##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 29, 2005
 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 No. 1-8899
 Claires Stores, Inc.  Florida
    
    59-0940416(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Stock, $.05 par value
    
    New York Stock ExchangeRights to Purchase Series A Junior
    
    New York Stock ExchangeParticipating Preferred Stock
 Securities registered pursuant to Section 12(g) of the Act: Title of each class 
  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
þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes þ No
o As of July 30, 2004, the last business day of the registrants most recently completed second
fiscal quarter, the aggregate market value of the shares of Class A common stock and Common stock
held by non-affiliates of the registrant was approximately $2.0 billion. All outstanding shares of
Class A common stock and Common stock, except for shares held by executive officers and members of
the Board of Directors and their affiliates, are deemed to be held by non-affiliates. The Class A
common stock is not traded on an exchange. At March 15, 2005, there were outstanding 94,008,350 shares of registrants Common stock, $.05
par value, and 5,125,313 shares of the registrants Class A common stock, $.05 par value. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the 2005 Annual Meeting of Shareholders, to be filed no later than 120
days after the end of the registrants fiscal year covered by this report, is incorporated by
reference into Part III of this report.




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TABLE OF CONTENTS Item
    
    Page No.PART I
    
    
    3Item 1.Business
    
    
    3Item 2.Properties
    
    
    7Item 3.Legal Proceedings
    
    
    8Item 4.Submission of Matters to a Vote of Security Holders
    
    
    8PART II
    
    
    9Item 5.Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    9Item 6.Selected Financial Data
    
    
    10Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    11Item 7A.Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 8.Financial Statements and Supplementary Data
    
    
    24Item 9.Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    47Item 9A.Controls and Procedures
    
    
    47Item 9B.Other Information
    
    
    47PART III
    
    
    48Item 10.Directors and Executive Officers of the Registrant
    
    
    48Item 11.Executive Compensation
    
    
    48Item 12.Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    48Item 13.Certain Relationships and Related Transactions
    
    
    48Item 14.Principal Accounting Fees and Services
    
    
    48PART IV
    
    
    48Item 15.Exhibits, Financial Statement Schedules
    
    
    48Signatures
    
    
    512005 Incentive Compensation PlanSubsidiaries of the CompanyConsent of KPMG LLPSection 302 Co-Chief Executive Officer CertificationSection 302 Co-Chief Executive Officer CertificationSection 302 Chief Financial Officer CertificationSection 906 Co-Chief Executive Officer CertificationSection 906 Co-Chief Executive Officer CertificationSection 906 Chief Financial Officer Certification
  2




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PART I. 
 Item 1. Business General We are a leading specialty retailer of value-priced fashion accessories for pre-teens and teenagers
as well as young adults. We are organized based on our geographic markets, which include our North
American operations and our International operations. As of January 29, 2005 we operated a total
of 2,836 stores in all 50 states of the United States, Puerto Rico, Canada, the Virgin Islands, the
United Kingdom, Switzerland, Austria, Germany (the latter three collectively referred to as
S.A.G.), France and Ireland. The stores are operated mainly under the trade names Claires
Boutiques, Claires Accessories, Icing by Claires, Afterthoughts and The Icing. We are
in the process of transitioning our Afterthoughts stores to Icing by Claires stores to
capitalize on the Claires brand name. We also operate 148 stores in Japan through a 50:50 joint
venture with AEON Co. Ltd. (Claires Nippon). We account for the results of operations of
Claires Nippon under the equity method whose results are included within Interest and other
income in our Statement of Operations within our North American division. In addition, we license
57 stores in the Middle East under a licensing and merchandising agreement with Al Shaya Co. Ltd.
and 4 stores in South Africa under similar agreements with the House of Busby Limited. We account
for the goods we sell under the merchandising agreements within Gross profit in our North
American division and the license fees we charge within Interest and other income within our
International division in our Statement of Operations. We incorporated in 1961 as a Delaware corporation. In June 2000, we completed our reincorporation
from the state of Delaware to the State of Florida through a merger transaction with one of our
wholly-owned subsidiaries. In May 2002, we disposed of our apparel segment. Our executive offices are located at 3 S.W. 129th Avenue, Pembroke Pines, Florida
33027, our telephone number is (954) 433-3900 and our internet address is www.claires.com. Through
our website, we make available, as soon as reasonably practicable after such information has been
filed or furnished to the Securities and Exchange Commission, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports. In
addition, we have made our Corporate Governance Guidelines, the charters of our Audit, Compensation
and Nominating and Corporate Governance Committees and our Code of Ethics available through our
website. We will disclose any amendments to our Code of Ethics or waivers of any provision thereof
on our website within four business days following the date of the amendment or waiver, and that
information will remain available for at least a twelve-month period. Printed copies of these
documents are also available to our shareholders upon written request to Investor Relations,
Claires Stores, Inc., 350 Fifth Avenue, Suite 900, New York, NY 10118. The reference to our
website does not constitute incorporation by reference of the information contained on our website,
and the information contained on the website is not part of this Form 10-K. Business Description We have two store concepts: Claires Accessories, which caters to fashion-conscious girls and teens
in the 7 to 17 age range, and Icing by Claires, which caters to fashion-conscious teens and young
women in the 17 to 27 age range. Our merchandise typically ranges in price between $2 and $20,
with the average product sold at approximately $4. Our stores share a similar format and our
different store concepts and trade-names allow us to have multiple store locations in a single
mall. Although we face competition from a number of small specialty store chains and others
selling fashion accessories, we believe that our stores comprise one of the largest chains of
specialty retail stores in the world devoted to the sale of value-priced fashion accessories for
pre-teen, teenage and young adult females. Our sales are divided into two principal product categories:  
    JewelryCostume jewelry, earrings and ear piercing services; and
    AccessoriesOther fashion accessories, hair ornaments, tote bags and novelty items. 3




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The following table compares our sales of each product category for the last three fiscal years
(dollars in thousands): Fiscal Year EndedJan. 29, 2005
    
    
    Jan. 31, 2004
    
    
    Feb. 1, 2003Jewelry
    
    $
    717,406
    
    
    
    56.1
    %
    
    $
    603,564
    
    
    
    53.3
    %
    
    $
    481,686
    
    
    
    48.1
    %Accessories
    
    
    562,001
    
    
    
    43.9
    %
    
    
    529,270
    
    
    
    46.7
    %
    
    
    519,851
    
    
    
    51.9
    %$
    1,279,407
    
    
    
    100.0
    %
    
    $
    1,132,834
    
    
    
    100.0
    %
    
    $
    1,001,537
    
    
    
    100.0
    %
 We refer to the fiscal years referenced above as Fiscal 2005, Fiscal 2004 and Fiscal 2003,
respectively. We are primarily organized based on geographic markets for which we operate. Under this
organizational structure, we have two reportable segments: North America and International. A
summary of North American and International operations is presented below (dollars in thousands): Fiscal Year EndedJan. 29,
    
    
    Jan. 31,
    
    
    Feb. 1,2005
    
    
    2004
    
    
    2003REVENUESNorth America
    
    $
    906,071
    
    
    $
    820,332
    
    
    $
    740,838International
    
    
    373,336
    
    
    
    312,502
    
    
    
    260,699Total revenues
    
    $
    1,279,407
    
    
    $
    1,132,834
    
    
    $
    1,001,537INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXESNorth America
    
    $
    170,323
    
    
    $
    138,387
    
    
    $
    97,849International
    
    
    51,313
    
    
    
    36,035
    
    
    
    22,274Total income from
continuing operations
before income taxes
    
    $
    221,636
    
    
    $
    174,422
    
    
    $
    120,123LONG-LIVED ASSETSNorth America
    
    $
    325,543
    
    
    $
    311,069
    
    
    $
    308,437International
    
    
    147,260
    
    
    
    134,832
    
    
    
    108,084Total long-lived assets
    
    $
    472,803
    
    
    $
    445,901
    
    
    $
    416,521
 Additional financial information for our two segments is set forth in Note 11 of our consolidated
financial statements included in this Annual Report. Strategy Through our Claires Accessories and Icing by Claires store concepts, our mission is to be the
most profitable specialty retailer selling accessories and costume jewelry to fashion-aware teens,
tweens and young adults. We believe our customers want to stay current with or ahead of fashion
trends and continually seek newness in their accessory wear. The key elements of our strategy are
as follows: Actively Manage Merchandise Trends and Display of Merchandise. We devote considerable effort to
identifying emerging fashion trends. Through constant product testing and rapid placement of
successful test items in our stores, we are able to respond to emerging fashion trends. We also
devote considerable effort to how our merchandise is displayed in our stores, which we believe
commands our customers attention, supports our image and promotes a consistent shopping
environment for our customers. Our merchandising and distribution systems enhance our ability to
make quick responses to new fashion trends. We typically deliver merchandise to our stores three
to five times a week. 4




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Provide Attentive Customer Service. We are committed to offering courteous and professional
customer service. We strive to give our customers the same level of respect that is generally
given to adult customers at other retail stores, and to provide friendly and informed customer
service for parents. Additionally, our stores provide a friendly and social atmosphere for our
customers. Store Growth Strategy. We opened our first store in Europe in 1996 and, as of January 29, 2005,
operated 717 stores in Europe. Our European stores are typically smaller than our North American
stores, which results in higher sales per square foot than our North American stores. We intend to
continue our store growth through the opening of new stores in our international markets. Any
future store openings in Asia are currently subject to our 50:50 joint venture arrangement under
Claires Nippon. Licensing Arrangements.We entered into our first licensing arrangement with a Kuwait company in
Fiscal 2002 and a similar arrangement with a South African company in Fiscal 2005. We intend to
continue to seek suitable licensees in order to open stores in certain international markets where
we desire a limited financial investment. Maintain Strong Supplier Relationships. We view our supplier relationships as important to our
success, and promote personal interaction with our suppliers. We believe many of our suppliers
view our stores as important distribution channels. Capitalize on Our Brand Name.We believe that the Claires brand name is one of our most important
assets. We intend to develop our brand through, among other things, in-store marketing and
licensing arrangements. Stores Our stores in North America are located primarily in enclosed shopping malls. Our stores in North
America operating as Claires Boutiques and Claires Accessories average approximately 1,100
square feet while those stores operating as Icing by Claires, The Icing and Afterthoughts
average approximately 1,200 square feet. Our stores in the United Kingdom, S.A.G., France, Ireland
and Japan average approximately 600 square feet and are located primarily in enclosed shopping
malls and central business districts. Each store uses our proprietary displays, which permit the
presentation of a wide variety of items in a relatively small space. Our stores are distinctively designed for customer identification, ease of shopping and display of
a wide selection of merchandise. Store hours are dictated by the mall operators and the stores are
typically open from 10:00 A.M. to 9:00 P.M., Monday through Saturday, and, where permitted by law,
from Noon to 5:00 P.M. on Sunday. Approximately 73% of sales are made in cash, with the balance made by credit cards. We permit,
with restrictions on certain items, returns for exchange or refund. Purchasing and Distribution We purchased our merchandise from approximately 755 domestic and international suppliers in Fiscal
2005. Approximately 82% of our merchandise in Fiscal 2005 was purchased from outside the United
States, including approximately 50% purchased from China. We are not dependent on an individual
supplier for merchandise purchased. All merchandise is shipped from suppliers to our distribution
facility in Hoffman Estates, Illinois, a suburb of Chicago (which services the North American
stores), the distribution facility in Birmingham, England (which services the stores in the United
Kingdom, Ireland and France), or the distribution facilities in Zurich, Switzerland and Vienna,
Austria (which service the stores in S.A.G.). After inspection, merchandise is shipped via common
carrier to the individual stores. Stores typically receive three to five shipments a week, which
provide our stores with a steady flow of new merchandise. 5




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Our business fluctuates according to changes in customer preferences, which are dictated in part by
fashion and season. In addition, the cyclical nature of the retail business requires us to carry a
significant amount of inventory, especially prior to peak selling seasons. As a result, we
typically purchase merchandise from our suppliers well in advance of the applicable selling season,
and sometimes before fashion trends are identified or evidenced by customer purchases. We determine the allocation of merchandise to our stores based on an analysis of various factors,
including size, location, demographics, sales and inventory history. Merchandise typically is sold
at its original marked price, with the length of time varying by item. We review our inventory
levels to identify slow-moving merchandise, and use markdowns to clear this merchandise. Markdowns
may be used if inventory exceeds client demand for reasons of fashion, design, seasonal adaptation
or changes in client preference, or if it is otherwise determined that the inventory will not sell
at its currently marked price. Store Management Except as stated below, our Executive Vice President of Store Operations is responsible for
managing our North American stores and reports to our Chief Operating Officer for North America,
who in turn, reports to our Co-Chief Executive Officers. Our stores are organized and controlled on
a district level. We currently employ 218 District Managers in North America, each of whom
oversees and manages approximately 10 stores in his or her respective geographic area and reports
to one of 22 Regional Managers. Each Regional Manager in North America reports to one of 6
Territorial Vice Presidents, who reports to the Executive Vice President of Store Operations. Each
store is staffed by a Manager, an Assistant Manager and one or more part-time employees. The
reporting structure for our stores in the International group is similar to the reporting structure
in North America. The Presidents of Claires UK and S.A.G. report to our Co-Chief Executive
Officer responsible for our International segment. The President of S.A.G is also responsible for
France. In the International group, there are a total of 7 Regional Managers and 75 District
Managers. Store Openings, Closings and Future Growth For Fiscal 2005, we opened 145 stores and closed 96 stores, for a total increase of 49 stores, net.
Net stores refers to stores opened, net of closings, if any. In our International group, we
decreased our operations by 17 stores, net, in the United Kingdom, resulting in a total of 442
stores, expanded our operations by 3 stores, net, in S.A.G., resulting in a total of 99 stores and
increased our operations by 31 stores, net, in France, resulting in a total of 176 stores. In
North America, we increased our operations by 7 stores, net to 2,119 stores. We believe our store
growth will occur in our international markets, where we plan on opening 50 stores, net, in France
and opening 1 store, net, in S.A.G. during the fiscal year ending January 28, 2006, which is
referred to as Fiscal 2006. We plan on opening approximately 20 stores, net, in North America in
Fiscal 2006 and closing 1 store, net, in the United Kingdom. In Fiscal 2005, Claires Nippon
increased operations in Japan by 25 stores, net, to 148 stores. There are 25 store openings
planned in Japan in Fiscal 2006. We closed 363 stores in the last three fiscal years, primarily due to certain locations not meeting
our established profit benchmarks, the unwillingness of landlords to renew leases on terms
acceptable to us, and the elimination of stores in connection with our acquisition of
Afterthoughts. Most of these stores were closed at or near lease expiration. We have not
experienced any substantial difficulty in renewing desired store leases and have no reason to
expect any such difficulty in the future. For each of the last three fiscal years, no individual
store accounted for more than one percent of total sales. We plan to continue opening stores when suitable locations are found and satisfactory lease
negotiations are concluded. Our initial investment in new stores opened during Fiscal 2005, which
includes leasehold improvements and fixtures, averaged approximately $146,000 per store. In
addition, certain store locations in our International operations require the purchase of
intangible assets. In these 38 cases, we invested approximately $188,000 per store in intangible
assets during Fiscal 2005. 6




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Our continued growth depends on our ability to open and operate stores on a profitable basis. Our
ability to expand successfully will be dependent upon a number of factors, including sufficient
demand for our merchandise in existing and new markets, our ability to locate and obtain favorable
store sites and negotiate acceptable lease terms, obtain adequate merchandise supply and hire and
train qualified management and other employees. Trademarks and Service Marks We are the owner in the United States of various marks, including Claires, Claires
Accessories, Afterthoughts, Icing by Claires and The Icing. We have also registered these
marks outside of the United States. We believe our rights in our marks are important to our
business and intend to maintain our marks and the related registrations. Competition The specialty retail business is highly competitive. We compete with department stores and chains
on a national and international level. We also compete on a regional or local level with specialty
and discount store chains and independent retail stores. Our competition also includes internet
and catalog businesses. We cannot estimate the number of our competitors because of the large
number of companies in the retail industry that fall into one of these categories. We believe the
main competitive factors in our business are fashion, price, merchandise, store location and
customer service. Seasonality Sales of each category of merchandise vary from period to period depending on current fashion
trends. We experience traditional retail patterns of peak sales during the Christmas, Easter and
back-to-school periods. Sales, as a percentage of total sales in each of the four quarters of the
fiscal year ended January 29, 2005 were 22%, 24%, 23% and 31%, respectively. Employees On January 29, 2005, we had approximately 18,000 employees, 58% of whom were part-time. Part-time
employees typically work up to 20 hours per week. We do not have collective bargaining agreements
with any labor unions and we consider employee relations to be good. 
 Item 2. Properties Our stores are located in all 50 states of the United States, Puerto Rico, Canada, the Virgin
Islands, the United Kingdom, Switzerland, Austria, Germany, France and Ireland. We lease all of
our 2,836 store locations, generally for terms ranging from five to 25 years. Under the terms of
the leases, we pay a fixed minimum rent and/or rentals based on gross sales in excess of specified
amounts. We also pay certain other expenses (e.g., common area maintenance charges and real estate
taxes) under the leases. The internal layout and fixtures of each store are designed by management
and constructed under contracts with third parties. Most of our stores in North America and the International division are located in enclosed shopping
malls, while other stores are located within central business districts, open-air outlet malls or
strip centers. Our criteria for new stores includes geographic location, demographic aspects of
communities surrounding the store site, quality of anchor tenants, advantageous location within a
mall, appropriate space availability and rental rates. We believe that sufficient desirable
locations are available to accommodate our expansion plans. We refurbish our existing stores on a
regular basis. We own central buying and store operations offices and the North American distribution center
located in Hoffman Estates, Illinois which is on approximately 24.8 acres of land. The property
has buildings with approximately 538,000 total square feet of space, of which 373,000 square feet
is devoted to receiving and distribution and 165,000 square feet is devoted to office space. 7




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Our subsidiary, Claires Accessories UK Ltd., or UK, leases distribution and office space in
Birmingham, England. The facility consists of 25,000 square feet of office space and 60,000 square
feet of distribution space. The lease expires in December 2024 and UK has the right to assign or
sublet this lease at any time during the term of the lease. Our stores operated by our subsidiaries, Claires Switzerland, Claires Austria and Claires
Germany, are serviced by distribution centers and offices in Zurich, Switzerland and Vienna,
Austria. The facility maintained in Zurich, Switzerland consists of 13,700 square feet devoted to
distribution and 8,500 square feet devoted to offices. The lease for this location expires on
December 31, 2006. In Vienna, Austria, the facility consists of 18,100 square feet devoted to
distribution and 3,400 square feet devoted to offices. The lease on this facility does not have an
expiration date but can be terminated by Claires Austria with six months notice to the landlord. We lease approximately 35,000 square feet in Pembroke Pines, Florida, where we maintain our
executive, accounting and finance offices. See Note 9 entitled Related Party Transactions to our
consolidated financial statements included in this Annual Report. We also own 10,000 square feet of warehouse space in Miami, Florida. The property is being
utilized as a storage facility. We also lease executive office space in New York City and are the
owners of a cooperative apartment in New York City. 
 Item 3. 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
metal content in our merchandise, litigation with respect to various employment matters, including
litigation with present and former employees, and litigation to protect our trademark rights.
Although litigation is routine and incidental to the conduct of our business, like any business of
our size and employing a significant number of employees, 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
position, earnings or cash flows. In May 2002, we sold 100% of the Common stock of Lux Corporation d/b/a Mr. Rags, and discontinued
the operations of our apparel segment. In January 2003, Lux Corporation filed for bankruptcy, and
on November 7, 2003, the Official Committee of Unsecured Creditors of Lux Corporation filed a
complaint against us in the United States Bankruptcy Court for the Central District of California.
This litigation has been settled for $5.0 million ($3.1 million net of income taxes). The
settlement was approved by the bankruptcy court, without objection by any party in interest, on
April 5, 2005. We expect that a final order will be entered later this month. Provided that no
appeal is filed or rehearing sought within 10 days after entry, the order will become final 10 days
after its entry. The settlement represents return of proceeds we received as a result of the sale,
and has been recorded net of tax, in the fiscal year 2005 financial statements as Net loss from
discontinued operations. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of Fiscal 2005. 8




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PART II 
  Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities We have two classes of common stock, par value $.05 per share, outstanding: common stock having
one vote per share and Class A common stock having ten votes per share. The common stock is traded
on the New York Stock Exchange, Inc. under the symbol CLE. The Class A common stock has only
limited transferability and is not traded on any stock exchange or in any organized market.
However, the Class A common stock is convertible on a share-for-share basis into common stock and
may be sold, as common stock, in open market transactions. In December 2003, our Board of
Directors declared a 2-for-1 stock split of the our Common stock and Class A common stock in the
form of a 100% stock dividend. As a result, all share and per share amounts have been restated to
reflect the stock split. The following table sets forth, for each quarterly period within the last
two fiscal years, the high and low closing prices of the common stock on the NYSE Composite Tape.
At March 15, 2005, the number of record holders of shares of common stock and Class A common stock
was 1,261 and 401, respectively. Closing Price of Common StockHigh
    
    
    LowYear Ended January 29, 2005First Quarter
    
    $
    21.91
    
    
    $
    18.61Second Quarter
    
    
    23.52
    
    
    
    18.75Third Quarter
    
    
    26.25
    
    
    
    21.87Fourth Quarter
    
    
    27.05
    
    
    
    19.78Year Ended January 31, 2004First Quarter
    
    $
    13.15
    
    
    $
    10.56Second Quarter
    
    
    15.67
    
    
    
    12.68Third Quarter
    
    
    20.25
    
    
    
    13.77Fourth Quarter
    
    
    23.20
    
    
    
    18.06
 We have paid regular quarterly dividends to our shareholders on the common stock since 1985
and on the Class A common stock since July 1994. Our Board of Directors, in their sole discretion,
determines the distribution rate based on our results of operations, economic conditions, tax
considerations and other factors. In Fiscal 2004, we paid quarterly cash dividends on our common
stock (one in the amount of $.06 per share, two in the amount of $.03 per share and one in the
amount of $.02 per share) and Class A common stock (one in the amount of $.03 per share, two in the
amount of $.015 per share and one in the amount of $.01 per share), or a total of $.14 per share on
our common stock and $.07 per share on our Class A common stock. In Fiscal 2005, we paid quarterly
cash dividends on our common stock (one in the amount of $.09 per share, one in the amount of $.08
per share, one in the amount of $.07 per share and one in the amount of $.06 per share) and Class A
common stock (one in the amount of $.045 per share, one in the amount of $.04 per share, one in the
amount of $.035 per share and one in the amount of $.03 per share), or a total of $.30 per share on
our common stock and $.15 per share on our Class A common stock. As of March 15, 2005 our current
dividend distribution amount per share is $.10 and $.05 each quarter for common stock and Class A
common stock, respectively. We expect to continue paying dividends. However, there is no
assurance that we will be able to continue to do so because the declaration and payment of
dividends are subject to various factors, including contingencies such as our earnings, liquidity
and financial condition and other factors our Board of Directors consider relevant as well as
certain limitations on our ability to make dividend distributions under our credit facility. See
Managements Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity
and Capital Resources. 9




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The following table provides information as of January 29, 2005 with respect to compensation plans
(including individual compensation arrangements) under which our Common stock and Class A common
stock are authorized for issuance. Equity Compensation Plan InformationNumber of
    
    
    
    
    
    
    Number of securitiessecurities to be
    
    
    
    
    
    
    remaining available forissued upon exercise
    
    
    Weighted-average
    
    
    future issuance underof outstanding
    
    
    exercise price of
    
    
    equity compensation plansoptions, warrants
    
    
    outstanding options,
    
    
    (excluding securitiesPlan Category
    
    and rights
    
    
    warrants and rights
    
    
    reflected in column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    1,511,813
    
    
    $
    15.40
    
    
    
    7,295,792Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,511,813
    
    
    $
    15.40
    
    
    
    7,295,792
 
 Item 6. Selected Financial Data The balance sheet and income statement data set forth below is derived from our consolidated
financial statements and should be read in conjunction with our consolidated financial statements
included in this Annual Report, and in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operation. The consolidated Balance Sheet data as of February
1, 2003, February 2, 2002, and February 3, 2001 and the consolidated Statements of Operations data
for each of the fiscal years ended February 2, 2002 and February 3, 2001 are derived from our
consolidated financial statements, which are not included herein. These amounts include certain
reclassifications of prior year amounts in order to conform to current year presentation. 10




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##### Table of Contents



Fiscal Year EndedJan. 29,
    
    
    Jan. 31,
    
    
    Feb. 1,
    
    
    Feb. 2,
    
    
    Feb. 3,2005
    
    
    2004
    
    
    2003
    
    
    2002(2)
    
    
    2001(1)(2)(In thousands except per share amounts)Statement of Operations Data:Net Sales
    
    $
    1,279,407
    
    
    $
    1,132,834
    
    
    $
    1,001,537
    
    
    $
    918,737
    
    
    $
    946,715Income from continuing operations
    
    
    146,259
    
    
    
    115,038
    
    
    
    77,979
    
    
    
    41,126
    
    
    
    67,772Net Income
    
    
    143,124
    
    
    
    115,038
    
    
    
    77,744
    
    
    
    19,583
    
    
    
    64,975Income Per Share:Basic:From continuing operations
    
    $
    1.48
    
    
    $
    1.17
    
    
    $
    .80
    
    
    $
    .42
    
    
    $
    .68Net income
    
    
    1.45
    
    
    
    1.17
    
    
    
    .80
    
    
    
    .20
    
    
    
    .65Diluted:From continuing operations
    
    $
    1.47
    
    
    $
    1.17
    
    
    $
    .80
    
    
    $
    .42
    
    
    $
    .68Net income
    
    
    1.44
    
    
    
    1.17
    
    
    
    .80
    
    
    
    .20
    
    
    
    .65Cash Dividends Per Share:Common stock
    
    $
    .30
    
    
    $
    .14
    
    
    $
    .08
    
    
    $
    .08
    
    
    $
    .08Class A common stock
    
    
    .15
    
    
    
    .07
    
    
    
    .04
    
    
    
    .04
    
    
    
    .04Balance Sheet Data:Current assets
    
    $
    493,326
    
    
    $
    360,023
    
    
    $
    321,608
    
    
    $
    214,424
    
    
    $
    265,964Current liabilities
    
    
    166,938
    
    
    
    143,326
    
    
    
    141,010
    
    
    
    82,536
    
    
    
    94,452Working capital
    
    
    326,388
    
    
    
    216,697
    
    
    
    180,598
    
    
    
    131,888
    
    
    
    171,512Total assets
    
    
    966,129
    
    
    
    805,924
    
    
    
    738,129
    
    
    
    611,575
    
    
    
    660,261Long-term debt
    
    
    
    
    
    
    
    
    
    
    70,000
    
    
    
    110,104
    
    
    
    151,374Stockholders equity
    
    
    755,687
    
    
    
    632,450
    
    
    
    501,254
    
    
    
    404,188
    
    
    
    399,700
   (1)
    Consists of 53 weeks.  (2)
    Restated to reflect the plan to discontinue the operations of Mr. Rags (Lux Corp.) in January
2002. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation Managements Discussion and Analysis 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, significant accounting policies and critical estimates, and the future impact of
accounting standards that have been issued but are not yet effective. Managements Discussion and
Analysis is presented in five sections: Overview, Critical Accounting Policies and Estimates,
Results of Consolidated Operations, Segment Operations and Analysis of Consolidated Financial
Condition. It is useful to read Managements Discussion and Analysis in conjunction with the
consolidated financial statements and related notes thereto contained elsewhere in this document. Our fiscal years end on the Saturday closest to January 31. As a result, our Fiscal 2005, Fiscal
2004 and Fiscal 2003 results consisted of 52 weeks. All references to earnings per share relate to
diluted earnings per share from continuing operations. We include a store in the calculation of comparable store sales once it has been in operation sixty
weeks after its initial opening. If a store is closed during a fiscal period, the stores sales
will be included in the computation of comparable store sales for that fiscal month, quarter and
year to date period only for the days in which it was operating as compared to those same days in
the comparable period. Relocated, remodeled and expanded square footage stores are classified the
same as the original store and are not considered new stores upon relocation, remodeling or
completion of their expansion. 11




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##### Table of Contents



Overview We are a leading specialty retailer of value-priced fashion accessories and jewelry for pre-teens
and teenagers as well as young adults. We are organized based on our geographic markets, which
include our North American operations and our International operations. As of January 29, 2005, we
operated a total of 2,836 stores in all 50 states of the United States, Puerto Rico, Canada, the
Virgin Islands, the United Kingdom, Switzerland, Austria, Germany (the latter three collectively
referred to as S.A.G.), France and Ireland. The stores are operated mainly under the trade names
Claires Boutiques, Claires Accessories, Icing by Claires, Afterthoughts and The Icing.
We are in the process of transitioning our Afterthoughts stores to Icing by Claires stores to
capitalize on the Claires brand name. We also operate 148 stores in Japan through a 50:50 joint
venture with AEON Co. Ltd. (Claires Nippon). We account for the results of operations of
Claires Nippon under the equity method and include these results within Interest and other
income in our Statement of Operations within our North American division. In addition, we license
57 stores in the Middle East under a licensing and merchandising agreement with Al Shaya Co. Ltd.
and 4 stores in South Africa under similar agreements with the House of Busby Limited. We account
for the goods we sell under the merchandising agreements within Gross profit in our North
American division and the license fees we charge within Interest and other income within our
International division in our Statement of Operations. We have two store concepts: Claires Accessories, which caters to fashion-conscious girls and teens
in the 7 to 17 age range, and Icing by Claires, which caters to fashion-conscious teens and young
women in the 17 to 27 age range. Our merchandise typically ranges in price between $2 and $20,
with the average product sold at approximately $4. Our stores share a similar format and our
different store concepts and trade-names allow us to have multiple store locations in a single
mall. Although we face competition from a number of small specialty store chains and others
selling fashion accessories, we believe that our stores comprise one of the largest chains of
specialty retail stores in the world devoted to the sale of value-priced fashion accessories for
pre-teen, teenage and young adult females. Fundamentally, our business model is to offer the customer a compelling price/value relationship
and a wide array of products to choose from. We seek to deliver a high level of profitability and
cash flow by:  
    maximizing the effectiveness of our retail product pricing through promotional activity
    minimizing our product costs through economies of scale as the worlds leading
mall-based retailer of value-priced accessories and jewelry
    reinvesting operating cash flows into opening new stores, remodeling existing stores and
infrastructure in order to create future revenues and build brand name loyalty While our financial results have grown steadily and record sales performance was achieved during
Fiscal 2005, the retail environment remains very competitive. Managements plan for future growth
is dependent on:  
    our ability to successfully identify merchandise appealing to our customers
    displaying our merchandise at convenient, accessible locations staffed with personnel
that provide courteous and professional customer service
    sourcing our merchandise to achieve a positive price/value relationship
    increasing sales at existing store locations
    expanding our sales, with our focus on our International segment, through additional
store locations 12




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##### Table of Contents



Our ability to achieve these objectives will be dependent on various factors, including those
outlined in Cautionary Note Regarding Forward-Looking Statements and Risk Factors. Critical Accounting Policies and Estimates The preparation of financial statements requires us to estimate the effect of various matters that
are inherently uncertain as of the date of the financial statements. Each of these required
estimates varies in regard to the level of judgment involved and its potential impact on our
reported financial results. Estimates are deemed critical when a different estimate could have
reasonably been used or where changes in the estimate are reasonably likely to occur from period to
period, and would materially impact our financial condition, changes in financial condition, or
results of operations. Our significant accounting policies are discussed in Note 1 of the Notes to
consolidated financial statements; critical estimates inherent in these accounting policies are
discussed in the following paragraphs. Inventory Valuation Our inventories in North America and S.A.G. are valued at the lower of cost or market, with cost
determined using the retail method. Inherent in the retail inventory calculation are certain
significant management judgments and estimates including, among others, merchandise markups,
markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting
gross margins. The methodologies used to value merchandise inventories include the development of
the cost to retail ratios, the groupings of homogeneous classes of merchandise, development of
shrinkage reserves and the accounting for retail price changes. The inventories in our United
Kingdom, Irish and French stores are accounted for under the lower of cost or market method, with
cost determined using the average cost method. Inventory valuation is impacted by the estimation
of slow moving goods, shrinkage and markdowns. Valuation of Long-Lived Assets We evaluate the carrying value of long-lived assets whenever events or changes in circumstances
indicate that a potential impairment has occurred. A potential impairment has occurred if the
projected future undiscounted cash flows at the district level are less than the carrying value of
the assets. The estimate of cash flows includes managements assumptions of cash inflows and
outflows directly resulting from the use of the asset in operations. When a potential impairment
has occurred, an impairment charge is recorded if the carrying value of the long-lived asset
exceeds its fair value. Fair value is measured based on a projected discounted cash flow model
using a discount rate we feel is commensurate with the risk inherent in our business. Our
impairment analyses contain estimates due to the inherently judgmental nature of forecasting
long-term estimated cash flows and determining the ultimate useful lives of assets. Actual results
may differ, which could materially impact our impairment assessment. During Fiscal 2003, we recorded impairment charges of $2.7 million relating to fixed assets in our
International segment due to those assets not being recoverable by estimated discounted cash flows.
We recorded no impairment charges during Fiscal 2004 and Fiscal 2005. Goodwill Impairment We continually evaluate whether events and changes in circumstances warrant recognition of an
impairment loss of goodwill. The conditions that would trigger an impairment assessment of
goodwill include a significant, sustained negative trend in our operating results or cash flows, a
decrease in demand for our products, a change in the competitive environment and other industry and
economic factors. We measure impairment of goodwill utilizing the discounted cash flow method for
each of our reporting units. The estimated discounted cash flows are then compared to our goodwill
amounts. If the balance of the goodwill exceeds the estimated discounted cash flows, the excess of
the balance is written off. Future cash flows may not meet projected amounts, which could result in
impairment. We performed these analyses during Fiscal 2004 and 2005 and no impairment was
required. 13




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##### Table of Contents



Intangible Asset Impairment We continually evaluate whether events and changes in circumstances warrant revised estimates of
the useful lives or recognition of an impairment loss for intangible assets. Future adverse
changes in market and legal conditions, or poor operating results of underlying assets could result
in losses or an inability to recover the carrying value of the intangible asset, thereby possibly
requiring an impairment charge in the future. The Company has concluded that certain intangible
assets, comprised primarily of lease rights, qualify as indefinite-life intangible assets. Fair
market value of the lease rights was determined through the use of third-party valuation. In
addition, we make investments through our International subsidiaries in intangible assets upon the
opening and acquisition of many of our store locations in Europe. These other intangible assets,
which are subject to amortization, are amortized over the useful lives of the respective leases,
not to exceed 25 years. We evaluate the market value of these assets periodically and record the
impairment charge when we believe the carrying amount of the asset is not recoverable. We recorded
impairment charges of approximately $1.0 million in Fiscal 2003 because the market value of certain
lease rights included in our International segment were determined to be less than their carrying
values. We recorded no impairment during Fiscal 2004 and Fiscal 2005. Income Taxes We are subject to income taxes in many jurisdictions, including the US, individual states and
localities and abroad. We must first determine which revenues and expenses are included for each
taxing jurisdiction. This process also involves the estimation of our actual current tax exposure,
together with the assessment of temporary differences resulting from differing treatment of income
or expense items for tax and accounting purposes. We establish deferred tax assets and liabilities
as a result of these temporary differences. If we adjust our estimates in the future such that we
would not expect to realize all or part of our net deferred tax assets, we may need to establish,
or adjust a valuation allowance against our deferred tax assets, which could also materially affect
our effective tax rate. We establish tax reserves in our consolidated financial statements based on
our estimation of current tax exposures. If we prevail in tax matters for which reserves have been
established or we are required to settle matters in excess of established reserves, our effective
tax rate for a particular period could be materially affected. Income tax expense also reflects our best estimate and assumptions regarding, among other things,
the level of future taxable income, interpretation of tax laws of multiple jurisdictions, and tax
planning. Future changes in tax laws, changes in projected levels of taxable income and tax
planning could affect the effective tax rate and tax balances recorded by us. During the year, we
base our tax rate on an estimate of our expected annual effective tax rate. These estimates are
updated quarterly. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the circumstances at the
time, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Although management believes that
the estimates discussed above are reasonable and the related calculations conform to generally
accepted accounting principles, actual results could differ from these estimates, and such
differences could be material. Management has discussed the development and selection of these critical accounting policies with
the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosures
relating to them. 14




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##### Table of Contents



Results of Consolidated Operations Overall, our operating results for Fiscal 2005 were a record in terms of sales and profitability.
A summary of our consolidated results of operations is as follows (dollars in thousands, except per
share data): Fiscal Year2005
    
    
    2004
    
    
    2003Net sales
    
    $
    1,279,407
    
    
    $
    1,132,834
    
    
    $
    1,001,537Comparable store sales
    
    
    8.0
    %
    
    
    7.0
    %
    
    
    5.0
    %Gross profit percentage
    
    
    54.1
    %
    
    
    53.7
    %
    
    
    51.4
    %Selling, general and administrative expenses
as a percentage of net sales
    
    
    33.7
    %
    
    
    34.8
    %
    
    
    35.5
    %Income from continuing operations
    
    $
    146,259
    
    
    $
    115,038
    
    
    $
    77,979Net income
    
    $
    143,124
    
    
    $
    115,038
    
    
    $
    77,744Income from continuing operations per diluted share
    
    $
    1.47
    
    
    $
    1.17
    
    
    $
    .80Number of stores at the end of the period(1)
    
    
    2,836
    
    
    
    2,812
    
    
    
    2,803
   (1)
 During the fourth quarter of Fiscal 2005, we recorded an after-tax charge of approximately $3.1
million, or $.03 per diluted share, relative to a settlement of litigation in connection with our
disposition of our apparel segment in Fiscal 2003. This amount has been accounted for as loss from
discontinued operation within our Consolidated Statement of Operations and Comprehensive Income. Net sales in Fiscal 2005 increased by $146.6 million, or 13%, from Fiscal 2004, which in turn was
$131.3 million, or 13% higher than Fiscal 2003. The increase in net sales was primarily
attributable to comparable store sales increases of 8.0% and 7.0%, or approximately $92.2 million
and $66.6 million during Fiscal 2005 and Fiscal 2004, respectively, the effects of the weak US
Dollar when translating our foreign operations at higher exchange rates of approximately $34.4
million and $29.8 million, respectively, and new stores opened in our International division which
produced higher average store sales than the stores we closed in our North American division. The positive comparable sales experienced in our North American division during Fiscal 2005 and
Fiscal 2004 were across most merchandise categories, most notably in the jewelry related areas and
were primarily driven by an increase in the average number of transactions per store. We believe
we experienced this trend through successfully meeting our customers demand for current fashion
trends in jewelry and superior customer service in our stores. We have actively employed strategic
initiatives in our International division to address the negative comparable store sales trend
noted in the second half of Fiscal 2004. These initiatives included sharing best practices
employed in our North American division for merchandise selection, store operations and attentive
customer service. We believe our efforts contributed to our International divisions success in
Fiscal 2005, providing comparable store sales of 4%. The following table compares our sales of each product category for the last three fiscal years: Fiscal Year EndedJan. 29, 2005
    
    
    Jan. 31, 2004
    
    
    Feb. 1, 2003Jewelry
    
    
    56.1
    %
    
    
    53.3
    %
    
    
    48.1
    %Accessories
    
    
    43.9
    %
    
    
    46.7
    %
    
    
    51.9
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 15




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##### Table of Contents



In calculating gross profit and gross profit percentages, we exclude the costs related to our
distribution center. These costs are included instead in Selling, general and administrative
expenses. Other retail companies may include these costs in cost of sales, so our gross profit
percentages may not be comparable to those retailers. Gross profit percentages increased by 40 basis points and 230 basis points during Fiscal 2005 and
Fiscal 2004, respectively. The primary source of this improvement during Fiscal 2005 was the
ability of our International division to source a significant portion of goods at a lower cost due
to those goods being purchased from our vendors in US Dollars. The lower cost was available due to
the weakness in the US Dollar as compared to the British Pound and the Euro and approximated $4.4
million. Most of the goods sourced for sale in our International division are purchased in US
Dollars. In addition, comparable sales increased at a rate faster than the increase in our
occupancy related costs, creating positive leverage on those costs; however, these costs were
partially offset by higher markdowns recorded at the end of Fiscal 2005 in connection with the
Christmas selling season not meeting expectations. Fiscal 2005 also includes $1.5 million of rent
expense recorded to account for the cumulative impact of not recording rent expense during the
construction period prior to lease commencement. The increased gross profit percentages during
Fiscal 2004 were primarily the result of improved merchandise margins relating to the shift in
business from accessories to jewelry, as jewelry carries a higher initial markup and profit margin
than that of accessories. Selling, general and administrative expenses increased $36.7 million and $39.1 million in Fiscal
2005 and Fiscal 2004, respectively. These increases are primarily attributable to the increases in
compensation paid to store personnel due to average wage increases and additional hours worked in
our North American stores and the effects of the weak US Dollar when translating our foreign
operations at higher exchange rates. Additional hours worked in the North American stores were
necessary to achieve the positive comparable store sales experienced during these periods. In
addition, during Fiscal 2005 and Fiscal 2004, increased store, field and corporate bonuses were
earned in North America due to the positive comparable store sales and profit results during the
period. We also recorded a charge of $8.7 million in the fourth quarter of Fiscal 2004 related to
the retirement compensation package of our founder and former Chairman of the Board. As a
percentage of Net sales, however, Selling, general and administrative expenses improved by 110
basis points and 70 basis points during Fiscal 2005 and Fiscal 2004, respectively. This
improvement was primarily due to comparable store increases greater than the overall increases in
the underlying expenses. Our effective income tax rate for Fiscal 2005 and Fiscal 2004 was 34.0%. During Fiscal 2005, we
recorded net benefits to the provision for income taxes totaling approximately $.4 million
attributable to concluded state tax examinations that were settled more favorably than anticipated.
Included in income taxes for Fiscal 2004 was a tax benefit of approximately $2.8 million related
to concluded United States and foreign tax examinations that were settled more favorably than
anticipated. Excluding the $2.8 million benefit recorded for Fiscal 2004, our effective income tax
rate for Fiscal 2005 has decreased from the previous year due to a greater proportion of earnings
from our International operations. This is primarily due to the fact that our combined effective
income tax rate for International operations is generally lower than our effective income tax rate
for domestic operations. Our effective income tax rate in future periods will depend on several
variables, including the mix of earnings between domestic and International operations and our
overall level of earnings. Our effective income tax rate could also be affected by the resolution
of tax contingencies for amounts different from our current estimates. Income from continuing operations increased by approximately $31.2 million and $37.1 million during
each of Fiscal 2005 and Fiscal 2004, respectively. These increases were made possible primarily by
the increase in comparable store sales and improved merchandise margins achieved during the period,
as well as the leverage attained on our fixed costs. 16




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##### Table of Contents



Seasonality and Quarterly Results Our business is seasonal by nature, with the Christmas, Easter and back-to-school periods
historically accounting for the largest percentage of annual net sales. In Fiscal 2005, the
Christmas, Easter and back-to-school periods together accounted for approximately 30% of our annual
net sales. See Note 10 of our consolidated financial statements for our quarterly results of
operations. Impact of Inflation Inflation impacts several of our operating costs including, but not limited to cost of goods and
supplies, occupancy costs and labor expenses. We seek to mitigate these effects by passing along
inflationary increases in costs through increased sales prices of our products or by increasing
sales volumes. Matters Affecting Comparability Included within Interest and other income during Fiscal 2005 and Fiscal 2004 is approximately $1.7
million and $1.2 million, respectively, of income recognized on our investment in Claires Nippon.
We recorded no income during Fiscal 2003 as our portion of losses incurred by Claires Nippon were
in excess of our investment and advances. Under the equity method of accounting, those losses
would not be reflected in our financial statements once our investment and advances were reduced to
zero. Store counts for the three years included in the tables above and below exclude Claires
Nippon stores. We believe that an understanding of our reported results and our ongoing financial performance is
not complete without considering this impact and other transactions, as described within
Managements Discussion and Analysis of Financial Condition and Results of Operation. Segment Operations We are organized into two business segments  North America and International. Following is a
discussion of results of operations by business segment. North America Key statistics and results of operations for our North American division are as follows (dollars in
thousands): Fiscal Year2005
    
    
    2004
    
    
    2003Net sales
    
    $
    906,071
    
    
    $
    820,332
    
    
    $
    740,838Comparable store sales
    
    
    10.0
    %
    
    
    10.0
    %
    
    
    6.0
    %Gross profit percentage
    
    
    53.9
    %
    
    
    54.5
    %
    
    
    52.1
    %Number of stores at the end of the period(1)
    
    
    2,119
    
    
    
    2,112
    
    
    
    2,150
   (1)
 It is our objective to increase sales in North America primarily through generating comparable
store sales increases and also by increasing our quantity of our selling square footage. Net sales in North America during Fiscal 2005 increased by $85.7 million, or 10.5%, from Fiscal
2004, which in turn was $79.5 million, or 10.7% higher than Fiscal 2003. The increase in Net sales
was primarily attributable to comparable store sales increases of 10.0% and 10.0% or approximately
$80.4 and $72.4 million during Fiscal 2005 and Fiscal 2004, respectively, and were primarily driven
by an increase in the number of transactions per store. 17




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##### Table of Contents



The positive comparable sales experienced in North America were across most merchandise
categories, most notably in the jewelry related areas. We believe we experienced this trend
through successfully meeting our customers demand for current fashion trends in jewelry and
superior customer service in our stores. In addition, best practices in merchandise buying,
planning and allocation from Claires have been shared with the Icing by Claires and Afterthoughts
stores, which we believe have contributed significantly to the comparable store sales increases
experienced during Fiscal 2005. The following table compares our sales of each product category for the last three fiscal years: Fiscal Year EndedJan. 29, 2005
    
    
    Jan. 31, 2004
    
    
    Feb. 1, 2003Jewelry
    
    
    62.6
    %
    
    
    59.7
    %
    
    
    54.0
    %Accessories
    
    
    37.4
    %
    
    
    40.3
    %
    
    
    46.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 The higher concentration of sales in jewelry as compared to accessories experienced during Fiscal
2005 and 2004 has had the result of improved gross profit margins due to the higher initial markup
realized on jewelry. International Division Key statistics and results of operations for our International division are as follows (dollars in
thousands): Fiscal Year2005
    
    
    2004
    
    
    2003Net sales
    
    $
    373,336
    
    
    $
    312,502
    
    
    $
    260,699Comparable store sales
    
    
    4.0
    %
    
    
    (2.0
    )%
    
    
    2.0
    %Gross profit percentage
    
    
    54.4
    %
    
    
    51.7
    %
    
    
    49.3
    %Number of stores at the end of the period(1)
    
    
    717
    
    
    
    700
    
    
    
    653
   (1)
    
    Number of stores excludes Claires Nippon It is our objective to increase sales in the International division primarily through store growth
and also through comparable store sales increases. We also continue to explore adding operations
in countries in which we do not currently operate. Net sales in our International division during Fiscal 2005 increased by $60.8 million, or 19.5%,
from Fiscal 2004, which in turn was $51.8 million, or 19.9% higher than Fiscal 2003. The increase
in Net sales during Fiscal 2005 was primarily attributable to the net addition of 17 stores, the
effects of the weak US Dollar when translating our foreign operations at higher exchange rates of
approximately $34.4 million and by comparable store sales increases of 4.0%, or approximately $11.8
million during the period. The comparable store sales increase in Fiscal 2005 was primarily driven
by an average increase in the number of units sold in each transaction. The increase in Net sales during Fiscal 2004 was primarily attributable to the net addition of 47
stores, the effects of the weak US Dollar when translating our foreign operations at higher
exchange rates of approximately $29.8 million, offset by comparable store sales decreases of 2.0%,
or approximately $5.9 million during the period. We believe that the deterioration of comparable
store sales during Fiscal 2004 was caused both by the difficult economic environments in several
European countries for which we have store locations and also the deviation from best practices
learned and practiced in our North American operations. 18




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##### Table of Contents



The following table compares our sales of each product category for the last three fiscal years: Fiscal Year EndedJan. 29, 2005
    
    
    Jan. 31, 2004
    
    
    Feb. 1, 2003Jewelry
    
    
    40.3
    %
    
    
    36.5
    %
    
    
    31.4
    %Accessories
    
    
    59.7
    %
    
    
    63.5
    %
    
    
    68.6
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Gross profit percentages improved by 270 basis points in Fiscal 2005 and by 240 basis points in
Fiscal 2004. The primary source of this improvement during both fiscal years was the ability of
our International division to source a significant portion of goods at a lower cost due to those
goods being purchased from our vendors in US Dollars, or approximately $4.4 million and $2.2
million, respectively. The lower cost was available due to the weakness in the US Dollar as
compared to the British Pound and the Euro. Most of the goods sourced for sale in our
International division are purchased in US Dollars. Analysis of Consolidated Financial Condition A summary of cash flows from operating, investing and financing activities is outlined in the table
below (dollars in thousands): Fiscal Year EndedJanuary 29, 2005
    
    
    January 31, 2004
    
    
    February 1, 2003Operating activities
    
    $
    199,290
    
    
    $
    204,407
    
    
    $
    167,235Investing activities
    
    
    (205,635
    )
    
    
    (58,709
    )
    
    
    (51,122
    )Financing activities
    
    
    (28,141
    )
    
    
    (113,980
    )
    
    
    (24,833
    )
 We have consistently satisfied operating liquidity needs and planned capital expenditure programs
through our normal conversion of sales to cash. Over the three years ended in Fiscal 2005, we
generated over $570.9 million of cash flows from operating activities from continuing operations.
We ended the year with approximately $191.0 million in cash and cash equivalents and $134.6 million
in short-term investments, an overall increase of $101.0 million from the prior year. We ended the
year with no debt outstanding. The decrease in cash and cash equivalents was due to cash generated
from operations and purchases, net of sales, of short-term investments, offset by capital
expenditures and the payment of dividends. Our major source of cash from operations is store sales, nearly all of which are generated on a
cash or credit card basis. Our primary outflow of cash from operations is the purchase of
short-term investments and inventory (net of customary credit arrangements with vendors),
operational costs and the payment of current taxes. Working capital at the end of Fiscal 2005 was $326.4 million compared to $216.7 million at the end
of Fiscal 2004. Changes in working capital reflect higher inventory levels and prepaid expenses,
offset by higher accounts payable, which is due to the timing of inventory payments and increased
accrued expenses, which reflects the increased bonuses earned by store, field and corporate
employees that were not yet paid at the end of the year. 19




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##### Table of Contents



Our $63.6 million of capital expenditures in Fiscal 2005 were made primarily to remodel existing
stores and to open new stores. We generally experience a noticeable increase in sales in locations
where a store has been recently remodeled. We also invested approximately $7.5 million during
Fiscal 2005 in intangible assets within our International division which generally represents
acquired lease rights on new store locations in certain countries. We expect to fund between $75.0
million and $85.0 million of capital expenditures and $10.0 million to $15.0 million of purchased
lease rights in Fiscal 2006 in an effort to continue to remodel and expand our store base. In
addition, purchases, net of sales of short-term investments, amounted to $134.6 million during
Fiscal 2005. We also paid dividends of $28.9 million during Fiscal 2005, an increase of approximately $15.6
million from the prior year. Dividends were increased again at the end of Fiscal 2005, and as of
March 15, 2005, we expect to pay at least $38.6 million in dividends in Fiscal 2006. Liquidity and Capital Resources We entered into a new credit facility in March 2004. This credit facility is a revolving line of
credit of up to $60.0 million, is secured by inventory in the United States and is due to expire
March 31, 2009. The borrowings under this facility are limited based on certain calculations of
availability, based primarily on the amount of inventory on hand in the United States. At January
29, 2005, the entire amount of $60.0 million would have been available for borrowing by us, subject
to reduction for $2.6 million of outstanding letters of credit. The credit facility is cancelable
by us without penalty and bears interest at an initial margin of 75 basis points over the London
Interbank Borrowing Rate (LIBOR). The margin is then adjusted periodically based on certain
liquidity measurements. The credit facility also contains other restrictive covenants which limit,
among other things, our ability to make dividend distributions. This credit facility replaced our
prior credit facility, which included a $40.0 million revolving line of credit and a $175.0 million
five year term loan. Our non-US subsidiaries have available credit facilities totaling approximately $843,000 with
banks. The 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 January 29, 2005, there were no
borrowings under these credit facilities. Management believes that our present ability to borrow is greater than our established credit
lines. However, if market conditions change and sales were to dramatically decline or we could not
control operating costs or other expenses, our cash flows and liquidity could be reduced, and we
could experience an increase in borrowing costs, or even a reduction in or elimination of our
access to debt and/or equity markets. Contractual Obligations and Off Balance Sheet Arrangements We finance certain leasehold improvements and equipment used in our stores through transactions
accounted for as non-cancelable operating leases. As a result, the rental expense for these
leasehold improvements and equipment is recorded during the term of the lease contract in our
consolidated financial statements, generally over four to seven years. In the event that any of
the real property leases where leasehold improvements or equipment are located that are subject to
these non-cancelable operating leases are terminated by us or our landlord prior to the scheduled
expiration date of the real property lease, we will be required to accrue all future rent payments
under these operating leases. 20




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##### Table of Contents



As of January 29, 2005, our future financial commitments under our arrangements were as follows: Payments Due by PeriodContractualObligations
    
    
    
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    
    More than(in millions)
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating leases
for real estate
    
    $
    856.2
    
    
    $
    151.2
    
    
    $
    274.1
    
    
    $
    217.6
    
    
    $
    213.3Operating leases
for equipment and
leasehold
improvements
    
    
    10.2
    
    
    
    5.8
    
    
    
    4.2
    
    
    
    .2
    
    
    
    Letters of credit
    
    
    2.6
    
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    869.0
    
    
    $
    159.6
    
    
    $
    278.3
    
    
    $
    217.8
    
    
    $
    213.3
 In Fiscal 2003, we disposed of our apparel segment, which was comprised of Mr. Rags stores, or
Lux Corp. As of January 29, 2005, we remained guarantor on certain real estate leases for Mr. Rags
store locations with future rental payments of approximately $4.2 million. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board, (FASB) issued Interpretation No. 46
Consolidation of Variable Interest Entities. The interpretation requires certain variable
interest entities, as defined, to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46, as amended, is effective for
all new variable interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after December 15, 2003. In December
2003, the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of the provisions of the
interpretation and defer the implementation date for certain entities to periods ending after March
14, 2004. The adoption of FIN 46R did not have an impact on our consolidated financial position,
results of operations or cash flows. In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) 123R,
Share-Based Payment, a revision of SFAS 123. The standard requires companies to expense the
grant-date fair value of stock options and other equity-based compensation issued to employees and
is effective for interim or annual periods beginning after June 15, 2005. In accordance with the
revised statement, we will be required to recognize the expense attributable to stock options
granted or vested subsequent to July 30, 2005. We are evaluating the requirements of SFAS 123R.
We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have
not determined whether the adoption will result in amounts that are similar to the current pro
forma disclosures under SFAS 123 in Note 1 of the Notes to consolidated financial statements. Cautionary Note Regarding Forward-Looking Statements and Risk Factors The Private Securities Litigation Reform Act of 1995, or the Act, provides a safe harbor for
forward-looking statements made by or on our behalf. We and our representatives may from time to
time make written or verbal forward-looking statements, including statements contained in this and
other filings with the Securities and Exchange Commission and in our press releases and reports to
shareholders. 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, planned capital expenditures and new store openings for Fiscal 2006, are
forward-looking statements within the meaning 21




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##### Table of Contents



of the Act and as defined in Section 21E of the Securities Exchange Act of 1934, as amended. 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. We believe that the following factors, among others, that are specific to our business, could cause
or contribute to our actual results, performance or achievements differing from the future results,
performance or achievements expressed or implied in our forward-looking statements:  
    inability to respond to emerging fashion trends, including decreased demand for jewelry
    changes in customer preference after merchandise has been purchased by us, which could
result in markdowns of our sales prices
    adverse changes in our relationships with designers, vendors and other sources of merchandise
    inability to adequately stock inventory to meet demand
    inability to execute our international expansion or successfully integrate our
International operations
    inability to increase comparable store sales at recent historical rates
    inability to design and implement new information systems, as well as enhance existing
systems
    loss of one or more members of our senior management team
    disruption in the operation of our North American or International distribution centers
    inability to negotiate favorable lease terms for new leases or renewal leases
    delays in anticipated store openings and renovations
    adverse determinations on litigation matters not covered by insurance
    inability to formulate or execute a long-term strategic plan We believe that the following factors, among others, that are general to our business, could cause
or contribute to our actual results, performance or achievements differing from the future results,
performance or achievements expressed or implied in our forward-looking statements:  
    changes in economic conditions, including, but not limited to, recessionary or
inflationary trends, increased gasoline prices affecting travel to our retail locations,
and overall consumer confidence
    potential new competition from both retail stores and alternative methods or channels of
distribution
    impact of seasonal buying patterns, which are difficult to forecast with certainty 22




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##### Table of Contents




    changes in the cost or availability of a suitable workforce to manage and support our
operating strategies, including further increases in the federal minimum wage or enactment
of additional state or local living wage proposals
    potential tariffs or trade restrictions imposed on products that we import
    fluctuation of the US Dollar against foreign currencies
    adjustments to the exchange rate of the Chinese Yuan from a fixed exchange rate against
the US Dollar to a flexible exchange rate which would cause our cost of merchandise
imported from China to fluctuate
    terrorist activities in the US or abroad, as well as the international war on terrorism,
or other events resulting in short or long-term disruption in business at our stores,
distribution centers or offices
    disruption of international, national or regional transportation systems, including dock
strikes or increased security measures
    lack of availability or access to sources of inventory
    imposition of new restrictions or regulations regarding importation of our merchandise
or on the composition of the merchandise that we sell
    occurrence of severe weather events or natural disasters, which could significantly
damage or destroy retail locations or prohibit customers from traveling to our retail
locations, especially during peak holiday seasons
    changes in tax rules or regulations applicable to us
    increases in ocean freight rates
    inability to timely receive Asian shipments due to the potential emergence of a disease
    volatility of financial markets 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency We are exposed to market risk from foreign currency exchange rate fluctuations on the US Dollar
value of foreign currency denominated transactions and our investment in foreign subsidiaries. We
manage this exposure to market risk through our regular operating and financing activities, and
foreign currency options. Exposure to market risk for changes in foreign exchange rates relates
primarily to foreign operations buying, selling and financing in currencies other than local
currencies and to the carrying value of net investments in foreign subsidiaries. We may manage our
exposure to foreign exchange rate risk related to our foreign operations buying, selling and
financing in currencies other than local currencies by using foreign currency options from time to
time to hedge foreign currency transactional exposure. At January 29, 2005, we had not entered
into foreign currency options. We do not generally hedge the translation exposure related to our
net investment in foreign subsidiaries, since we generally have no near term intent to repatriate
funds from such subsidiaries. During Fiscal 2005, included in comprehensive income and
stockholders equity is $7.9 million reflecting foreign currency translation. Based on our average
net currency positions in Fiscal 2005, the potential gain or loss due to a 10% adverse change on
foreign currency exchange rates could be significant to our operations. 23




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Certain of our subsidiaries make significant US Dollar purchases from Asian suppliers, particularly
in China. There continues to be speculation that China may elect to adjust the exchange rate of
the Chinese Yuan against the US Dollar. Currently, the Chinese Yuan has a fixed exchange rate
against the US Dollar. If China adjusts the exchange rate or allows the value to float, based on
the current weak US Dollar, we could experience increases in our cost of merchandise imported from
China. The results of operations of foreign subsidiaries, when translated into US Dollars, reflect the
average rates of exchange for the periods presented. As a result, similar results in local
currency can vary significantly upon translation into US Dollars if exchange rates fluctuate
significantly from one period to the next. Interest Rates Our exposure to market risk for changes in interest rates is limited to our cash, cash equivalents
and debt. Based on our average invested cash balances and outstanding debt during Fiscal 2005, a
10% increase in the average effective interest rate in Fiscal 2005 would not have materially
impacted our annual interest income or expense. 
 Item 8. Financial Statements and Supplementary Data Page No.Independent Auditors Reports
    
    
    25Consolidated Balance Sheets as of January 29, 2005 and January 31, 2004
    
    
    28Consolidated Statements of Operations and Comprehensive Income for the fiscal years ended January 29, 2005, January 31, 2004 and February 1, 2003
    
    
    29Consolidated Statements of Changes in Stockholders Equity for the fiscal years ended January 29, 2005, January 31, 2004 and February 1, 2003
    
    
    30Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2005, January 31, 2004 and February 1, 2003
    
    
    31Notes to Consolidated Financial Statements
    
    
    32
 24




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Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Claires Stores, Inc.: We have audited the accompanying consolidated balance sheets of Claires Stores, Inc. and
subsidiaries as of January 29, 2005 and January 31, 2004, and the related consolidated statements
of operations and comprehensive income, changes in stockholders equity, and cash flows for the
fiscal years ended January 29, 2005, January 31, 2004, and February 1, 2003. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Claires Stores, Inc. and subsidiaries as of January
29, 2005 and January 31, 2004 and the results of their operations and their cash flows for the
fiscal years ended January 29, 2005, January 31, 2004, and February 1, 2003 in conformity with U.S.
generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of
accounting for goodwill and intangible assets in the fiscal year ended February 1, 2003. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Claires Stores, Inc.s internal control over financial
reporting as of January 29, 2005, based on criteria established in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated April 12, 2005 expressed an unqualified opinion on managements assessment of,
and the effective operation of, internal control over financial reporting. /S/KPMG LLP
Tampa, Florida
April 12, 2005 25




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Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Claires Stores, Inc.: We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting, that Claires Stores, Inc. maintained effective internal
control over financial reporting as of January 29, 2005, based on criteria established in Internal
Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Claires Stores, Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. 26




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In our opinion, managements assessment that Claires Stores, Inc. maintained effective internal
control over financial reporting as of January 29, 2005, is fairly stated, in all material
respects, based on criteria established in Internal Control  Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
Claires Stores, Inc. maintained, in all material respects, effective internal control over
financial reporting as of January 29, 2005, based on criteria established in Internal Control 
Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Claires Stores, Inc. and subsidiaries as
of January 29, 2005 and January 31, 2004, and the related consolidated statements of operations and
comprehensive income, changes in stockholders equity, and cash flows for the fiscal years ended
January 29, 2005, January 31, 2004, and February 1, 2003, and our report dated April 12, 2005
expressed an unqualified opinion on those consolidated financial statements. /S/KPMG LLP
Tampa, Florida
April 12, 2005 27




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CLAIRES STORES, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 Jan. 29,
    
    
    Jan. 31,2005
    
    
    2004(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    191,006
    
    
    $
    224,630Short-term investments
    
    
    134,613
    
    
    
    Inventories
    
    
    110,072
    
    
    
    92,498Prepaid expenses and other current assets
    
    
    57,635
    
    
    
    42,895Total current assets
    
    
    493,326
    
    
    
    360,023Property and equipment:Land and building
    
    
    18,151
    
    
    
    18,151Furniture, fixtures and equipment
    
    
    238,022
    
    
    
    225,425Leasehold improvements
    
    
    211,721
    
    
    
    186,760467,894
    
    
    
    430,336Less accumulated depreciation and amortization
    
    
    (263,368
    )
    
    
    (244,484
    )204,526
    
    
    
    185,852Intangible assets, net
    
    
    52,474
    
    
    
    43,896Other assets
    
    
    14,736
    
    
    
    16,351Goodwill
    
    
    201,067
    
    
    
    199,802268,277
    
    
    
    260,049Total assets
    
    $
    966,129
    
    
    $
    805,924LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    41,994
    
    
    $
    37,754Income taxes payable
    
    
    30,600
    
    
    
    29,148Accrued expenses
    
    
    94,344
    
    
    
    76,424Total current liabilities
    
    
    166,938
    
    
    
    143,326Long term liabilities:Deferred tax liability
    
    
    24,293
    
    
    
    12,148Deferred rent expense
    
    
    19,211
    
    
    
    18,00043,504
    
    
    
    30,148Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock par value $1.00 per share;
authorized 1,000,000 shares, issued and
outstanding 0 shares
    
    
    
    
    
    
    Class A common stock par value $.05 per share;
authorized 20,000,000 shares, issued and
outstanding 5,125,432 shares and 5,221,660
shares, respectively
    
    
    256
    
    
    
    261Common stock par value $.05 per share; authorized
150,000,000 shares, issued and outstanding
93,858,213 shares and 93,693,448 shares,
respectively
    
    
    4,693
    
    
    
    4,685Additional paid-in capital
    
    
    50,477
    
    
    
    49,392Accumulated other comprehensive income, net of tax
    
    
    28,041
    
    
    
    20,109Retained earnings
    
    
    672,220
    
    
    
    558,003755,687
    
    
    
    632,450Total liabilities and stockholders equity
    
    $
    966,129
    
    
    $
    805,924
 See accompanying notes to consolidated financial statements. 28




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CLAIRES STORES, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 Fiscal Year EndedJan. 29, 2005
    
    
    Jan. 31, 2004
    
    
    Feb. 1, 2003(In thousands, except per share amounts)Net sales
    
    $
    1,279,407
    
    
    $
    1,132,834
    
    
    $
    1,001,537Cost of sales, occupancy and buying expenses
    
    
    587,687
    
    
    
    524,455
    
    
    
    486,858Gross profit
    
    
    691,720
    
    
    
    608,379
    
    
    
    514,679Other expenses (income):Selling, general and administrative
    
    
    430,867
    
    
    
    394,152
    
    
    
    355,093Depreciation and amortization
    
    
    44,882
    
    
    
    41,451
    
    
    
    37,897Interest expense
    
    
    193
    
    
    
    2,561
    
    
    
    4,435Interest and other income
    
    
    (5,858
    )
    
    
    (4,207
    )
    
    
    (2,869
    )470,084
    
    
    
    433,957
    
    
    
    394,556Income from continuing operations before income taxes
    
    
    221,636
    
    
    
    174,422
    
    
    
    120,123Income taxes
    
    
    75,377
    
    
    
    59,384
    
    
    
    42,144Income from continuing operations
    
    
    146,259
    
    
    
    115,038
    
    
    
    77,979Discontinued operation (Note 4):Loss on disposal of Lux Corp., net of income taxes
of $1,865, $0 and $141, respectively
    
    
    (3,135
    )
    
    
    
    
    
    
    (235
    )Net loss from discontinued operations
    
    
    (3,135
    )
    
    
    
    
    
    
    (235
    )Net income
    
    
    143,124
    
    
    
    115,038
    
    
    
    77,744Foreign currency translation adjustments
    
    
    7,932
    
    
    
    12,890
    
    
    
    23,928Comprehensive income
    
    $
    151,056
    
    
    $
    127,928
    
    
    $
    101,672Net income per share:Basic:Income from continuing operations
    
    $
    1.48
    
    
    $
    1.17
    
    
    $
    .80Loss from discontinued operations
    
    
    (.03
    )
    
    
    
    
    
    
    Net income per share
    
    $
    1.45
    
    
    $
    1.17
    
    
    $
    .80Diluted:Income from continuing operations
    
    $
    1.47
    
    
    $
    1.17
    
    
    $
    .80Loss from discontinued operations
    
    
    (.03
    )
    
    
    
    
    
    
    Net income per share
    
    $
    1.44
    
    
    $
    1.17
    
    
    $
    .80Weighted average number of shares outstanding:Basic
    
    
    98,937
    
    
    
    97,955
    
    
    
    97,434Diluted
    
    
    99,310
    
    
    
    98,440
    
    
    
    97,782
 See accompanying notes to consolidated financial statements. 29




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CLAIRES STORES, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 Number of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    Accumulatedshares of Class A
    
    
    Class A
    
    
    shares of
    
    
    
    
    
    
    Additional
    
    
    othercommon
    
    
    common
    
    
    common
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    Treasurystock
    
    
    stock
    
    
    stock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    earnings
    
    
    stock
    
    
    Total(In thousands, except for share amounts)Balance: February 2, 2002
    
    
    2,831
    
    
    $
    142
    
    
    
    45,950
    
    
    $
    2,297
    
    
    $
    29,871
    
    
    $
    (16,709
    )
    
    $
    389,039
    
    
    $
    (452
    )
    
    $
    404,188Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,744
    
    
    
    
    
    
    
    77,744Class A common stock converted to Common stock
    
    
    (28
    )
    
    
    (2
    )
    
    
    28
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    8
    
    
    
    2,963
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,971Cash dividends ($.08 per Common share and
$.04 per Class A common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,577
    )
    
    
    
    
    
    
    (7,577
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,928
    
    
    
    
    
    
    
    
    
    
    
    23,928Retirement of treasury stock
    
    
    (110
    )
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (447
    )
    
    
    452
    
    
    
    Balance: February 1, 2003
    
    
    2,693
    
    
    
    135
    
    
    
    46,147
    
    
    
    2,307
    
    
    
    32,834
    
    
    
    7,219
    
    
    
    458,759
    
    
    
    
    
    
    
    501,254Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,038
    
    
    
    
    
    
    
    115,038Class A common stock converted to Common stock
    
    
    (83
    )
    
    
    (5
    )
    
    
    83
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of 2 for 1 stock split
    
    
    2,612
    
    
    
    131
    
    
    
    46,471
    
    
    
    2,323
    
    
    
    
    
    
    
    
    
    
    
    (2,454
    )
    
    
    
    
    
    
    Stock options exercised, including tax benefit
    
    
    
    
    
    
    
    
    
    
    992
    
    
    
    50
    
    
    
    16,558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,608Cash dividends ($.14 per Common share and
$.07 per Class A common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,340
    )
    
    
    
    
    
    
    (13,340
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,890
    
    
    
    
    
    
    
    
    
    
    
    12,890Balance: January 31, 2004
    
    
    5,222
    
    
    
    261
    
    
    
    93,693
    
    
    
    4,685
    
    
    
    49,392
    
    
    
    20,109
    
    
    
    558,003
    
    
    
    
    
    
    
    632,450Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143,124
    
    
    
    
    
    
    
    143,124Class A common stock converted to Common stock
    
    
    (97
    )
    
    
    (5
    )
    
    
    97
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised, including tax benefit
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    3
    
    
    
    1,085
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,088Cash dividends ($.30 per Common share and
$.15 per Class A common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,907
    )
    
    
    
    
    
    
    (28,907
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,932
    
    
    
    
    
    
    
    
    
    
    
    7,932Balance: January 29, 2005
    
    
    5,125
    
    
    $
    256
    
    
    
    93,858
    
    
    $
    4,693
    
    
    $
    50,477
    
    
    $
    28,041
    
    
    $
    672,220
    
    
    $
    
    
    
    $
    755,687
 See accompanying notes to consolidated financial statements. 30




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Year EndedJan. 29, 2005
    
    
    Jan. 31, 2004
    
    
    Feb. 1, 2003(In thousands)Cash flows from operating activities:Net income
    
    $
    143,124
    
    
    $
    115,038
    
    
    $
    77,744Adjustments to reconcile net income to net cash
provided by operating activities:Loss on disposal of discontinued operations, net of tax benefit
    
    
    3,135
    
    
    
    
    
    
    
    235Impairment of intangible assets
    
    
    
    
    
    
    
    
    
    
    961Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    2,728(Gain) loss on sale of intangible assets
    
    
    (170
    )
    
    
    (409
    )
    
    
    137Depreciation and amortization
    
    
    44,882
    
    
    
    41,451
    
    
    
    37,897Amortization of intangible assets
    
    
    1,129
    
    
    
    1,211
    
    
    
    726Loss on retirement of property and equipment
    
    
    3,253
    
    
    
    2,923
    
    
    
    2,262Tax benefit of stock options
    
    
    323
    
    
    
    3,900
    
    
    
    Stock option compensation expense
    
    
    
    
    
    
    2,416
    
    
    
    (Increase) decrease in -Inventories
    
    
    (15,959
    )
    
    
    (1,192
    )
    
    
    (6,784
    )Prepaid expenses and other assets
    
    
    (4,830
    )
    
    
    (1,330
    )
    
    
    2,663Increase (decrease) in -Trade accounts payable
    
    
    3,489
    
    
    
    200
    
    
    
    10,126Income taxes payable
    
    
    3,657
    
    
    
    15,638
    
    
    
    8,086Accrued expenses
    
    
    11,725
    
    
    
    22,393
    
    
    
    16,919Deferred income taxes
    
    
    4,502
    
    
    
    797
    
    
    
    12,300Deferred rent expense
    
    
    1,030
    
    
    
    1,371
    
    
    
    1,121Net cash provided by continuing operations
    
    
    199,290
    
    
    
    204,407
    
    
    
    167,121Net cash provided by discontinued operations
    
    
    
    
    
    
    
    
    
    
    114Net cash provided by operating activities
    
    
    199,290
    
    
    
    204,407
    
    
    
    167,235Cash flows from investing activities:Acquisition of property and equipment
    
    
    (63,567
    )
    
    
    (48,838
    )
    
    
    (45,448
    )Acquisition of intangible assets
    
    
    (7,455
    )
    
    
    (9,871
    )
    
    
    (6,885
    )Purchase of short-term investments
    
    
    (246,234
    )
    
    
    
    
    
    
    Sale of short-term investments
    
    
    111,621
    
    
    
    
    
    
    
    1,563Capital expenditures of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (352
    )Net cash used in investing activities
    
    
    (205,635
    )
    
    
    (58,709
    )
    
    
    (51,122
    )Cash flows from financing activities:Principal payments on term loan
    
    
    
    
    
    
    (85,932
    )
    
    
    (20,227
    )Principal payments on lines of credit
    
    
    
    
    
    
    (25,000
    )
    
    
    Proceeds from stock options exercised
    
    
    766
    
    
    
    10,292
    
    
    
    2,971Dividends paid
    
    
    (28,907
    )
    
    
    (13,340
    )
    
    
    (7,577
    )Net cash used in financing activities
    
    
    (28,141
    )
    
    
    (113,980
    )
    
    
    (24,833
    )Effect of foreign currency exchange rate changes on cash
and cash equivalents
    
    
    862
    
    
    
    (2,570
    )
    
    
    4,290Net increase (decrease) in cash and cash equivalents
    
    
    (33,624
    )
    
    
    29,148
    
    
    
    95,570Cash and cash equivalents at beginning of period
    
    
    224,630
    
    
    
    195,482
    
    
    
    99,912Cash and cash equivalents at end of period
    
    $
    191,006
    
    
    $
    224,630
    
    
    $
    195,482
 See accompanying notes to consolidated financial statements. 31




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations  Claires Stores, Inc., a Florida corporation, and subsidiaries
(collectively the Company), is a leading retailer of value-priced fashion accessories targeted
towards pre-teens, teenagers and young adults. The Company operates stores throughout the United
States, Puerto Rico, Canada, the Virgin Islands, the United Kingdom, Switzerland, Austria, Germany,
(the latter three collectively referred to as S.A.G.), France, Ireland and Japan. Principles of Consolidation  The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. The Companys 50% ownership interest in its
Japanese joint venture (Claires Nippon) is accounted for under the equity method. All material
intercompany balances and transactions have been eliminated in consolidation. All references in
the Companys financial statements to number of shares, per share amounts, stock option data and
market prices of the Companys Common stock have been restated to give effect to the 2-for-1 stock
split of the Companys Common stock and Class A common stock in the form of a 100% stock dividend
in December 2003. Reclassifications  The consolidated financial statements include certain reclassifications
of prior period amounts in order to conform to current year presentation. Use of Estimates  These 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 that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The most
significant estimates include valuation of inventories, valuation of goodwill and intangible
assets, provisions for income taxes and contingencies and litigation. Actual results could differ
from these estimates. Fiscal Year  The Companys fiscal year ends on the Saturday closest to January 31. Fiscal
year 2005 consisted of 52 weeks and ended on January 29, 2005, Fiscal year 2004 consisted of 52
weeks and ended on January 31, 2004 and Fiscal year 2003 consisted of 52 weeks and ended on
February 1, 2003. Cash and Cash Equivalents  The Company considers all highly liquid debt instruments
purchased with an original maturity of 90 days or less to be cash equivalents. Short-term Investments  All short-term investments are classified as available-for-sale
and are carried at par plus accrued interest, which approximates fair value. There were no
unrealized gains or losses at January 29, 2005. At January 29, 2005, these investments consist of
auction rate securities with original maturities over 90 days. The cost of securities sold is
based on the specific identification method. The Company views its portfolio of auction rate securities with maturity beyond 90 days to be
available for use in current operations and has accordingly classified such marketable investments
as short-term investments, even though the stated maturity dates may be one year or more beyond the
current balance sheet date. Inventories  Merchandise inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out basis using the retail method in North America and S.A.G.,
while the UK, Ireland and France use average cost. Approximately 18% and 16% of the Companys
inventory was maintained using the average cost method in Fiscal 2005 and 2004, respectively. 32




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##### Table of Contents



Prepaid Expenses and Other Current Assets  Prepaid expenses and other current assets
include the following components as of the period indicated (dollars in thousands): Jan. 29,
    
    
    Jan. 31,2005
    
    
    2004Prepaid Rent
    
    $
    26,696
    
    
    $
    25,843Deferred tax asset
    
    
    12,246
    
    
    
    3,544Other
    
    
    18,693
    
    
    
    13,508$
    57,635
    
    
    $
    42,895
 Property and Equipment  Property and equipment are recorded at cost. Depreciation is
computed on the straight-line method over the estimated useful lives of the building and the
furniture, fixtures and equipment, which range from three to twenty-five years. Amortization of
leasehold improvements is computed on the straight-line method based upon the shorter of the
estimated useful lives of the assets or the terms of the respective leases. Maintenance and repair
costs are charged to earnings while expenditures for major improvements are capitalized. Upon the
disposition of property, plant and equipment, the accumulated depreciation is deducted from the
original cost and any gain or loss is reflected in current earnings. The Company reviews its long-lived assets for impairment under the provisions of Financial
Accounting Standards Board, (FASB) Statement No. 144, whenever events or changes in circumstances
indicate that the net book value of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the net book value of an asset to the future net
undiscounted cash flows expected to be generated by the asset. An impairment loss would be
recorded for the excess of the net book value over the fair value of the asset impaired. The fair
value is estimated based on expected discounted future cash flows. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost to sell and are no longer
depreciated. The Company recorded no impairment charges during the year ended January 31, 2004 or
January 29, 2005. The Company recorded approximately $2.7 million during the year ended February 1,
2003 related to fixed assets in the International segment due to those assets not being recoverable
by discounted cash flows. The impairment charge is included within the financial statement caption
Selling, general and administrative expenses within the Companys Consolidated Statements of
Operations and Comprehensive Income. Goodwill  Effective February 3, 2002, the Company adopted Statement of Financial
Accounting Standards 142 (SFAS 142), Goodwill and Other Intangible Assets. In accordance with
SFAS 142, the Company ceased amortizing its goodwill effective February 3, 2002. The Company had
$201.1 million and $199.8 million of unamortized goodwill at January 29, 2005 and January 31, 2004,
respectively. The Company had $18.2 million and $18.1 million of accumulative goodwill
amortization at January 29, 2005 and January 31, 2004, respectively. SFAS 142 required the Company upon its adoption to reassess the value of, and useful lives assigned
to, intangible assets including goodwill to determine whether the value is impaired. The first
step of this impairment test required the Company, within the first six months of Fiscal 2003, to
determine the fair value of its reporting units, as defined by SFAS 142, and compare it to the
carrying value of the net assets allocated to the reporting units. If this fair value exceeded the
carrying value, no further analysis was required. If the fair value of the reporting unit was less
than the carrying value of the net assets, the Company was required to perform step two of the
impairment test, which required the Company to allocate the implied fair value of the reporting
unit to all underlying assets and liabilities, including both recognized and unrecognized tangible
and intangible assets, based on their fair value. The Company performed a transitional goodwill
impairment test as required and determined that no goodwill impairment existed at February 3, 2002. SFAS 142 also requires the Company to perform a goodwill and intangible assets impairment test on
an annual basis. Any impairment charges resulting from the application of this test in the future
would be immediately recorded as a charge to earnings in the Companys statement of operations.
The Company 33




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##### Table of Contents



performed these impairment tests as of the first day of the fourth quarter of Fiscal
2004 and Fiscal 2005 and determined that no impairment exists. Other Assets  Other assets primarily include deposits and the non-current portion of
prepaid lease payments on leasehold improvements and equipment financed under non-cancelable
operating leases. The prepaid lease payments are amortized on a straight line basis over the
respective lease terms, typically ranging from four to seven years. Also included is the Companys
investment in its unconsolidated subsidiary in the amount of $3.2 million and $1.2 million at
January 29, 2005 and January 31, 2004, respectively. Intangible Assets  The Company has concluded that certain intangible assets,
comprised primarily of lease rights, qualify as indefinite-life intangible assets under SFAS 142.
Fair market value of the lease rights was determined through the use of third-party valuations. In
addition, the Company makes investments through its International subsidiaries in intangible assets
upon the opening and acquisition of many of our store locations in Europe. These other intangible
assets which are subject to amortization are amortized over the useful lives of the respective
leases, not to exceed 25 years. The Company evaluates the market value of its intangible assets
periodically and records an impairment charge when the Company believes the carrying amount of the
asset is not recoverable. The Company recorded impairment charges of approximately $1.0 million in
Fiscal 2003, included within selling, general and administrative expenses, because the market value
of certain lease rights included in its International segment were determined to be less than their
carrying values. No impairment charges related to these assets were recorded during Fiscal 2005
and Fiscal 2004. The following table summarizes certain information regarding intangible assets at
the respective periods, (dollars in thousands): Jan. 29,
    
    
    Jan. 31,2005
    
    
    2004Gross
    
    
    Accumulated
    
    
    Gross
    
    
    AccumulatedCarrying Amount
    
    
    Amortization
    
    
    Carrying Amount
    
    
    AmortizationAmortizable lease rights
    
    $
    19,275
    
    
    $
    10,218
    
    
    $
    18,455
    
    
    $
    9,000Non-amortizable lease
rights
    
    
    43,417
    
    
    
    
    
    
    
    34,441
    
    
    
    $
    62,692
    
    
    $
    10,218
    
    
    $
    52,896
    
    
    $
    9,000
 Weighted AverageNon-Amortizable
    
    
    Amortizable
    
    
    AmortizationAmount
    
    
    Amount
    
    
    Period for AmortizableAmortizable Lease Right Acquisitions
    
    Acquired
    
    
    Acquired
    
    
    Lease Rights Acquisitions(in years)January 29, 2005
    
    $
    7,310
    
    
    $
    913
    
    
    
    10.3January 31, 2004
    
    $
    9,348
    
    
    $
    1,045
    
    
    
    9.0February 1, 2003
    
    $
    6,840
    
    
    $
    244
    
    
    
    9.5
 Amortization expense on these intangible assets is expected to be approximately $1.0 million
for each of the next five years. The weighted average amortization period of amortized intangible
assets as of January 29, 2005 approximates 14 years. Accrued Expenses  Accrued expenses include the following components as of the period
indicated (dollars in thousands): Jan. 29,
    
    
    Jan. 31,2005
    
    
    2004Compensation and benefits
    
    $
    39,464
    
    
    $
    33,056Sales and local taxes
    
    
    9,529
    
    
    
    9,172Gift cards
    
    
    11,625
    
    
    
    7,825Other
    
    
    33,726
    
    
    
    26,371$
    94,344
    
    
    $
    76,424
 34




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##### Table of Contents



Revenue Recognition  The Company recognizes sales as the customer takes possession of
the merchandise. The estimated liability for sales returns is based on the historical return
levels, which is included in accrued expenses. Cost of Sales  Included within the Companys Consolidated Statement of Operations line
item Cost of sales, occupancy and buying expenses is the cost of merchandise sold to our
customers, inbound and outbound freight charges, purchasing costs and inspection costs. Also
included in this line item are the occupancy costs of the Companys stores and the Companys
internal costs of facilitating the merchandise procurement process, both of which are treated as
period costs. All merchandise purchased by the Company is shipped to one of its three distribution
centers. As a result, the Company has no internal transfer costs. The cost of the Companys
distribution center is included within the financial statement line item Selling, general and
administrative expenses, and not in Cost of sales, occupancy and buying expenses. These
distribution center costs were approximately $10.7 million, $9.2 million and $9.0 million in Fiscal
2005, Fiscal 2004 and Fiscal 2003, respectively. Leasing  The Company recognizes rent expense for operating leases with periods of free
rent (including construction periods), step rent provisions and escalation clauses on a straight
line basis over the applicable lease term. The Company considers lease renewals in the useful life
of its leasehold improvements when such renewals are reasonably assured. The Company takes these
provisions into account when calculating minimum aggregate rental commitments under non-cancelable
operating leases set forth below. From time to time, the Company may receive capital improvement
funding from its lessors. These amounts are recorded as deferred liabilities and amortized over
the remaining lease term as a reduction of rent expense. Basic and Diluted Shares  Basic net income per share is based on the weighted average
number of shares of Class A Common Stock and Common Stock outstanding during the period. Diluted
net income per share includes the dilutive effect of stock options plus the number of shares
included in basic net income per share. Options to purchase 326,604 and 328,346 shares of common
stock, at $16.93 per share and prices ranging from $10.78 to $15.13 per share, respectively, were
outstanding for the years ended January 31, 2004 and February 1, 2003, respectively, but were not
included in the computation of diluted earnings per share because the options exercise prices were
greater than the average market price of the common shares for the respective fiscal year. All
options outstanding at January 29, 2005 were included in the calculation of diluted shares. Income Taxes  The Company accounts for income taxes under the provisions of SFAS 109 which
generally requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities, using enacted tax
rates in effect for the year in which the differences are expected to reverse. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Foreign Currency Translation  The financial statements of the Companys foreign operations
are translated into US Dollars. Assets and liabilities are translated at current exchange rates
while income and expense accounts are translated at the average rates in effect during the year.
Equity accounts are translated at historical exchange rates. Resulting translation adjustments are
accumulated as a component of other comprehensive income. Foreign currency gains and losses
resulting from transactions denominated in foreign currencies, including intercompany transactions,
except for intercompany loans of a long-term investment nature, are included in results of
operations. Fair Value of Financial Instruments  The Companys financial instruments consist primarily
of current assets and current liabilities. Current assets and liabilities approximate fair market
value. Derivative Instruments and Hedging Activities  The Company accounts for derivatives and
hedging activities in accordance with SFAS 133, Accounting for Derivative Instruments and Certain
Hedging 35




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##### Table of Contents



Activities, as amended, which requires that all derivative instruments be recorded on the
balance sheet at their respective fair values. The Company is exposed to market risk from foreign exchange rates. The Company continues to
evaluate these risks and continues to take measures to mitigate these risks, including, among other
measures, entering into derivative financial instruments to hedge risk exposures to currency rates.
The Company enters into foreign currency options to minimize and manage the currency related to
its import
merchandise purchase program. The counter-party to these contracts is a highly rated financial
institution. These foreign currency options are designated as cash flow hedges, as defined by SFAS
133, and are effective as hedges. Accordingly, changes in the effective portion of the fair value
of these foreign currency options are included in other comprehensive income. Once the hedged
transactions are completed, or when merchandise is sold, the unrealized gains and losses on the
foreign currency options are reclassified from accumulated other comprehensive income and
recognized in earnings. The unrealized losses related to the import merchandise purchase program
contracts, which were recorded in other comprehensive income, were not material for each period
presented. Stock Options  SFAS 123, Accounting for Stock Based Compensation, as amended by SFAS
148, Accounting for Stock Based Compensation-Transition and Disclosure, allows entities to choose
between a fair value based method of accounting for employee stock options or similar equity
instruments and the intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion 25 (APB 25), Accounting for Stock Issued to Employees. Entities electing to
account for employee stock options or similar equity instruments under APB 25 must make pro forma
disclosures of net income and earnings per share as if the fair value method of accounting had been
applied. The Company has elected to apply the provisions of APB 25 in the preparation of its
consolidated financial statements and provide pro forma disclosure of net income and earnings per
share as required under SFAS 123 and SFAS 148 (dollars in thousands, except share data). Fiscal Year Ended2005
    
    
    2004
    
    
    2003Net income  as reported
    
    $
    143,124
    
    
    $
    115,038
    
    
    $
    77,744Stock-based employee compensation
expense not included in reported
net income, net of tax
    
    
    (1,944
    )
    
    
    (1,649
    )
    
    
    (840
    )Stock-based employee compensation
expense included in reported
net income, net of tax
    
    
    
    
    
    
    
    
    
    
    Net income  pro forma
    
    
    141,180
    
    
    
    113,389
    
    
    
    76,904Basic net income per share  as reported
    
    
    1.45
    
    
    
    1.17
    
    
    
    .80Basic net income per share  pro forma
    
    
    1.43
    
    
    
    1.16
    
    
    
    .79Diluted net income per share  as reported
    
    
    1.44
    
    
    
    1.17
    
    
    
    .80Diluted net income per share  pro forma
    
    
    1.42
    
    
    
    1.15
    
    
    
    .79
 Recent Accounting Pronouncements  In January 2003, the FASB issued Interpretation No. 46
Consolidation of Variable Interest Entities. The interpretation requires certain variable
interest entities, as defined, to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46, as amended, is effective for
all new variable interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after December 15, 2003. In December
2003, the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of the provisions of the
interpretation and defer the implementation date for certain entities to periods ending after March
14, 2004. The adoption of FIN 46R did not have an impact on the Companys consolidated financial
position, results of operations or cash flows. 36




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##### Table of Contents



In December 2004, the FASB issued SFAS 123R, Share-Based Payment, a revision of SFAS 123. The
standard requires companies to expense the grant-date fair value of stock options and other
equity-based compensation issued to employees and is effective for interim or annual periods
beginning after June 15, 2005. In accordance with the revised statement, the Company will be
required to recognize the expense attributable to stock options granted or vested subsequent to
July 30, 2005. The Company is evaluating the requirements of SFAS 123R and has not yet determined
the method of adoption or the effect of adopting SFAS 123R. 2. STATEMENTS OF CASH FLOWS Payments of income taxes were $67.9 million in Fiscal 2005, $43.6 million in Fiscal 2004 and $20.5
million in Fiscal 2003. Payments of interest were $.2 million in Fiscal 2005, $2.7 million in
Fiscal 2004 and $4.5 million in Fiscal 2003. 3. CREDIT FACILITIES The Company entered into a new credit facility in March 2004. This credit facility is a revolving
line of credit of up to $60.0 million, is secured by inventory in the United States and expires on
March 31, 2009. The borrowings under this facility are limited based on certain calculations of
availability, primarily on the amount of inventory on hand in the United States. At January 29,
2005, the entire amount of $60.0 million would have been available for borrowing by the Company.
The credit facility is cancelable without penalty and bears interest at a margin of 75 basis points
over the London Interbank Borrowing Rate (LIBOR). The margin is adjusted periodically based on
certain liquidity measurements. The Company also had $2.6 million of issued letters of credit
which are supported and considered drawn against the line of credit. In December of 1999, the Company entered into a credit facility pursuant to which the Company
financed $200.0 million of the purchase price for Afterthoughts. The credit facility included a
$40.0 million revolving line of credit which would have matured on December 1, 2004, and a $175.0
million five year term loan, the first installment of which was paid on December 31, 2000, with
future installments, thereafter, payable on a quarterly basis through December 1, 2004. The credit
facility was prepayable without penalty and bore interest at a margin of 100 basis points over the
LIBOR. The margin was adjusted periodically based on the Companys performance as it related to
certain financial covenants. The Company terminated this facility on March 31, 2004. The Companys non-US subsidiaries have available credit facilities totaling approximately $843,000
with banks. The 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 January 29, 2005, there were no
borrowings on these credit facilities. 4. COMMITMENTS AND CONTINGENCIES Leasing  The Company leases its retail stores, offices and warehouse space and certain
equipment under operating leases which expire at various dates through the year 2030 with options
to renew certain of such leases for additional periods. The lease agreements covering retail store
space provide for minimum rentals and/or rentals based on a percentage of net sales. Rental
expense for each of the three fiscal years ended January 29, 2005 is set forth below (in
thousands): Fiscal 2005
    
    
    Fiscal 2004
    
    
    Fiscal 2003Minimum store rentals
    
    $
    154,994
    
    
    $
    143,067
    
    
    $
    132,981Store rentals based on net sales
    
    
    4,700
    
    
    
    3,767
    
    
    
    2,951Other rental expense
    
    
    17,796
    
    
    
    22,605
    
    
    
    23,260Total rental expense from
continuing operations
    
    $
    177,490
    
    
    $
    169,439
    
    
    $
    159,192
 37




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##### Table of Contents



Fiscal 2005 also includes $1.5 million of rent expense recorded to account for the cumulative
impact of not recording rent expense during the construction period prior to lease commencement. Minimum aggregate rental commitments under non-cancelable operating leases are summarized by fiscal
year ending as follows (in thousands): 2006
    
    $
    157,0442007
    
    
    145,4842008
    
    
    132,7972009
    
    
    116,5032010
    
    
    101,242Thereafter
    
    
    213,289$
    866,359
 Certain leases provide for payment of real estate taxes, insurance and other operating expenses of
the properties. In other leases, some of these costs are included in the basic contractual rental payments.
Certain leases contain escalation clauses resulting from the pass-through of increases in operating
costs, property taxes and the effect on costs from changes in consumer price indexes. SFAS 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs, was adopted by the Company on February 2, 2003. SFAS 143
requires that the fair value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be made and that the
associated asset retirement costs be capitalized as part of the carrying amount of the long-lived
asset. The retirement obligation relates to costs associated with the retirement of leasehold
improvements under store and warehouse leases, within the International division. The cumulative
effect adjustment recognized upon adoption of this standard and its impact on our results of
operations or financial condition for each of the earlier periods presented was not material. The
Company had retirement obligations of $1.3 million and $1.5 million recorded at January 29, 2005
and January 31, 2004, respectively. In Fiscal 2003, the Company disposed of its apparel segment, which was comprised of Mr. Rags
stores, or Lux Corp. At January 29, 2005, the Company remains guarantor on certain real estate
leases for Mr. Rags store locations with future rental payments of approximately $4.2 million. Foreign Currency Options  From time to time, the Company has entered into short-term
foreign currency options to hedge exposure to currency fluctuations between the British Pound and
the US Dollar. These contracts are accounted for as cash-flow hedges and are accounted for by
adjusting the carrying amount of the contracts to market and recognizing any gain or loss in the
accumulated other comprehensive income. The amount recognized in relation to these contracts was
not material. The counterparty to the Companys foreign currency options is a major financial institution. The
credit ratings and concentration of risk of the financial institution is monitored on a continuing
basis. In the unlikely event that the counterparty fails to meet the terms of a foreign currency
contract, the Companys exposure is limited to the foreign currency rate difference. Legal  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 metal content in merchandise, litigation with
respect to various employment matters, including litigation with present and former employees, and
litigation to protect trademark rights. In May 2002, the Company sold the stock of Lux Corporation
d/b/a Mr. Rags, and discontinued the operations of its apparel segment. In January 2003, Lux
Corporation filed for bankruptcy, and on November 7, 2003, the Official Committee of Unsecured
Creditors of Lux Corporation, filed a complaint against the 38




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##### Table of Contents



Company in the United States Bankruptcy
Court for the Central District of California. This litigation has been settled for $5 million
($3.1 million net of income taxes). The settlement was approved by the
bankruptcy court, without objection by any party in interest, on April 5, 2005. The Company
expects that a final order will be entered later this month. Provided that no appeal is filed or
rehearing sought within 10 days after entry, the order will become final 10 days after its entry.
The settlement represents return of proceeds the Company received as a result of the sale, and has
been recorded during fiscal year 2005 within the financial statement line item Net loss from
discontinued operations. The Company believes that current pending litigation will not have a
material adverse effect on its financial position, earnings or cash flows. Other

Approximately 50% of the merchandise purchased by the Company was manufactured in China. Any event
causing a sudden disruption of imports from China, or other foreign countries, could have a
material adverse effect on the Companys operations. In November 2003, the Companys Board of Directors authorized a retirement compensation package for
the Companys founder and former Chairman of the Board. Management estimated that the retirement
package would cost the Company approximately $8.7 million, which was recorded in the Companys
Statement of Operations within expenses titled Selling, general and administrative. At January
29, 2005, the Companys estimated remaining liability relating to this package was approximately
$5.2 million. 5. STOCKHOLDERS EQUITY Stock Split  On November 4, 2003, the Companys Board of Directors announced a 2-for-1
stock split of its Common stock and Class A common stock in the form of a 100% stock dividend
distribution. On December 19, 2003, 46,471,815 shares of Common stock and 2,611,989 shares of
Class A common stock were distributed to stockholders. Stockholders equity has been adjusted to
give recognition of the stock split by reclassifying from retained earnings to the Common stock and
Class A common stock accounts the par value of the additional shares arising from the split. In
addition, all references in the financial statements to number of shares, per share amounts, stock
option data and market prices of the Companys stock have been restated. Preferred Stock  The Company has authorized 1,000,000 shares of $1 par value preferred
stock, none of which have been issued. The rights and preferences of such stock may be designated
in the future by the Board of Directors. Class A Common Stock  The Class A common stock has only limited transferability and is not
traded on any stock exchange or any organized market. However, the Class A common stock is
convertible on a share-for-share basis into Common stock and may be sold, as Common stock, in open
market transactions. The Class A common stock has ten votes per share. Dividends declared on the
Class A common stock are limited to 50% of the dividends declared on the Common stock. Treasury Stock  Treasury stock acquired is recorded at cost. The Company may use treasury
stock to fulfill its obligations under its stock option plans. When stock is issued pursuant to the
stock option plans, the difference between the cost of treasury stock issued and the option price
is charged or credited to additional paid-in capital. In January 2003, the Company retired these
shares. Rights to Purchase Series A Junior Participating Preferred Stock  The Companys Board of
Directors adopted a stockholder rights plan (the Rights Plan) in May 2003. The Rights Plan has
certain anti-takeover provisions that may cause substantial dilution to a person or group that
attempts to acquire the Company on terms not approved by the Board of Directors. Under the Rights
Plan, each stockholder is issued one right to acquire one one-thousandth of a share of Series A
Junior Participating Preferred Stock at an exercise price of $130.00, subject to adjustment, for
each outstanding share of Common stock and Class A common stock they own. These rights are only
exercisable if a single person or company acquires 15% or more of the outstanding shares of the
Companys common stock. If the Company were acquired, each right, except those of the acquirer,
would entitle its holder to purchase the number of shares of common stock having a then-current
market value of twice the exercise price. The Company may redeem 39




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##### Table of Contents



the rights for $.01 per right at
any time prior to a triggering acquisition and, unless redeemed earlier, the rights would expire on
May 30, 2013. 6. STOCK OPTIONS On March 12, 2003, the Claires Stores, Inc. 1996 Stock Option Plan was amended and restated to,
among other things, change the name of the 1996 Plan to the Claires Stores, Inc. 1996 Incentive
Compensation Plan (as amended and restated, the 1996 Plan). Under the 1996 Plan, the Company
may grant either incentive stock options or non-qualified stock options to purchase up to 8,000,000
shares of Common stock, plus any shares unused or recaptured from previous plans. Incentive stock
options granted under the 1996 Plan are exercisable at prices equal to the fair market value of
shares at the date of grant, except that incentive stock options granted to any person holding 10%
or more of the total combined voting power or value of all classes of capital stock of the Company,
or any subsidiary of the Company, carry an exercise price equal to 110% of the fair market value at
the date of grant. The aggregate number of shares granted to any one person may not exceed
1,000,000. Each incentive stock option or non-qualified stock option will terminate ten years
after the date of grant (or such shorter period as specified in the grant) and may not be exercised
thereafter. Incentive stock options currently outstanding are exercisable at various rates beginning one year
from the date of grant, and expire five to ten years after the date of grant. Non-qualified stock
options currently outstanding are exercisable at prices equal to the fair market value of the
shares at the date of grant and expire five to ten years after the date of grant. Options to purchase an additional 1,082,971 shares were outstanding, but not yet exercisable, at
January 29, 2005 under the 1996 Plan. There were 7,295,792 shares of Common stock available for
future option grants under the 1996 Plan at January 29, 2005 (which includes shares recaptured from
the previous plans). A summary of the activity in the Companys stock option plans is presented below: Fiscal 2005
    
    
    Fiscal 2004
    
    
    Fiscal 2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of
period
    
    
    1,266,868
    
    
    $
    14.23
    
    
    
    1,669,096
    
    
    $
    8.52
    
    
    
    2,569,954
    
    
    $
    9.40Options granted
    
    
    350,000
    
    
    $
    19.01
    
    
    
    900,000
    
    
    $
    16.77
    
    
    
    
    
    
    
    Options exercised
    
    
    (68,555
    )
    
    $
    11.16
    
    
    
    (1,235,728
    )
    
    $
    8.30
    
    
    
    (337,612
    )
    
    $
    8.39Options canceled
    
    
    (36,500
    )
    
    $
    15.96
    
    
    
    (66,500
    )
    
    $
    15.34
    
    
    
    (563,246
    )
    
    $
    12.63Outstanding at end of period
    
    
    1,511,813
    
    
    $
    15.40
    
    
    
    1,266,868
    
    
    $
    14.23
    
    
    
    1,669,096
    
    
    $
    8.52Exercisable at end of period
    
    
    428,842
    
    
    $
    12.39
    
    
    
    189,534
    
    
    $
    8.73
    
    
    
    978,648
    
    
    $
    8.14Weighted average fair value
of options granted during
the period (see below)
    
    
    
    
    
    $
    10.19
    
    
    
    
    
    
    $
    8.98
    
    
    
    
    
    
    
    N/A
 40




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##### Table of Contents



The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: Fiscal
    
    
    Fiscal
    
    
    Fiscal2005
    
    
    2004
    
    
    2003Expected dividend yield
    
    
    1.30
    %
    
    
    1.40
    %
    
    
    N/AExpected stock price volatility
    
    
    50.00
    %
    
    
    50.00
    %
    
    
    N/ARisk-Free interest rate
    
    
    4.60
    %
    
    
    4.70
    %
    
    
    N/AExpected life of options
    
    
    7 years
    
    
    
    7 years
    
    
    
    N/A
 The following table summarizes information about stock options outstanding at January 29,
2005: Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Remaining
    
    
    Average
    
    
    
    
    
    
    AverageShares
    
    
    Contractual
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Shares
    
    
    Price$4.00 to $5.95
    
    
    27,500
    
    
    
    1.05
    
    
    $
    4.18
    
    
    
    25,000
    
    
    $
    4.00$5.96 to $8.96
    
    
    100,000
    
    
    
    1.48
    
    
    $
    8.96
    
    
    
    100,000
    
    
    $
    8.96$8.97 to $13.40
    
    
    296,813
    
    
    
    5.32
    
    
    $
    10.62
    
    
    
    141,342
    
    
    $
    11.08$16.93 to $22.04
    
    
    1,087,500
    
    
    
    8.76
    
    
    $
    17.58
    
    
    
    162,500
    
    
    $
    16.93$4.00 to $22.04
    
    
    1,511,813
    
    
    
    7.46
    
    
    $
    15.40
    
    
    
    428,842
    
    
    $
    12.39
 The Company adopted SFAS 123, Accounting for Stock-Based Compensation, issued in October
1995. As permitted under the provisions of SFAS 123, the Company applies the principles of APB 25
and related interpretations in accounting for its stock option plans and, accordingly, does not
recognize compensation cost in earnings. In December 2003, the Companys Board of Directors authorized the acceleration of the vesting
period on 240,000 options to purchase the Companys common stock in connection with the retirement
compensation package granted to the Companys founder and former Chairman of the Board. As a
result of this acceleration, $2.4 million of compensation expense was recorded by the Company
during the year ended January 31, 2004. 7. EMPLOYEE BENEFIT PLANS Profit Sharing Plan  The Company has adopted a Profit Sharing Plan under Section 401(k) of the
Internal Revenue Code. This plan allows employees who serve more than 1,000 hours per year to
defer up to 18% of their income through contributions to the plan. In line with the provisions of
the plan, for every dollar the employee contributes the Company will contribute an additional $.50,
up to 2% of the employees salary. In Fiscal 2005, Fiscal 2004 and Fiscal 2003, the cost of
Company matching contributions was $509,000, $603,000 and $507,000, respectively. Deferred Compensation Plans  In August 1999, the Company adopted a deferred compensation plan that
enables certain associates of the Company to defer a specified percentage of their cash
compensation. The plan generally provides for payments upon retirement, death, or termination of
employment. Participants may elect to defer a percentage of their cash compensation while the
Company contributes a specified percentage of the participants cash compensation based on the
participants number of years of service. All contributions are immediately vested. The Companys
obligations under this plan are funded by making contributions to a rabbi trust. Assets held under
this plan totaled $4.6 million, $2.4 million and $1.3 million at January 29, 2005, January 31, 2004
and February 1, 2003, respectively. The obligations under the plan are included in accrued
expenses. Total Company contributions were $313,000, $197,000 and $151,000 in Fiscal 2005, 2004
and 2003, respectively. 41




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##### Table of Contents



8. INCOME TAXES Income before income taxes from continuing operations is as follows (in thousands): Fiscal
    
    
    Fiscal
    
    
    Fiscal2005
    
    
    2004
    
    
    2003Domestic
    
    $
    155,497
    
    
    $
    125,567
    
    
    $
    97,239Foreign
    
    
    66,139
    
    
    
    48,855
    
    
    
    22,884$
    221,636
    
    
    $
    174,422
    
    
    $
    120,123
 The components of income tax expense (benefit) consist of the following (in thousands): Fiscal Year EndedJan. 29, 2005
    
    
    Jan. 31, 2004
    
    
    Feb. 1, 2003Federal:Current
    
    $
    55,299
    
    
    $
    38,307
    
    
    $
    26,880Deferred
    
    
    3,557
    
    
    
    5,664
    
    
    
    5,88158,856
    
    
    
    43,971
    
    
    
    32,761State:Current
    
    
    4,679
    
    
    
    3,970
    
    
    
    3,783Deferred
    
    
    369
    
    
    
    587
    
    
    
    7005,048
    
    
    
    4,557
    
    
    
    4,483Foreign:Current
    
    
    10,836
    
    
    
    9,373
    
    
    
    4,900Deferred
    
    
    637
    
    
    
    1,483
    
    
    
    11,473
    
    
    
    10,856
    
    
    
    4,900Total income tax expense from
continuing operations
    
    
    75,377
    
    
    
    59,384
    
    
    
    42,144Tax benefit of discontinued operations
    
    
    (1,865
    )
    
    
    
    
    
    
    (141
    )Total income tax expense
    
    $
    73,512
    
    
    $
    59,384
    
    
    $
    42,003
 42




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##### Table of Contents



The approximate tax effects on the significant components of the Companys net deferred tax asset
(liability) are as follows (in thousands): Fiscal Year EndedJan. 29,
    
    
    Jan. 31,
    
    
    Feb. 1,2005
    
    
    2004
    
    
    2003Deferred tax assets:Depreciation
    
    $
    
    
    
    $
    
    
    
    $
    88Accrued expenses
    
    
    4,193
    
    
    
    2,647
    
    
    
    2,555Deferred rent
    
    
    3,555
    
    
    
    3,265
    
    
    
    2,844Discontinued operations
    
    
    3,023
    
    
    
    1,250
    
    
    
    1,589Compensation & benefits
    
    
    3,921
    
    
    
    3,469
    
    
    
    959Net operating loss carryforwards
    
    
    6,388
    
    
    
    5,236
    
    
    
    4,096Other
    
    
    1,381
    
    
    
    1,567
    
    
    
    870Total gross deferred tax assets
    
    
    22,461
    
    
    
    17,434
    
    
    
    13,001Valuation allowance
    
    
    (5,884
    )
    
    
    (5,236
    )
    
    
    (4,096
    )Total deferred tax assets, net
    
    
    16,577
    
    
    
    12,198
    
    
    
    8,905Deferred tax liabilities:Depreciation
    
    
    9,139
    
    
    
    3,804
    
    
    
    Operating leases
    
    
    1,034
    
    
    
    2,069
    
    
    
    3,564Intangible asset amortization
    
    
    17,607
    
    
    
    12,962
    
    
    
    11,809Other
    
    
    844
    
    
    
    848
    
    
    
    233Total deferred tax liabilities
    
    
    28,624
    
    
    
    19,683
    
    
    
    15,606Net deferred tax liability
    
    $
    (12,047
    )
    
    $
    (7,485
    )
    
    $
    (6,701
    )
 The provision for income taxes from continuing operations differs from an amount computed at the
statutory federal rate as follows: Jan. 29,
    
    
    Jan. 31,
    
    
    Feb. 1,2005
    
    
    2004
    
    
    2003US income taxes at statutory federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Foreign income tax benefit at less than domestic rate
    
    
    (6.0
    )
    
    
    (5.3
    )
    
    
    (5.5
    )State and local income taxes, net of federal tax benefit
    
    
    1.7
    
    
    
    1.7
    
    
    
    2.3Other, net
    
    
    3.3
    
    
    
    2.6
    
    
    
    3.334.0
    %
    
    
    34.0
    %
    
    
    35.1
    %
 Our effective income tax rate for Fiscal 2005 and Fiscal 2004 was 34%. During Fiscal 2005, the
Company recorded net benefits to the provision for income taxes totaling approximately $.4 million
attributable to concluded state tax examinations that were settled more favorably than anticipated.
During Fiscal 2004, the Company recorded net benefits to the provision for income taxes totaling
$2.8 million attributable to concluded United States and foreign tax examinations that were settled
more favorably than anticipated. In addition, our tax rate is impacted by tax planning, marginally
lower worldwide tax rates and the change in the mix of income attributed to the various countries
in which we do business. As of January 29, 2005 and January 31, 2004, net current deferred income tax assets of $12.2
million and $3.5 million, respectively, are classified as Other Current Assets in the accompanying
Consolidated Balance Sheet. In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
Company provides valuation allowances to offset portions of deferred tax assets due to the
uncertainty surrounding the future 43




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realization of such deferred tax assets. The Company adjusts
the valuation allowance in the period management determines it is more likely than not that
deferred tax assets will or will not be realized. As of January 29, 2005, foreign subsidiaries of the Company had available net operating loss
(NOL) carry forwards of approximately $16.0 million ($5.7 million after-tax) for foreign income
tax purposes, all of which has an indefinite expiration. Generally, a valuation allowance of $15.7
million ($5.5 million after-tax) has been established for these carry forwards because the ability
to utilize them is uncertain. Additionally, the Company had available state NOL carry forwards of
approximately $28.0 million ($.7 million after-tax) for domestic state income tax purposes. The
state carry forwards are subject to various expiration dates pursuant to the applicable statutes of
the respective taxing jurisdictions. A valuation allowance of $6.8 million ($.4 million after-tax)
has been established for these carry forwards because the ability to utilize them is uncertain. A change in the valuation allowance of $.7 million from Fiscal 2004 to Fiscal 2005 was primarily
the result of an increase in NOL carry forwards for current year losses in the Companys foreign
subsidiaries. The net change in the total valuation allowance for the years ended Fiscal 2005,
2004, and 2003 was an increase of $.7 million, $1.1 million, and $1.3 million, respectively. As of January 29, 2005, there are accumulated unremitted earnings from the Companys foreign
subsidiaries on which deferred taxes have not been provided as the undistributed earnings of the
foreign subsidiaries are indefinitely reinvested. Based on the current United States and foreign
subsidiaries income tax rates, it is estimated that United States taxes, net of foreign tax
credits, of approximately $42.7 million would be due upon repatriation. Accumulated Other Comprehensive Income at January 29, 2005 and January 31, 2004 includes $7.0
million and $5.8 million, respectively, resulting in an increase of $1.2 million related to the
income tax effect of unrealized gains on foreign currency translation within the Companys foreign
subsidiaries. On October 22, 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA
includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the
AJCA. The Company may elect to apply this provision to qualifying earnings repatriations in Fiscal
2006. The Company is currently reviewing the provisions of the new law and has not yet determined
the impact, if any, upon future financial statements. 9. RELATED PARTY TRANSACTIONS The Company leases its executive offices located in Pembroke Pines, Florida from Rowland Schaefer &
Associates, a general partnership owned by two corporate general partners. Each of our two
Co-Chairmen have an approximately 32% ownership interest in the general partnership, and our Chief
Financial Officer has an approximately 5% ownership interest in the general partnership. During
Fiscal 2005, 2004, and 2003, the Company paid Rowland Schaefer & Associates, Inc. $1,147,000,
$900,000, and $874,000, respectively, for rent, real estate taxes, and operating expenses as
required under the lease. After obtaining approval of the Companys Corporate
Governance/Nominating Committee, the Company executed a new lease in January 2004 which expires on
December 31, 2013. The Company leases retail space for a Claires Boutiques store in New York City from 720 Lexington
Realty LLC, a limited liability corporation that is controlled by the Companys two Co-Chairmen and
another sister of the Companys Co-Chairmen. During Fiscal 2005, 2004 and 2003, the Company paid
$293,000, $282,000 and $281,000, respectively, for rent to 720 Lexington Realty LLC. During Fiscal
2005, 2004 and 2003, the terms under the lease with 720 Lexington Realty LLC were the same terms as
were in effect since September 1994 when the Company leased the retail space from an unaffiliated
third party prior to the purchase by 720 Lexington Realty LLC. The lease expired on January 31,
2005 and the Companys Corporate Governance/Nominating Committee approved the terms of a new lease
in January 2005. The new lease terms provide for a five-year term with a five year renewal option,
and annual rental payments of $460,000 (exclusive of real estate taxes and other operating expenses
to be paid by the Company under the lease). 44




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##### Table of Contents



Management believes that these lease arrangements are on no less favorable terms than we could
obtain from unaffiliated third parties. 10. SELECTED QUARTERLY FINANCIAL DATA  Fiscal Year Ended January 29, 20051st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th Qtr
    
    
    Year(In thousands except per share amounts)Net sales
    
    $
    281,591
    
    
    $
    305,223
    
    
    $
    296,702
    
    
    $
    395,891
    
    
    $
    1,279,407Gross profit
    
    
    156,067
    
    
    
    163,303
    
    
    
    157,470
    
    
    
    214,880
    
    
    
    691,720Income from continuing operations
    
    
    27,692
    
    
    
    32,745
    
    
    
    27,158
    
    
    
    58,664
    
    
    
    146,259Loss on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,135
    
    
    
    3,135Net income
    
    
    27,692
    
    
    
    32,745
    
    
    
    27,158
    
    
    
    55,529
    
    
    
    143,124Basic net income per shareIncome from continuing operations
    
    $
    .28
    
    
    $
    .33
    
    
    $
    .27
    
    
    $
    .59
    
    
    $
    1.48Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.03
    )
    
    
    (0.03
    )Net income
    
    $
    .28
    
    
    $
    .33
    
    
    $
    .27
    
    
    $
    .56
    
    
    $
    1.45Diluted net income per shareIncome from continuing operations
    
    $
    .28
    
    
    $
    .33
    
    
    $
    .27
    
    
    $
    .59
    
    
    $
    1.47Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.03
    )
    
    
    (.03
    )Net income
    
    $
    .28
    
    
    $
    .33
    
    
    $
    0.27
    
    
    $
    .56
    
    
    $
    1.44
 Fiscal Year Ended January 31, 20041st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th Qtr
    
    
    Year(In thousands except per share amounts)Net sales
    
    $
    239,756
    
    
    $
    264,949
    
    
    $
    264,146
    
    
    $
    363,983
    
    
    $
    1,132,834Gross profit
    
    
    124,616
    
    
    
    137,865
    
    
    
    139,212
    
    
    
    206,686
    
    
    
    608,379Net income
    
    
    15,565
    
    
    
    22,181
    
    
    
    25,253
    
    
    
    52,039
    
    
    
    115,038Basic net income per share:
    
    $
    .16
    
    
    $
    .23
    
    
    $
    .26
    
    
    $
    .53
    
    
    $
    1.17Diluted net income per share:
    
    $
    .16
    
    
    $
    .23
    
    
    $
    .26
    
    
    $
    .53
    
    
    $
    1.17
 Included in Net income during the fourth quarter of the Fiscal year ended January 31, 2004 is
approximately $8.7 million attributable to the retirement compensation package awarded to the
Companys founder and former Chairman of the Board. 11. SEGMENT REPORTING The Company is primarily organized based on the geographic markets in which it operates. Under
this organizational structure, the Company currently has two reportable segments: North America and
International. 45




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##### Table of Contents



Information about the Companys operations by segment is as follows (in thousands): Fiscal Year Ended2005
    
    
    2004
    
    
    2003Net sales:North America
    
    $
    906,071
    
    
    $
    820,332
    
    
    $
    740,838International
    
    
    373,336
    
    
    
    312,502
    
    
    
    260,699Total net sales
    
    $
    1,279,407
    
    
    $
    1,132,834
    
    
    $
    1,001,537Operating income:North America
    
    $
    195,689
    
    
    $
    165,279
    
    
    $
    126,370International
    
    
    65,164
    
    
    
    48,948
    
    
    
    33,216Total operating income
    
    $
    260,853
    
    
    $
    214,227
    
    
    $
    159,586Depreciation and amortization:North America
    
    $
    29,046
    
    
    $
    27,222
    
    
    $
    26,295International
    
    
    15,836
    
    
    
    14,229
    
    
    
    11,602Total depreciation and amortization
    
    $
    44,882
    
    
    $
    41,451
    
    
    $
    37,897Interest expense:North America
    
    $
    171
    
    
    $
    2,530
    
    
    $
    4,094International
    
    
    22
    
    
    
    31
    
    
    
    341Total interest expense
    
    $
    193
    
    
    $
    2,561
    
    
    $
    4,435Interest and other income:North America
    
    $
    (3,851
    )
    
    $
    (2,860
    )
    
    $
    (1,868
    )International
    
    
    (2,007
    )
    
    
    (1,347
    )
    
    
    (1,001
    )Total interest and other income
    
    $
    (5,858
    )
    
    $
    (4,207
    )
    
    $
    (2,869
    )Income from continuing operations before income taxes:North America
    
    $
    170,323
    
    
    $
    138,387
    
    
    $
    97,849International
    
    
    51,313
    
    
    
    36,035
    
    
    
    22,274Total income from continuing operations before income taxes
    
    $
    221,636
    
    
    $
    174,422
    
    
    $
    120,123Income taxes:North America
    
    $
    68,484
    
    
    $
    52,578
    
    
    $
    39,923International
    
    
    6,893
    
    
    
    6,806
    
    
    
    2,221Total income taxes
    
    $
    75,377
    
    
    $
    59,384
    
    
    $
    42,144Income from continuing operations:North America
    
    $
    101,839
    
    
    $
    85,809
    
    
    $
    57,926International
    
    
    44,420
    
    
    
    29,229
    
    
    
    20,053Total income from continuing operations
    
    $
    146,259
    
    
    $
    115,038
    
    
    $
    77,979Goodwill:North America
    
    $
    170,650
    
    
    $
    170,650
    
    
    $
    170,650International
    
    
    30,417
    
    
    
    29,152
    
    
    
    27,225Total goodwill
    
    $
    201,067
    
    
    $
    199,802
    
    
    $
    197,875Total assets:North America
    
    $
    668,772
    
    
    $
    542,763
    
    
    $
    536,132International
    
    
    297,357
    
    
    
    263,161
    
    
    
    201,997Total assets
    
    $
    966,129
    
    
    $
    805,924
    
    
    $
    738,129Capital ExpendituresNorth America
    
    $
    46,930
    
    
    $
    33,331
    
    
    $
    29,052International
    
    
    16,637
    
    
    
    15,507
    
    
    
    16,396Discontinued operation
    
    
    
    
    
    
    
    
    
    
    352Total capital expenditures
    
    $
    63,567
    
    
    $
    48,838
    
    
    $
    45,800
 46




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##### Table of Contents



Identifiable assets are those assets that are identified with the operations of each segment.
Corporate assets consist mainly of cash and cash equivalents, investments in affiliated companies
and other assets. These assets are included within North America. Operating income represents
Gross profit less Selling, general and administrative costs. Approximately 19%, 19% and 19% of the
Companys Net sales were in the United Kingdom for Fiscal Years 2005, 2004 and 2003, respectively. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A. Controls and Procedures Controls and Procedures We carried out an evaluation, under the supervision and with the participation of our
management, including our Co-Chief Executive Officers and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
Annual Report. Based upon that evaluation, our Co-Chief Executive Officers and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this Annual Report to ensure that information required to be disclosed in this
Annual Report is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commissions rules and forms. There was no change in our internal control over financial reporting during our last fiscal
quarter identified in connection with the evaluation referred to above that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting. Managements Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision
and with the participation of our management, including our Co-Chief Executive Officers and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under
the framework in Internal Control - Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of January 29, 2005. Our managements
assessment of the effectiveness of our internal control over financial reporting as of January 29,
2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in
their report which is included herein. 
 Item 9B. Other Information None. 47




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##### Table of Contents



PART III. 
 Items 10, 11, 12, 13 and 14. Directors and Executive Officers of the Registrant; Executive
Compensation; Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters; Certain Relationships and Related Transactions; and Principal Accounting Fees
and Services. The information called for by Items 10, 11, 12, 13 and 14 will be contained in our definitive Proxy
Statement for our 2005 Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission no later than 120 days after the end of our fiscal year covered by this report pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended, and is incorporated herein
by reference. 
 PART IV. 
 Item 15. Exhibits, Financial Statement Schedules (a) List of documents filed as part of this report 1.

    Financial Statements
    

Page No.Independent Auditors Reports
    
    
    25Consolidated Balance Sheets as of January 29, 2005 and
January 31, 2004
    
    
    28Consolidated Statements of Operations and Comprehensive Income
for the fiscal years ended January 29, 2005, January 31, 2004
and February 1, 2003
    
    
    29Consolidated Statements of Changes in Stockholders Equity for
the fiscal years ended January 29, 2005, January 31, 2004
and February 1, 2003
    
    
    30Consolidated statements of Cash Flows for the fiscal years ended
January 29, 2005, January 31, 2004 and February 1, 2003
    
    
    31Notes to Consolidated Financial Statements
    
    
    322.

    Financial Statement Schedules
 All schedules have been omitted because the required information is included in the consolidated
financial statements or the notes thereto, or the omitted schedules are not applicable. 3.

    Exhibits(2
    )(a)
    
    Agreement and Plan of Merger dated as of March 9, 1998 among the Company, CSI
Acquisition Corp., Lux Corporation, and David Shih, Eva Shih, Daniel Shih,
Douglas Shih, the Shih Irrevocable Trust and Crestwood Partners LLC, as amended
by letter amendment dated March 23, 1998 and addendum thereto dated March 24,
1998 (incorporated by reference to exhibit 2 (a) to the Companys Annual Report
on Form 10-K for the fiscal year ended January 30, 1999).(2
    )(b)
    
    Asset Purchase Agreement, dated as of November 1, 1999, by and between the
Company, Venator Group, Inc., Venator Group Specialty, Inc., Venator Group
Canada, Inc., Afterthoughts Boutiques, Inc. and Afterthoughts (incorporated by
reference to Exhibit 2.1 to the Companys Current Report on Form 8-K dated
December 1, 1999).
 48




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##### Table of Contents



(2
    )(c)
    
    Agreement and Plan of Merger, dated as of April 28, 2000, by and between
Claires Stores, Inc. and CSI Florida Acquisition, Inc. (incorporated by
reference to Appendix A to the Companys Proxy Statement relating to the 2000
Annual Meeting of Stockholders).(2
    )(d)
    
    Stock Purchase Agreement, dated as of May 17, 2002, by and among Mr. Rags
Acquisition, Inc., Claires Stores, Inc. and Lux Corporation d/b/a Mr. Rags
(omitted schedules will be furnished supplementally to the Commission upon
request) (incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on June 3, 2002).(3
    )(a)
    
    Amended and Restated Articles of Incorporation of Claires Stores, Inc.
(formerly known as CSI Florida Acquisition, Inc.) (incorporated by reference to
Exhibit 3.1 to the Companys Current Report on Form 8-K dated June 30, 2000).(3
    )(b)
    
    Amended and Restated Bylaws of Claires Stores, Inc. (formerly known as CSI
Florida Acquisition, Inc.)(incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q filed on September 2, 2004).(3
    )(c)
    
    Articles of Amendment to the Amended and Restated Articles of Incorporation of
Claires Stores, Inc. (incorporated by reference to Exhibit 3(c) to the Companys
Annual Report on Form 10-K filed on April 15, 2004).(4
    )(a)
    
    Rights Agreement, effective May 30, 2003 between Claires Stores, Inc. and
Wachovia Bank, N.A., as Rights Agent, together with the following exhibits
thereto: Exhibit A  Form of Articles of Amendment Designating the Series A
Junior Participating Preferred Stock of Claires Stores, Inc.; Exhibit B  Form
of Right Certificate; Exhibit C  Summary of Rights to Purchase Shares of
Preferred Shares of Claires Stores, Inc. (incorporated by reference to Exhibit
4.1 to the Companys Registration Statement on Form 8-A filed on June 23, 2003).(10
    )(a)
    
    1996 Incentive Compensation Plan of the Company (incorporated by reference to
Appendix B to the Companys Proxy Statement relating to the 2003 Annual Meeting
of Stockholders).(10
    )(b)
    
    401(k) Profit Sharing Plan, as amended (incorporated by reference to Exhibit
10(e) to the Companys Annual Report on Form 10-K for the fiscal year ended
February 1, 1992).(10
    )(c)
    
    Claires Stores, Inc. Management Deferred Compensation Plan effective as of
July 26, 1999, as amended (incorporated by reference to Exhibit 10(m) to the
Companys Annual Report on Form 10-K filed on May 2, 2003).(10
    )(d)
    
    Amended and Restated Office Lease dated January 1, 2004 between the Company
and Rowland Schaefer Associates (incorporated by reference to Exhibit 10(x) to
the Companys Annual Report on Form 10-K filed on April 15, 2004).(10
    )(e)
    
    Retirement Agreement dated December 2003 between Claires Stores, Inc. and
Rowland Schaefer (incorporated by reference to Exhibit 10(y) to the Companys
Annual Report on Form 10-K filed on April 15, 2004).
 49




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##### Table of Contents



(10
    )(f)
    
    Loan and Security Agreement dated March 31, 2004 by and among, the Company,
as lead borrower for BMS Distributing Corp., Claires Boutiques, Inc., CBI
Distributing Corp., and Claires Puerto Rico Corp., Fleet Retail
Group, Inc., as administrative agent for and the revolving credit lenders
and other financial institutions or entities from time to time parties
thereto, and Fleet National Bank as issuer (incorporated by reference to
Exhibit 10(z) to the Companys Annual Report on Form 10-K filed on April
15, 2004).(10
    )(g)
    
    Employment Agreement, dated February 11, 2005, between the Company and E.
Bonnie Schaefer (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed on February 17, 2005).(10
    )(h)
    
    Employment Agreement, dated February 11, 2005, between the Company and Marla
Schaefer (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed on February 17, 2005).(10
    )(i)
    
    2005 Incentive Compensation Plan.(1)(21
    )
    
    Subsidiaries of the Company.(1)(23
    )
    
    Consent of KPMG LLP.(1)(24
    )
    
    Power of Attorney (included on signature page).Each management contract or compensatory plan or arrangement to be filed
as an exhibit to this report pursuant to Item 14(c) is listed in exhibit
nos. (10)(a), (10)(b), (10)(c), (10)(e), (10)(g), (10)(h) and (10)(i).(31.1
    )
    
    Certification of Co-Chief Executive Officerpursuant to Rule
13a-14(a) and 15d-14(a).(1)(31.2
    )
    
    Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a).(1)(31.3
    )
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a).(1)(32.1
    )
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(1)(32.2
    )
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(1)(32.3
    )
    
    Certification of Chief Financial Officer pursuant to 18 USC. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
   (1) Filed herewith. 50




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized. CLAIRES STORES, INC.April 12, 2005
    
    By:
    
    /s/ Marla SchaeferMarla Schaefer, Co-Chief Executive OfficerApril 12, 2005
    
    By:
    
    /s/ E. Bonnie SchaeferE. Bonnie Schaefer, Co-Chief Executive OfficerApril 12, 2005
    
    By:
    
    /s/ Ira D. KaplanIra D. Kaplan, Senior Vice President and ChiefFinancial Officer
 POWER OF ATTORNEY We, the undersigned, hereby constitute Ira D. Kaplan and Michael Rabinovitch, or either of
them, our true and lawful attorneys-in-fact with full power to sign for us in our name and in the
capacity indicated below any and all amendments and supplements to this report, and to file the
same, with exhibits thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their
substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. April 12, 2005
    
    /s/ Marla SchaeferMarla Schaefer, Co-Chairman of the Board of
Directors (principal co-executive officer and
director)April 12, 2005
    
    /s/ E. Bonnie SchaeferE. Bonnie Schaefer, Co-Chairman of the Board of
Directors (principal co-executive officer and
director)April 12, 2005
    
    /s/ Ira D. KaplanIra D. Kaplan, Senior Vice President, ChiefFinancial Officer and Director
(principal financial and accounting officer and director)April 12, 2005
    
    /s/ Martha Clark GossMartha Clark Goss, DirectorApril 12, 2005
    
    /s/ Todd D. JickTodd D. Jick, DirectorApril 12, 2005
    
    /s/ Ann Spector LieffAnn Spector Lieff, DirectorApril 12, 2005
    
    /s/ Bruce G. MillerBruce G. Miller, DirectorApril 12, 2005
    
    /s/ Steven H. TishmanSteven H. Tishman, Director
 51




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##### Table of Contents



INDEX TO EXHIBITS EXHIBIT NO.
    
    DESCRIPTION10(i)
    
    
    2005 Incentive Compensation Plan21
    
    
    Subsidiaries of the Company23
    
    
    Consent of KPMG LLP.31.1
    
    
    Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a).31.2
    
    
    Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a).31.3
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a).32.1
    
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.3
    
    
    Certification of Chief Financial Officer pursuant to 18 USC. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 52