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Proxy Statement

Claire's Stores, Inc.

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CLAIRE'S STORES, INC. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS JUNE 2, 1997 To the Stockholders: Notice Is Hereby Given that the Annual Meeting of Stockholders (the "Meeting") of Claire's Stores, Inc. (the "Company") will be held in the Reid Room of the New York Palace Hotel, 455 Madison Avenue, New York, New York, on June 2, 1997 at 9:30 a.m., New York City time, for the following purposes, all as more fully described in the accompanying Proxy Statement: 1. To elect seven directors to the Board of Directors of the Company for a oneyear term; 2. To approve and adopt the 1996 Stock Option Plan of the Company; and 3. To transact such other business as may properly come before the Meeting or any adjournments thereof. Only stockholders of record as of the close of business on April, 18, 1997 are entitled to notice of and to vote at the Meeting. A complete list of the stockholders entitled to vote at the Meeting will be maintained at the offices of the Company, 350 Fifth Avenue, New York, New York, for a period of at least ten days prior to the Meeting. By order of the Board of Directors, Harold E. Berritt Secretary April 25, 1997 Please fill in, date and sign the enclosed Proxy or Proxies, as the case may be, and return it or them promptly in the enclosed stamped envelope, whether or not you expect to be present at the Meeting. Each Proxy is revocable and will not affect your right to vote in person if you attend the Meeting. CLAIRE'S STORES, INC. 3 S.W. 129th Avenue Pembroke Pines, Florida 33027 PROXY STATEMENT ANNUAL MEETING OF STOCKHOLDERS To Be Held on June 2, 1997 INTRODUCTION The accompanying proxy or proxies, as the case may be, are solicited by and on behalf of the Board of Directors of Claire's Stores, Inc., a Delaware corporation (the "Company"), in connection with the Annual Meeting of Stockholders (the "Meeting") to be held in the Reid Room of the New York Palace Hotel, 455 Madison Avenue, New York, New York, on June 2, 1997 at 9:30 a.m., New York City time, or any adjournment or adjournments thereof. This Proxy Statement and the accompanying proxy or proxies will first be sent to stockholders on or about April 25, 1997. The cost of solicitation of proxies will be borne by the Company. The Board of Directors may use the services of the individual Directors, officers and other regular employees of the Company to solicit proxies personally or by telephone or telegram and may request brokers, fiduciaries, custodians and nominees to send proxies, Proxy Statements and other material to their principals and reimburse them for their outofpocket expenses in doing so. Each proxy signed and returned by a stockholder may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i)Ýfiling with the Secretary of the Company, at or before the Meeting, a written notice of revocation relating to the proxy, (ii)Ýduly executing a subsequent proxy bearing a later date relating to the same shares of Common Stock or Class A Common Stock, as the case may be, and delivering it to the Secretary of the Company at or before the Meeting, or (iii) voting in person at the Meeting (although attendance at the Meeting will not in and of itself constitute a revocation of a proxy). No such revocation will be effective, however, with respect to any matter or matters upon which, prior to such revocation, a vote shall have been cast pursuant to the authority conferred by such proxy. Where instructions are indicated, proxies will be voted in accordance therewith. Where no instructions are indicated, proxies will be voted in favor of the election of the nominees for director set forth below. Abstentions and broker nonvotes will be included in the determination of the number of shares present and voting. Neither abstentions nor broker nonvotes will be counted as for or against a proposal; however, their effect on the outcome will be the same as a vote against a proposal. The Board of Directors has fixed AprilÝ18, 1997 as the record date for the purpose of determining the stockholders entitled to notice of and to vote at the Meeting. As of such date, there were issued and outstanding and entitled to vote 45,245,703 shares of Common Stock, excluding shares held in treasury, each such share being entitled to one vote, and 2,918,119 shares of Class A Common Stock, excluding shares held in treasury, each such share being entitled to ten votes. A quorum of the stockholders, present in person or by proxy, consists of the holders of outstanding shares of Common Stock or Class A Common Stock representing a majority of the number of votes entitled to be cast at the Meeting. ELECTION OF DIRECTORS The Restated Certificate of the Company currently provides for a Board of Directors consisting of not less than three and not more than nine persons as the Board of Directors from time to time shall decide. At present, the Board of Directors consists of seven members. The Board of Directors expects that the nominees named below will be available for election for a oneyear term, but in the event of the refusal or inability of any such nominee to stand for election, proxies will be voted for the election of such other person, if any, as may be nominated by the management of the Company. Set forth below are the names and ages of the nominees whose terms expire at the Meeting, their positions with the Company, or Claire's Boutiques, Inc., a whollyowned subsidiary of the Company ("Claire's Boutiques"), as the case may be, and their principal occupations at present and during the past five years. Present Position with the Name Age Company and Principal Occupation Since Rowland Schaefer(1) 80 President and Chairman of the Board 1961 of Directors of the Company Sylvia Schaefer(1) 73 Vice President and Director of the Company 1961 Bruce G.Miller 54 Director of the Company; Senior Vice President, Corporate Finance, of Ryan, Beck & Co. since July 1992; Vice President, Corporate Finance, of First Albany Corporation from January 1988 to July 1992 1983 Joel J.Silver 61 Director of the Company; President, International Cutlery, Ltd., a retailer of speciality gift items, since December 1994; also a director of Acorn Venture Capital Corporation; prior to December 1994 Mr.Silver was President of Hoffritz Holding Company, Inc. and CW Acquisitions, Inc., retailers of specialty gift items, which were placed into reorganization proceedings under Chapter 11 of the U.S.ÝBankruptcy Code in September 1994 pursuant to involuntary petitions filed in August 1994 1993 Harold E.Berritt 61 Secretary and Director of the Company; member of the law firm of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., counsel to the Company; also a director of Biscayne Apparel, Inc., an apparel manufacturer; prior to April 1, 1997, Mr. Berritt was a member of the law firm of Rubin Baum Levin Constant & Friedman; prior to AprilÝ1, 1995 Mr.ÝBerritt was a member of the law firm of Pryor, Cashman, Sherman & Flynn 1970 Fred D.Hirt 53 Director of the Company; President and Chief Executive Officer of Mt. Sinai Medical Center, Miami Beach, Florida 1986 Marla L.Schaefer(2) 47 Vice President of Fashion Merchandising of Claire's Boutiques since April 1990; Merchandise buyer for Claire's Boutiques prior to April 1990 1990 (1) Mr.Rowland Schaefer and Mrs. Sylvia Schaefer are husband and wife. (2) Marla L.Schaefer is the daughter of Mr.Rowland Schaefer and Mrs. Sylvia Schaefer. During the Company's last fiscal year, six meetings of the Board of Directors were held, and each incumbent director attended 75% or more of the meetings of the Board held during that period. The Board of Directors has a standing Audit Committee, which consists of Messrs. Miller, Hirt and Silver. The Audit Committee represents the Board of Directors in its relations with the Company's independent public accountants and oversees the financial reporting and disclosures prepared by the Company's management. The Audit Committee also reviews the scope and results of the examination of the Company's financial statements by its independent accountants, oversees the adequacy of the Company's internal accounting controls and reviews and monitors any other activity that the Committee deems necessary or appropriate. During the year ended February 1, 1997, the Audit Committee met one time. The Company has no standing nominating or compensation committees or committees performing similar functions. EXECUTIVE OFFICERS The following table sets forth the names and ages of all executive officers of the Company and its subsidiaries, and their positions with the Company or its subsidiaries, as the case may be. Name Age Position Rowland Schaefer 80 Chairman of the Board and President) Leslie D.Dunavant 52 President and Chief Operating Officer of Claire's Boutiques) Marc A.Hoffman 48 Executive Vice President of Claire's Boutiques Ira D. Kaplan 38 Senior Vice President, Chief Financial Officer and Treasurer Rowland Schaefer has been Chairman of the Board and President of the Company since the inception of the Company in 1961. Leslie D. Dunavant joined Claire's Boutiques as Vice President--Store Operations in September 1986 and became Senior Vice President in February 1990. In March 1995, Mr.Dunavant was elected President and Chief Operating Officer of Claire's Boutiques. Marc A.Hoffman joined Claire's Boutiques as Executive Vice President in May 1994. From April 1990 to December 1991 Mr. Hoffman served as Executive Vice President and Chief Operating Officer, and from December 1991 to January 1994 as President and Chief Executive Officer, of Accessory Place Inc. From February 1988 to January 1990 Mr. Hoffman served as Executive Vice President, Managing Director of Country Road Australia Inc. Ira D.Kaplan has been Chief Financial Officer of the Company since September 1990 and Treasurer since September 1987. Mr. Kaplan was elected Senior Vice President in April 1997. The officers of the Company are elected or appointed by the Board of Directors to hold office until the meeting of the Board of Directors following the next annual meeting of stockholders. Subject to the right of the Company to remove officers pursuant to its ByLaws, officers serve until their successors are chosen and have qualified. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The table below sets forth information concerning the shares of Common Stock and Class A Common Stock beneficially owned as of April 1, 1997 by all directors and nominees for director, the Company's Chief Executive Officer and the Company's executive officers other than the Chief Executive Officer as of the end of the fiscal year ended February 1, 1997 (these four officers being hereinafter referred to as the "Named Executive Officers") and by all directors and officers of the Company as a group. Common Stock Class A Common Stock Shares Shares Name of Beneficial Beneficially Percent Beneficially Percent Owner and Address Owned(1) of Class Owned(1) of Class Rowland Schaefer 4,879,812 (2) 10.8% 1,970,251(3) 67.5% Leslie D.Dunavant 421,661 (4) * 3,937 * Ira Kaplan 96,863 (5) * -- -- Marc A.Hoffman 43,088 (6) * -- -- Sylvia Schaefer 4,936,062 (7) 10.9 1,970,251(8) 67.5 Harold E.Berritt 2,003 (9) * -- -- Bruce G.Miller 285,750 (10) * -- -- Fred D.Hirt 112,500 (11) * 3,937 * Joel J.Silver 7,500 (12) * -- -- Marla L.Schaefer 56,250 (13) * 5,692(14) * All executive officers and directors as a group (10 persons) 5,961,680 (15) 13.2 1,983,817(16) 68.0 * Less than 1% of the shares outstanding. (1) Adjusted to reflect the threefortwo stock splits effective February 21, 1996 and August 29, 1996. Unless otherwise indicated, each person has sole voting and investment power with respect to the shares shown as beneficially owned by such person. (2) Includes 1,242,537 shares beneficially owned by Mrs. Schaefer. Does not include 1,503,562 shares held in a trust for the benefit of Mr. Schaefer's children. Mr. Schaefer disclaims beneficial ownership of all such shares. (3) Includes 368,739 shares owned by Mrs. Schaefer and 189,843 shares held in a trust for the benefit of Mr. Schaefer's children for which Mrs. Schaefer is the trustee. Does not include 375,889 shares held in a trust for the benefit of Mr. Schaefer's children. Mr.Schaefer disclaims beneficial ownership of all such shares. (4) Includes 242,924 shares subject to currently exercisable options and options exercisable within 60 days. (5) Includes 59,063 shares issuable upon the exercise of currently exercisable stock options and options exercisable within 60 days. (6) Includes 42,188 shares subject to stock options currently exercisable and options exercisable within 60 days. (7) Includes 3,637,275 shares beneficially owned by Mr. Schaefer, but not 1,503,562 shares held in a trust for the benefit of Mrs.Schaefer's children. Mrs. Schaefer disclaims beneficial ownership as to all such shares. Also includes 56,250 shares subject to currently exercisable options and options exercisable within 60 days. (8) Includes 189,843 shares held in a trust for the benefit of Mrs. Schaefer's children for which Mrs. Schaefer is the trustee and 1,411,669 shares owned by Mr. Schaefer, but not 375,889 shares held in a trust for the benefit of Mrs. Schaefer's children. Mrs. Schaefer disclaims beneficial ownership as to all such shares. (9) Includes 1,283 shares held by Mrs. Berritt as custodian for their child. Mr.Berritt disclaims beneficial ownership as to such shares. (10) Includes 56,250 shares subject to currently exercisable stock options. (11) Includes 56,250 shares subject to currently exercisable stock options. (12) Includes 7,500 shares subject to currently exercisable stock options. (13) Includes 42,188 shares subject to currently exercisable stock options and options exercisable within 60Ýdays. Does not include 501,187 shares held for the benefit of Ms. Schaefer under the trust referred to in footnotes (2) and (7) to the table, as to which Ms. Schaefer has no present voting or investment power. (14) Does not include 163,264 shares held for the benefit of Ms. Schaefer under the trusts referred to in footnotes (3) and (8) to the table, as to which Ms. Schaefer has no present voting or investment power. (15) Includes an aggregate of 560,858 shares issuable upon the exercise of stock options currently exercisable and exercisable within 60 days. Does not include those shares held in the trusts referred to in notes (2) and (7) to the table. (16) Does not include those shares held in the trusts referred to in notes (3) and (8) to the table. The table below sets forth information concerning the shares of Common Stock and Class A Common Stock beneficially owned as of April 1, 1997 by each person who is known by the Company to be the beneficial owner of more than five percent of the Common Stock or Class A Common Stock as of such date. Common Stock Class A Common Stock Shares Shares Name of Beneficial Beneficially Percent Beneficially Percent Owner and Address Owned(1) of Class Owned(1) of Class Rowland Schaefer 4,879,812 (2) 10.8% 1,970,251(3) 67.5% c/o Claire's Stores, Inc. 3 S.W. 129th Avenue Pembroke Pines, Florida 33027 Sylvia Schaefer 4,936,062 (4) 10.9 1,970,251(5) 67.5 c/o Claires Stores, Inc. 3 S.W. 129th Avenue Pembroke Pines, Florida 33027 Charles L.Ruffner 1,503,562 (6) 3.3 375,889(7) 12.9 c/o Charles L.ÝRuffner, P.A. 601 Brickell Key Drive Suite 507 Miami, Florida 33131 Lynch & Mayer, Inc. 2,239,190 (8) 4.9 -- -- 520 Madison Avenue New York, New York 10022 (1) Adjusted to reflect threefortwo stock splits effective February 21, 1996 and August 29, 1996. Unless otherwise indicated, each person has sole voting and investment power with respect to the shares shown as beneficially owned by such person. (2) See footnote (2) on page 5. (3) See footnote (3) on page 5. (4) See footnote (7) on page 5. (5) See footnote (8) on page 6. (6) Represents 1,503,562 shares held in a trust for the benefit of certain of Mr. and Mrs. Schaefer's children for which Mr.Ruffner is trustee and as to which shares he disclaims beneficial ownership. (7) Represents 375,889 shares held in a trust for the benefit of certain of Mr. and Mrs. Schaefer's children for which Mr.ÝRuffner is trustee and as to which shares he disclaims beneficial ownership. (8) Lynch & Mayer, Inc. ("L&M") has shared voting and dispositive power with respect to such shares. Such information is furnished in reliance on the Schedule 13G of L&M dated February 7, 1997, filed with the SEC. EXECUTIVE COMPENSATION Summary Compensation Table The following table summarizes the compensation paid or accrued by the Company during the three fiscal years ended FebruaryÝ1, 1997 to those persons who, as of FebruaryÝ1, 1997, were the Named Executive Officers. Long Term Compensation Awards Payouts Annual Compensation Other Other Annual Restricted All Other Fiscal Compensation Stock LTIP Compensation Name and Principal Year Salary($) Bonus($) (2)($) Award(s)($) Options(#) Payouts($) ($)(1) Position Rowland Schaefer 1997 $1,000,000 $ -- 0 0 37,500 0 0 Chairman of the 1996 778,846 200,000 0 0 0 0 0 Board and President 1995 750,000 190,000 0 0 0 0 0 of the Company Ira D.Kaplan 1997 200,000 60,000 0 0 75,000 0 $2,250 Senior Vice President,1996 188,077 30,000 0 0 22,500 0 2,071 Chief Financial 1995 154,515 15,000 0 0 45,000 0 2,384 Officer and Treasurer of the Company Leslie D.Dunavant 1997 550,000 100,000 0 0 0 0 2,250 President and Chief 1996 360,715 250,000 0 0 562,500 0 3,779 Operating Officer of 1995 242,821 25,000 0 0 56,250 0 2,417 Claire's Boutiques Marc A.Hoffman 1997 276,950 20,000 0 0 150,000 0 2,512 Executive Vice 1996 229,536 50,000 0 0 0 0 3,654 President of 1995 164,243 25,000 0 0 112,500 0 0 Claire's Boutiques (1) Consists of matching Company contributions under the Company's 401(k) Profit Sharing Plan. (2) Except as otherwise provided herein, no amounts for executive perquisites and other personal benefits, securities or property are shown because the aggregate dollar amount per executive is the lesser of either $50,000 or 10% of annual salary and bonus. Compensation of Directors Directors of the Company who are not employees (other than Mr. Berritt) currently receive an annual retainer of $35,000 and are entitled to reimbursement for outofpocket expenses incurred in connection with the attendance at Board of Directors and committee meetings. Related Transactions The Company leases from Rowland Schaefer & Associates (formerly Two Centrum Plaza Associates) approximately 30,000 square feet in Pembroke Pines, Florida, where it maintains its executive and accounting and finance offices. Rowland Schaefer & Associates is a general partnership of two corporate general partners which are owned by immediate family members of the Chairman of the Board and President of the Company, two of whom are Vice Presidents of Claire's Boutiques. The lease provides for the payment by the Company of annual base rent of approximately $494,000, which is subject to annual costofliving increases, and a proportionate share of all taxes and operating expenses of the building. The lease expires on July 31, 2000 and may be extended, at the option of the Company, for an additional fiveyear term. The Board of Directors of the Company believes, based upon the report of an independent committee of the Board, that the terms of the lease are no less favorable to the Company than those which would be obtained from an independent third party. Option Grants In Last Fiscal Year The following table sets forth certain information concerning stock option grants during the year ended February 1, 1997 to the Named Executive Officers. % of Total Options Potential Realizable Value Common Granted to Exercise at Assumed Annual Rates of Stock Employees or Base Stock Price Appreciation for Options in Fiscal Price(2) Expiration Option Term(3) (4) Name Granted(#) Year ($/per Share) Date 5%($) 10%($) Rowland Schaefer 37,500 6 19.01 7/24/01 448,500 1,136,250 Ira Kaplan 75,000 13 17.92 7/24/06 844,748 2,141,595 Leslie D.Dunavant 0 NA NA NA NA NA Marc A. Hoffman 150,000 25 17.92 7/24/06 1,689,495 4,283,191 (1) Options awarded to employees in the future will be granted pursuant to the Claires Stores, Inc. 1996 Stock Option Plan (the "1996 Plan"), assuming the 1996 Plan is approved and adopted at this Meeting. For details concerning the 1996 Plan, see pages 13 to 17 of the Proxy Statement. (2) The exercise price for all option grants is equal to the fair market value of a share of Common Stock on the date of grant. (3) Based upon the market price on the date of grant and an assumed annualized appreciation at the rate stated of such market price through the expiration date of such options. The dollar amounts under these columns are the result of calculations at the 5% rates and 10% rates set by the SEC and therefore are not intended to forecast possible future appreciation, if any, of the Company's stock price. The Company did not use an alternative formula for a grant date valuation, as the Company is not aware of any formula which will determine with reasonable accuracy a present value based on future unknown or volatile factors. (4) Options granted to employees, begin to vest 12 months after the grant date at varying annual rates depending on the length of the option's term, with full vesting occurring generally between the fourth and ninth anniversaries of the grant date. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's directors and executive officers, and persons who own more than 10 percent of the Company's Common Stock, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock. Officers, directors and greater than 10 percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and representations that no other reports were required, during the fiscal year ended February 1, 1997, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with. Option Exercises and YearEnd Values The following table sets forth certain information concerning each exercise of stock options during the fiscal year ended FebruaryÝ1, 1997 by each of the Named Executive Officers and the number and value of unexercised options held by each of the Named Executive Officers on February 1, 1997. Options at Options at Shares Year-End(#) Year-End($)(2) Acquired on Value Exercisable/ Exercisable/ Name Exercise(#) Realized($)(1) Unexercisable Unexercisable Rowland Schaefer 700,313 6,245,909 0/37,500 0/0 Ira Kaplan 0 NA 53,438/117,187 496,490/373,043 Leslie D.Dunavant 61,875 874,297 196,212/557,538 1,582,695/3,850,109 Marc A.Hoffman 0 NA 28,125/234,375 242,969/728,907 (1) Represents the difference between the exercise price and the fair market value of the Common Stock on the date of exercise. (2) Represents the difference between the closing price of the Common Stock on the New York Stock Exchange on February 1, 1997 ($14.25) and the exercise price of the options. REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION The Company's executive compensation program is administered by the Board of Directors and is structured to promote the achievement of the Company's business goals and, thereby, to maximize corporate performance and stockholder return. The Company's executive compensation is based primarily upon base salary, grants of stock options and, to a lesser extent, special achievement bonuses. The Board of Directors believes that it is important to have stock incentives constitute a portion of each executive's compensation package in order to help align executive and stockholder interests. In determining the total amount and mixture of the compensation package for each executive officer, the Board of Directors considers the overall value to each executive of his or her compensation package in light of numerous factors such as (i) competitive position, (ii) individual performance, including the expected contribution to the Company's goals of each executive officer, and (iii) the Company's longterm needs and goals, including attracting and retaining key management personnel. The overall objectives of this strategy are to attract and retain the best possible executive talent, to motivate the Company's executives to achieve goals inherent in the Company's business strategy, to link executive and stockholder interests and to provide a compensation package that recognizes individual contributions as well as overall business results. In the final quarter of each fiscal year, the Board of Directors reviews and approves an annual salary plan for the Company's senior executives for the succeeding fiscal year. In formulating the plan, key executive positions within the Company are defined carefully in terms of scope and responsibility, job complexity, knowledge and experience required, and other relevant factors. Executive positions are ranked internally on the basis of these criteria, and a logical value relationship is established among them. The Board also obtains and analyzes comparative industry, peer group and national compensation surveys. By reviewing the comparative industry data and other surveys, the Board develops salary ranges for all senior executive positions in the Company, and agrees upon each executive's base salary within the range, taking into account certain past performance factors, including how well objectives contributing to the Company's success have been met by the executive, how well the executive's responsibilities have been fulfilled, the executive's growth in qualifications for the job, the executive's experience and accomplishment of personal goals and other aspects of performance, and the anticipated future contributions of the executive. The Company has also relied upon stock options to reward and incentivize the performance of executives. The Board of Directors believes that stock options have been and remain an excellent vehicle for compensating its employees. Because the option exercise price for the employees generally equals or exceeds the price of the stock on the date of grant, employees recognize a gain only if the value of the stock increases. As a result, options effectively align the interests of executive officers with the Company's stockholders by tying a significant portion of each executive's total longterm compensation to the continued growth of the Company and appreciation of its shares. Also, the stock ownership gives employees a greater personal stake in the Company. In general, stock options granted to executive officers vest in equal annual installments over periods of four to nine years commencing on the first anniversary of the date of grant, so long as the optionee remains employed with the Company. The size of the individual option grants are generally based upon competitive practice and the position level of the executive officer. In April 1996, the Board of Directors adopted a performancebased executive bonus arrangement tied to the Company's consolidated pretax income for the fiscal year ended February 1, 1997. Pursuant to that arrangement, bonuses totalling $621,000 were paid to the executive and other officers of the Company. The Board of Directors recently adopted an executive bonus arrangement whereby if in the current fiscal year the Company's consolidated pretax income is between $72 million and $80Ýmillion, the bonus pool for executives will be 1% of such pretax income. If the pretax income exceeds $80 million but not $89 million, the bonus pool will be 1.2% thereof and if pretax income exceeds $89 million, the bonus pool will be 1.5% thereof. The Board of Directors will apportion any such amounts among the executive and other officers of the Company as it deems appropriate based upon each officer's contribution to the Company's overall performance in the fiscal year in question. For additional information regarding bonuses paid to the Named Executive Officers, see "Executive Compensation-- Summary Compensation Table" above. The compensation paid to Rowland Schaefer, the Company's chief executive officer, in the fiscal year ended February 1, 1997 is reflected in the table under "Executive Compensation--Summary Compensation Table" above. The base salary paid to Mr. Schaefer during the fiscal year ended February 1, 1997, was within the salary range developed by the Board of Directors based upon the base salaries of chief executive officers of comparable companies in the compensation surveys reviewed by the Board of Directors and took into account Mr.Schaefer's active role in Company management, the Company's financial performance during the prior fiscal year and the challenges and expectations for the Company in fiscal 1997, Mr. Schaefer's stature within the industry as a spokesman for the Company and his more than 30 years of service as the Company's senior executive officer. The base salaries of Messrs. Dunavant, Hoffman and Kaplan have been fixed at levels which the Board of Directors believes are competitive with amounts paid to senior executives with comparable qualifications, experience and responsibilities. In December 1993, the Internal Revenue Service issued proposed regulations concerning compliance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Section 162(m) generally disallows a public company's deduction for compensation to any one employee in excess of $1.0 million per year unless the compensation is pursuant to a plan approved by the public company's shareholders. The Board of Directors intends to take the necessary steps to ensure compliance with Section 162(m) of the Code. Rowland Schaefer Sylvia Schaefer Bruce G.Miller Harold E.Berritt Fred D.Hirt Marla L.Schaefer Joel J.Silver Board of Director Interlocks and Insider Participation The Board of Directors has not established a compensation committee. All decisions regarding the compensation of executive officers are determined by the Board of Directors as a whole. All directors participated in deliberations of the Board of Directors concerning annual performancebased compensation for the year ended February 1, 1997. Rowland Schaefer, Sylvia Schaefer and Marla L.Schaefer are officers and employees of the Company or Claire's Boutiques. Each management director is asked to excuse himself or herself from discussions and decisions regarding his or her performance and compensation. During the year ended February 1, 1997 Mr. Berritt was a member of Rubin Baum Levin Constant & Freidman, which provide legal services to the Company. Stockholder Return Performance Graph Set forth below is a line graph comparing the cumulative total shareholder return on the Company's Common Stock with the cumulative total return of companies on the Standard & Poor's 500 (S&P 500) Stock Index and the Retail SpecialtyApparel Index for the five fiscal years ended FebruaryÝ1, 1997. This graph assumes the investment of $100 in the Company's Common Stock, the S&PÝ500 and the Retail Specialty Apparel Index on JanuaryÝ31, 1992 and assumes dividends are reinvested. Measurement points are on the last trading day of each of the five fiscal years. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG CLAIRE'S STORES, INC., THE S&P 500 INDEX AND THE S&P RETAIL (SPECIALTYAPPAREL) INDEX * $100 invested on 01/31/92 in stock or index--including reinvestment of dividends, fiscal year ending January 31. APPROVAL OF CLAIRE'S STORES, INC. 1996 STOCK OPTION PLAN The following resolution will be considered at the Annual Meeting: RESOLVED, that the Company's 1996 Stock Option Plan, as adopted by the Board of Directors of the Company (subject to shareholder approval) on August 13, 1996, in the form of Appendix A of the proxy statement for the 1997 Annual Meeting of Stockholders, is hereby approved. General The Company's Board of Directors adopted the Company's 1996 Stock Option Plan (the "Plan") on August 13, 1996, subject to the approval of the Company's stockholders at the 1997 Annual Meeting. The purpose of the Plan is to provide an additional incentive to attract and retain qualified competent persons who provide management services and upon whose efforts and judgment the success of the Company is largely dependent, through the encouragement of stock ownership in the Company by such persons. In furtherance of this purpose, the Plan authorizes, among other things, the discretionary granting of incentive or nonqualified stock options to purchase shares of the Company's Common Stock to persons selected by the administrators of the plan from the class of all regular employees of the Company (including directors and officers who are regular employees), nonemployee directors, and persons who provide consulting or other services to the Company as independent contractors, which class presently consists of approximately 50 persons. The Plan also provides for loans to participants to finance the exercise of options and the payment of taxes in connection therewith, and the use of already owned shares of Common Stock as payment of the exercise price for options granted under the Plan. Upon approval of the plan by the stockholders at the Annual Meeting, the Company will cease granting any additional stock options under the Company's existing stock option plan. All subsequent grants of options will be made under the new Plan or other plans or arrangements that may be implemented by the Company in the future. One of the reasons for submitting the Plan for stockholder approval is to ensure that awards under the Plan will qualify as performancebased compensation for purposes of SectionÝ162(m) of the Internal Revenue Code (the "Code"). That section, which became law in 1993, generally disallows a tax deduction for certain compensation over $1 million paid, or otherwise taxable, to persons named in the Executive Compensation Table and employed by the Company at the end of the applicable year. Qualifying performancebased compensation is not subject to the deduction limit if certain requirements are met, including stockholder approval in the case of the Plan. Stockholder approval of the Plan will also satisfy any applicable requirements of the New York Stock Exchange for stockholder approval. A summary of the Plan is set forth below. The full text of the Plan is annexed to this Proxy Statement as AppendixÝA, and the following summary is qualified in its entirety by reference to Appendix A. Summary of Plan The Plan limits the total aggregate number of options that any one person can receive under the Plan to options for 500,000 shares of Common Stock. The purpose of this limit is to help ensure that the Company's tax deductions for compensation expense under the Plan are not limited by Section 162(m) of the Code. The Plan and the options granted thereunder are designed and intended to be administered so that the grant of options under the Plan and transactions thereunder will comply with the requirements for exemption under Rule 16b3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Rule 16b3 exempts certain transactions involving the grant and exercise of stock options under the Plan by directors, executive officers and principal stockholders of the Company from the shortswing profit recovery provisions of Section 16 of the Exchange Act. The Plan provides that it shall be administered by a committee consisting of not less than two directors designated by the Board of Directors (the "Committee"), which directors shall be "outside directors" (i.e., a member of the Board who qualifies as an "outside director" under SectionÝ162(m) of the Code and the regulations thereunder and as a "nonemployee director" under Rule 16b3). However, the Plan provides that the Board of Directors may grant options to directors who are not employees of the Company or its subsidiaries or to other persons who are eligible to receive grants under the Plan. The Board has established a Stock Option Committee, comprised of Messrs. Miller, Hirt and Silver, to administer the Plan. Both the Board and the Committee have the power to determine the persons to be awarded options, the number of shares subject thereto and the exercise price and other terms thereof. In addition, both the Committee and the Board have the power and authority to construe and interpret the Plan, and the acts of the Committee or the Board are final, conclusive and binding upon all interested parties, including the Company, its stockholders, its officers and employees, recipients of grants under the plan, and all persons or entities claiming by or through such persons. An aggregate of 3,000,000 shares of Common Stock plus any shares unused or recaptured under the Company's existing stock option plan (subject to adjustment as described below) are reserved for issuance upon exercise of options granted under the Plan. The shares acquired upon exercise of options granted under the Plan will be authorized and issued shares of Common Stock. The Company's stockholders will not have any preemptive rights to purchase or subscribe for any Common Stock by reason of the reservation and issuance of Common Stock under the Plan. If any option granted under the Plan should expire or terminate for any reason other than having been exercised in full, the unpurchased shares subject to that option will again be available for purposes of the Plan. Options Granted Under the Plan No options have been granted under the Plan as of the date of this Proxy Statement. The Company's management believes that options granted under the Plan will be awarded primarily to those persons who possess a capacity to contribute significantly to the successful performance of the Company. Because persons to whom discretionary grants of options are to be made are to be determined from time to time by the Committee or the Board in their discretion, it is impossible at this time to indicate the precise number, name or positions of persons who will hereafter receive such options or the number of shares for which options will be granted. Certain Terms and Conditions All grants of options under the Plan must be evidenced by an Option Agreement between the Company and the grantee. Such agreement shall contain such terms and conditions as the Committee (or the Board) shall prescribe, consistent with the Plan, including, without limitation, the exercise price, term and any restrictions on the exercisability of the options granted. Such terms often include the automatic termination of options upon certain events, such as the death, disability or termination of employment of an optionee. The price per share for discretionary grants may be any price determined by the Committee (or the Board); provided, however, that in no event shall the option price of any incentive stock option be less than the fair market value per share of Common Stock on the date of grant. For purposes of the Plan, and for so long as the Company's Common Stock is listed on the New York Stock Exchange, the term "fair market value" means the closing price of the Common Stock as reported on the New York Stock Exchange on the date of grant, unless the Committee or the Board shall determine otherwise in a fair and uniform manner. The exercise price of an option may be paid in cash, by certified or official bank check, by money order, by delivery of already owned shares of Common Stock having a fair market value equal to the exercise price, or by a combination of the foregoing. The Plan also authorizes the Company to make loans to optionees to enable them to exercise their options. If the exercise price is paid with the optionee's promissory note, the note must (i)Ýprovide for recourse to the optionee, (ii)Ýbear interest at a rate no less than the prime rate of interest of the Company's principal lender, and (iii)Ýbe secured by the shares of Common Stock purchased. Cash payments will be used by the Company for general corporate purposes. Payments made in Common Stock must be made by delivery of stock certificates in negotiable form. Already owned shares of Common Stock may be used to pay the exercise price of an option in a single transaction or by "pyramiding" already owned shares in successive, simultaneous option exercises. In general, pyramiding permits an option holder to start with as little as one share of Common Stock and exercise an entire option to the extent then exercisable (no matter what the number of shares subject thereto). By utilizing already owned shares of Common Stock, no cash (except for fractional share adjustments) is needed to exercise an option. Consequently, the optionee would receive Common Stock equal in value to the spread between the fair market value of the shares subject to the option and the exercise price of the option. In addition, the Plan allows other forms of cashless exercise procedures approved by the Committee or the Board. Generally, options granted under the Plan are not assignable or transferable, other than by will or by the laws of descent and distribution or with the prior consent of the Committee or the Board. During the lifetime of an optionee, an option is exercisable only by the optionee. The expiration date of an option will be determined by the Committee or the Board at the time of the grant, but in no event will an option be exercisable after the expiration of 10 years from the date of grant. An option may be exercised at any time or from time to time or only after a period of time or in installments, as the Committee or the Board determines, except that under the terms of the Plan no option may be exercised prior to one year after the date of grant. The Committee or the Board may in its sole discretion accelerate the date on which any option may be exercised. Each Option Agreement shall set forth when the unexercised portion of any option granted under the Plan shall be terminated. To prevent dilution of the rights of a holder of an option, the Plan provides for appropriate adjustment of the number of shares for which options may be granted, the number of shares subject to outstanding options and the exercise price of outstanding options, in the event of any increase or decrease in the number of issued and outstanding shares of the Company's capital stock resulting from a stock dividend, recapitalization or other capital adjustment of the Company. The Committee or the Board has discretion to make appropriate antidilution adjustments to outstanding options in the event of a merger, consolidated or other reorganization of the Company or a sale or other disposition of substantially all the Company's assets. The Plan will expire on AugustÝ13, 2006, and any option outstanding on such date will remain outstanding until it expires or is exercised. The Committee or the Board may amend the Plan or any option at any time, provided that such amendment may not substantially impair the rights of an optionee under an outstanding option without the optionee's consent. Any such amendment shall be subject to stockholder approval if necessary under any federal law or state law or regulation (including, without limitation, Rule 16b3 or to comply with Section 162(m) of the Code) or under the rules of any stock exchange or automated quotation system on which the Common Stock may be listed or traded. Federal Income Tax Consequences The Plan is not qualified under the provisions of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), nor is it subject to any of the provisions of the Employee Retirement Income Security Act of 1974, as amended. Nonqualified Stock Options. An optionee granted a nonqualified stock option under the Plan will generally recognize, at the date of exercise of such option, ordinary income equal to the difference between the exercise price and the fair market value of the shares of Common Stock purchased. This taxable ordinary income will be subject to Federal income tax withholding, and the Company will be entitled to a deduction for Federal income tax purposes equal to the amount of ordinary income recognized by the optionee, provided that such amount constitutes an ordinary and necessary business expense to the Company and is reasonable, and either the employee includes that amount in his income or the Company timely satisfies its reporting requirements with respect to that amount. If an optionee exercises a nonqualified stock option by delivering shares of the Company's Common Stock, the optionee will not recognize gain or loss with respect to the exchange of such shares, even if their then fair market value is different from the optionee's tax basis. The optionee, however, will be taxed as described above with respect to the exercise of the nonqualified stock option as if he had paid the exercise price in cash, and the Company likewise generally will be entitled to an equivalent tax deduction. Provided a separate identifiable stock certificate is issued therefor, the optionee's tax basis in that number of shares received on such exercise which is equal to the number of shares surrendered on such exercise will be equal to his tax basis in the shares surrendered, and his holding period for such number of shares received will include his holding period for the shares surrendered. The optionee's tax basis and holding period for the additional shares received on exercise of a nonqualified stock option paid for, in whole or in part, with shares will be the same as if the optionee had exercised the nonqualified stock option solely for cash. Incentive Stock Options. The Plan provides for the grant of stock options that qualify as "incentive stock options" as defined in SectionÝ422 of the Code. Under the Code, an optionee generally is not subject to ordinary income tax upon the grant or exercise of an incentive stock option. However, an employee who exercises an incentive stock option by delivering shares of common stock previously acquired pursuant to the exercise of an incentive stock option is treated as making a "Disqualifying Disposition" (as defined below) of such shares if the employee delivers such shares before the expiration of the holding period applicable to such shares. The applicable holding period is the longer of two years from the date of grant or one year from the date of exercise. The effect of this provision is to prevent "pyramiding" the exercise of an incentive stock option (i.e., the exercise of the incentive stock option for one share and the use of that share to make successive exercises of the incentive stock option until it is completely exercised) without the imposition of current income tax. If, subsequent to the exercise of an incentive stock option (whether paid for in cash or in shares), the optionee holds the shares received upon exercise for a period that exceeds (a)Ýtwo years from the date such incentive stock option was granted or, if later, (b)Ýone year from the date of exercise (the "Required Holding Period"), the difference (if any) between the amount realized from the sale of such shares and their tax basis to the holder will be taxed as longterm capital gain or loss. In general, if, after exercising an incentive stock option, an employee disposes of the shares so acquired before the end of the Required Holding Period (a "Disqualifying Disposition"), such optionee would be deemed in receipt of ordinary income in the year of the Disqualifying Disposition in an amount equal to the excess of the fair market value of the shares at the date the incentive stock option was exercised over the exercise price. If the Disqualifying Disposition is a sale or exchange that would permit a loss to be recognized under the Code (were a loss in fact to be sustained), and the sales proceeds are less than the fair market value of the shares on the date of exercise, the optionee's ordinary income would be limited to the gain (if any) from the sale. If the amount realized upon disposition exceeds the fair market value of the shares on the date of exercise, the excess would be treated as shortterm or longterm capital gain, depending on whether the holding period for such shares exceeded one year. The amount by which the fair market value of the shares of Common Stock acquired pursuant to the exercise of an incentive stock option exceeds the exercise price of such shares under such option generally will be treated as an item of adjustment included in the optionee's alternative minimum taxable income for purposes of the alternative minimum tax for the year in which the option is exercised. If, however, there is a Disqualifying Disposition of the shares in the year in which the option is exercised, there will be no item of adjustment for purposes of the alternative minimum tax as a result of the exercise of the option with respect to those shares. If there is a Disqualifying Disposition in a year after the year of exercise, the income on the Disqualifying Disposition will not be considered income for purposes of the alternative minimum tax in that subsequent year. The optionee's tax basis for shares acquired pursuant to the exercise of an incentive stock option will be increased for purposes of determining his alternative minimum tax by the amount of the item of adjustment recognized with respect to such shares in the year the option was exercised. Only employees of the Company or its subsidiaries qualify for the tax treatment applicable to incentive stock options. Thus, optionees who are nonemployee advisors or consultants to the Company will be taxed solely under the rules applicable to nonqualified stock options. An income tax deduction is not allowed to the Company with respect to the grant or exercise of an incentive stock option or the disposition, after the Required Holding period, of shares acquired upon exercise. In the event of a Disqualifying Disposition, a Federal income tax deduction will be allowed to the Company in an amount equal to the ordinary income to be recognized by the optionee, provided that such amount constitutes an ordinary and necessary business expense to the Company and is reasonable, and either the employee includes that amount in his income or the Company timely satisfies its reporting requirements with respect to that amount. Importance of Consulting Tax Adviser. The information set forth above is a summary only and does not purport to be complete. In addition, the information is based upon current federal income tax rules and therefore is subject to change when those rules change. Moreover, because the tax consequences to any optionee may depend on his or her particular situation, each optionee should consult his or her tax adviser as to the Federal, state, local and other tax consequences of the grant or exercise of an option or the disposition of Common Stock acquired on exercise of an option. Vote Required and Recommendation The affirmative vote of a majority of the aggregate combined voting power of the shares of Common Stock (one vote per share) and Class A Common Stock (ten votes per share) present, or represented, and entitled to vote at the Meeting will be required for approval of the Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE COMPANY'S 1996 STOCK OPTION PLAN. OTHER BUSINESS As of the date of this Proxy Statement, the only business which the Board of Directors intends to present and knows that others will present at the Meeting is as hereinabove set forth. If any other matter or matters are properly brought before the Meeting, or any adjournments thereof, it is the intention of the persons named in the accompanying proxy to vote the proxy on such matter or matters in accordance with their judgment. RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS The firm of KPMG Peat Marwick LLP, the Company's accountants for its last fiscal year, has been selected by the Board of Directors of the Company as the Company's principal accountants for the current fiscal year. It is anticipated that a representative of KPMG Peat Marwick LLP will be present at the Meeting, with the opportunity to make a statement if he desires to do so, and will be available to respond to appropriate questions. 1998 STOCKHOLDER PROPOSALS Proposals by stockholders which are intended to be presented at the 1998 Annual Meeting of Stockholders must be received by the Company on or before January 15, 1998. By order of the Board of Directors, Rowland Schaefer Chairman of the Board and President Dated: AprilÝ25, 1997 APPENDIX A CLAIRE'S STORES, INC. 1996 STOCK OPTION PLAN 1. Purpose. The purpose of this Plan is to advance the interests of Claire's Stores, Inc., a Delaware corporation (the "Company"), and its Subsidiaries by providing an additional incentive to attract and retain qualified and competent persons who provide services to the Company and its Subsidiaries, and upon whose efforts and judgment the success of the Company and its Subsidiaries is largely dependent, through the encouragement of stock ownership in the Company by such persons. 2. Definitions. As used herein, the following terms shall have the meaning indicated: (a) "Board" shall mean the Board of Directors of the Company. (b) "Committee" shall mean the committee appointed by the Board pursuant to Section 13(a) hereof. (c) "Common Stock" shall mean the Company's Common Stock, par value $.05 per share. (d) "Director" shall mean a member of the Board. (e) "Fair Market Value" of a Share on any date of reference shall mean the "Closing Price" (as defined below) of the Common Stock on such date, unless the Committee in its sole discretion shall determine otherwise in a fair and uniform manner. For the purpose of determining Fair Market Value, the "Closing Price" of the Common Stock on any business day shall be (i)Ýif the Common Stock is listed or admitted for trading on any United States national securities exchange, or if actual transactions are otherwise reported on a consolidated transaction reporting system, the last reported sale price of Common Stock on such exchange or reporting system, as reported in any newspaper of general circulation, (ii)Ýif the Common Stock is quoted on the National Association of Securities Dealers Automated Quotations System ("NASDAQ"), or any similar system of automated dissemination of quotations of securities prices in common use, the last reported sale price of Common Stock on such system or, if sales prices are not reported, the mean between the closing high bid and low asked quotations for such day of Common Stock on such system, as reported in any newspaper of general circulation or (iii)Ýif neither clause (i) or (ii) is applicable, the mean between the high bid and low asked quotations for the Common Stock as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and asked quotations for Common Stock on at least five of the ten preceding days. If neither (i), (ii), or (iii) above is applicable, then Fair Market Value shall be determined in good faith by the Committee or the Board in a fair and uniform manner. (f) "Incentive Stock Option" shall mean an incentive stock option as defined in Section 422 of the Internal Revenue Code. (g) "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (h) "NonQualified Stock Option" shall mean an Option which is not an Incentive Stock Option. (i) "Officer" shall mean the Company's Chairman of the Board, President, Chief Executive Officer, principal financial officer, principal accounting officer, any vicepresident of the Company in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policymaking function, or any other person who performs similar policymaking functions for the Company. Officers of Subsidiaries shall be deemed Officers of the Company if they perform such policymaking functions for the Company. As used in this paragraph, the phrase "policymaking function" does not include policymaking functions that are not significant. If pursuant to ItemÝ401(b) of Regulation SK (17 C.F.R. 229.401(b)) the Company identifies a person as an "executive officer," the person so identified shall be deemed an "Officer" even though such person may not otherwise be an "Officer" pursuant to the foregoing provisions of this paragraph. (j) "Option" (when capitalized) shall mean any option granted under this Plan. (k) "Optionee" shall mean a person to whom a stock option is granted under this Plan or any person who succeeds to the rights of such person under this Plan by reason of the death of such person. (l) "Outside Director" shall mean a member of the Board who qualifies as an "outside director" under SectionÝ162(m) of the Internal Revenue Code and the regulations thereunder and as a "NonEmployee Director" under RuleÝ16b3 promulgated under the Securities Exchange Act. (m) "Plan" shall mean this 1996 Stock Option Plan of the Company. (n) "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (o) "Share" shall mean a share of Common Stock. (p) "Subsidiary" shall mean any corporation (other than the Company) in any unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. Shares Available for Option Grants. The Committee or the Board may grant to Optionees from time to time Options to purchase an aggregate of up to THREE MILLION (3,000,000) Shares (plus the number of shares unused or recaptured under the Company's 1991 Stock Option Plan) from the Company's authorized and unissued Shares. If any Option granted under the Plan shall terminate, expire, or be canceled or surrendered as to any Shares, new Options may thereafter be granted covering such Shares. 4. Incentive and NonQualified Options. (a) An Option granted hereunder shall be either an Incentive Stock Option or a NonQualified Stock Option as determined by the Committee or the Board at the time of grant of such Option and shall clearly state whether it is an Incentive Stock Option or a NonQualified Stock Option. All Incentive Stock Options shall be granted within 10 years from the effective date of this Plan. Incentive Stock Options may not be granted to any person who is not an employee of the Company or any Subsidiary. (b) Options otherwise qualifying as Incentive Stock Options hereunder will not be treated as Incentive Stock Options to the extent that the aggregate fair market value (determined at the time the Option is granted) of the Shares, with respect to which Options meeting the requirements of SectionÝ422(b) of the Internal Revenue Code are exercisable for the first time by any individual during any calendar year (under all plans of the Company and its parent and subsidiary corporations as defined in SectionÝ424 of the Internal Revenue Code), exceeds $100,000. 5. Conditions for Grant of Options. (a) Each Option shall be evidenced by an option agreement that may contain any term deemed necessary or desirable by the Committee or the Board, provided such terms are not inconsistent with this Plan or any applicable law. Optionees shall be (i)Ýthose persons selected by the Committee or the Board from the class of all regular employees of, or persons who provide consulting or other services as independent contractors to, the Company or its Subsidiaries, including Directors and Officers who are regular employees, and (ii)ÝDirectors or Officers who are not employees of the Company or of any Subsidiaries. Any person who files with the Committee or the Board, in a form satisfactory to the Committee or the Board, a written waiver of eligibility to receive any Option under this Plan shall not be eligible to receive any Option under this Plan for the duration of such waiver. (b) In granting Options, the Committee or the Board shall take into consideration the contribution the person has made to the success of the Company or its Subsidiaries and such other factors as the Committee or the Board shall determine. The Committee or the Board shall also have the authority to consult with and receive recommendations from officers and other personnel of the Company and its Subsidiaries with regard to these matters. The Committee or the Board may from time to time in granting Options under the Plan prescribe such other terms and conditions concerning such Options as it deems appropriate, including, without limitation, (i)Ýprescribing the date or dates on which the Option becomes exercisable, (ii)Ýproviding that the Option rights accrue or become exercisable in installments over a period of years, or upon the attainment of stated goals or both, or (iii)Ýrelating an Option to the continued employment of the Optionee for a specified period of time, provided that such terms and conditions are not more favorable to an Optionee that those expressly permitted herein. (c) The Options granted to employees under this Plan shall be in addition to regular salaries, pension, life insurance or other benefits related to their employment with the Company or its Subsidiaries. Neither the Plan nor any Option granted under the Plan shall confer upon any person any right to employment or continuance of employment by the Company or its Subsidiaries. (d) Notwithstanding any other provision of this Plan, an Incentive Stock Option shall not be granted to any person owning directly or indirectly (through attribution under SectionÝ424(d) of the Internal Revenue Code) at the date of grant, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or of its parent or subsidiary corporation [as defined in Section 424 of the Internal Revenue Code] at the date of grant) unless the option price of such Option is at least 110% of the Fair Market Value of the Shares subject to such Option on the date the Option is granted, and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. (e) Notwithstanding any other provision of this Plan, and in addition to any other requirements of this Plan, the aggregate number of Shares subject to Options granted to any one Optionee may not exceed 500,000, subject to adjustment as provided in SectionÝ10 hereof. 6. Option Price. The option price per Share of any Option shall be any price determined by the Committee or the Board but shall not be less than the par value per Share; provided, however, that in no event shall the option price per Share of any Incentive Stock Option be less than the Fair Market Value of the Shares underlying such Option on the date such Option is granted. 7. Exercise of Options. An Option shall be deemed exercised when (i) the Company has received written notice of such exercise in accordance with the terms of the Option, (ii) full payment of the aggregate option price of the Shares as to which the Option is exercised has been made, and (iii) arrangements that are satisfactory to the Committee or the Board in its sole discretion have been made for the Optionee's payment to the Company of the amount that is necessary for the Company or Subsidiary employing the Optionee to withhold in accordance with applicable Federal or state tax withholding requirements. Unless further limited by the Committee or the Board in any Option, and subject to such guidelines as the Committee or the Board may establish, the option price of any Shares purchased shall be paid (1)Ýin cash, (2) by certified or official bank check, (3) by money order, (4)Ýwith Shares, (5) by the withholding of Shares issuable upon exercise of the Option or by any other form of cashless exercise procedure approved by the Committee or the Board, or (6) in such other consideration as the Committee or the Board deems appropriate, or by a combination of the above. The Committee or the Board in its sole discretion may accept a personal check in full or partial payment of any Shares. If the exercise price is paid in whole or in part with Shares, or through the withholding of Shares issuable upon exercise of the Option, the value of the Shares surrendered or withheld shall be their Fair Market Value on the date the Option is exercised. The Company in its sole discretion may, on an individual basis or pursuant to a general program established in connection with this Plan, lend money to an Optionee, guarantee a loan to an Optionee, or otherwise assist an Optionee to obtain the cash necessary to exercise all or a portion of an Option granted hereunder or to pay any tax liability of the Optionee attributable to such exercise. If the exercise price is paid in whole or part with Optionee's promissory note, such note shall (i) provide for full recourse to the maker, (ii)Ýbe collateralized by the pledge of the Shares that the Optionee purchases upon exercise of such Option, (iii)Ýbear interest at the prime rate of the Company's principal lender, and (iv) contain such other terms as the Board in its sole discretion shall reasonably require. No Optionee shall be deemed to be a holder of any Shares subject to an Option unless and until a stock certificate or certificates for such Shares are issued to such person(s) under the terms of this Plan. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in SectionÝ10 hereof. 8. Exercisability of Options. Any Option shall become exercisable in such amounts, at such intervals and upon such terms as the Committee or the Board shall provide in such Option, except as otherwise provided in this Section 8. (a) The expiration date of an Option shall be determined by the Committee at the time of grant, but in no event shall an Option be exercisable after the expiration of 10 years from the date on which the Option is granted. (b) No Option may be exercised prior to one year from the date on which the Option is granted, except that the Committee or the Board may in its sole discretion accelerate the date on which any Option may be exercised and may accelerate the vesting of any Shares subject to any Option or previously acquired by the exercise of any Option. 9. Termination of Option Period. The unexercised portion of any Option shall automatically and without notice terminate and become null and void at those times determined by the Committee or the Board and set forth in the option agreement that evidences the Option. 10. Adjustment of Shares. (a) If at any time while the Plan is in effect or unexercised Options are outstanding, there shall be any increase or decrease in the number of issued and outstanding Shares through the declaration of a stock dividend or through any recapitalization resulting in a stock splitup, combination or exchange of Shares, then and in such event: (i) appropriate adjustment shall be made in the maximum number of Shares available for grant under the Plan, or available for grant to any person under the Plan, so that the same percentage of the Company's issued and outstanding Shares shall continue to be subject to being so optioned; and (ii) appropriate adjustment shall be made in the number of Shares and the exercise price per Share thereof then subject to any outstanding Option, so that the same percentage of the Company's issued and outstanding Shares shall remain subject to purchase at the same aggregate exercise price. (b) Unless otherwise provided in any Option, the Committee or the Board may change the terms of Options outstanding under this Plan, with respect to the option price or the number of Shares subject to the Options, or both, when, in the Committee's or Board's sole discretion, such adjustments become appropriate so as to preserve but not increase benefits under the Plan. (c) Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with a direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made to, the number of or exercise price for Shares then subject to outstanding Options granted under the Plan. (d) Without limiting the generality of the foregoing, the existence of outstanding Options granted under the Plan shall not affect in any manner the right or power of the Company to make, authorize or consummate (i) any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business; (ii)Ýany merger or consolidation of the Company; (iii)Ýany issue by the Company of debt securities, or preferred or preference stock that would rank above the Shares subject to outstanding Options; (iv)Ýthe dissolution or liquidation of the Company; (v)Ýany sale, transfer or assignment of all or any part of the assets or business of the Company; or (vi)Ýany other corporate act or proceeding, whether of a similar character or otherwise. 11. Transferability of Options and Shares. (a) No Incentive Stock Option, and unless the prior written consent of the Committee or the Board is obtained and the transaction does not violate the requirements of Rule 16b3 promulgated under the Securities Exchange Act no NonQualified Stock Option, shall be subject to alienation, assignment, pledge, charge or other transfer other than by the Optionee by will or the laws of descent and distribution, and any attempt to make any such prohibited transfer shall be void. Each Option shall be exercisable during the Optionee's lifetime only by the Optionee, or in the case of a NonQualified Stock Option that has been assigned or transferred with the prior written consent of the Committee or the Board, only by the permitted assignee. (b) Unless the prior written consent of the Committee or the Board is obtained and the transaction does not violate the requirements of Rule 16b3 promulgated under the Securities Exchange Act, no Shares acquired by an Officer or Director pursuant to the exercise of an Option may be sold, assigned, pledged or otherwise transferred prior to the expiration of the sixmonth period following the date on which the Option was granted. 12. Issuance of Shares. (a) Notwithstanding any other provision of this Plan, the Company shall not be obligated to issue any Shares unless it is advised by counsel of its selection that it may do so without violation of the applicable Federal and State laws pertaining to the issuance of securities, and may require any stock so issued to bear a legend, may give its transfer agent instructions, and may take such other steps, as in its judgment are reasonably required to prevent any such violation. (b) As a condition to any sale or issuance of Shares upon exercise of any Option, the Committee or the Board may require such agreements or undertakings as the Committee or the Board may deem necessary or advisable to facilitate compliance with any applicable law or regulation including, but not limited to, the following: (i) a representation and warranty by the Optionee to the Company, at the time any Option is exercised, that he is acquiring the Shares to be issued to him for investment and not with a view to, or for sale in connection with, the distribution of any such Shares; and (ii) a representation, warranty and/or agreement to be bound by any legends endorsed upon the certificate(s) for such Shares that are, in the opinion of the Committee or the Board, necessary or appropriate to facilitate compliance with the provisions of any securities laws deemed by the Committee or the Board to be applicable to the issuance and transfer of such Shares. 13. Administration of the Plan. (a) The Plan shall be administered by a committee appointed by the Board (the "Committee") which shall be composed of two or more Directors all of whom shall be Outside Directors. The membership of the Committee shall be constituted so as to comply at all times with the applicable requirements of RuleÝ16b3 promulgated under the Securities Exchange Act and Section 162(m) of the Internal Revenue Code. The Committee shall serve at the pleasure of the Board and shall have the powers designated herein and such other powers as the Board may from time to time confer upon it. (b) The Board may grant Options pursuant to this Plan to Directors who are not employees of the Company or any Subsidiary and/or other persons to whom Options may be granted under Section 5(a) hereof. (c) The Committee or the Board, from time to time, may adopt rules and regulations for carrying out the purposes of the Plan. The determinations by the Committee or the Board, and the interpretation and construction of any provision of the Plan or any Option by the Committee or the Board, shall be final and conclusive. (d) Any and all decisions or determinations of the Committee shall be made either (i)by a majority vote of the members of the Committee at a meeting or (ii)without a meeting by the unanimous written approval of the members of the Committee. 14. Withholding or Deduction for Taxes. If at any time specified herein for the making of any issuance or delivery of any Option or Common Stock to any Optionee or beneficiary, any law or regulation of any governmental authority having jurisdiction in the premises shall require the Company to withhold, or to make any deduction for, any taxes or take any other action in connection with the issuance or delivery then to be made, such issuance or delivery shall be deferred until such withholding or deduction shall have been provided for by the Optionee or beneficiary, or other appropriate action shall have been taken. 15. Interpretation. (a) As it is the intent of the Company that the Plan comply in all respects with Rule 16b3 promulgated under the Securities Exchange Act ("Rule 16b3"), any ambiguities or inconsistencies in construction of the Plan shall be interpreted to give effect to such intention, and if any provision of the Plan is found not to be in compliance with Rule 16b3, such provision shall be deemed null and void to the extent required to permit the Plan to comply with Rule 16b3. The Committee or the Board may from time to time adopt rules and regulations under, and amend, the Plan in furtherance of the intent of the foregoing. (b) The Plan shall be administered and interpreted so that all Incentive Stock Options granted under the Plan will qualify as Incentive Stock Options under section 422 of the Internal Revenue Code. If any provision of the Plan should be held invalid for the granting of Incentive Stock Options or illegal for any reason, such determination shall not affect the remaining provisions hereof, but instead the Plan shall be construed and enforced as if such provision had never been included in the Plan. (c) This Plan shall be governed by the laws of the State of Delaware. (d) Headings contained in this Plan are for convenience only and shall in no manner be construed as part of this Plan. (e) Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate. 16. Amendment and Discontinuation of the Plan. The Committee or the Board may from time to time amend, suspend or terminate the Plan or any Option; provided, however, that, any amendment to the Plan shall be subject to the approval of the Company's stockholders if such stockholder approval is required by any federal or state law or regulation (including, without limitation, RuleÝ16b3 or to comply with Section 162(m) of the Internal Revenue Code) or the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or traded. Except to the extent provided in Sections 9 and 10 hereof, no amendment, suspension or termination of the Plan or any Option issued hereunder shall substantially impair the rights or benefits of any Optionee pursuant to any Option previously granted without the consent of the Optionee. 17. Effective Date and Termination Date. The effective date of the Plan is August 13, 1996, the date on which the Board adopts this Plan, and the Plan shall terminate on the tenth anniversary of such adoption. Bowne Conversion


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