##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended May 3, 2008
 OR
 o 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 and 333-148108
 Claires Stores, Inc.
  Florida
    
    59-0940416(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 3 S.W. 129th Avenue, Pembroke Pines, Florida
    
    33027(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (954) 433-3900
 x o
   Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer x
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o x




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##### 



CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
 PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets at May 3, 2008
and February 2, 2008
    
    
    3Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Three Months Ended May 3,
2008 (Successor Entity) and May 5, 2007 (Predecessor Entity)
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for
the Three Months Ended May 3, 2008 (Successor Entity) and May 5,
2007 (Predecessor Entity)
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24PART II. OTHER INFORMATION
    
    
    25Item 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 6. Exhibits
    
    
    25SIGNATURE PAGE
    
    
    26Ex-10.1 Joan Munnelly Employment AgreementEx-31.1 Section 302 Certification of CEOEx-31.2 Section  302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
   
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 May 3, 2008
    
    
    February 2, 2008(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    68,014
    
    
    $
    85,974Inventories
    
    
    117,783
    
    
    
    117,679Prepaid expenses
    
    
    52,291
    
    
    
    37,315Other current assets
    
    
    42,938
    
    
    
    37,658Total current assets
    
    
    281,026
    
    
    
    278,626Property and equipment:Land and building
    
    
    22,288
    
    
    
    22,288Furniture, fixtures and equipment
    
    
    137,239
    
    
    
    130,130Leasehold improvements
    
    
    220,281
    
    
    
    211,163379,808
    
    
    
    363,581Less accumulated depreciation and amortization
    
    
    (72,964
    )
    
    
    (53,972
    )306,844
    
    
    
    309,609Intangible assets, net
    
    
    781,758
    
    
    
    777,130Deferred financing costs, net of accumulated amortization of $9,726
    
    
    67,863
    
    
    
    70,511and $7,079, respectivelyOther assets
    
    
    73,849
    
    
    
    71,754Goodwill
    
    
    1,836,553
    
    
    
    1,840,8672,760,023
    
    
    
    2,760,262Total assets
    
    $
    3,347,893
    
    
    $
    3,348,497LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    73,400
    
    
    $
    56,089Current portion of long-term debt
    
    
    14,500
    
    
    
    14,500Income taxes payable
    
    
    6,951
    
    
    
    12,191Accrued interest payable
    
    
    42,157
    
    
    
    19,536Accrued expenses and other liabilities
    
    
    120,483
    
    
    
    117,076Total current liabilities
    
    
    257,491
    
    
    
    219,392Long-term debt
    
    
    2,359,625
    
    
    
    2,363,250Deferred tax liability
    
    
    124,978
    
    
    
    139,506Deferred rent expense
    
    
    12,795
    
    
    
    10,572Other liabilities
    
    
    11,293
    
    
    
    10,5772,508,691
    
    
    
    2,523,905Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock par value $0.001 per share; authorized 1,000
shares;
issued and outstanding 100 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    603,968
    
    
    
    601,201Accumulated other comprehensive income, net of tax
    
    
    12,672
    
    
    
    3,358Retained earnings (deficit)
    
    
    (34,929
    )
    
    
    641581,711
    
    
    
    605,200Total liabilities and stockholders equity
    
    $
    3,347,893
    
    
    $
    3,348,497
  3




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CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 Successor Entity
    
    
    
    Predecessor EntityThree Months
    
    
    
    Three MonthsEnded
    
    
    
    EndedMay 3, 2008
    
    
    
    May 5, 2007Net sales
    
    $
    327,003
    
    
    
    $
    340,571Cost of sales, occupancy and buying expenses
    
    
    171,982
    
    
    
    
    161,591Gross profit
    
    
    155,021
    
    
    
    
    178,980Other expenses (income):Selling, general and administrative
    
    
    131,335
    
    
    
    
    123,684Depreciation and amortization
    
    
    22,101
    
    
    
    
    15,234Transaction-related costs
    
    
    5,968
    
    
    
    
    3,486Other income
    
    
    (560
    )
    
    
    
    (1,341
    )158,844
    
    
    
    
    141,063Operating income (loss)
    
    
    (3,823
    )
    
    
    
    37,917Interest expense (income), net
    
    
    48,657
    
    
    
    
    (3,753
    )Income (loss) before income taxes
    
    
    (52,480
    )
    
    
    
    41,670Income tax expense (benefit)
    
    
    (16,910
    )
    
    
    
    12,888Net income (loss)
    
    $
    (35,570
    )
    
    
    $
    28,782Net income (loss)
    
    $
    (35,570
    )
    
    
    $
    28,782Foreign currency translation and interest rate
swap adjustments, net of tax
    
    
    9,314
    
    
    
    
    9,323Comprehensive income (loss)
    
    $
    (26,256
    )
    
    
    $
    38,105
  4




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Successor Entity
    
    
    
    Predecessor EntityThree Months
    
    
    
    Three MonthsEnded
    
    
    
    EndedMay 3, 2008
    
    
    
    May 5, 2007Cash flows from operating activities:Net income (loss)
    
    $
    (35,570
    )
    
    
    $
    28,782Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    22,101
    
    
    
    
    15,234Amortization of lease rights and other assets
    
    
    528
    
    
    
    
    444Amortization of debt issuance costs
    
    
    2,647
    
    
    
    
    Impairment of assets
    
    
    
    
    
    
    
    73Loss on sale/retirement of property and equipment, net
    
    
    27
    
    
    
    
    872Stock compensation expense
    
    
    2,767
    
    
    
    
    1,275(Increase) decrease in:Inventories
    
    
    269
    
    
    
    
    (5,026
    )Prepaid expenses
    
    
    (14,845
    )
    
    
    
    (13,520
    )Other assets
    
    
    (1,637
    )
    
    
    
    (3,961
    )Increase (decrease) in:Trade accounts payable
    
    
    16,855
    
    
    
    
    11,502Income taxes payable
    
    
    (14,164
    )
    
    
    
    (7,060
    )Accrued expenses and other liabilities
    
    
    9,218
    
    
    
    
    (7,970
    )Accrued interest payable
    
    
    22,621
    
    
    
    
    Deferred income taxes
    
    
    (14,329
    )
    
    
    
    (815
    )Deferred rent expense
    
    
    2,153
    
    
    
    
    423Net cash provided by (used in) operating activities
    
    
    (1,359
    )
    
    
    
    20,253Cash flows from investing activities:Acquisition of property and equipment, net
    
    
    (15,598
    )
    
    
    
    (22,324
    )Acquisition of intangible assets/lease rights
    
    
    (427
    )
    
    
    
    (16
    )Net cash used in investing activities
    
    
    (16,025
    )
    
    
    
    (22,340
    )Cash flows from financing activities:Credit facility payment
    
    
    (3,625
    )
    
    
    
    Stock option proceeds
    
    
    
    
    
    
    
    177Dividends paid
    
    
    
    
    
    
    
    (9,065
    )Net cash used in financing activities
    
    
    (3,625
    )
    
    
    
    (8,888
    )Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    3,049
    
    
    
    
    883Net decrease in cash and cash equivalents
    
    
    (17,960
    )
    
    
    
    (10,092
    )Cash and cash equivalents at beginning of period
    
    
    85,974
    
    
    
    
    340,877Cash and cash equivalents at end of period
    
    $
    68,014
    
    
    
    $
    330,785Supplemental disclosure of cash flow information:Income taxes paid
    
    $
    11,973
    
    
    
    $
    21,498Interest paid
    
    
    24,022
    
    
    
    
    67
  5




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CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
 
 2. Acquisition of Claires Stores, Inc.
     6




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Predecessor Entity
    
    
    Successor EntityMay 28,
    
    
    Transaction
    
    
    May 29,2007
    
    
    Adjustments
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    350,476
    
    
    $
    (186,053
    )
    
    $
    164,423Inventories
    
    
    133,156
    
    
    
    
    
    
    
    133,156Prepaid expenses
    
    
    29,792
    
    
    
    
    
    
    
    29,792Other current assets
    
    
    36,378
    
    
    
    
    
    
    
    36,378Total current assets
    
    
    549,802
    
    
    
    (186,053
    )
    
    
    363,749Property and equipment:Land and buildings
    
    
    17,272
    
    
    
    5,016
    
    
    
    22,288Furniture, fixtures and equipment
    
    
    289,974
    
    
    
    (194,125
    )
    
    
    95,849Leasehold improvements
    
    
    305,469
    
    
    
    (120,083
    )
    
    
    185,386612,715
    
    
    
    (309,192
    )
    
    
    303,523Less accumulated depreciation and amortization
    
    
    (336,240
    )
    
    
    336,240
    
    
    
    276,475
    
    
    
    27,048
    
    
    
    303,523Intangible assets, net
    
    
    55,629
    
    
    
    721,524
    
    
    
    777,153Deferred debt issuance costs, net
    
    
    
    
    
    
    77,411
    
    
    
    77,411Other assets
    
    
    35,589
    
    
    
    27,287
    
    
    
    62,876Goodwill
    
    
    201,552
    
    
    
    1,633,388
    
    
    
    1,834,940292,770
    
    
    
    2,459,610
    
    
    
    2,752,380Total assets
    
    $
    1,119,047
    
    
    $
    2,300,605
    
    
    $
    3,419,652LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    87,854
    
    
    $
    (753
    )
    
    $
    87,101Current portion of long-term debt
    
    
    
    
    
    
    10,875
    
    
    
    10,875Income taxes payable
    
    
    11,355
    
    
    
    3,611
    
    
    
    14,966Accrued expenses and other liabilities
    
    
    170,444
    
    
    
    531
    
    
    
    170,975Total current liabilities
    
    
    269,653
    
    
    
    14,264
    
    
    
    283,917Long-term debt
    
    
    
    
    
    
    2,374,125
    
    
    
    2,374,125Deferred tax liability
    
    
    21,534
    
    
    
    134,602
    
    
    
    156,136Deferred rent expense
    
    
    26,808
    
    
    
    (26,808
    )
    
    
    Other liabilities
    
    
    8,981
    
    
    
    818
    
    
    
    9,79957,323
    
    
    
    2,482,737
    
    
    
    2,540,060Stockholders equity
    
    
    792,071
    
    
    
    (196,396
    )
    
    
    595,675Total liabilities and stockholders equity
    
    $
    1,119,047
    
    
    $
    2,300,605
    
    
    $
    3,419,652
  Three MonthsEndedMay 5, 2007Net sales
    
    $
    340,571Depreciation and amortization
    
    
    21,892Transaction-related costs
    
    
    Operating income
    
    
    33,424Interest expense, net
    
    
    51,440Loss before income taxes
    
    
    (18,016
    )Net loss
    
    
    (7,686
    )
 7




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##### Table of Contents



3. Significant Accounting Policies
 Recent Accounting Pronouncements
     4. Segment Information
  8




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##### Table of Contents



Successor Entity
    
    
    Predecessor EntityThree Months
    
    
    Three MonthsEnded
    
    
    EndedMay 3, 2008
    
    
    May 5, 2007Net sales:North America
    
    $
    209,344
    
    
    $
    235,680Europe
    
    
    117,659
    
    
    
    104,891Total net sales
    
    
    327,003
    
    
    
    340,571Depreciation and amortization:North America
    
    
    14,626
    
    
    
    9,982Europe
    
    
    7,475
    
    
    
    5,252Total depreciation and amortization
    
    
    22,101
    
    
    
    15,234Operating income (loss) for reportable segments:North America
    
    
    3,697
    
    
    
    40,499Europe
    
    
    (1,552
    )
    
    
    904Total operating income for reportable segments
    
    
    2,145
    
    
    
    41,403Transaction-related costs
    
    
    5,968
    
    
    
    3,486Total consolidated operating income (loss)
    
    
    (3,823
    )
    
    
    37,917Interest expense (income), net
    
    
    48,657
    
    
    
    (3,753
    )Total consolidated income (loss) before income taxes
    
    $
    (52,480
    )
    
    $
    41,670
   5. Stock Options and Stock-Based Compensation
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber of
    
    Exercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Life (Years)
    
    ValueOutstanding at beginning of period
    
    
    6,142,622
    
    
    $
    10.00
    
    
    
    6.4
    
    
    Options granted
    
    
    699,500
    
    
    $
    10.00
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    (661,100
    )
    
    $
    10.00
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    6,181,022
    
    
    $
    10.00
    
    
    
    6.2
    
    
    Exercisable at end of period
    
    
    1,104,500
    
    
    $
    10.00
    
    
    
    6.1
    
    
    
 9




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##### Table of Contents



6. Income Taxes
   7. Fair Value of Financial Instruments
   Fair Value Measurements at May 3, 2008 UsingQuoted Prices inActive Markets for
    
    
    Significant
    
    
    SignificantIdentical Assets
    
    
    Other Observable
    
    
    Unobservable(Liabilities)
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Interest rate swaps
    
    $
    
    
    
    $
    (17,552
    )
    
    $
    
  8. Commitments and Contingencies
  10




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##### Table of Contents



9. Supplemental Financial Information
   Condensed Consolidating Balance Sheet
May 3, 2008
(in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    220
    
    
    $
    3,385
    
    
    $
    64,409
    
    
    $
    
    
    
    $
    68,014Inventories
    
    
    
    
    
    
    82,497
    
    
    
    35,286
    
    
    
    
    
    
    
    117,783Prepaid expenses
    
    
    908
    
    
    
    15,074
    
    
    
    36,309
    
    
    
    
    
    
    
    52,291Other current assets
    
    
    8,776
    
    
    
    22,950
    
    
    
    11,212
    
    
    
    
    
    
    
    42,938Total current assets
    
    
    9,904
    
    
    
    123,906
    
    
    
    147,216
    
    
    
    
    
    
    
    281,026Property and equipment:Land and building
    
    
    
    
    
    
    22,288
    
    
    
    
    
    
    
    
    
    
    
    22,288Furniture, fixtures and equipment
    
    
    2,068
    
    
    
    89,880
    
    
    
    45,291
    
    
    
    
    
    
    
    137,239Leasehold improvements
    
    
    1,630
    
    
    
    132,370
    
    
    
    86,281
    
    
    
    
    
    
    
    220,2813,698
    
    
    
    244,538
    
    
    
    131,572
    
    
    
    
    
    
    
    379,808Less accumulated depreciation and amortization
    
    
    (806
    )
    
    
    (46,663
    )
    
    
    (25,495
    )
    
    
    
    
    
    
    (72,964
    )2,892
    
    
    
    197,875
    
    
    
    106,077
    
    
    
    
    
    
    
    306,844Intercompany receivables
    
    
    34,557
    
    
    
    
    
    
    
    1,073
    
    
    
    (35,630
    )
    
    
    Investment in subsidiaries
    
    
    2,458,864
    
    
    
    1,388
    
    
    
    
    
    
    
    (2,460,252
    )
    
    
    Intangible assets, net
    
    
    422,438
    
    
    
    291
    
    
    
    359,029
    
    
    
    
    
    
    
    781,758Deferred financing costs, net
    
    
    67,863
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,863Other assets
    
    
    35,019
    
    
    
    1,020
    
    
    
    37,810
    
    
    
    
    
    
    
    73,849Goodwill
    
    
    
    
    
    
    1,402,613
    
    
    
    433,940
    
    
    
    
    
    
    
    1,836,5533,018,741
    
    
    
    1,405,312
    
    
    
    831,852
    
    
    
    (2,495,882
    )
    
    
    2,760,023Total assets
    
    $
    3,031,537
    
    
    $
    1,727,093
    
    
    $
    1,085,145
    
    
    $
    (2,495,882
    )
    
    $
    3,347,893LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    320
    
    
    $
    20,312
    
    
    $
    52,768
    
    
    $
    
    
    
    $
    73,400Current portion of long-term debt
    
    
    14,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,500Income taxes payable
    
    
    
    
    
    
    
    
    
    
    6,951
    
    
    
    
    
    
    
    6,951Accrued interest payable
    
    
    42,150
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    42,157Accrued expenses and other liabilities
    
    
    32,109
    
    
    
    41,353
    
    
    
    47,021
    
    
    
    
    
    
    
    120,483Total current liabilities
    
    
    89,079
    
    
    
    61,665
    
    
    
    106,747
    
    
    
    
    
    
    
    257,491Intercompany payables
    
    
    
    
    
    
    35,630
    
    
    
    
    
    
    
    (35,630
    )
    
    
    Long-term debt
    
    
    2,359,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,359,625Deferred tax liability
    
    
    
    
    
    
    105,864
    
    
    
    19,114
    
    
    
    
    
    
    
    124,978Deferred rent expense
    
    
    1,122
    
    
    
    7,209
    
    
    
    4,464
    
    
    
    
    
    
    
    12,795Other liabilities
    
    
    
    
    
    
    11,293
    
    
    
    
    
    
    
    
    
    
    
    11,2932,360,747
    
    
    
    159,996
    
    
    
    23,578
    
    
    
    (35,630
    )
    
    
    2,508,691Stockholders equity:Common stock
    
    
    
    
    
    
    367
    
    
    
    2
    
    
    
    (369
    )
    
    
    Additional paid in capital
    
    
    603,968
    
    
    
    1,445,684
    
    
    
    876,855
    
    
    
    (2,322,539
    )
    
    
    603,968Accumulated other comprehensive income, net
of tax
    
    
    12,672
    
    
    
    3,015
    
    
    
    22,762
    
    
    
    (25,777
    )
    
    
    12,672Retained earnings (deficit)
    
    
    (34,929
    )
    
    
    56,366
    
    
    
    55,201
    
    
    
    (111,567
    )
    
    
    (34,929
    )581,711
    
    
    
    1,505,432
    
    
    
    954,820
    
    
    
    (2,460,252
    )
    
    
    581,711Total liabilities and stockholders equity
    
    $
    3,031,537
    
    
    $
    1,727,093
    
    
    $
    1,085,145
    
    
    $
    (2,495,882
    )
    
    $
    3,347,893
 11




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##### Table of Contents



Condensed Consolidating Balance Sheet
February 2, 2008
(in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,835
    
    
    $
    1,892
    
    
    $
    58,247
    
    
    $
    
    
    
    $
    85,974Inventories
    
    
    
    
    
    
    84,952
    
    
    
    32,727
    
    
    
    
    
    
    
    117,679Prepaid expenses
    
    
    403
    
    
    
    15,264
    
    
    
    21,648
    
    
    
    
    
    
    
    37,315Other current assets
    
    
    100
    
    
    
    31,501
    
    
    
    6,057
    
    
    
    
    
    
    
    37,658Total current assets
    
    
    26,338
    
    
    
    133,609
    
    
    
    118,679
    
    
    
    
    
    
    
    278,626Property and equipment:Land and building
    
    
    
    
    
    
    22,288
    
    
    
    
    
    
    
    
    
    
    
    22,288Furniture, fixtures and equipment
    
    
    2,050
    
    
    
    83,924
    
    
    
    44,156
    
    
    
    
    
    
    
    130,130Leasehold improvements
    
    
    1,628
    
    
    
    127,522
    
    
    
    82,013
    
    
    
    
    
    
    
    211,1633,678
    
    
    
    233,734
    
    
    
    126,169
    
    
    
    
    
    
    
    363,581Less accumulated depreciation and amortization
    
    
    (609
    )
    
    
    (34,615
    )
    
    
    (18,748
    )
    
    
    
    
    
    
    (53,972
    )3,069
    
    
    
    199,119
    
    
    
    107,421
    
    
    
    
    
    
    
    309,609Intercompany receivables
    
    
    20,198
    
    
    
    
    
    
    
    13
    
    
    
    (20,211
    )
    
    
    Investment in subsidiaries
    
    
    2,452,074
    
    
    
    5,764
    
    
    
    
    
    
    
    (2,457,838
    )
    
    
    Intangible assets, net
    
    
    423,000
    
    
    
    300
    
    
    
    353,830
    
    
    
    
    
    
    
    777,130Deferred financing costs, net
    
    
    70,511
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,511Other assets
    
    
    35,124
    
    
    
    1,269
    
    
    
    35,361
    
    
    
    
    
    
    
    71,754Goodwill
    
    
    
    
    
    
    1,401,959
    
    
    
    438,908
    
    
    
    
    
    
    
    1,840,8673,000,907
    
    
    
    1,409,292
    
    
    
    828,112
    
    
    
    (2,478,049
    )
    
    
    2,760,262Total assets
    
    $
    3,030,314
    
    
    $
    1,742,020
    
    
    $
    1,054,212
    
    
    $
    (2,478,049
    )
    
    $
    3,348,497LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    762
    
    
    $
    22,140
    
    
    $
    33,187
    
    
    $
    
    
    
    $
    56,089Current portion of long-term debt
    
    
    14,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,500Income taxes payable
    
    
    (8,383
    )
    
    
    14,246
    
    
    
    6,328
    
    
    
    
    
    
    
    12,191Accrued interest payable
    
    
    19,534
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    19,536Accrued expenses and other liabilities
    
    
    34,194
    
    
    
    39,737
    
    
    
    43,145
    
    
    
    
    
    
    
    117,076Total current liabilities
    
    
    60,607
    
    
    
    76,123
    
    
    
    82,662
    
    
    
    
    
    
    
    219,392Intercompany payables
    
    
    
    
    
    
    20,211
    
    
    
    
    
    
    
    (20,211
    )
    
    
    Long-term debt
    
    
    2,363,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,363,250Deferred tax liability
    
    
    
    
    
    
    120,742
    
    
    
    18,764
    
    
    
    
    
    
    
    139,506Deferred rent expense
    
    
    1,257
    
    
    
    5,350
    
    
    
    3,965
    
    
    
    
    
    
    
    10,572Other liabilities
    
    
    
    
    
    
    10,577
    
    
    
    
    
    
    
    
    
    
    
    10,5772,364,507
    
    
    
    156,880
    
    
    
    22,729
    
    
    
    (20,211
    )
    
    
    2,523,905Stockholders equity:Common stock
    
    
    
    
    
    
    367
    
    
    
    2
    
    
    
    (369
    )
    
    
    Additional paid in capital
    
    
    601,201
    
    
    
    1,449,307
    
    
    
    878,145
    
    
    
    (2,327,452
    )
    
    
    601,201Accumulated other comprehensive income, net
of tax
    
    
    3,358
    
    
    
    2,959
    
    
    
    17,513
    
    
    
    (20,472
    )
    
    
    3,358Retained earnings
    
    
    641
    
    
    
    56,384
    
    
    
    53,161
    
    
    
    (109,545
    )
    
    
    641605,200
    
    
    
    1,509,017
    
    
    
    948,821
    
    
    
    (2,457,838
    )
    
    
    605,200Total liabilities and stockholders equity
    
    $
    3,030,314
    
    
    $
    1,742,020
    
    
    $
    1,054,212
    
    
    $
    (2,478,049
    )
    
    $
    3,348,497
 12




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##### Table of Contents



Successor Entity
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended May 3, 2008
(in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    367,918
    
    
    $
    131,478
    
    
    $
    (172,393
    )
    
    $
    327,003Cost of sales, occupancy and buying expenses
    
    
    
    
    
    
    275,566
    
    
    
    68,809
    
    
    
    (172,393
    )
    
    
    171,982Gross profit
    
    
    
    
    
    
    92,352
    
    
    
    62,669
    
    
    
    
    
    
    
    155,021Other expenses (income):Selling, general and administrative
    
    
    10,205
    
    
    
    66,653
    
    
    
    54,477
    
    
    
    
    
    
    
    131,335Depreciation and amortization
    
    
    760
    
    
    
    12,921
    
    
    
    8,420
    
    
    
    
    
    
    
    22,101Transaction-related costs
    
    
    4,300
    
    
    
    
    
    
    
    1,668
    
    
    
    
    
    
    
    5,968Other (income) expense
    
    
    (5,301
    )
    
    
    4,628
    
    
    
    113
    
    
    
    
    
    
    
    (560
    )9,964
    
    
    
    84,202
    
    
    
    64,678
    
    
    
    
    
    
    
    158,844Operating income (loss)
    
    
    (9,964
    )
    
    
    8,150
    
    
    
    (2,009
    )
    
    
    
    
    
    
    (3,823
    )Interest expense (income), net
    
    
    49,167
    
    
    
    (185
    )
    
    
    (325
    )
    
    
    
    
    
    
    48,657Income (loss) before income taxes
    
    
    (59,131
    )
    
    
    8,335
    
    
    
    (1,684
    )
    
    
    
    
    
    
    (52,480
    )Income tax expense (benefit)
    
    
    (22,043
    )
    
    
    8,856
    
    
    
    (3,723
    )
    
    
    
    
    
    
    (16,910
    )Income (loss) from continuing operations
    
    
    (37,088
    )
    
    
    (521
    )
    
    
    2,039
    
    
    
    
    
    
    
    (35,570
    )Equity in earnings of subsidiaries
    
    
    1,518
    
    
    
    505
    
    
    
    
    
    
    
    (2,023
    )
    
    
    Net income (loss)
    
    
    (35,570
    )
    
    
    (16
    )
    
    
    2,039
    
    
    
    (2,023
    )
    
    
    (35,570
    )Foreign currency translation and interest
rate swap adjustments
    
    
    9,314
    
    
    
    56
    
    
    
    5,672
    
    
    
    (5,728
    )
    
    
    9,314Comprehensive income (loss)
    
    $
    (26,256
    )
    
    $
    40
    
    
    $
    7,711
    
    
    $
    (7,751
    )
    
    $
    (26,256
    )
 Predecessor Entity
Condensed Consolidating Statement of Operations and Comprehensive Income
For The Three Months Ended May 5, 2007
(in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    441,654
    
    
    $
    118,570
    
    
    $
    (219,653
    )
    
    $
    340,571Cost of sales, occupancy and buying expenses
    
    
    
    
    
    
    322,925
    
    
    
    58,319
    
    
    
    (219,653
    )
    
    
    161,591Gross profit
    
    
    
    
    
    
    118,729
    
    
    
    60,251
    
    
    
    
    
    
    
    178,980Other expenses (income):Selling, general and administrative
    
    
    8,032
    
    
    
    66,579
    
    
    
    49,073
    
    
    
    
    
    
    
    123,684Depreciation and amortization
    
    
    299
    
    
    
    8,940
    
    
    
    5,995
    
    
    
    
    
    
    
    15,234Transaction-related costs
    
    
    3,486
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,486Other (income) expense
    
    
    (6,190
    )
    
    
    4,638
    
    
    
    211
    
    
    
    
    
    
    
    (1,341
    )5,627
    
    
    
    80,157
    
    
    
    55,279
    
    
    
    
    
    
    
    141,063Operating income (loss)
    
    
    (5,627
    )
    
    
    38,572
    
    
    
    4,972
    
    
    
    
    
    
    
    37,917Interest expense (income), net
    
    
    (2,636
    )
    
    
    (92
    )
    
    
    (1,025
    )
    
    
    
    
    
    
    (3,753
    )Income (loss) before income taxes
    
    
    (2,991
    )
    
    
    38,664
    
    
    
    5,997
    
    
    
    
    
    
    
    41,670Income tax expense (benefit)
    
    
    (1,116
    )
    
    
    16,447
    
    
    
    (2,443
    )
    
    
    
    
    
    
    12,888Income (loss) from continuing operations
    
    
    (1,875
    )
    
    
    22,217
    
    
    
    8,440
    
    
    
    
    
    
    
    28,782Equity in earnings of subsidiaries
    
    
    30,657
    
    
    
    2,040
    
    
    
    
    
    
    
    (32,697
    )
    
    
    Net income
    
    
    28,782
    
    
    
    24,257
    
    
    
    8,440
    
    
    
    (32,697
    )
    
    
    28,782Foreign currency translation adjustments
    
    
    9,323
    
    
    
    1,785
    
    
    
    9,354
    
    
    
    (11,139
    )
    
    
    9,323Comprehensive income
    
    $
    38,105
    
    
    $
    26,042
    
    
    $
    17,794
    
    
    $
    (43,836
    )
    
    $
    38,105
 13




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##### Table of Contents



Successor Entity
Condensed Consolidating Statement of Cash Flows
For The Three Months Ended May 3, 2008
(in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (35,570
    )
    
    $
    (16
    )
    
    $
    2,039
    
    
    $
    (2,023
    )
    
    $
    (35,570
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Equity in earnings of subsidiaries
    
    
    (1,518
    )
    
    
    (505
    )
    
    
    
    
    
    
    2,023
    
    
    
    Depreciation and amortization
    
    
    760
    
    
    
    12,921
    
    
    
    8,420
    
    
    
    
    
    
    
    22,101Amortization of lease rights and other assets
    
    
    
    
    
    
    14
    
    
    
    514
    
    
    
    
    
    
    
    528Amortization of debt issuance costs
    
    
    2,647
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,647Loss on sale / retirement of property and equipment, net
    
    
    
    
    
    
    11
    
    
    
    16
    
    
    
    
    
    
    
    27Stock compensation expense
    
    
    2,767
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,767(Increase) decrease in:Inventories
    
    
    
    
    
    
    2,455
    
    
    
    (2,186
    )
    
    
    
    
    
    
    269Prepaid expenses
    
    
    (505
    )
    
    
    190
    
    
    
    (14,530
    )
    
    
    
    
    
    
    (14,845
    )Other assets
    
    
    495
    
    
    
    515
    
    
    
    (2,647
    )
    
    
    
    
    
    
    (1,637
    )Increase (decrease) in:Trade accounts payable
    
    
    (442
    )
    
    
    (1,828
    )
    
    
    19,125
    
    
    
    
    
    
    
    16,855Income taxes payable
    
    
    (683
    )
    
    
    (8,040
    )
    
    
    (5,441
    )
    
    
    
    
    
    
    (14,164
    )Accrued expenses and other liabilities
    
    
    3,808
    
    
    
    2,096
    
    
    
    3,314
    
    
    
    
    
    
    
    9,218Accrued interest payable
    
    
    22,616
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    22,621Deferred income taxes
    
    
    
    
    
    
    (13,575
    )
    
    
    (754
    )
    
    
    
    
    
    
    (14,329
    )Deferred rent expense
    
    
    (135
    )
    
    
    1,859
    
    
    
    429
    
    
    
    
    
    
    
    2,153Net cash provided by (used in) operating activities
    
    
    (5,760
    )
    
    
    (3,903
    )
    
    
    8,304
    
    
    
    
    
    
    
    (1,359
    )Cash flows from investing activities:Acquisition of property and equipment, net
    
    
    (20
    )
    
    
    (11,575
    )
    
    
    (4,003
    )
    
    
    
    
    
    
    (15,598
    )Acquisition of intangible assets
    
    
    
    
    
    
    (35
    )
    
    
    (392
    )
    
    
    
    
    
    
    (427
    )Net cash used in investing activities
    
    
    (20
    )
    
    
    (11,610
    )
    
    
    (4,395
    )
    
    
    
    
    
    
    (16,025
    )Cash flows from financing activities:Credit facility payment
    
    
    (3,625
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,625
    )Intercompany financing
    
    
    (13,849
    )
    
    
    15,419
    
    
    
    (1,570
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (17,474
    )
    
    
    15,419
    
    
    
    (1,570
    )
    
    
    
    
    
    
    (3,625
    )Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    (2,361
    )
    
    
    1,587
    
    
    
    3,823
    
    
    
    
    
    
    
    3,049Net increase (decrease) in cash and cash equivalents
    
    
    (25,615
    )
    
    
    1,493
    
    
    
    6,162
    
    
    
    
    
    
    
    (17,960
    )Cash and cash equivalents at beginning of period
    
    
    25,835
    
    
    
    1,892
    
    
    
    58,247
    
    
    
    
    
    
    
    85,974Cash and cash equivalents at end of period
    
    $
    220
    
    
    $
    3,385
    
    
    $
    64,409
    
    
    $
    
    
    
    $
    68,014
 14




---



##### Table of Contents



Predecessor Entity
Condensed Consolidating Statement of Cash Flows
For The Three Months Ended May 5, 2007
(in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income
    
    $
    28,782
    
    
    $
    24,257
    
    
    $
    8,440
    
    
    $
    (32,697
    )
    
    $
    28,782Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Equity in earnings of subsidiaries
    
    
    (30,657
    )
    
    
    (2,040
    )
    
    
    
    
    
    
    32,697
    
    
    
    Depreciation and amortization
    
    
    299
    
    
    
    8,940
    
    
    
    5,995
    
    
    
    
    
    
    
    15,234Amortization of intangibles and other assets
    
    
    
    
    
    
    33
    
    
    
    411
    
    
    
    
    
    
    
    444Impairment of assets
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    73Loss on sale / retirement of property and equipment, net
    
    
    
    
    
    
    631
    
    
    
    241
    
    
    
    
    
    
    
    872Stock compensation expense
    
    
    1,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,275(Increase) decrease in:Inventories
    
    
    
    
    
    
    (3,369
    )
    
    
    (1,657
    )
    
    
    
    
    
    
    (5,026
    )Prepaid expenses
    
    
    278
    
    
    
    (359
    )
    
    
    (13,439
    )
    
    
    
    
    
    
    (13,520
    )Other assets
    
    
    (60
    )
    
    
    376
    
    
    
    (4,277
    )
    
    
    
    
    
    
    (3,961
    )Increase (decrease) in:Trade accounts payable
    
    
    (866
    )
    
    
    (4,020
    )
    
    
    16,388
    
    
    
    
    
    
    
    11,502Income taxes payable
    
    
    
    
    
    
    (2,376
    )
    
    
    (4,684
    )
    
    
    
    
    
    
    (7,060
    )Accrued expenses and other liabilities
    
    
    (470
    )
    
    
    (5,049
    )
    
    
    (2,451
    )
    
    
    
    
    
    
    (7,970
    )Deferred income taxes
    
    
    
    
    
    
    (523
    )
    
    
    (292
    )
    
    
    
    
    
    
    (815
    )Deferred rent expense
    
    
    
    
    
    
    610
    
    
    
    (187
    )
    
    
    
    
    
    
    423Net cash provided by (used in) operating activities
    
    
    (1,419
    )
    
    
    17,111
    
    
    
    4,561
    
    
    
    
    
    
    
    20,253Cash flows from investing activities:Acquisition of property and equipment
    
    
    (169
    )
    
    
    (15,210
    )
    
    
    (6,945
    )
    
    
    
    
    
    
    (22,324
    )Acquisition of intangible assets
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    (16
    )Net cash used in investing activities
    
    
    (169
    )
    
    
    (15,226
    )
    
    
    (6,945
    )
    
    
    
    
    
    
    (22,340
    )Cash flows from financing activities:Stock option proceeds
    
    
    177
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177Dividends paid
    
    
    (9,065
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,065
    )Intercompany financing
    
    
    22,461
    
    
    
    (14,283
    )
    
    
    (8,178
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    13,573
    
    
    
    (14,283
    )
    
    
    (8,178
    )
    
    
    
    
    
    
    (8,888
    )Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    (5
    )
    
    
    (26
    )
    
    
    914
    
    
    
    
    
    
    
    883Net increase (decrease) in cash and cash equivalents
    
    
    11,980
    
    
    
    (12,424
    )
    
    
    (9,648
    )
    
    
    
    
    
    
    (10,092
    )Cash and cash equivalents at beginning of period
    
    
    194,098
    
    
    
    15,807
    
    
    
    130,972
    
    
    
    
    
    
    
    340,877Cash and cash equivalents at end of period
    
    $
    206,078
    
    
    $
    3,383
    
    
    $
    121,324
    
    
    
    
    
    
    $
    330,785
 15




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##### Table of Contents



10. Subsequent Events
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Business Overview
     16




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##### Table of Contents




    
    Jewelry (53.6% of Fiscal 2007 net sales)  Which includes earrings, including ear
piercing studs, necklaces, bracelets and rings; and
    
    Accessories (46.4% of Fiscal 2007 net sales)  Which includes hairgoods, handbags,
small leather goods, and other fashion accessory classifications, as well as cosmetics.
     Consolidated Results of Operations
  Successor Entity
    
    
    Predecessor EntityThree Months
    
    
    Three MonthsEnded
    
    
    EndedMay 3, 2008
    
    
    May 5, 2007Net sales
    
    $
    327,003
    
    
    $
    340,571Increase (decrease) in same store sales
    
    
    (8.4
    %)
    
    
    1.3
    %Gross profit percentage
    
    
    47.4
    %
    
    
    52.6
    %Selling, general and administrative expenses as a percentage of
net sales
    
    
    40.2
    %
    
    
    36.3
    %Depreciation and amortization as a percentage of net sales
    
    
    6.8
    %
    
    
    4.5
    %Transaction-related costs as percentage of net sales
    
    
    1.8
    %
    
    
    1.0
    %Operating income (loss)
    
    
    (3,823
    )
    
    
    37,917Net income (loss)
    
    $
    (35,570
    )
    
    $
    28,782Number of stores at the end of the period (1)
    
    
    3,053
    
    
    
    3,003
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores.   17




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##### Table of Contents



Successor Entity
    
    
    Predecessor EntityThree Months
    
    
    Three MonthsEnded
    
    
    Ended% of Total
    
    May 3, 2008
    
    
    May 5, 2007Jewelry
    
    
    54.8
    
    
    
    55.5Accessories
    
    
    45.2
    
    
    
    44.5100.0
    
    
    
    100.0
         18




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##### Table of Contents



Segment Operations
  North America
  Successor Entity
    
    
    Predecessor EntityThree Months
    
    
    Three MonthsEnded
    
    
    EndedMay 3, 2008
    
    
    May 5, 2007Net sales
    
    $
    209,344
    
    
    $
    235,680Increase (decrease) in same store sales
    
    
    (12.3
    %)
    
    
    2.1
    %Gross profit percentage
    
    
    47.6
    %
    
    
    54.4
    %Number of stores at the end of the period (1)
    
    
    2,142
    
    
    
    2,126
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores.   19




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##### Table of Contents



Successor Entity
    
    
    Predecessor EntityThree Months
    
    
    Three MonthsEnded
    
    
    Ended% of Total
    
    May 3, 2008
    
    
    May 5, 2007Jewelry
    
    
    60.3
    
    
    
    59.1Accessories
    
    
    39.7
    
    
    
    40.9100.0
    
    
    
    100.0
 Europe
  Successor Entity
    
    
    Predecessor EntityThree Months
    
    
    Three MonthsEnded
    
    
    EndedMay 3, 2008
    
    
    May 5, 2007Net sales
    
    $
    117,659
    
    
    $
    104,891Increase (decrease) in same store sales
    
    
    (0.2
    %)
    
    
    (0.7
    %)Gross profit percentage
    
    
    47.1
    %
    
    
    48.4
    %Number of stores at the end of the period (1)
    
    
    911
    
    
    
    877
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores.    Successor Entity
    
    
    Predecessor EntityThree Months
    
    
    Three MonthsEnded
    
    
    Ended% of Total
    
    May 3, 2008
    
    
    May 5, 2007Jewelry
    
    
    45.0
    
    
    
    47.3Accessories
    
    
    55.0
    
    
    
    52.7100.0
    
    
    
    100.0
 20




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##### Table of Contents



Analysis of Consolidated Financial Condition
  Successor Entity
    
    
    Predecessor EntityThree Months
    
    
    Three MonthsEnded
    
    
    EndedMay 3, 2008
    
    
    May 5, 2007Operating activities
    
    $
    (1,359
    )
    
    $
    20,253Investing activities
    
    
    (16,025
    )
    
    
    (22,340
    )Financing activities
    
    
    (3,625
    )
    
    
    (8,888
    )
      21




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##### Table of Contents



Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
     Cautionary Note Regarding Forward-Looking Statements and Risk Factors
  22




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##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency
   23




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##### Table of Contents



Interest Rates
   
 Item 4.
    
    Controls and Procedures
      24




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 6.
    
    Exhibits
 10.1
    
    
    Joan Munnelly Employment Agreement.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 U.S.C.
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 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted.
 25




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##### Table of Contents



SIGNATURES
  CLAIRES STORES, INC.June 11, 2008
    By:
    /s/ Eugene S. KahnEugene S. Kahn, Chief Executive Officer(principal executive officer) June 11, 2008
    By:
    /s/ J. Per BrodinJ. Per Brodin, Senior Vice President and ChiefFinancial Officer (principal financial and
accounting officer) 26




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##### Table of Contents



INDEX TO EXHIBITS
 EXHIBIT NO.
    
    DESCRIPTION10.1
    
    Joan Munnelly Employment Agreement.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.
 27