4,468
Interest expense, net		54,042			43,543			149,943			134,113

Income (loss) before income tax expense		(9,332	)		5,091			(34,348	)		(21,981	)
Income tax expense		4,398			3,193			6,576			5,861

Net (loss) income	$	(13,730	)	$	1,898		$	(40,924	)	$	(27,842	)

Net (loss) income	$	(13,730	)	$	1,898		$	(40,924	)	$	(27,842	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		2,165			(2,541	)		(632	)		2,726
Net gain (loss) on intra-entity foreign currency transactions, net of tax (benefit) of $485, $(394), $6 and $443		6,499			(3,945	)		(1,841	)		5,469
Unrealized (loss) gain on interest rate swap, net of tax of $0, $0, $0 and $0		(153	)		167			375			(1,209	)
Reclassification adjustment of unrealized loss on termination of interest rate swap into net loss		1,784			—			1,784			—

Other comprehensive income (loss)		10,295			(6,319	)		(314	)		6,986

Comprehensive loss	$	(3,435	)	$	(4,421	)	$	(41,238	)	$	(20,856	)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine Months Ended October 27, 2012			Nine Months Ended October 29, 2011
Cash flows from operating activities:
Net loss	$	(40,924	)	$	(27,842	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		48,232			50,535
Amortization of lease rights and other assets		2,390			2,424
Amortization of debt issuance costs		7,389			11,155
Payment of in kind interest expense		—			11,831
Foreign currency exchange net loss on Euro Loan		—			1,485
Net unfavorable accretion of lease obligations		(536	)		(522	)
Loss on sale/retirement of property and equipment, net		73			53
Loss (gain) on early debt extinguishment		9,707			(4,468	)
Loss on sale on intangible assets/lease rights		117			—
Stock compensation (benefit) expense		(1,403	)		2,759
(Increase) decrease in:
Inventories		(50,430	)		(48,997	)
Prepaid expenses		916			(12,534	)
Other assets		(10,323	)		(7,776	)
Increase (decrease) in:
Trade accounts payable		8,281			21,193
Income taxes payable		(4,830	)		(4,808	)
Accrued interest payable		16,290			24,880
Accrued expenses and other liabilities		(8,075	)		(20,948	)
Deferred income taxes		(899	)		(1,377	)
Deferred rent expense		823			1,164

Net cash used in operating activities		(23,202	)		(1,793	)

Cash flows from investing activities:
Acquisition of property and equipment, net		(46,396	)		(51,382	)
Acquisition of intangible assets/lease rights		(2,077	)		(2,411	)
Changes in restricted cash		4,350			(1,480	)

Net cash used in investing activities		(44,123	)		(55,273	)

Cash flows from financing activities:
Payments of Credit facility		(1,154,310	)		(438,940	)
Proceeds from Notes		1,142,125			450,000
Repurchases of Notes		—			(71,674	)
Payment of debt issuance costs		(27,610	)		(10,751	)

Net cash used in financing activities		(39,795	)		(71,365	)

Effect of foreign currency exchange rate changes on cash and cash equivalents		(231	)		2,246

Net decrease in cash and cash equivalents		(107,351	)		(126,185	)
Cash and cash equivalents, at beginning of period		170,024			255,902

Cash and cash equivalents, at end of period		62,673			129,717
Restricted cash, at end of period		—			26,153

Cash and cash equivalents and restricted cash, at end of period	$	62,673		$	155,870

Supplemental disclosure of cash flow information:
Interest paid	$	126,346		$	86,303
Income taxes paid		12,163			12,304

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

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

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

2. Recent Accounting Pronouncements

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

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

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

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

3. Fair Value Measurements

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

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

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


				Fair Value Measurements at January 28, 2012 Using
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Liabilities) (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate swap	$	(2,159	)	$	—	$	(2,159	)	$	—

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

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

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

Financial Instruments Not Measured at Fair Value

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

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

4. Debt

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


	October 27, 2012		January 28, 2012
Long-term debt:
Senior secured term loan facility due 2014	$	—	$	1,154,310
Senior fixed rate notes due 2015		220,270		220,270
Senior toggle notes due 2015		302,190		302,190
Senior subordinated notes due 2017		259,612		259,612
Senior secured first lien notes due 2019 (1)		1,141,834		—
Senior secured second lien notes due 2019		450,000		450,000

		2,373,906		2,386,382
Less: current portion of long-term debt		—		—

Long-term debt	$	2,373,906	$	2,386,382

Obligation under capital lease	$	17,290	$	17,290

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

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

Senior Secured First Lien Notes

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

New Credit Facility

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

Borrowings under the New Credit Facility will bear interest at a rate equal to, at the Company’s option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, or (b) a LIBOR rate with respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the London Interbank Market for the interest period relevant to such borrowing, adjusted for certain additional costs, in each case plus an applicable margin of 4.50% for LIBOR rate loans and 3.50% for alternate base rate loans. The Company will also pay a facility fee of 0.50% per annum of the committed amount of the New Credit Facility whether or not utilized.

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

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

The New Credit Facility contains customary provisions relating to mandatory prepayments, voluntary payments, affirmative and negative covenants, and events of default; however, it does not contain any covenants that require the Company to maintain any particular financial ratio or other measure of financial performance except that so long as the revolving loans and letters of credit outstanding exceed $15 million, the Company will be required to comply with a maximum Total Net Secured Leverage Ratio of 5.5 to 1.0 based upon the ratio of its net senior secured debt to adjusted earnings before interest, taxes, depreciation and amortization for the period of four consecutive fiscal quarters most recently ended.

Note Repurchases

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


	Three Months Ended October 29, 2011						Nine Months Ended October 29, 2011
Notes Repurchased	Principal Amount		Repurchase Price		Recognized Gain (1)		Principal Amount		Repurchase Price		Recognized Gain (2)
Senior Fixed Rate Notes	$	2,730	$	2,343	$	346	$	15,730	$	15,213	$	260
Senior Toggle Notes		27,780		23,834		3,640		60,920		56,461		4,208

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

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

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

Covenants

Our Senior Fixed Rate Notes, Senior Toggle Notes, Senior Subordinated Notes, Senior Secured First Lien Notes and Senior Secured Second Lien Notes (collectively, the “Notes”) and New Credit Facility contain certain covenants that, among other things, and subject to certain exceptions and other basket amounts, restrict our ability and the ability of our subsidiaries to:

•

incur additional indebtedness;

•

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

•

make certain investments;

•

create or incur certain liens;

•

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

•

transfer or sell assets;

•

engage in certain transactions with our affiliates; and

•

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

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

5. Derivatives and Hedging Activities

The Company formally designates and documents the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction. The Company formally assesses both at inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. The Company measures the effectiveness of its cash flow hedges by evaluating the following criteria: (i) the re-pricing dates of the derivative instrument match those of the debt obligation; (ii) the interest rates of the derivative instrument and the debt obligation are based on the same interest rate index and tenor; (iii) the variable interest rate of the derivative instrument does not contain a floor or cap, or other provisions that cause a basis difference with the debt obligation; and (iv) the likelihood of the counterparty not defaulting is assessed as being probable.

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

For derivatives that qualify as cash flow hedges, the Company reports the effective portion of the change in fair value as a component of “Accumulated other comprehensive loss, net of tax” in the Unaudited Condensed Consolidated Balance Sheets and reclassifies it into earnings in the same periods in which the hedged item affects earnings, and within the same income statement line item as the impact of the hedged item. The ineffective portion of the change in fair value of a cash flow hedge is recognized in income immediately. No ineffective portion was recorded to earnings during the three and nine months ended October 27, 2012 and October 29, 2011, respectively, and all components of the derivative gain or loss were included in the assessment of hedge effectiveness. For derivative financial instruments which do not qualify as cash flow hedges, any changes in fair value would be recorded in the Consolidated Statements of Operations and Comprehensive Loss.

The Company may at its discretion change the designation of any such hedging instrument agreements prior to maturity. At that time, any gains or losses previously reported in accumulated other comprehensive income (loss) on termination would amortize into interest expense or interest income to correspond to the recognition of interest expense or interest income on the hedged debt. If such debt instrument was also terminated, the gain or loss associated with the terminated derivative included in accumulated other comprehensive income (loss) at the time of termination of the debt would be recognized in the Consolidated Statements of Operations and Comprehensive Loss at that time.

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

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

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

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


Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (1)
	Three months ended							Three months ended
	October 27, 2012			October 29, 2011				October 27, 2012 (2)			October 29, 2011
Interest rate swap	$	(153	)	$	167		Interest expense, net	$	(1,896	)	$	(491	)

(1)

Represents reclassification of amounts from accumulated other comprehensive loss to earnings as interest expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges.

(2)

Includes a reclassification amount of $1,784,000 from accumulated other comprehensive loss into interest expense resulting from the termination of the Swap.


Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (1)
	Nine months ended							Nine months ended
	October 27, 2012		October 29, 2011					October 27, 2012 (2)			October 29, 2011
Interest rate swap	$	375	$	(1,209	)		Interest expense, net	$	(2,620	)	$	(1,437	)

(1)

(2)

Includes a reclassification amount of $1,784,000 from accumulated other comprehensive loss into interest expense resulting from the termination of the Swap.

6. Commitments and Contingencies

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

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

7. Stock Options and Stock-Based Compensation

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


	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)
Outstanding at January 28, 2012		6,343,756		$	10.00
Options granted		2,348,864		$	10.00
Options exercised		—
Options forfeited		(2,924,063	)	$	10.00
Options expired		(1,044,376	)	$	10.00

Outstanding at October 27, 2012		4,724,181		$	10.00		4.5

Options vested and expected to vest at October 27, 2012		4,265,316		$	10.00		4.3

Exercisable at October 27, 2012		2,119,012		$	10.00		2.2

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

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

Performance Based Stock Option Exchange Offer

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

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

•

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

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

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

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

•

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

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

8. Income Taxes

The effective income tax rate was (47.1)% and (19.1)% for the three and nine months ended October 27, 2012 . This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three and nine months ended October 27, 2012 by the Company’s U.S. operations.

The effective income tax rate was 62.7% and (26.7)% for the three and nine months ended October 29, 2011. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three and nine months ended October 29, 2011 by the Company’s U.S. operations.

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

9. Related Party Transactions

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

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

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

10. Segment Information

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

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


	Three Months Ended October 27, 2012			Three Months Ended October 29, 2011		Nine Months Ended October 27, 2012			Nine Months Ended October 29, 2011
Net sales:
North America	$	226,390		$	221,825	$	666,705		$	663,070
Europe		136,998			134,175		396,917			397,923

Total net sales		363,388			356,000		1,063,622			1,060,993

Depreciation and amortization:
North America		9,786			10,709		29,795			31,235
Europe		6,256			6,420		18,437			19,300

Total depreciation and amortization		16,042			17,129		48,232			50,535

Operating income for reportable segments:
North America		35,077			32,803		98,786			87,371
Europe		14,709			12,025		27,684			21,242

Total operating income for reportable segments		49,786			44,828		126,470			108,613
Severance and transaction-related costs		(29	)		180		1,168			949

Net consolidated operating income		49,815			44,648		125,302			107,664
Gain (loss) on early debt extinguishment		(5,105	)		3,986		(9,707	)		4,468
Interest expense, net		54,042			43,543		149,943			134,113

Net consolidated (loss) income before income tax expense	$	(9,332	)	$	5,091	$	(34,348	)	$	(21,981	)

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

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

11. Supplemental Financial Information

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

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

Condensed Consolidating Balance Sheet

October 27, 2012

(in thousands)


	Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents and restricted cash (1)	$	15,243		$	5,546		$	41,884		$	—		$	62,673
Inventories		—			111,855			80,562			—			192,417
Prepaid expenses		982			2,519			15,379			—			18,880
Other current assets		130			20,385			10,152			—			30,667

Total current assets		16,355			140,305			147,977			—			304,637

Property and equipment:
Furniture, fixtures and equipment		5,638			137,212			81,069			—			223,919
Leasehold improvements		1,073			161,497			140,139			—			302,709

		6,711			298,709			221,208			—			526,628
Less accumulated depreciation and amortization		(3,530	)		(195,329	)		(118,244	)		—			(317,103	)

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

Leased property under capital lease:
Land and building		—			18,055			—			—			18,055
Less accumulated depreciation and amortization		—			(2,483	)		—			—			(2,483	)

		—			15,572			—			—			15,572

Intercompany receivables		—			304,905			—			(304,905	)		—
Investment in subsidiaries		2,238,396			(59,224	)		—			(2,179,172	)		—
Goodwill		—			1,235,651			314,405			—			1,550,056
Intangible assets, net		286,000			4,466			253,374			—			543,840
Deferred financing costs, net		43,249			—			—			—			43,249
Other assets		130			3,527			42,495			9			46,161

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

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

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable	$	1,385		$	31,930		$	35,401		$	—		$	68,716
Income taxes payable		(43	)		(290	)		5,222			—			4,889
Accrued interest payable		48,149			—			—			—			48,149
Accrued expenses and other current liabilities		10,693			35,364			48,103			—			94,160

Total current liabilities		60,184			67,004			88,726			—			215,914

Intercompany payables		218,158			—			86,738			(304,896	)		—
Long-term debt		2,373,906			—			—			—			2,373,906
Obligation under capital lease		—			17,249			—			—			17,249
Deferred tax liability		—			106,584			12,820			—			119,404
Deferred rent expense		—			18,089			11,670			—			29,759
Unfavorable lease obligations and other long-term liabilities		—			21,197			548			—			21,745

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

Stockholder’s equity (deficit):
Common stock		—			367			2			(369	)		—
Additional paid in capital		618,050			1,435,909			796,316			(2,232,225	)		618,050
Accumulated other comprehensive (loss) income, net of tax		(4,665	)		3,754			(14,457	)		10,703			(4,665	)
Retained earnings (accumulated deficit)		(678,322	)		78,429			(121,148	)		42,719			(678,322	)

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

Total liabilities and stockholder’s equity (deficit)	$	2,587,311		$	1,748,582		$	861,215		$	(2,484,068	)	$	2,713,040

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

Condensed Consolidating Balance Sheet

January 28, 2012

(in thousands)


	Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents and restricted cash (1)	$	107,265		$	4,908		$	62,201		$	—		$	174,374
Inventories		—			84,608			57,496			—			142,104
Prepaid expenses		676			1,530			17,804			—			20,010
Other current assets		—			15,967			9,456			—			25,423

Total current assets		107,941			107,013			146,957			—			361,911

Property and equipment:
Furniture, fixtures and equipment		4,540			128,650			74,430			—			207,620
Leasehold improvements		1,071			151,891			128,812			—			281,774

		5,611			280,541			203,242			—			489,394
Less accumulated depreciation and amortization		(2,761	)		(175,999	)		(103,114	)		—			(281,874	)

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

Leased property under capital lease:
Land and building		—			18,055			—			—			18,055
Less accumulated depreciation and amortization		—			(1,805	)		—			—			(1,805	)

		—			16,250			—			—			16,250

Intercompany receivables		—			234,828			—			(234,828	)		—
Investment in subsidiaries		2,138,159			(58,841	)		—			(2,079,318	)		—
Goodwill		—			1,235,651			314,405			—			1,550,056
Intangible assets, net		286,000			6,176			257,592			—			549,768
Deferred financing costs, net		32,432			—			593			—			33,025
Other assets		130			3,788			40,577			—			44,495

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

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

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable	$	1,468		$	23,845		$	35,391		$	—		$	60,704
Income taxes payable		—			766			9,462			—			10,228
Accrued interest payable		31,859			—			—			—			31,859
Accrued expenses and other current liabilities		14,890			39,744			49,891			—			104,525

Total current liabilities		48,217			64,355			94,744			—			207,316

Intercompany payables		155,209			—			79,619			(234,828	)		—
Long-term debt		2,386,382			—			—			—			2,386,382
Obligation under capital lease		—			17,290			—			—			17,290
Deferred tax liability		—			106,825			13,627			—			120,452
Deferred rent expense		—			17,680			11,181			—			28,861
Unfavorable lease obligations and other long-term liabilities		—			24,217			803			—			25,020

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

Stockholder’s equity (deficit):
Common stock		—			367			2			(369	)		—
Additional paid in capital		619,453			1,435,909			815,866			(2,251,775	)		619,453
Accumulated other comprehensive (loss) income, net of tax		(4,351	)		3,675			(11,780	)		8,105			(4,351	)
Accumulated deficit		(637,398	)		(20,911	)		(143,810	)		164,721			(637,398	)

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

Total liabilities and stockholder’s equity (deficit)	$	2,567,512		$	1,649,407		$	860,252		$	(2,314,146	)	$	2,763,025

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

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Three Months Ended October 27, 2012

(in thousands)


	Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	207,010		$	156,378		$	—		$	363,388
Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)		446			101,828			77,309			—			179,583

Gross profit (deficit)		(446	)		105,182			79,069			—			183,805

Other expenses:
Selling, general and administrative		7,135			61,992			52,084			—			121,211
Depreciation and amortization		268			8,702			7,072			—			16,042
Severance and transaction-related costs		45			—			(74	)		—			(29	)
Other (income) expense		(2,847	)		(1,532	)		1,145			—			(3,234	)

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

Operating income (loss)		(5,047	)		36,020			18,842			—			49,815
Loss on early debt extinguishment		(5,105	)		—			—			—			(5,105	)
Interest expense, net		53,489			557			(4	)		—			54,042

Income (loss) before income taxes		(63,641	)		35,463			18,846			—			(9,332	)
Income tax expense		—			635			3,763			—			4,398

Income (loss) from continuing operations		(63,641	)		34,828			15,083			—			(13,730	)
Equity in earnings of subsidiaries		49,911			1,129			—			(51,040	)		—

Net income (loss)		(13,730	)		35,957			15,083			(51,040	)		(13,730	)
Foreign currency translation adjustments		2,165			(36	)		1,838			(1,802	)		2,165
Net gain on intra-entity foreign currency transactions, net of tax		6,499			57			6,630			(6,687	)		6,499
Unrealized loss on interest rate swap, net of tax		(153	)		—			—			—			(153	)
Reclassification adjustment of unrealized loss on termination of interest rate swap into net loss		1,784			—			—			—			1,784

Other comprehensive income (loss)		10,295			21			8,468			(8,489	)		10,295

Comprehensive income (loss)	$	(3,435	)	$	35,978		$	23,551		$	(59,529	)	$	(3,435	)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Three Months Ended October 29, 2011

(in thousands)


	Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	204,222		$	151,778		$	—		$	356,000
Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)		1,647			98,605			72,253			—			172,505

Gross profit (deficit)		(1,647	)		105,617			79,525			—			183,495

Other expenses:
Selling, general and administrative		6,398			61,646			55,334			—			123,378
Depreciation and amortization		184			9,831			7,114			—			17,129
Severance and transaction-related costs		1			—			179			—			180
Other (income) expense		(2,752	)		(356	)		1,268			—			(1,840	)

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

Operating income (loss)		(5,478	)		34,496			15,630			—			44,648
Gain on early debt extinguishment		3,986			—			—			—			3,986
Interest expense, net		41,508			539			1,496			—			43,543

Income (loss) before income taxes		(43,000	)		33,957			14,134			—			5,091
Income tax expense		—			752			2,441			—			3,193

Income (loss) from continuing operations		(43,000	)		33,205			11,693			—			1,898
Equity in earnings of subsidiaries		44,898			1,637			—			(46,535	)		—

Net income		1,898			34,842			11,693			(46,535	)		1,898
Foreign currency translation adjustments		(2,541	)		(245	)		157			88			(2,541	)
Net loss on intra-entity foreign currency transactions, net of tax		(3,945	)		(947	)		(4,153	)		5,100			(3,945	)
Unrealized gain on interest rate swap, net of tax		167			—			—			—			167

Other comprehensive loss		(6,319	)		(1,192	)		(3,996	)		5,188			(6,319	)

Comprehensive income (loss)	$	(4,421	)	$	33,650		$	7,697		$	(41,347	)	$	(4,421	)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Nine months ended October 27, 2012

(in thousands)


	Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	614,581		$	449,041		$	—		$	1,063,622
Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)		2,071			297,879			231,502			—			531,452

Gross profit (deficit)		(2,071	)		316,702			217,539			—			532,170

Other expenses:
Selling, general and administrative		15,497			185,654			158,971			—			360,122
Depreciation and amortization		769			26,549			20,914			—			48,232
Severance and transaction-related costs		1,376			—			(208	)		—			1,168
Other (income) expense		(7,824	)		(2,578	)		7,748			—			(2,654	)

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

Operating income (loss)		(11,889	)		107,077			30,114			—			125,302
Loss on early debt extinguishment		(9,707	)		—			—			—			(9,707	)
Interest expense, net		147,693			1,650			600			—			149,943

Income (loss) before income taxes		(169,289	)		105,427			29,514			—			(34,348	)
Income tax expense (benefit)		—			(276	)		6,852			—			6,576

Income (loss) from continuing operations		(169,289	)		105,703			22,662			—			(40,924	)
Equity in earnings (loss) of subsidiaries		128,365			(231	)		—			(128,134	)		—

Net income (loss)		(40,924	)		105,472			22,662			(128,134	)		(40,924	)
Foreign currency translation adjustments		(632	)		(102	)		(799	)		901			(632	)
Net (loss) gain on intra-entity foreign currency transactions, net of tax		(1,841	)		181			(1,878	)		1,697			(1,841	)
Unrealized gain on interest rate swap, net of tax		375			—			—			—			375
Reclassification adjustment of unrealized loss on termination of interest rate swap into net loss		1,784			—			—			—			1,784

Other comprehensive income (loss)		(314	)		79			(2,677	)		2,598			(314	)

Comprehensive income (loss)	$	(41,238	)	$	105,551		$	19,985		$	(125,536	)	$	(41,238	)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Nine months ended October 29, 2011

(in thousands)


	Issuer			Guarantors			Non- Guarantors		Eliminations			Consolidated
Net sales	$	—		$	613,791		$	447,202	$	—		$	1,060,993
Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)		4,588			294,544			220,114		—			519,246

Gross profit (deficit)		(4,588	)		319,247			227,088		—			541,747

Other expenses:
Selling, general and administrative		22,308			189,700			168,301		—			380,309
Depreciation and amortization		549			28,586			21,400		—			50,535
Severance and transaction-related costs		298			—			651		—			949
Other (income) expense		(9,737	)		1,503			10,524		—			2,290

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

Operating income (loss)		(18,006	)		99,458			26,212		—			107,664
Gain on early debt extinguishment		4,468			—			—		—			4,468
Interest expense, net		128,021			1,611			4,481		—			134,113

Income (loss) before income taxes		(141,559	)		97,847			21,731		—			(21,981	)
Income tax expense		—			398			5,463		—			5,861

Income (loss) from continuing operations		(141,559	)		97,449			16,268		—			(27,842	)
Equity in earnings of subsidiaries		113,717			1,412			—		(115,129	)		—

Net income (loss)		(27,842	)		98,861			16,268		(115,129	)		(27,842	)
Foreign currency translation adjustments		2,726			(15	)		2,117		(2,102	)		2,726
Net gain on intra-entity foreign currency transactions, net of tax		5,469			91			5,663		(5,754	)		5,469
Unrealized loss on interest rate swap, net of tax		(1,209	)		—			—		—			(1,209	)

Other comprehensive income		6,986			76			7,780		(7,856	)		6,986

Comprehensive income (loss)	$	(20,856	)	$	98,937		$	24,048	$	(122,985	)	$	(20,856	)

Condensed Consolidating Statement of Cash Flows

Nine months ended October 27, 2012

(in thousands)


	Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(40,924	)	$	105,472		$	22,662		$	(128,134	)	$	(40,924	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) loss of subsidiaries		(128,365	)		231			—			128,134			—
Depreciation and amortization		769			26,549			20,914			—			48,232
Amortization of lease rights and other assets		—			—			2,390			—			2,390
Amortization of debt issuance costs		6,795			—			594			—			7,389
Net accretion of favorable (unfavorable) lease obligations		—			(633	)		97			—			(536	)
Loss on sale/retirement of property and equipment, net		—			71			2			—			73
Loss on early debt extinguishment		9,707			—			—			—			9,707
Loss on sale of intangible asset/lease rights		—			—			117						117
Stock compensation expense (benefit)		(886	)		(576	)		59			—			(1,403	)
(Increase) decrease in:
Inventories		2			(27,247	)		(23,185	)		—			(50,430	)
Prepaid expenses		(305	)		(989	)		2,210			—			916
Other assets		(128	)		(4,444	)		(5,751	)		—			(10,323	)
Increase (decrease) in:
Trade accounts payable		(82	)		6,615			1,748			—			8,281
Income taxes payable		(43	)		(1,013	)		(3,774	)		—			(4,830	)
Accrued interest payable		16,290			—			—			—			16,290
Accrued expenses and other liabilities		(2,048	)		(4,419	)		(1,608	)		—			(8,075	)
Deferred income taxes		—			(690	)		(209	)		—			(899	)
Deferred rent expense		—			409			414			—			823

Net cash provided by (used in) operating activities		(139,218	)		99,336			16,680			—			(23,202	)

Cash flows from investing activities:
Acquisition of property and equipment, net		(1,101	)		(23,226	)		(22,069	)		—			(46,396	)
Acquisition of intangible assets/lease rights		—			(70	)		(2,007	)		—			(2,077	)
Changes in restricted cash		4,350			—			—			—			4,350

Net cash provided by (used in) investing activities		3,249			(23,296	)		(24,076	)		—			(44,123	)

Cash flows from financing activities:
Payments of Credit facility		(1,154,310	)		—			—			—			(1,154,310	)
Proceeds from Notes		1,142,125			—			—			—			1,142,125
Payment of debt issuance costs		(27,610	)		—			—			—			(27,610	)
Intercompany activity, net		88,094			(75,633	)		(12,461	)		—			—

Net cash provided by (used in) financing activities		48,299			(75,633	)		(12,461	)		—			(39,795	)

Effect of foreign currency exchange rate changes on cash and cash equivalents		(2	)		231			(460	)		—			(231	)

Net increase (decrease) in cash and cash equivalents		(87,672	)		638			(20,317	)		—			(107,351	)
Cash and cash equivalents, at beginning of period		102,915			4,908			62,201			—			170,024

Cash and cash equivalents, at end of period	$	15,243		$	5,546		$	41,884		$	—		$	62,673

Condensed Consolidating Statement of Cash Flows

Nine months ended October 29, 2011

(in thousands)


	Issuer			Guarantors			Non- Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(27,842	)	$	98,861		$	16,268		$	(115,129	)	$	(27,842	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) loss of subsidiaries		(113,717	)		(1,412	)		—			115,129			—
Depreciation and amortization		549			28,586			21,400			—			50,535
Amortization of lease rights and other assets		—			—			2,424			—			2,424
Amortization of debt issuance costs		10,702			—			453			—			11,155
Payment of in kind interest expense		11,831			—			—			—			11,831
Foreign currency exchange net loss on Euro Loan		—			—			1,485			—			1,485
Net accretion of favorable (unfavorable) lease obligations		—			(928	)		406			—			(522	)
Loss on sale/retirement of property and equipment, net		—			42			11			—			53
Gain on early debt extinguishment		(4,468	)		—			—			—			(4,468	)
Stock compensation expense		2,333			—			426			—			2,759
(Increase) decrease in:
Inventories		—			(27,238	)		(21,759	)		—			(48,997	)
Prepaid expenses		(169	)		(13,598	)		1,233			—			(12,534	)
Other assets		—			(3,164	)		(4,612	)		—			(7,776	)
Increase (decrease) in:
Trade accounts payable		605			7,305			13,283			—			21,193
Income taxes payable		—			(1,098	)		(3,710	)		—			(4,808	)
Accrued interest payable		24,937			—			(57	)		—			24,880
Accrued expenses and other liabilities		(9,681	)		(2,393	)		(8,874	)		—			(20,948	)
Deferred income taxes		—			(338	)		(1,039	)		—			(1,377	)
Deferred rent expense		—			366			798			—			1,164

Net cash provided by (used in) operating activities		(104,920	)		84,991			18,136			—			(1,793	)

Cash flows from investing activities:
Acquisition of property and equipment, net		(357	)		(18,751	)		(32,274	)		—			(51,382	)
Acquisition of intangible assets/lease rights		—			(35	)		(2,376	)		—			(2,411	)
Changes in restricted cash		(1,350	)		—			(130	)		—			(1,480	)

Net cash used in investing activities		(1,707	)		(18,786	)		(34,780	)		—			(55,273	)

Cash flows from financing activities:
Payments of Credit facility		(438,940	)		—			—			—			(438,940	)
Proceeds from Note		450,000			—			—			—			450,000
Repurchases of Notes		(71,674	)		—			—			—			(71,674	)
Payment of debt issuance costs		(10,661	)		—			(90	)		—			(10,751	)
Intercompany activity, net		68,466			(67,905	)		(561	)		—			—

Net cash used in financing activities		(2,809	)		(67,905	)		(651	)		—			(71,365	)

Effect of foreign currency exchange rate changes on cash and cash equivalents		—			609			1,637			—			2,246

Net decrease in cash and cash equivalents		(109,436	)		(1,091	)		(15,658	)		—			(126,185	)
Cash and cash equivalents, at beginning of period		176,079			3,587			76,236			—			255,902

Cash and cash equivalents, at end of period		66,643			2,496			60,578			—			129,717
Restricted cash, at end of period		4,800			—			21,353			—			26,153

Cash and cash equivalents and restricted cash, at end of period	$	71,443		$	2,496		$	81,931		$	—		$	155,870

Item 2.

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

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

We include sales from a store in the calculation of same store sales when it has been in operation sixty weeks after its initial opening and, effective in the third quarter of fiscal 2012, we include sales from e-commerce. A store that is temporarily closed, such as for remodeling, is removed from the same store sales computation if it is closed for nine consecutive weeks. The removal is effective prospectively upon the completion of the ninth consecutive week of closure. A store that is closed permanently, such as upon termination of the lease, is immediately removed from the same store sales computation. We compute same store sales on a local currency basis, which eliminates any impact for changes in foreign currency rates.

Business Overview

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

As of October 27, 2012, we also franchised or licensed 381 stores in Japan, the Middle East, Turkey, Greece, Guatemala, Malta, Ukraine, Mexico, India, Dominican Republic, El Salvador, Venezuela, and Panama. We account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in our Consolidated Statements of Operations and Comprehensive Loss. The franchise fees we charge under the franchising agreements are reported in “Other expense (income), net” in our Consolidated Statements of Operations and Comprehensive Loss.

Our primary brand in North America and exclusively in Europe is Claire’s. Our Claire’s customers are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6).

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

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

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

•

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

•

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

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

Consolidated Results of Operations

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


	Three Months Ended October 27, 2012			Three Months Ended October 29, 2011
Net sales	$	363,388		$	356,000
Increase (decrease) in same store sales (1)		2.4	%		(2.2	)%
Gross profit percentage		50.6	%		51.5	%
Selling, general and administrative expenses as a percentage of net sales		33.4	%		34.7	%
Depreciation and amortization as a percentage of net sales		4.4	%		4.8	%
Operating income	$	49,815		$	44,648
Gain (loss) on early debt extinguishment	$	(5,105	)	$	3,986
Net (loss) income	$	(13,730	)	$	1,898
Number of stores at the end of the period (2)		3,088			3,047

(1)	Includes e-commerce.

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


	Nine Months Ended October 27, 2012			Nine Months Ended October 29, 2011
Net sales	$	1,063,622		$	1,060,993
Increase (decrease) in same store sales (1)		0.3	%		(0.2	)%
Gross profit percentage		50.0	%		51.1	%
Selling, general and administrative expenses as a percentage of net sales		33.9	%		35.8	%
Depreciation and amortization as a percentage of net sales		4.5	%		4.8	%
Operating income	$	125,302		$	107,664
Gain (loss) on early debt extinguishment	$	(9,707	)	$	4,468
Net loss	$	(40,924	)	$	(27,842	)
Number of stores at the end of the period (2)		3,088			3,047

(1) Includes e-commerce.

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

Net sales

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

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

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

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

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


	Percentage of Total				Percentage of Total
Product Category	Three Months Ended October 27, 2012		Three Months Ended October 29, 2011		Nine Months Ended October 27, 2012		Nine Months Ended October 29, 2011
Jewelry		50.0		47.0		50.2		47.6
Accessories		50.0		53.0		49.8		52.4

		100.0		100.0		100.0		100.0

Gross profit

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

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

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

Selling, general and administrative expenses

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

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

Depreciation and amortization expense

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

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

Other (income) expense, net

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


	Three Months Ended October 27, 2012			Three Months Ended October 29, 2011			Nine Months Ended October 27, 2012			Nine Months Ended October 29, 2011
Foreign currency exchange (gain) loss, net	$	(951	)	$	(1,354	)	$	705		$	4,011
Royalty income		(2,283	)		(486	)		(3,359	)		(1,472	)
Other income		—			—			—			(249	)

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

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

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

Gain (loss) on early debt extinguishment

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

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


	Three Months Ended October 29, 2011						Nine months ended October 29, 2011
Notes Repurchased	Principal Amount		Repurchase Price		Recognized Gain (1)		Principal Amount		Repurchase Price		Recognized Gain (2)
Senior Fixed Rate Notes	$	2,730	$	2,343	$	346	$	15,730	$	15,213	$	260
Senior Toggle Notes		27,780		23,834		3,640		60,920		56,461		4,208

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

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

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

Interest expense, net

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

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

Income taxes

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

Segment Operations

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

North America

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


	Three Months Ended October 27, 2012			Three Months Ended October 29, 2011			Nine Months Ended October 27, 2012			Nine Months Ended October 29, 2011
Net sales	$	226,390		$	221,825		$	666,705		$	663,070
Increase in same store sales (1)		2.0	%		0.8	%		0.2	%		2.5	%
Gross profit percentage		51.5	%		52.2	%		51.6	%		52.1	%
Number of stores at the end of the period (2)		1,939			1,959			1,939			1,959

(1)	Includes e-commerce.

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

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

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

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

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

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

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

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


	Percentage of Total				Percentage of Total
Product Category	Three Months Ended October 27, 2012		Three Months Ended October 29, 2011		Nine Months Ended October 27, 2012		Nine Months Ended October 29, 2011
Jewelry		53.8		51.1		54.6		52.9
Accessories		46.2		48.9		45.4		47.1

		100.0		100.0		100.0		100.0

Europe

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


	Three Months Ended October 27, 2012			Three Months Ended October 29, 2011			Nine Months Ended October 27, 2012			Nine Months Ended October 29, 2011
Net sales	$	136,998		$	134,175		$	396,917		$	397,923
Increase (decrease) in same store sales		3.2	%		(7.1)	%		0.6	%		(4.8)	%
Gross profit percentage		49.1	%		50.5	%		47.4	%		49.3	%
Number of stores at the end of the period (1)		1,149			1,088			1,149			1,088

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

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

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

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

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

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

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


	Percentage of Total				Percentage of Total
Product Category	Three Months Ended October 27, 2012		Three Months Ended October 29, 2011		Nine Months Ended October 27, 2012		Nine Months Ended October 29, 2011
Jewelry		44.0		40.3		42.9		39.0
Accessories		56.0		59.7		57.1		61.0

		100.0		100.0		100.0		100.0

Liquidity and Capital Resources

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


	Nine Months Ended October 27, 2012			Nine Months Ended October 29, 2011
Operating activities	$	(23,202	)	$	(1,793	)
Investing activities		(44,123	)		(55,273	)
Financing activities		(39,795	)		(71,365	)

Cash flows from operating activities

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

Cash flows from investing activities

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

Cash flows from financing activities

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

Cash Position

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

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

We anticipate that cash generated from operations will be sufficient to meet our debt service requirements as they become due, new store expenditures, and future working capital requirements for at least the next twelve months. However, our ability to make scheduled payments of interest on, to pay principal on, or refinance indebtedness, to satisfy any other present or future debt obligations and our ability to fund future capital expenditures and operating expenses will depend on future operating performance. Our future operating performance and liquidity may also be adversely affected by general economic, financial, and other factors beyond the Company’s control, including those disclosed in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

Senior Secured First Lien Notes

New Credit Facility

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

Europe Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.1 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. At October 27, 2012, the entire amount of $2.1 million was available for borrowing by us, subject to a reduction of $2.1 million for outstanding bank guarantees.

Covenants

Our Senior Fixed Rate Notes, Senior Toggle Notes, Senior Subordinated Notes, Senior Secured Second Lien Notes and Senior Secured First Lien Notes (collectively, the “Notes”) and New Credit Facility contain certain covenants that, among other things, and subject to certain exceptions and other basket amounts, restrict our ability and the ability of our subsidiaries to:

•

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.

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.

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 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 October 27, 2012, all cash equivalents were maintained in one money market fund that was invested exclusively in U.S. Treasury securities.

Interest Rates

The Company no longer has exposure to interest rate risk associated with derivative instruments. On September 20, 2012, the Company terminated the interest rate swap entered into on July 28, 2010 (the “Swap”) and also extinguished the associated hedged debt instrument. We previously entered into the Swap to manage exposure to fluctuations in interest rates. The Swap had an expiration date of July 30, 2013. The Swap represented a contract to exchange floating rate for fixed interest rates periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covered an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rate of the Swap was 1.2235% and was designated and accounted for as a cash flow hedge.

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 October 27, 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 ($2.5) million and $8.2 million, net of tax, reflecting the unrealized (loss) gain on foreign currency translations and intra-entity foreign currency transactions during the nine months ended October 27, 2012 and October 29, 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.

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 negatively 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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer 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 and 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 October 27, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

We are, from time to time, involved in routine litigation incidental to the conduct of our business, including litigation instituted by persons injured upon premises under our control; litigation regarding the merchandise that we sell, including product and safety concerns regarding 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



4.1		Senior Secured First Lien Notes Third Supplemental Indenture dated as of September 2012. ⁽²⁾

10.1		Offer Letter Amendment dated August 28, 2012 with Beatrice Lafon ⁽¹⁾

10.2		$115 Million Amended and Restated Credit Agreement dated as of September 20, 2012⁽²⁾

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). ⁽¹⁾

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). ⁽¹⁾

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ⁽¹⁾

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ⁽¹⁾

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

⁽¹⁾	Filed herewith.

⁽²⁾	Filed previously as exhibit to Form 8-K by the Company on September 25, 2012.

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

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.

INDEX TO EXHIBITS


EXHIBIT NO.		DESCRIPTION

10.1		Offer Letter Amendment dated August 28, 2012 with Beatrice Lafon

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).

32.1		Certification of 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 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.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company