SCHEDULE 14A
(RULE 14-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14 INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
WESTAFF, INC.
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(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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(4) Proposed maximum aggregate value of transaction:
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/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 17, 2000
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TO THE STOCKHOLDERS OF WESTAFF, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of stockholders (the "Annual
Meeting") of Westaff, Inc. (the "Company"), a Delaware corporation, will be held
on May 17, 2000 at 10:00 a.m., local time, at the Company's administrative
offices located at 220 N. Wiget Lane, Walnut Creek, California, for the
following purposes, as more fully described in the Proxy Statement accompanying
this Notice:
1. To elect two Class I directors to serve for three-year terms and until
their successors are elected;
2. To ratify the selection of Arthur Andersen LLP as independent public
accountants of the Company for the fiscal year ending October 28, 2000;
3. To amend Articles One, Two, Three and Four of the Company's 1996 Stock
Option/Stock Issuance Plan ("the Plan") (i) to address qualification of
option grants and other awards for the "performance-based compensation"
exemption to the deduction limit under Section 162(m) of the Internal
Revenue Code on compensation paid to "covered employees", (ii) to expand
eligibility of non-employee members of the Board of Directors serving as
plan administrator to participate in Discretionary Option Grant and Stock
Issuance Programs, (iii) to permit additional administrative flexibility
in amending the Plan in accordance with changes in the Securities and
Exchange Commission Rule 16b-3, and (iv) to amend Article One to change
the name of the Plan to the Westaff, Inc. 1996 Stock Option/Stock
Issuance Plan; and
4. To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
Only stockholders of record at the close of business on March 17, 2000 are
entitled to notice of and to vote at the Annual Meeting. The stock transfer
books will not be closed between the record date and the date of the meeting.
All stockholders are cordially invited to attend the meeting in person. Whether
or not you plan to attend, please sign and return the enclosed Proxy as promptly
as possible in the envelope enclosed for your convenience. Should you receive
more than one proxy because your shares are registered in different names and
addresses, each proxy should be signed and returned to assure that all your
shares will be voted. You may revoke your proxy at any time prior to the time it
is voted at the Annual Meeting. If you attend the Annual Meeting and vote by
ballot, your proxy will be revoked automatically and only your vote at the
Annual Meeting will be counted.
Sincerely,
/s/ W. ROBERT STOVER
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W. Robert Stover
CHAIRMAN OF THE BOARD OF DIRECTORS
February 28, 2000
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE
READ THE ATTACHED PROXY STATEMENT CAREFULLY, AND COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED
ENVELOPE.
PROXY STATEMENT
TABLE OF CONTENTS
PAGE
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PROXY STATEMENT............................................. 3
Voting.................................................. 3
Revocability Of Proxies................................. 4
Solicitation............................................ 4
Deadline For Receipt Of Stockholder Proposals........... 4
MATTERS TO BE CONSIDERED AT ANNUAL MEETING.................. 5
PROPOSAL ONE--ELECTION OF CLASS I DIRECTORS............... 5
General................................................. 5
Business Experience of Directors........................ 5
Board Meetings and Committees........................... 6
Directors' Compensation................................. 7
PROPOSAL TWO--RATIFICATION OF INDEPENDENT PUBLIC
ACCOUNTANTS............................................. 9
PROPOSAL THREE--AMENDMENT OF 1996 STOCK OPTION/STOCK
ISSUANCE PLAN........................................... 10
OTHER MATTERS............................................... 18
OWNERSHIP OF SECURITIES..................................... 19
EXECUTIVE COMPENSATION REPORT............................... 21
GENERAL COMPENSATION POLICY................................. 21
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER................. 24
EXECUTIVE COMPENSATION...................................... 25
Summary Compensation Table.............................. 25
Option Grants in Last Fiscal Year....................... 26
Aggregate Option Exercises and Fiscal Year End Values... 26
Employment Arrangements................................. 26
Compensation Committee Interlocks and Insider
Participation.......................................... 28
CERTAIN TRANSACTIONS........................................ 29
COMPARISON OF STOCKHOLDER RETURN............................ 30
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
OF 1934................................................... 31
FORM 10-K................................................... 31
EXHIBIT A................................................... 32
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WESTAFF, INC.
301 LENNON LANE
WALNUT CREEK, CALIFORNIA 94598-2453
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PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 17, 2000
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The enclosed proxy ("Proxy") is solicited on behalf of the Board of
Directors of the Company, for use at the Annual Meeting. The Annual Meeting will
be held at 10:00 a.m., local time, at the Company's administrative offices
located at 220 N. Wiget Lane, Walnut Creek, California. These proxy solicitation
materials will be mailed on or about April 3, 2000 to all stockholders entitled
to vote at the Annual Meeting.
VOTING
The specific proposals to be considered and acted upon at the Annual Meeting
are summarized in the accompanying Notice and are described in more detail in
this Proxy Statement. On February 28, 2000, 15,922,954 shares of the Company's
common stock, $0.01 par value ("Common Stock"), were issued and outstanding. No
shares of the Company's preferred stock were outstanding.
The presence at the Annual Meeting of a majority, or approximately 7,961,478
shares of Common Stock, either in person or by Proxy, will constitute a quorum
for the transaction of business at the Annual Meeting. Abstentions and broker
non-votes are counted as present for the purpose of determining the presence or
absence of a quorum for the transaction of business. Each stockholder is
entitled to one vote for each share of Common Stock held by such stockholder on
March 17, 2000, the record date for determination of stockholders entitled to
notice of and to vote at the Annual Meeting. Directors are elected by a
plurality vote. Since votes are cast in favor of or withheld from each nominee,
abstentions and broker non-votes therefore will have no effect on the outcome of
Proposal One. Proposals Two and Three require an affirmative vote of a majority
of shares present in person or represented by proxy at the Annual Meeting and
entitled to vote on such matter. Abstentions will have the same effect as
negative votes, while broker non-votes are not included in the total number of
votes cast on Proposals Two or Three and therefore will not be counted for
purposes of determining whether that proposal has been approved. All votes will
be tabulated by the inspector of elections appointed for the meeting, who will
separately tabulate affirmative and negative votes, abstentions and broker
non-votes.
If any stockholder is unable to attend the Annual Meeting, such stockholder
may vote by proxy. The enclosed Proxy is solicited by the Board, and, when
returned properly completed, will be voted as you direct on your proxy card. In
the discretion of the proxy holder, shares represented by such proxies will be
voted upon any other business as may properly come before the Annual Meeting. If
no specific instructions are given with respect to matters to be acted upon at
the Annual Meeting, shares of Common Stock represented by a properly executed
proxy will be voted FOR (i) the election of management's nominees for Directors;
(ii) the ratification of the selection of Arthur Andersen LLP as the independent
public accountants for the Company for fiscal 2000; and (iii) the amendment of
the 1996 Stock Option/Stock Issuance Plan.
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REVOCABILITY OF PROXIES
You may revoke or change your Proxy at any time before it is voted at the
Annual Meeting by filing with the Secretary of the Company at the Company's
principal executive offices a notice of revocation or another signed Proxy with
a later date. You also may revoke your Proxy by attending the Annual Meeting and
voting in person.
SOLICITATION
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the Proxy
and any additional solicitation materials furnished to stockholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs in
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by a solicitation by
telephone, telegram, or other means by directors, officers or employees. No
additional compensation will be paid to these individuals for any such services.
Except as described above, the Company does not presently intend to solicit
proxies other than by mail.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be presented
by such stockholders at the Company's 2001 Annual Meeting must be received no
later than October 25, 2000, in order that they may be included in the proxy
statement and form of proxy relating to that meeting. The deadline for
submitting a stockholder's proposal that will not be included in the proxy
statement and form of proxy for the Company's 2001 Annual Meeting but
nonetheless will be eligible for consideration is January 29, 2001.
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MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL ONE--ELECTION OF CLASS I DIRECTORS
GENERAL
The Board of Directors has selected two nominees, both of whom are currently
serving as Class I directors of the Company. The nominees for directors are Jack
D. Samuelson and Gilbert L. Sheffield. Both Mr. Samuelson and Mr. Sheffield were
directors of the Company as of the date of the Proxy Statement. Each nominee has
agreed to serve if elected, and management has no reason to believe that either
of them will be unavailable to serve. In the event a nominee is unable or
declines to serve as a director at the time of the Annual Meeting, the proxies
will be voted for any nominee who may be designated by the present Board of
Directors to fill the vacancy.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them FOR the nominee named below. In the event that additional
persons are nominated, other than by the Board of Directors, for election as
Directors, the proxy holders intend to vote all proxies received by them for the
nominee listed below and any additional Board of Directors' nominee as described
above. The two candidates receiving the highest number of affirmative votes of
the shares represented and voting on this particular matter at the Annual
Meeting will be elected Class I directors of the Company, to serve their
respective three-year terms and until their successors have been elected and
qualified.
BUSINESS EXPERIENCE OF DIRECTORS
DIRECTORS TO BE ELECTED AT THE ANNUAL MEETING
JACK D. SAMUELSON, age 75, has been a director of the Company since
March 1995. Mr. Samuelson co-founded Samuelson Brothers in 1957 to engage in
general construction and commercial real estate development. Mr. Samuelson has
been President and Chairman of the Board of Samuelson Brothers from
incorporation to the present. Samuelson Brothers sold its construction business
in 1979 and since then has continued to develop industrial and commercial real
estate, with headquarters in Los Angeles and partnerships in a number of cities.
GILBERT L. SHEFFIELD, age 70, has been a director of the Company since
March 1995. He has served in a number of capacities in the telecommunications
industry, most recently as the President, Chief Executive Officer and a director
of PacTel Communications Companies from 1987 to 1990. Mr. Sheffield began his
career in 1953 with Pacific Telephone and Telegraph, where he was employed until
1969, when he was appointed the first Director of the California Department of
Human Resources Development. In 1971, Mr. Sheffield returned to Pacific
Telephone and Telegraph, from which he retired in 1984 as Executive Vice
President of Operations. Following two years in the real estate investment
business, he returned to Pacific Telesis in 1986 as Executive Vice President and
Chief Operating Officer of PacTel Corporation. Mr. Sheffield is now retired.
DIRECTORS WHOSE TERMS EXTEND BEYOND THE ANNUAL MEETING
W. ROBERT STOVER, age 78, founded the Company in 1948 and has been
continuously involved in the management of the Company since that time. Since
the Company's incorporation in 1954, Mr. Stover has held the position of
Chairman of the Board of Directors. From 1954 to 1985, Mr. Stover served as
President of the Company, and from 1985 to the end of calendar year 1998 as
Chief Executive Officer.
MICHAEL K. PHIPPEN, age 47, joined the Company in October 1995 as an
Executive Vice President. Mr. Phippen became President, Chief Operating Officer
and a director of the Company in January 1996. As of January 1, 1999,
Mr. Phippen became President and Chief Executive Officer of the Company.
Mr. Phippen directed the operations of the Company's corporate office and all
operating divisions of the Company from July 1997, at which time the Company
announced a management restructuring, to
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December 31, 1998. From October 1995 to January 1996, he directed the daily
field operations of all light industrial, clerical and light technical offices
in the United States, as well as the Company's planning, sales, marketing and
franchise operations. Mr. Phippen's affiliation with the Company began in 1987
with the opening of his first franchise. Under his leadership, the affiliate
group, Merbco Inc., grew to encompass 14 offices. The Company acquired the
assets of Merbco Inc. in October 1995. From 1977 to 1987, Mr. Phippen served in
various positions for Kelly Services, Inc., including as Branch Manager and
Regional Manager.
PAUL A. NORBERG, age 59 has been employed by the Company since 1979,
initially as Vice President and Chief Financial Officer, then in 1985 as Senior
Vice President and since 1988 as Executive Vice President. Previously he had
been employed by Liken Home Furnishings Division of Beatrice Foods Co., a
manufacturer of window coverings, from 1973 to 1979 in the position of
Controller and, subsequently, Vice President, Finance. He is a certified public
accountant on inactive status.
The Company's bylaws authorize the Board of Directors to fix the number of
directors by resolution. The number is currently fixed at six. The Company's
Board of Directors is divided into three classes, designated Class I, Class II
and Class III, with each class having a three-year term. Following the Company's
Initial Public Offering, on April 30, 1996 (the "Offering"), Jack D. Samuelson
and Gilbert L. Sheffield were appointed to serve in Class I, Michael K. Phippen
and Paul A. Norberg were appointed to serve in Class II and W. Robert Stover and
Harvey L. Maslin were appointed to serve in Class III. The initial directors in
each class are to hold office for terms of one year, two years and three years,
respectively. Thereafter each class will serve a three-year term. At the 1997
Annual Meeting, Messrs. Samuelson and Sheffield were elected to serve their
respective three-year terms. At the 1998 Annual Meeting, Messrs. Phippen and
Norberg were elected to serve their respective three-year terms. Mr. Maslin
resigned his directorship in the first quarter of fiscal 1998. The resulting
vacancy has not been filled, and presently there is only one Class III director,
namely, Mr. Stover who was elected to serve his three-year term at the 1999
Annual Meeting. Officers are appointed to serve at the discretion of the Board
of Directors. There are no family relationships among executive officers or
directors of the Company.
BOARD MEETINGS AND COMMITTEES
During fiscal 1999, the Board of Directors held six meetings including four
regular quarterly meetings and two special meetings, and acted by unanimous
written consent on three occasions. The Board of Directors has an Audit
Committee, a Compensation Committee and a Strategic Planning Committee. Each of
the current directors attended (i) all meetings of the Board and (ii) all
meetings held by committees on which he served during fiscal 1999.
The Audit Committee currently consists of three directors, W. Robert Stover,
Gilbert L. Sheffield and Jack D. Samuelson, and Mr. Samuelson is its Chairman.
The Committee's duties include reviewing internal financial information,
monitoring cash flow, budget variances and credit arrangements, reviewing the
audit program of the Company, reviewing with the Company's independent
accountants the results of all audits upon their completion, annually selecting
and recommending independent accountants, overseeing the quarterly unaudited
reporting process and taking such other action as may be necessary to assure the
adequacy and integrity of all financial information distributed by the Company.
The Audit Committee held two meetings during fiscal 1999.
The Compensation Committee currently consists of three directors, W. Robert
Stover, Gilbert L. Sheffield and Jack D. Samuelson. Mr. Sheffield is its
Chairman. The Compensation Committee has the exclusive authority to administer
the Company's 1996 Stock Option/Stock Issuance Plan, the Employee Stock Purchase
Plan and the International Employee Stock Purchase Plan. In addition, the
Compensation Committee is responsible for providing recommendations to the Board
of Directors concerning compensation levels for the Company's senior executive
officers and working with senior executive officers on benefit and compensation
programs for Company employees, including matters related to participation
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in profit sharing, bonus plans and stock option plans and preparing reports to
the extent necessary to comply with applicable disclosure requirements
established by the Securities and Exchange Commission or other regulatory
bodies. The Compensation Committee held two meetings during fiscal 1999.
The Strategic Planning Committee currently consists of four directors, W.
Robert Stover, Michael K. Phippen, Gilbert L. Sheffield and Jack D. Samuelson.
Mr. Stover is its Chairman. The Committee is responsible for evaluating the
Company's business plans and future business including, but not limited to, the
evaluation of potential acquisitions and new business opportunities. The
Strategic Planning Committee held one meeting during fiscal 1999. All committee
members also participated with the entire Board of Directors in discussions of a
strategic plan at five Board meetings.
The Board of Directors established a Special Negotiating Committee on
December 14, 1999 consisting of the directors of the Company who are non members
of, and independent from management, Gilbert L. Sheffield and Jack D. Samuelson,
to consider proposals involving the acquisition of all or a substantial portion
of the Company from third parties and other strategic alternatives for the
Company.
The Board of Directors set the compensation of the Special Negotiating
Committee at $40,000 per member, payable in a lump sum by the end of the first
week of January 2000, and to the extent members spend in excess of 200 hours on
matters relating to the activities of the Special Committee $200 per hour
payable twice per month with respect to such time.
DIRECTORS' COMPENSATION
Non-employee Board members each received an annual fee of $7,500 and an
additional fee of $1,000 for each meeting attended for the first half of fiscal
1999. Effective as of the second half of fiscal 1999, non-employee Board members
each received an annual fee of $15,000 for service on the Board in addition to a
fee of $1,000 for each meeting attended in person and $500 for each telephonic
meeting attended, if called by the Chairman of the Board or an employee Board
member. Non-employee Board members also were reimbursed for their reasonable
expenses incurred in connection with attending Board meetings. The Company
anticipates no increase in such directors' compensation during fiscal 2000.
In addition, non-employee Board members are eligible to receive periodic
option grants under the Automatic Option Grant Program in effect under the
Company's 1996 Stock Option/Stock Issuance Plan. Under the Automatic Option
Grant Program, each individual who subsequently joins the Board as a non-
employee director will receive at that time an option grant, provided such
individual has not previously been in the Company's employ. In addition, due to
the three-for-two stock split effected in the form of a stock dividend on
May 29, 1998 to shareholders of record on May 18, 1998 (the "Stock Split"), at
each annual stockholders' meeting each individual who continues to serve as a
non-employee Board member presently is entitled to an option grant for 3,000
shares with an exercise price equal to the fair market value of the option
shares on the grant date, provided such individual has served as a Board member
for at least six months. The employee Board members had approved an increase to
double the original number of such shares from 1,000 to 2,000 pre-split shares,
beginning with the 1998 Annual Meeting, and this matter was approved by the
stockholders at that meeting.
Each automatic option grant will have a maximum term of ten years measured
from the grant date, subject to earlier termination following the optionee's
cessation of Board service. The option will become exercisable for all the
option shares upon the optionee's completion of one year of Board service
measured from the grant date. However, the option will become immediately
exercisable for all the option shares should the optionee cease Board service by
reason of death or disability or should the Company be acquired by merger or
asset sale during the period of the optionee's service on the Board.
Pursuant to the terms of the Automatic Option Grant Program,
Messrs. Sheffield and Samuelson, the two individuals serving as non-employee
Board members at the time of the Offering, each received an option grant for
1,500 shares with an exercise price of $9.33 per share (based on the original
$14.00 per
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share price at which the Common Stock was sold in the Offering and adjusted for
the Stock Split). As of the Company's first Annual Meeting on April 15, 1997,
Messrs. Sheffield and Samuelson each also received an automatic option grant for
1,500 shares with an exercise price of $6.08 per share (based on the closing
selling price of the Company's Common Stock on that date and adjusted for the
Stock Split), due to their continuing service as non-employee directors. In
addition, as of the Company's second Annual Meeting on March 26, 1998,
Messrs. Sheffield and Samuelson each also received an automatic option grant for
3,000 shares with an exercise price of $16.17 per share (based on the closing
selling price of the Company's Common Stock on that date and adjusted for the
Stock Split). Moreover, as of the Company's third Annual Meeting on March 30,
1999, Messrs. Sheffield and Samuelson each received an automatic option grant
for 3,000 shares with an exercise price of $6.00 per share (based on the closing
selling price of the Company's Common Stock on that date).
In addition to the foregoing option grants, Messrs. Sheffield and Samuelson
were each granted special options on November 1, 1996 to purchase 2,250 option
shares with an exercise price of $9.50 per share (based on the closing selling
price of the Company's Common Stock on that date and adjusted for the Stock
Split). Each of these options has a maximum term of ten years measured from the
grant date, subject to earlier termination following the optionee's cessation of
Board service. The options became exercisable for all the option shares on
October 31, 1997 following the optionees' completion of one year of Board
service measured from the grant date.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE ELECTION
OF MESSRS. SAMUELSON AND SHEFFIELD AS CLASS I DIRECTORS OF THE COMPANY.
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PROPOSAL TWO--RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed the firm of Arthur Andersen LLP,
independent public accountants for the Company during fiscal 2000, and is asking
the stockholders to ratify this appointment. Arthur Andersen LLP served as the
Company's principal independent public accountants for fiscal 1999. The
affirmative vote of a majority of the shares represented and voting at the
Annual Meeting is required to ratify the selection of Arthur Andersen LLP.
Prior to fiscal 1999, PricewaterhouseCoopers LLP served as the Company's
independent public accountants. After the Audit Committee of the Company's Board
of Directors initiated a process of screening accounting firms based on
responses to a request for proposal, PricewaterhouseCoopers LLP resigned on
May 20, 1999. On July 14, 1999, following the completion of this selection
process, the Company selected Arthur Andersen LLP as the Company's independent
accountants. Arthur Andersen LLP accepted the engagement on August 18, 1999.
For the Company's two fiscal years ended November 1, 1997 and October 31,
1998 and the subsequent interim period prior to its engagement of Arthur
Andersen LLP, neither the Company nor anyone acting on its behalf consulted with
Arthur Andersen LLP regarding application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, and no
written report or oral advice was provided to the Company that the new
accountants concluded was an important factor considered by the Company in
reaching a decision as to accounting, auditing or financial reporting issues.
The Company never consulted with Arthur Andersen LLP prior to its engagement
concerning any disagreement or reportable event, as those terms are defined in
Item 304(a) of Securities and Exchange Commission Regulation S-K.
In the event the stockholders fail to ratify the appointment, the Board of
Directors will reconsider its selection. Even if the selection is ratified, the
Board of Directors in its discretion may direct the appointment of a different
independent accounting firm at any time during the year if the Board of
Directors believes that such a change would be in the best interests of the
Company and its stockholders.
A representative of Arthur Andersen LLP is expected to be present at the
Annual Meeting, will have the opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE SELECTION OF ARTHUR ANDERSEN LLP TO SERVE
AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL 2000.
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PROPOSAL THREE--AMENDMENT OF 1996 STOCK OPTION/STOCK ISSUANCE PLAN
The Board of Directors has approved amendments to the 1996 Stock
Option/Stock Issuance Plan (as defined before, the "Plan"), subject to
stockholder approval. The proposed amendments to the Plan include amending
Articles One, Two, Three and Four of the Plan to (i) address qualification of
option grants and other awards for the "performance-based compensation"
exemption to the deduction limit under Section 162(m) of the Internal Revenue
Code on compensation paid to "covered employees", (ii) permit additional
flexibility for grants to non-employee members of the Board serving as the plan
administrator, (iii) authorize amendments to the Plan in accordance with changes
to the Securities and Exchange Commission Rule 16b-3, and (iv) change the name
of the Plan to the Westaff, Inc. 1996 Stock Option/Stock Issuance Plan. This
proposal to amend the Plan requires stockholder approval pursuant to the terms
of the Plan. The Board recommends approval of the amendments because it believes
they increase the Company's ability to attract, retain and motivate key
employees and directors by providing them with an enhanced proprietary interest
in the Company or an additional feature enhancing the value of certain options
issued under the Plan, which results in an incentive to improve the growth and
profitability of the Company.
SUMMARY OF 1996 STOCK OPTION/STOCK ISSUANCE PLAN
The essential terms of the Plan, as proposed to be amended, are summarized
below. This summary is not intended to be a complete description of all of the
terms of the Plan, and is qualified in its entirety by the terms of the Plan, as
proposed to be amended, which is attached to this Proxy Statement as Exhibit A
and is hereby incorporated herein by reference.
PLAN ADMINISTRATION. The Plan is composed of three separate components: the
Discretionary Option Grant Program, the Automatic Option Grant Program and the
Stock Issuance Program. Either the Board or a committee of the Board shall
administer the Discretionary Option Grant Program, the Stock Issuance Program
and the Automatic Option Grant Program (the relevant administrating entity shall
hereinafter be referred to as the "Plan Administrator").
The Board may appoint a Primary Committee, consisting of two or more
non-employee Board members who meet certain requirements, as the Plan
Administrator to execute the Discretionary Option Grant, the Automatic Option
Grant and Stock Issuance Programs with respect to eligible individuals who are
subject to Section 16 ("Section 16 Insiders") under the Securities Exchange Act
of 1934, as amended (the "1934 Act"). The Primary Committee shall be constituted
in such a manner as to satisfy all applicable laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. The Board may appoint a Secondary
Committee as the Plan Administrator to execute the Discretionary Option Grant
and Stock Issuance Programs with respect to eligible parties EXCEPT for
Section 16 Insiders, or the Board may retain such administrative duties itself.
Grants of stock options, separately exercisable stock appreciation rights or
direct stock issuances to any "covered employee" under Section 162(m)(3) of the
Internal Revenue Code intended to qualify as "performance-based compensation"
shall be made only by a committee (or sub-committee) which is comprised solely
of two or more Board members eligible to serve on a committee making grants
qualifying as Performance-Based Compensation. The Plan Administrator has
complete discretion to determine eligible individuals, the number of shares
subject to a discretionary grant or stock issuance, the status of an option as
either an Incentive Stock Option or a Non-Statutory Stock Option, the vesting
schedule and the maximum term for which any discretionary option is to remain
outstanding. The Automatic Grant Program, in comparison, is self-executing.
ELIGIBILITY. Officers and other key employees of the Company and its
subsidiaries (whether now existing or subsequently established) and independent
consultants and advisors to the Company and its subsidiaries shall be eligible
to participate in the Discretionary Option Grant and Stock Issuance Programs. In
addition, the Plan as amended, permits non-employee members of the Board to
participate in the
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Discretionary Option Grant and Stock Issuance Programs. However, it is expected
that non-employee members of the Board will participate primarily in the
Automatic Option Grant Program. In no event may any one participant in the Plan
be granted stock options, separately exercisable stock appreciation rights and
direct stock issuances for more than 500,000 shares in the aggregate per
calendar year.
VALUATION. The fair market value per share of the Company's Common Stock on
any relevant date under the Plan shall be the closing selling price per share on
that date on the Nasdaq National Market ("Nasdaq"). If there is no reported sale
for such date, then the closing selling price for the last previous date for
which such quotation exists shall be determinative of fair market value.
EQUITY INCENTIVE PROGRAMS. As indicated above, the Plan contains three
separate equity incentive programs: (i) a Discretionary Option Grant Program
under which certain non-employee Board members, officers and key employees,
consultants or independent advisors may be granted stock options to purchase
shares of the Company's Common Stock; (ii) an Automatic Option Grant Program
under which option grants are made at specified intervals to non-employee
directors of the Board; and (iii) a Stock Issuance Program under which eligible
individuals may be issued shares of the Company's Common Stock directly through
the immediate purchase of such shares.
DISCRETIONARY OPTION GRANT PROGRAM. Under the Discretionary Option Grant
Program, the exercise price per share for Incentive Options shall not be less
than 100% of the fair market value per share of the Company's Common Stock on
the grant date. For Incentive Stock Options granted to employees possessing 10%
or more of the total combined voting power of all classes of stock of the
Company or any of its subsidiaries (a "10% Holder"), the exercise price per
share may not be less than 110% of such fair market value. The exercise price
per share for Non-Statutory Options shall not be less than 85% of the fair
market value per share of the Company's Common Stock on the grant date. In the
case of an option intended to qualify as Performance-Based Compensation, the
exercise price per share of the Company's Common Stock shall in no event be less
than 100% of the fair market value of such Common Stock on the grant date. The
Plan Administrator shall have full authority to determine which eligible persons
are to receive option grants, the time or times such grants are to be made, the
number of shares to be covered by each grant, the status of the option as either
an Incentive Stock Option or Non-Statutory Stock Option, the vesting schedule
and other attributes of the option. No granted option shall, however, have a
maximum term in excess of ten years. No Incentive Stock Option granted to a 10%
Holder shall have a maximum term in excess of five years.
Any option held by the optionee at the time of cessation of service shall
not remain exercisable beyond the limited period designated by the Plan
Administrator (not to exceed 12 months) at the time of the option grant. During
that period the option generally shall be exercisable only for the number of
shares of the Company's Common Stock in which the optionee is vested at the time
of cessation of service. The Plan Administrator, however, shall have complete
discretion to extend the period following the optionee's cessation of service
during which his or her outstanding option may be exercised and/or to accelerate
the exercisability or vesting of such options in whole or in part.
Such discretion may be exercised at the time of grant or at any time while
the options remain outstanding. Any unvested share of the Company's Common Stock
shall be subject to repurchase by the Company, at the original exercise price
paid per share, upon the optionee's cessation of service prior to vesting in
those shares. The Plan Administrator shall have complete discretion in
establishing the vesting schedule for any such unvested shares and shall have
full authority to cancel the Company's outstanding repurchase rights with
respect to those shares and thereby accelerate the vesting of such shares in
whole or in part at any time.
The Plan Administrator, in its discretion, is also authorized to issue stock
appreciation rights in connection with option grants made under the
Discretionary Option Grant Program. Stock appreciation rights provide holders
with the right to surrender all or part of an unexercised option in exchange for
a
11
distribution from the Company in an amount equal to the excess of (i) the fair
market value (on the option surrender date) of the vested shares of the
Company's Common Stock subject to the surrendered option over (ii) the aggregate
exercise price payable for such shares. Such appreciation distribution may, at
the discretion of the Plan Administrator, be made in cash or in shares of the
Company's Common Stock or partly in shares and partly in cash. With respect to
officers of the Company subject to short-swing profit restrictions under Section
16 of the 1934 Act, limited stock appreciation rights may be granted as part of
their option grants. Any option with such a limited stock appreciation right in
effect for at least six months may be surrendered to the Company to the extent
such option is exercisable for fully vested shares upon the occurrence of a
hostile take over that effects a change in ownership of securities possessing
more than 50% of the total combined voting power of the Company's outstanding
securities. In return for the surrendered option, the officer shall be entitled
to a cash distribution from the Company in an amount per surrendered option
share equal to the excess of (i) the Take-Over Price (as such term is defined in
the Plan) per share of the Company Common Stock paid in such hostile tender
offer over (ii) the aggregate exercise price payable for such share.
AUTOMATIC OPTION GRANT PROGRAM. Under the Automatic Option Grant Program,
each individual who is already serving as, or who first becomes, a non-employee
director of the Board on or after the Plan Effective Date (as such term is
defined in the Plan), whether through election by the stockholders or
appointment by the Board, shall automatically be granted at the time of such
initial election or appointment, an option grant for 3,000 shares of the
Company's Common Stock, provided such individual has not been in the Company's
prior employ. In addition, option grants for 3,000 shares of the Company's
Common Stock shall automatically be made annually thereafter to non-employee
directors of the Board who have served for at least six months. Accordingly, on
the date of each annual stockholders meeting, each individual who has been
re-elected to serve as a non-employee director of the Board and who has served
for at least six months shall automatically be granted a stock option to
purchase 3,000 shares of the Company's Common Stock. There shall be no limit on
the number of such additional 3,000-share option grants any one non-employee
director of the Board may receive over his or her period of Board service.
Prior to the amendments proposed herein, non-employee members of the Board
were not eligible during their period of service to participate in the
Discretionary Option Grant and Stock Issuance Programs. They will be eligible
under the proposed amendment.
Under the Automatic Option Grant Program, the exercise price per share shall
be equal to 100% of the fair market value per share of the Company's Common
Stock on the automatic grant date. Each option shall have a maximum term of 10
years from the grant date and each option shall become fully exercisable for all
of the option shares upon the holder's completion of one year of Board service
from the grant date.
Should the optionee cease to serve as a Board member for any reason other
than death or permanent disability, he or she shall have a twelve-month period
from the cessation of service in which to exercise the vested portion of the
option. If an optionee should die within twelve months after the cessation of
Board service, the personal representative of the optionee, or the person or
persons to whom the option is transferred by the optionee's will or the laws of
decent and distribution, may exercise the vested portion of the option within
twelve months after the cessation of Board service. Should the optionee die or
become permanently disabled while serving as a Board member, then each automatic
option grant held by that individual optionee shall accelerate in full and those
vested shares may be purchased at any time within the twelve-month period
following the date of the optionee's cessation of Board service.
The Company's repurchase rights with respect to each automatic option grant
shall immediately lapse upon certain changes in control or ownership of the
Company, as discussed in more detail below under "General Provisions." In
addition, upon the occurrence of a hostile take over that effects a change in
ownership of securities possessing more than 50% of the total combined voting
power of the Company's outstanding securities, each automatic option grant which
has been outstanding for at least six months may be surrendered to the Company
for a cash distribution per surrendered option share in an amount equal to
12
the excess of (i) the Take-Over Price (as such term is defined in the Plan) over
(ii) the aggregate exercise price payable for such share.
The remaining terms and conditions of the option grants under the Automatic
Option Grant Program shall conform in general to the terms described above for
option grants made under the Discretionary Option Grant Program.
STOCK ISSUANCE PROGRAM. Shares may be sold directly to an eligible
individual under the Stock Issuance Program at a price per share not less than
85% of the fair market value, payable in cash or check or through a promissory
note payable to the Company or in consideration of past services rendered to the
Company or any subsidiary.
The issued shares may either be immediately vested upon issuance or subject
to a vesting schedule in one or more installments tied to the participant's
period of future services or the Company's attainment of specified financial
performance objectives as the Plan Administrator may establish at the time of
issuance. Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Company or issued directly to the participant with legends on
the certificates evidencing transfer restrictions. Individuals holding shares
under the Stock Issuance Program shall have full stockholder rights with respect
to those shares, whether the shares are vested or unvested, including voting
rights and the right to receive any regular dividends. In the case of shares of
Common Stock issued under the Stock Issuance Program that are intended to
qualify as Performance-Based Compensation the price per share of such shares
shall not be less than 100% of the Fair Market Value of such shares on the grant
date.
APPROVAL OF CODE SECTION 162(m) LIMITATIONS. The Board, subject to
stockholder approval, adopted an amendment to the Plan to limit the number of
options and stock appreciation rights which may be awarded to an employee in any
fiscal year to 500,000 shares. The purpose of the amendment is to ensure that
any options and stock appreciation rights granted under the Plan after the 2000
stockholder's meeting will qualify as "performance-based compensation" under
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
Under Code Section 162(m) no deduction is allowed in any taxable year of the
Company for compensation in excess of $1 million paid to its chief executive
officer and each of its four most highly paid other executive officers who are
serving in such capacities as of the last day of such taxable year. An exception
to this rule applies to compensation that is paid pursuant to a stock incentive
plan approved by the Company's stockholders and that specifies, among other
things, the maximum number of shares with respect to which options and stock
appreciation rights may be granted to eligible employees under such plan during
a specified period. Compensation paid pursuant to options and stock appreciation
rights granted under such a plan and with an exercise price equal to the fair
market value of Company Common Stock on the date of grant is deemed to be
inherently performance-based, since such awards provide value to employees only
if the stock price appreciates. While Code Section 162(m) generally became
effective in 1994, a special rule allows options and other awards granted under
the Plan to be treated as qualifying under Code Section 162(m) without having a
per-person share limit until the first meeting of the stockholders at which
directors are to be elected that occurs after the close of the third calendar
year following the calendar year in which the initial public offering occurs.
If stockholders do not approve the Code Section 162(m) amendment, any
compensation expense of the Company associated with the options and stock
appreciation rights granted under the Plan in excess of the shares currently
available for issuance (together with all other non-performance based
compensation) in excess of $1 million for any of the Company's five highest paid
officers will not be deductible under the Code.
13
GENERAL PROVISIONS
ACCELERATION OF OPTION VESTING. Outstanding options under the Plan shall
become immediately exercisable, and unvested shares issued or issuable under the
Plan shall be subject to accelerated vesting, in the event of certain changes in
the ownership or control of the Company. Such option vesting acceleration is
triggered by (i) the acquisition of the Company by any person or entity through
merger, consolidation or asset sale (a "Corporate Transaction") or (ii) a
hostile takeover of the Company through a successful tender offer for securities
possessing more than 50% of the total combined voting power of the Company's
outstanding securities or a change in the majority of the Board over a period of
36 consecutive months effected through one or more contested elections for Board
membership (a "Change in Control").
Each option outstanding under the Discretionary Option Grant Program at the
time of a Corporate Transaction shall automatically become fully and immediately
exercisable. However, an outstanding option under the Discretionary Option Grant
Program shall not accelerate to the extent such option is to be assumed by the
successor corporation or its parent, replaced with either a comparable option to
purchase shares of the capital stock of the successor corporation or a cash
incentive program of the successor corporation, or its parent, or if other
limitations are imposed by the Plan Administrator at the time of the grant. The
Plan Administrator shall have the discretion to provide for the subsequent
acceleration of any option which does not accelerate at the time of a Corporate
Transaction, in the event the optionee's service terminates within a designated
period (not to exceed twelve months) following a Corporate Transaction or Change
in Control.
Upon the occurrence of a Corporate Transaction, the Company's outstanding
repurchase rights under the Discretionary Option Grant and Stock Issuance
Programs may also terminate, and the shares subject to those terminated rights
shall become fully vested.
The shares of the Company's Common Stock subject to each option outstanding
under the Automatic Option Grant Program at the time of any Corporate
Transaction or Change in Control shall immediately vest, and the options shall
accordingly become immediately exercisable. In addition, all unvested shares
issued under the Stock Issuance Program shall immediately vest upon the
occurrence of any Corporate Transaction, except to the extent any such right is
expressly assigned to the successor corporation in connection with the Corporate
Transaction or as otherwise limited by the Issuance Agreement (as such term is
defined in the Plan). The acceleration of options in the event of a Corporate
Transaction or Change in Control may be seen as an anti-take over provision and
may have the effect of discouraging a merger proposal, a takeover attempt or
other efforts to gain control of the Company.
CHANGES IN CAPITALIZATION. In the event any change is made to the
outstanding shares of the Company's Common Stock by reason of any
recapitalization, stock dividend, stock split, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Company's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan; (ii) the maximum number and/or class of securities for which any one
individual may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances in the aggregate per calendar
year; (iii) the number and/or class of securities and price per share in effect
under each outstanding option under the Discretionary Option Grant Program or
Automatic Option Grant Program; and (iv) the number and/or class of securities
for which option grants are to be subsequently made under the Automatic Option
Grant Program to each newly-elected or continuing non-employee Director.
TRANSFERABILITY OF OPTIONS AND STOCK. Pursuant to the Discretionary Option
Grant Program, Incentive Options are only exercisable by the optionee and are
therefore not transferable except upon the optionee's death. Non-Statutory
Options, however, may be assigned in whole or in part during the lifetime of the
optionee. Finally, participants in the Stock Issuance Program have no right to
transfer any unvested shares of Common Stock.
14
FINANCIAL ASSISTANCE. The Plan Administrator may institute a loan program
in order to assist one or more participants in financing their exercise of
outstanding options under the Discretionary Option Grant Program or in the
purchase of shares under the Stock Issuance Program. The form and manner in
which such assistance is to be made available (including loans or installment
payments with or without security or collateral), and the terms upon which such
assistance is to be provided, shall be determined by the Plan Administrator.
However, the maximum amount of financing provided to any optionee or participant
may not exceed the option or purchase price of the acquired shares (less the par
value) plus the minimum amount of applicable federal, state and local income and
employment taxes required to be withheld in connection with the acquisition of
the shares. Any such financing may be subject to forgiveness in whole or in
part, at the discretion of the Plan Administrator.
SPECIAL TAX ELECTION. The Plan Administrator may provide one or more
holders of Non-Statutory Options or unvested shares under the Plan with the
right to have the Company use shares of the Company's Common Stock otherwise
issuable to such individuals in satisfaction of all or part of the minimum
amount of federal, state and local income and employment tax liabilities
required to be withheld by the Company in connection with the exercise of their
options or the vesting of their shares. Alternatively, the Plan Administrator
may allow such individuals to deliver previously acquired shares of the
Company's Common Stock in payment of such tax liabilities.
AMENDMENT AND TERMINATION. The Board may amend or modify the Plan in any or
all respects whatsoever, subject to obtaining any required stockholder approval
pursuant to the Plan and applicable law, including any applicable stock exchange
or national market system requirements. Notwithstanding the foregoing, the Board
may neither amend nor modify the Plan if such action would adversely affect the
rights and obligations of any optionee or participant in the Stock Issuance
Program, unless such optionee or participant consents to the amendment. In
addition, under the Plan, as amended, the Board may not, without the approval of
the Company's stockholders, amend the Plan to increase the maximum number of
shares issuable under the Plan or the maximum number of shares for which any one
individual participating in the Plan may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances in the
aggregate per calendar year. The Plan shall in all events terminate on
April 30, 2006, unless sooner terminated by the Board.
Prior to the amendments proposed herein, stockholder approval was required
for amendments to the Plan that (i) materially increase the number of shares for
which options may be granted to newly elected or continuing eligible directors
under Article Three of the Plan; (ii) materially modify the eligibility
requirements for Plan participation; or (iii) materially increase the benefits
accruing to Plan participants. These terms were required under a prior version
of Securities and Exchange Commission Rule 16b-3 which has since been amended
and which amendments are reflected in the proposed amendments to the Plan.
CERTAIN FEDERAL INCOME TAX INFORMATION
The following summary of the U.S. federal income tax consequences of Plan
transactions is based upon U.S. federal income tax laws in effect on the date of
this Proxy Statement. This summary does not purport to be complete, and does not
discuss foreign, state or local tax consequences.
INCENTIVE OPTIONS. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. However, the difference between the fair market
value of the shares on the exercise date and the exercise price paid for the
shares is classified as an item of adjustment in the year of exercise for
purposes of the alternative minimum tax. In addition, the optionee shall
recognize taxable income in the year in which the purchased shares are sold or
otherwise made the subject of disposition. For federal tax purposes,
dispositions are divided into two categories: (i) qualifying and
(ii) disqualifying. The optionee makes a qualifying disposition of the purchased
shares if the sale or other disposition of such shares is made after the
optionee has held the
15
shares for more than two years after the grant date of the option and more than
one year after the exercise date. If the optionee fails to satisfy either of
these two minimum holding periods prior to the sale or other disposition of the
purchased shares, then a disqualifying disposition shall result.
Upon a qualifying disposition of the shares, the optionee shall recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over
(ii) the exercise price paid for those shares. If there is a disqualifying
disposition of the shares then the lesser of (i) the difference between the
amount realized on disposition of the shares and the exercise price paid for
those shares or (ii) the difference between the fair market value of the shares
on the exercise date and the exercise price paid for the shares shall be taxable
as ordinary income. Any additional gain recognized upon the disposition shall be
a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company shall be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the amount of ordinary income
recognized by the optionee. In no other instance shall the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
NON-STATUTORY OPTIONS. No taxable income is recognized by an optionee upon
the grant of a Non-Statutory Option. The optionee shall in general recognize
ordinary income in the year in which the option is exercised equal to the excess
of the fair market value of the purchased shares on the exercise date over the
exercise price paid for the shares, and the optionee shall be required to
satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the Non-Statutory Option are subject
to repurchase by the Company at the original exercise price in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee shall not recognize any taxable income at the time of exercise but
shall have to report as ordinary income, as and when the Company's repurchase
right lapses, an amount equal to the excess of (i) the fair market value of the
shares on the date the repurchase right lapses with respect to those shares over
(ii) the exercise price paid for the shares.
The optionee may, however, elect under Section 83(b) of the Code to include
as ordinary income in the year of exercise of the Non-Statutory Option an amount
equal to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the
Section 83(b) election is made, the optionee shall not recognize any additional
ordinary income as and when the repurchase right lapses.
The Company shall be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
Non-Statutory Option. In general, the deduction shall be allowed for the taxable
year of the Company in which such ordinary income is recognized by the optionee.
APPRECIATION RIGHTS. An optionee who is granted a stock appreciation right
shall recognize ordinary income in the year exercised equal to the amount of the
appreciation distribution. The Company shall be entitled to an income tax
deduction equal to the appreciation distribution for the taxable year in which
the ordinary income is recognized by the optionee.
DIRECT STOCK ISSUANCE. The tax principles applicable to direct stock
issuances under the Plan shall be substantially the same as those summarized
above for the exercise of unvested shares of the Company's Common Stock under
Non-Statutory Option grants.
PARACHUTE PAYMENTS. If the exercisability of an option or the vesting of
shares issued under the Plan were accelerated as a result of a Change in Control
or Corporate Transaction, all or a portion of the value of the option or stock
subject to such acceleration may constitute a "parachute payment" for purposes
of the excess parachute provisions of the Code. If total parachute payments
exceed three times an employee's average compensation for the five tax years
preceding the Change in Control or Corporate Transaction, the
16
employer loses its deduction for, and the recipient is subject to a 20% excise
tax on the amount of, the parachute payments in excess of one times such average
compensation.
AMENDED PLAN BENEFITS
With the exception of those options which would be granted pursuant to the
Automatic Option Grant Program, the Company cannot now determine the number of
options to be granted in the future under the Plan, as proposed to be amended,
to all current executive officers as a group, all current members of the Board
excluding current executive officers as a group or all employees (excluding
current executive officers) as a group.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE AMENDED AND
RESTATED 1996 STOCK OPTION/STOCK ISSUANCE PLAN.
17
OTHER MATTERS
The Company knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters properly come before
the Annual Meeting, it is the intention of the persons named in the enclosed
form of Proxy to vote the shares they represent as the Board of Directors may
recommend. Discretionary authority with respect to such other matters is granted
by the execution of the enclosed Proxy.
18
OWNERSHIP OF SECURITIES
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1999 for (i) all
persons who are beneficial owners of five percent (5%) or more of the
outstanding shares of the Company's Common Stock, (ii) each director of the
Company, (iii) the Company's Chief Executive Officer and the four other most
highly paid executive officers as of the fiscal year ended October 30, 1999, and
(iv) all executive officers and directors of the Company as a group. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws, where applicable.
NAME NUMBER OF SHARES(#)(1) PERCENT(%)(2)
- ---- ---------------------- -------------
W. Robert Stover(3)................................. 7,416,852 46.72
Joan C. Stover(4)................................... 2,060,705 12.98
c/o Westaff, Inc.
301 Lennon Lane
Walnut Creek, CA 94598
Michael K. Phippen(5)............................... 239,849 1.51
Paul A. Norberg(6).................................. 103,211 *
Dirk A. Sodestrom(7)................................ 29,760 *
Michael W. Ehresman(8).............................. 29,992 *
Jack D. Samuelson(9)................................ 21,250 *
Gilbert L. Sheffield(10)............................ 16,250 *
Ronald C. Picco(11)................................. 20,733 *
All executive officers and directors as a group
(11 persons)(12).................................. 7,912,796 49.84
- ------------------------
* Less than one percent (1%)
(1) To the Company's knowledge, except as indicated in the footnotes to this
table and subject to applicable community property laws, each of the
persons named in this table has sole voting and investment power with
respect to all shares of Common Stock indicated opposite such person's
name.
(2) Based on 15,875,879 shares of Common Stock outstanding at December 31,
1999. Shares of Common Stock subject to options, warrants and convertible
notes and other purchase rights currently exercisable or convertible, or
exercisable or convertible within 60 days of December 31, 1999 are deemed
outstanding for computing the percentage of the person or entity holding
such securities but are not deemed outstanding for computing the percentage
of any other person or entity.
(3) Includes 2,060,705 shares of Common Stock held by W. Robert Stover and Joan
C. Stover as Co-Trustees of the Stover Revocable Trust dated 11/16/88, as
amended, the beneficial ownership of which may be attributable to each of
Mr. Stover and Mrs. Stover. Includes 65,000 shares of Common Stock
contributed to the Stover Charitable Remainder Unitrust dated 11/1/94 of
which Mr. Stover is a Co-Trustee. Includes 4,402,263 shares of Common Stock
contributed to the Stover 1999 Charitable Remainder Unitrust dated 4/21/99
of which Mr. Stover is Co-Trustee. Includes 888,884 shares of Common Stock
contributed to the Stover Charitable Lead Annuity Trust as to which
Mr. Stover has voting power, but has disclaimed beneficial ownership. Does
not include 2,234,855 shares of Common Stock owned by the Stover
Foundation, a California nonprofit religious corporation (the "Foundation")
as to which Mr. Stover has shared voting power.
19
(4) Includes 2,060,705 shares of Common Stock held by W. Robert Stover and Joan
C. Stover as Co-Trustees of the Stover Revocable Trust dated 11/16/88, as
amended, the beneficial ownership of which may be attributable to each of
Mr. Stover and Mrs. Stover.
(5) Includes options to purchase 182,809 shares of Common Stock held by
Mr. Phippen, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.
(6) Includes options to purchase 92,812 shares of Common Stock held by
Mr. Norberg, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.
(7) Includes options to purchase 22,046 shares of Common Stock held by
Mr. Sodestrom, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.
(8) Includes options to purchase 22,046 shares of Common Stock held by
Mr. Ehresman, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.
(9) Includes options to purchase 8,250 shares of Common Stock held by
Mr. Samuelson, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.
(10) Includes options to purchase 8,250 shares of Common Stock held by
Mr. Sheffield, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.
(11) Includes options to purchase 17,733 shares of Common Stock held by
Mr. Picco, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.
(12) Includes options to purchase 384,070 shares of Common Stock which are
immediately exercisable under the 1996 Stock Option/Stock Issuance Plan.
20
WESTAFF, INC.
COMPENSATION COMMITTEE
OF THE
BOARD OF DIRECTORS
EXECUTIVE COMPENSATION REPORT
The Compensation Committee was formed on March 9, 1995 in anticipation of
the Offering. It consists of three Board members, namely, W. Robert Stover,
Gilbert L. Sheffield and Jack D. Samuelson. Mr. Stover is Chairman of the Board
of Directors and was Chief Executive Officer through December 31, 1998.
Messrs. Sheffield and Samuelson are not officers or employees of the Company.
Mr. Sheffield is presently the Chairman of the Compensation Committee.
It is the duty of the Compensation Committee to review and establish the
compensation of executive officers of the Company, including base salary,
participation in profit sharing, bonus and other cash incentive plans, subject
to ratification by the Board. During fiscal 1999, the Compensation Committee
also had the exclusive authority to administer the Company's 1996 Stock
Option/Stock Issuance Plan, under which grants may be made to such officers.
GENERAL COMPENSATION POLICY
The fundamental policy of the Compensation Committee is to offer the
Company's executive officers competitive compensation opportunities based upon
their personal performance and their contribution to the financial success of
the Company. To achieve this policy, a substantial portion of each executive
officer's total annual compensation is made contingent upon the achievement of
designated financial and performance goals. Accordingly, each executive
officer's compensation package is comprised of three elements: (i) base salary
which is designed primarily to be competitive with base salary levels in effect
both at companies within the temporary staffing industry that are of comparable
size to the Company and at companies outside of such industry with which the
Company competes for executive talent; (ii) annual bonuses payable in cash and
tied to the Company's attainment of financial milestones based on criteria
established by the Compensation Committee; and (iii) long-term stock-based
incentive awards which strengthen the mutuality of interests between the
executive officers and the Company's stockholders. As an employee's level of
responsibility and accountability within the Company increases over time, a
greater portion of his or her total compensation is intended to be dependent
upon the Company's performance and stock price appreciation rather than upon
base salary.
FACTORS. The principal factors considered by the Compensation Committee in
establishing the components of each executive officer's compensation package for
fiscal 1999 are summarized below. However, the Compensation Committee may in its
discretion apply entirely different factors, particularly different measures of
financial performance, in setting executive compensation for future fiscal
years.
BASE SALARY. The base salary for each executive officer is determined on
the basis of internal comparability considerations and the base salary levels in
effect for comparable positions at the Company's principal competitors, both
within and outside the temporary staffing industry. The base salary level for
executive officers is generally at a level determined for such individuals on
the basis of the external salary data of temporary staffing service companies
within the same geographic area and with small to medium market capitalization.
This group of companies is less inclusive than the temporary staffing index in
the performance graph included in the Company's Proxy Statement for purposes of
comparing the stock price performance of the Company's Common Stock. However,
the Company believes this smaller group of companies gives a more accurate
indication of the market for executive services in which the Company competes.
Salaries are reviewed on an annual basis, and discretionary adjustments to each
executive officer's base salary are based upon individual performance and salary
increases paid by the Company's competitors. The Compensation Committee sets the
base salaries of the Chairman of the Board of
21
Directors and the Chief Executive Officer and the committee reviews the salaries
of the other corporate officers who are members of the senior management team.
ANNUAL INCENTIVE COMPENSATION. An annual bonus may be earned by selected
executive officers except the Chairman of the Board of Directors based upon
their participating interest in a bonus pool tied to Company performance. Each
officer's participating interest is determined by the Compensation Committee at
the start of the fiscal year and may vary from year to year. The bonus pool for
fiscal 1999 was based on the Company Stock Value Increase. For such purpose the
Company Stock Value Increase was defined as the percentage increase in the
average closing price of the Company's Common Stock for the month of October
1999 compared to the average closing price of the Company's Common Stock for the
month of October 1998. The average closing price was determined by adding the
actual closing price of the Company's Common Stock for each day the stock traded
during the month of October and dividing that total by the number of days the
stock traded in October.
All bonus payments under the fiscal 1999 executive bonus plan were to be
included as an expense in determining net income. For all participants selected
by the Compensation Committee, if the Company Stock Value Increase was at least
30%, the bonus would be 10% of base salary at the start of the fiscal 1999; if
the Company Stock Value Increase was at least 45%, the bonus would be 25% of
base salary at the start of the fiscal 1999; and if the Company Stock Value
Increase was at least 60%, the bonus would be 50% of base salary at the start of
the fiscal 1999. For fiscal 1999, no specific personal performance goals were
established for the executive officers as a condition to their participation in
the bonus pool; however, no bonus payout was to be made to any officer unless
his or her performance for the fiscal year was considered to be at a
satisfactory level. Accordingly, the Compensation Committee reviewed the
performance of the President and Chief Executive Officer, and the President and
Chief Executive Officer reviewed the performance of the Executive Vice President
and Chief Financial Officer, and made his recommendations to the Compensation
Committee. The Compensation Committee has delegated to those senior executive
officers the authority to review the performances of the other corporate
officers and key employees who report to them directly; and although the
performances of such officers were satisfactory, the Committee did not authorize
salary increases for any of them for fiscal 1999, except as contractually
required with respect to Mr. Phippen's becoming Chief Executive Officer
effective January 1, 1999. For fiscal 1999, no executive bonuses were paid.
For fiscal 2000, the Compensation Committee unanimously agreed to continue
the executive bonus plan on the same terms and conditions. For each subsequent
fiscal year, the Compensation Committee will determine whether or not to
continue or modify the executive bonus program for that year and, specifically,
will designate the executive officers eligible to participate in the program,
specify what percentage of the bonus pool each of the participants may earn, and
determine the eligibility criteria for participation.
LONG-TERM INCENTIVE COMPENSATION. Option grants are intended to align the
interests of each executive officer with those of the Company's stockholders and
to provide each individual with a significant incentive to manage the Company
from the perspective of an owner with an equity stake in the business. The
Compensation Committee has the discretion to set the option exercise price and
the vesting schedule for option grants. The Compensation Committee determines
the size of the option grant according to each executive's position within the
Company and sets a level it considers appropriate to create a meaningful
opportunity for stock ownership. In addition, the Compensation Committee takes
into account an individual's level of responsibility and opportunity to
influence the Company's financial results, comparable awards made to individuals
in similar positions within the industry, and the number of unvested options
held by each individual at the time of the new grant. The relative weight given
to each of these factors varies among individuals and is at the Compensation
Committee's discretion.
Each option grant allows the officer to acquire shares of the Company's
Common Stock at a fixed price per share (typically the closing market price on
the date of grant) over a specified period of time (up
22
to ten years). The options generally vest in installments over a four-year
period, contingent upon the executive officer's continued employment with the
Company. The options generally become exercisable with respect to twenty-five
percent (25%) of the option shares upon the optionee's completion of one year of
service measured from the vesting commencement date and the balance in 36
successive monthly installments upon the optionee's completion of each month of
service over the 36-month period measured from the first anniversary of the
vesting commencement date. Accordingly, the option will provide a return to the
executive officer only if the executive officer remains employed by the Company
for one or more years during which the option vests, and then only if the market
price of the underlying shares appreciates over the option term.
TAX LIMITATION. As a result of federal tax legislation enacted in 1993, a
publicly-held company such as Westaff, Inc. will not be allowed a federal income
tax deduction for compensation paid to the executive officers named in the
Summary Compensation Table, to the extent that compensation exceeds one million
dollars ($1,000,000) per officer. The compensation paid to the Company's
executive officers for fiscal 1999 did not exceed the one million dollar limit
per officer, nor is the compensation to be paid to the Company's executive
officers for fiscal 2000 expected to reach that level. Because it is very
unlikely that the compensation payable to any of the Company's executive
officers in the foreseeable future will approach the one million dollar
limitation, the Compensation Committee has decided not to take any action at
this time to limit or restructure the elements of compensation payable to the
Company's executive officers. The Committee will reconsider this decision should
the individual compensation of any executive officer ever approach the one
million dollar level or otherwise when required by law. However, the Committee
and the Board have submitted for shareholder approval amendments to the
Company's 1996 Stock Option/Stock Issuance Plan that if approved will preserve
the exemption from the one million dollar deduction limit compensation
attributable to option grants and stock appreciation rights which the Company
currently enjoys.
23
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In fiscal 1998 the Compensation Committee developed and negotiated an
employment agreement with Mr. Phippen, to be effective January 1, 1999, when
Mr. Phippen assumed the role of Chief Executive Officer with an annual base
salary of $375,000 and with other benefits as set forth in the employment
agreement. Mr. Phippen's base salary was established through an evaluation of
salaries paid to similarly situated chief executive officers both at companies
in the industry which are of comparable size to the Company and at companies in
other industries with which the Company competes for executive personnel.
The Chief Executive Officer's bonus, if any, is at the discretion of the
Compensation Committee. Mr. Phippen participated in the fiscal 1999 executive
bonus plan but did not earn a bonus under that plan. The Compensation Committee
made no discretionary option grants to Mr. Phippen in fiscal 1999; however,
pursuant to his employment agreement and as a result of his continuing
employment, he received a grant of 100,000 option shares as of October 31, 1999,
the beginning of fiscal 2000.
In view of his having voluntarily relinquished the Chief Executive Officer
title as of December 31, 1998, the Company entered into a new employment
agreement with Mr. Stover effective January 1, 1999, in his continuing role as
Chairman of the Board of Directors, including a lesser annual salary of $75,000.
In addition, Mr. Stover's compensation package includes payment of office
relocation expenses for suitable offsite leased premises, payment of monthly
office rent as well as all related expenses. No consideration was paid to
Mr. Stover for his having relinquished the Chief Executive Officer's title. The
Compensation Committee did not award a cash bonus to Mr. Stover for fiscal 1999,
despite his efforts and contributions to the successful operation of the Company
throughout fiscal 1999. The Committee granted no option shares to Mr. Stover
during fiscal 1999 since he is a principal shareholder of the Company.
Compensation Committee
Gilbert L. Sheffield,
Chairman of Compensation
Committee
Jack D. Samuelson
Member of Compensation
Committee
W. Robert Stover
Member of Compensation
Committee
24
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned, by the Company's
Chief Executive Officer and the four other highest-paid executive officers whose
salary and bonus for fiscal 1999 was in excess of $100,000, for services
rendered in all capacities to the Company and its subsidiaries for each of the
last three fiscal years. (1) No executive officer who would have otherwise been
includable in such table on the basis of salary and bonus earned for fiscal 1999
has been excluded by reason of his or her termination of employment or change in
executive status during that fiscal year. The individuals included in the table
collectively will be referred to as the "Named Officers."
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(4) ($)(5)(6)
- --------------------------- -------- --------- -------- ------------- ------------
W. Robert Stover.............................. 1999 104,616 -- -- 2,619
Chairman of the Board of Directors(2) 1998 250,000 -- -- 6,036
1997 250,000 -- -- --
Michael K. Phippen............................ 1999 365,398 -- -- 9,161
President, Chief Executive Officer(3) 1998 250,000 250,000 175,000 12,874
and Director 1997 222,115 23,531 -- --
Paul A. Norberg............................... 1999 215,002 -- -- 5,401
Executive Vice President, Chief 1998 193,270 95,000 15,000 7,521
Financial Officer and Director 1997 190,000 18,825 -- --
Ronald C. Picco............................... 1999 200,000 -- -- 1,026
Senior Vice President, Operations 1998 178,462 82,500 18,750 1,323
1997 144,375 4,706 -- --
Michael W. Ehresman........................... 1999 150,000 -- -- 3,776
Senior Vice President and Treasurer 1998 140,769 67,500 18,750 5,218
1997 125,023 4,706 -- --
Dirk A. Sodestrom............................. 1999 150,000 -- -- 776
Senior Vice President and Controller 1998 140,769 67,500 18,750 1,063
1997 132,115 4,706 -- --
- ------------------------
(1) Long-term compensation has not been included in the table because such
information is not applicable.
(2) Mr. Stover relinquished the Chief Executive Officer title effective
December 31, 1998.
(3) Mr. Phippen became President and Chief Executive Officer on January 1, 1999.
(4) Adjusted for the Stock Split.
(5) All other compensation for fiscal 1998 includes employer matching
contributions under the Westaff Deferred Savings Plan for fiscal 1998, the
first year in which such contributions were made. The matching contributions
for fiscal 1998 were 25% of the first ten percent of the participant's
contribution to the plan, and were equal to $6,010 for Mr. Stover, $12,848
for Mr. Phippen, $7,495 for Mr. Norberg, $1,297 for Mr. Picco, $5,194 for
Mr. Ehresman and $1,039 for Mr. Sodestrom. Also includes employer's portion
of group term life insurance premium in the amount of $26 each for
Messrs. Stover, Phippen, Picco and Norberg and in the amount of $24 each for
Messrs. Sodestrom and
25
Ehresman. Employer's portion was 17 cents per $1,000 of coverage and allowed
coverage was one times base salary up to a maximum of $150,000.
(6) All other compensation for fiscal 1999 includes employer matching
contributions under the Westaff Deferred Savings Plan for fiscal 1999, the
second year in which such contributions were made. The matching
contributions for fiscal 1999 again were 25% of the first ten percent of the
participant's contribution to the plan, and were equal to $2,615 for
Mr. Stover, $9,135 for Mr. Phippen, $5,375 for Mr. Norberg, $1,000 for
Mr. Picco, $3,750 for Mr. Ehresman and $750 for Mr. Sodestrom. Also includes
employer's portion of Group term life insurance premium in the amount of $4
for Mr. Stover and $26 each for Messrs. Phippen, Norberg, Picco, Ehresman,
and Sodestrom. Employer's portion was 17 cents per $1,000 of coverage and
allowed coverage was one times base salary up to a maximum of $150,000
except for Mr. Stover whose maximum was $23,000.
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock option grants made during fiscal 1999 under the
Company's 1996 Stock Option/ Stock Issuance Plan to the Named Officers.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR END VALUES
None of the Named Officers exercised an option during fiscal 1999. The table
below sets forth information with respect to the unexercised options held by the
Named Officers as of the end of fiscal 1999. No stock appreciation rights were
exercised during such fiscal year, and no stock appreciation rights were
outstanding at the end of such fiscal year.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE END(#)(1) FISCAL YEAR END($)(1)(2)
ON EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
W. Robert Stover................ -- -- -- -- -- --
Michael K. Phippen.............. -- -- 164,057 160,943 -- --
Paul A. Norberg................. -- -- 84,062 20,938 -- --
Ronald C. Picco................. -- -- 15,546 10,704 -- --
Michael W. Ehresman............. -- -- 19,484 11,266 -- --
Dirk A. Sodestrom............... -- -- 19,484 11,266 -- --
- ------------------------
(1) Adjusted for the Stock Split. Options are "in-the-money" if the fair market
value of the underlying securities exceeds the exercise price of the option.
Options are "out-of-the-money" if the exercise price of the option exceeds
the fair market value of the underlying securities.
(2) Calculated by determining the difference between the fair market value of
the securities underlying the in-the-money options at October 30, 1999
(based on the closing price of $8.50 for the Company's Common Stock on
Nasdaq for October 29, 1999, the trading day immediately preceding the end
of fiscal 1999) and the exercise price of the options.
EMPLOYMENT ARRANGEMENTS
The Company entered into an employment agreement with W. Robert Stover on
September 29, 1994 which provided for his continuing employment until he chose
to retire or until his death. In addition to base annual compensation, subject
to adjustment with the mutual agreement of the parties, the agreement provided
that Mr. Stover may be paid bonuses based on the Company's economic
circumstances and his extraordinary efforts and contributions. The agreement was
amended as of November 2, 1996 to eliminate the death benefits otherwise payable
to Mr. Stover's widow or estate upon his death during the
26
employment term and to maintain Mr. Stover's base salary at $250,000 for fiscal
1997. The agreement was amended effective August 14, 1997 to reinstate such
death benefits, which provided for the payment of three times Mr. Stover's
annual compensation then in effect in equal monthly installments over a four
year period. There was no change in Mr. Stover's base salary for fiscal 1998.
However, in view of his having voluntarily relinquished the Chief Executive
Officer title as of December 31, 1998, the Company entered into a new employment
agreement with Mr. Stover effective January 1, 1999. No consideration was paid
to Mr. Stover for his having relinquished the Chief Executive Officer's title.
The new agreement contains a renegotiated compensation package for Mr. Stover in
his continuing role as Chairman of the Board of Directors, including a lesser
annual salary of $75,000. In addition, Mr. Stover's compensation package
includes payment of office relocation expenses for suitable offsite leased
premises, payment of monthly office rent as well as all related leasehold
expenses including parking, utilities, janitorial services, and a pro rata share
of increases in operating expenses and real estate taxes over calendar year 1999
under a two-year lease for such premises, payment of his executive assistant's
annual salary, continued participation by Mr. Stover and his executive assistant
in present and future employee benefit plans including group health, life,
supplemental life, long-term disability, accidental death and dismemberment
insurance, a 401(k) savings plan and a deferred savings plan, and reimbursement
for reasonable travel and other business expenses. Mr. Stover is not eligible
for a bonus or other incentive compensation under the new agreement nor is he
entitled to vacation pay. The new agreement is of indefinite duration and will
continue until Mr. Stover chooses to retire or until his death; however, the
contractual obligations relating to compensation of his executive assistant will
terminate upon reassignment of the current assistant to other duties or upon
termination of Mr. Stover's employment, subject to negotiation of a different
arrangement in the discretion of the Compensation Committtee of the Board of
Directors.
The Company entered into a new employment agreement with Mr. Phippen for a
period of five years from January 1, 1999 providing for an increased annual
salary of $375,000 as of that date in consideration of his succeeding
Mr. Stover as Chief Executive Officer. In addition, Mr. Phippen has the right to
participate in all present and future benefit plans specified in the Company's
policies and generally made available to similarly situated employees, he is
entitled to four weeks of vacation leave per year, and he will be reimbursed for
reasonable travel and other business expenses incurred in the performance of his
duties in accordance with the Company's policies, as amended from time to time.
Mr. Phippen's eligibility for a bonus or other incentive compensation is at the
discretion of the Compensation Committee of the Board of Directors. The Company
may terminate Mr. Phippen's employment at any time, for any reason or without
cause as defined in the agreement, by providing him ninety days' advance written
notice. The Company will have the option, in its complete discretion, to
terminate his employment at any time before the end of the notice period,
provided Mr. Phippen is paid all compensation due and owing through the last day
actually worked, plus an amount equal to the base salary he would have earned
through the balance of the notice period. In addition, if Mr. Phippen's
employment is so terminated, he will also be paid one-half of the salary
payments remaining under the term of the agreement up to a maximum payment of
one year's salary. These salary payments, if any, will be on a monthly basis
over the twelve-month period following the employment termination date. The
Company may also terminate Mr. Phippen's employment at any time without prior
notice for cause (as defined in the agreement), subject to payment of all
compensation owed on the date of termination. Mr. Phippen may terminate his
employment for any reason by providing the Company ninety days' advance written
notice. The Company has the complete discretion to make his employment
termination effective at any time before the end of such notice period, provided
it pays him all compensation due and owing through the last day actually worked,
plus an amount equal to the base salary he would have earned through the balance
of the notice period, not to exceed ninety days, and thereafter all of the
Company's obligations under the agreement will cease.
In consideration of his execution of the new employment agreement in July
1998, Mr. Phippen was granted an option to purchase 100,000 shares of the
Company's Common Stock. The option has a maximum term of ten years measured from
the grant date. The exercise price per share of such option
27
grant is the fair market value, or closing market price, on the date of grant.
The option will become exercisable on October 30, 2001, which is two years from
the last day of fiscal 1999, subject to cancellation should Mr. Phippen's
employment be terminated for cause; however, the option will become immediately
exercisable for all the option shares should Mr. Phippen's employment be
terminated without cause. Mr. Phippen's agreement also includes an agreement to
grant him options to purchase a total of 400,000 shares of the Company's Common
Stock at a rate of 100,000 per year on the first day of each of the next three
fiscal years commencing after October 30, 1999, provided that Mr. Phippen is
employed by the Company on the first day of the applicable fiscal year, as
follows: October 29, 2000, November 4, 2001 and November 3, 2002 for fiscal
years 2001, 2002 and 2003, respectively. The exercise price per share for each
such future option grant will be the average of the fair market value on the
first and last trading days of the fiscal year completed immediately prior to
the date of grant of each such option. Such future option grants likewise will
not become exercisable until two years from the last day of the fiscal year for
which they were granted, and they likewise will be subject to cancellation in
the event of employment termination for cause or acceleration in the event of
employment termination without cause. Pursuant to the agreement and in
consideration of Mr. Phippen's continuing employment, he was granted 100,000
option shares as of October 31, 1999 at an exercise price of $9.3125.
The Company's employment agreements with the other Named Officers are at
will, and the Company may terminate their employment at any time at the
discretion of the Board of Directors. However, the Plan Administrator of the
1996 Stock Option Plan/Stock Issuance has authority to provide for the
accelerated vesting of the shares of Common Stock subject to outstanding options
held by the current Chief Executive Officer and the Company's other executive
officers, whether granted under that plan or any predecessor plan, in the event
their employment were to be terminated within a designated period (whether
involuntarily or through a forced resignation) following: (i) an acquisition of
the Company by merger or asset sale, or (ii) a hostile takeover of the Company
effected through a successful tender offer for more than 50% of the Company's
outstanding Common Stock or through a change in the majority of the Board as a
result of one or more contested elections for Board membership over a period of
36 consecutive months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee in March 1995.
The Compensation Committee currently consists of Messrs. Stover, Sheffield and
Samuelson. Except for Mr. Stover, no member of such Committee was at any time
during fiscal 1999 or at any other time an officer or employee of the Company.
No executive officer of the Company served on the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
For a description of transactions between the Company and members of the
Compensation Committee or their affiliates, see the "Certain Transactions"
section.
28
CERTAIN TRANSACTIONS
MANAGEMENT CONTRACT WITH WESTERN VIDEO IMAGES. The Company has a management
services contract with Western Video Images, Inc. ("WVI"), a corporation wholly
owned by Mr. Stover, the principal stockholder of the Company. Management fees
charged to WVI for fiscal 1999 and fiscal 1998 were $52,000 and $149,000,
respectively. The Company provides accounting, tax, legal, administrative and
management support and services to WVI for a fee based generally upon the gross
sales of WVI, adjusted for actual services rendered. The fee is paid monthly in
arrears. The Company believes that the terms of the management services contract
are commercially reasonable. WVI has arranged separate financing for itself as
required by its operations and does not receive any financing from the Company.
In addition, the Company is the lessee of the principal facilities in which
WVI operates. WVI is charged for all costs of the lease for these facilities.
The Company will remain the lessee and has subleased the facilities to WVI until
October 31, 2000, the termination date of the lease obligation. The Company has
entered into an arrangement with WVI, whereby WVI will indemnify the Company
against any and all liability arising out of the Company's continuing
obligations under the lease.
OTHER TRANSACTIONS WITH AFFILIATES. On the date of the closing of the
Offering, the Company and all of its current stockholders entered into a Tax
Indemnification Agreement relating to their respective income tax liabilities.
Because the Company became fully subject to corporate income taxation after the
termination of the Company's S corporation status ("Effective Termination
Date"), the reallocation of income and deductions between the period during
which the Company was treated as an S corporation and the period during which
the Company became subject to corporate income taxation may increase the taxable
income of one party while decreasing that of another party. The Tax
Indemnification Agreement was intended to assure that taxes would be borne by
the Company on the one hand and by the current stockholders on the other, only
to the extent that such parties were treated as receiving the related income for
income tax purposes. Subject to certain limitations, the Tax Indemnification
Agreement generally provides that the current stockholders will be indemnified
by the Company with respect to federal and state income taxes shifted from a
Company taxable year subsequent to the Effective Termination Date to a taxable
year in which the Company was an S corporation, and the Company will be
indemnified by the current stockholders with respect to federal and state income
taxes shifted from an S corporation taxable year to a Company taxable year
subsequent to the Effective Termination Date. The Tax Indemnification Agreement
also provides that the current stockholders will pay or reimburse the Company
for any and all taxes of the Company which was formerly taxed as an
S corporation for any period ending on or prior to the Effective Termination
Date (other than certain taxes reflected in the Company's fiscal 1995
Consolidated Financial Statements). In addition, the Tax Indemnification
Agreement provides that the amount of the S corporation distribution to current
stockholders will not exceed $5.0 million. Any payment made by the Company to
the current stockholders pursuant to the Tax Indemnification Agreement may be
considered by the Internal Revenue Service or state taxing authorities to be
non-deductible by the Company for income tax purposes.
During October 1995, the Company purchased the operations of one of its
franchise agents, Michael K. Phippen, now President and Chief Executive Officer
of the Company, for a total price of $5.9 million. The Company paid $1.5 million
in cash and agreed to make installment payments for the balance at an interest
rate of 6.50%. Installments of $973,000 in fiscal 1998, $973,000 in fiscal 1997
and $1.5 million in fiscal 1996 have been paid and the final installment of
$972,000 was paid in fiscal 1999.
Any future transactions between the Company and its officers, directors, and
affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties. Such transactions with such persons
will be subject to approval by a majority of the Company's outside directors or
will be consistent with policies approved by such outside directors.
29
COMPARISON OF STOCKHOLDER RETURN
The graph depicted below reflects a comparison of the cumulative total
return (change in stock price plus reinvestment dividends) of the Company's
Common Stock with the cumulative total returns of the Standard and Poor's 500
Index and peer issuers in the temporary staffing industry.(2) The graph covers
the period from April 30, 1996, the date of the Offering, through the last
trading day of fiscal 1999.
The graph assumes that $100 was invested on April 30, 1996 in the Company's
Common Stock and in each index and that all dividends were reinvested. No cash
dividends have been declared on the Company's Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
WESTAFF, S&P 500 INDEX AND PEER GROUP INDEX
[GRAPHIC]
04/30/1996 11/01/1996 10/31/1997 10/30/1998 10/29/1999
---------- ---------- ---------- ---------- ----------
S&P 500 100.00 107.58 139.81 167.95 208.34
Peer Group 100.00 80.29 93.35 68.16 74.09
Westaff 100.00 89.74 90.93 81.47 80.29
The Company's stock was first traded publicly on April 30, 1996. The graph
depicts cumulative returns calculated on an annual basis on $100 invested in
Westaff stock, the S&P 500 Index and Peer Group Index comparing Kelly Services
Inc., Interim Services Inc., Manpower Inc., Olsten Corporation and Personnel
Group of America Inc.
- ------------------------
(1) The performance graph and all of the material in the Compensation Committee
Report is not deemed filed with the Securities and Exchange Commission, and
is not incorporated by reference to any filing of the Company under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
whether made before or after the date of this Proxy Statement and
irrespective of any general incorporation language in any such filing.
(2) Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
30
COMPLIANCE WITH SECTION 16 OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms and amendments thereto
furnished to the Company and written representations from certain reporting
persons, the Company believes that all executive officers, directors and greater
than 10% stockholders complied with all filing requirements applicable to them
with respect to transactions during fiscal 1999.
FORM 10-K
The Company filed an Annual Report on Form 10-K with the SEC on January 28,
2000. A copy of the Company's Form 10-K will be mailed concurrently with the
Proxy Statement to all stockholders entitled to notice at the Annual Meeting.
Stockholders may obtain an additional copy of this report, without charge, by
writing to Paul A. Norberg, Executive Vice President and Chief Financial
Officer, at the Company's executive offices at P.O. Box 9280, 301 Lennon Lane,
Walnut Creek, California 94598-2453.
Dated: February 28, 2000
THE BOARD OF DIRECTORS OF
WESTAFF, INC.
31
EXHIBIT A
1996 STOCK OPTION/STOCK ISSUANCE PLAN
AS PROPOSED TO BE AMENDED
32
WESTAFF, INC.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
(amended and restated as of March 26, 1998)
(amended and restated as of May 17, 2000)
ARTICLE ONE
GENERAL
I. PURPOSE OF THE PLAN
A. This 1996 Stock Option/Stock Issuance Plan (the "Plan") is intended to
promote the interests of Westaff, Inc., a Delaware corporation (the
"Corporation"), by providing eligible individuals with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to remain in the service
of the Corporation (or its Parent or Subsidiary corporations).
B. The Plan became effective immediately upon the execution and final
pricing of the Underwriting Agreement for the initial public offering of the
Corporation's Common Stock on April 30, 1996 (referred to herein as the Plan
Effective Date).
II. DEFINITIONS
A. For purposes of the Plan, the following definitions shall be in effect:
BOARD: the Corporation's Board of Directors.
CHANGE IN CONTROL: a change in ownership or control of the Corporation
effected through either of the following transactions:
(i) the acquisition directly or indirectly by any person or related
group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined
voting power of the Corporation's outstanding securities pursuant to
a tender or exchange offer made directly to the Corporation's
stockholders which the Board does not recommend such stockholders to
accept;
(ii) or a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of
the Board members ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who
either (A) have been Board members continuously since the beginning
of such period or (B) have been elected or nominated for election
as Board members during such period by at least a majority of the
Board members described in clause (A) who were still in office at
the time such election or nomination was approved by the Board.
CODE: the Internal Revenue Code of 1986, as amended.
COMMON STOCK: shares of the Corporation's Common Stock, par value of
$0.01 per share.
CORPORATE TRANSACTION: either of the following stockholder-approved
transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities
immediately prior to such transaction, or
33
(ii) the sale, transfer or other disposition of all or substantially all
of the Corporation's assets in complete liquidation or dissolution
of the Corporation.
COVERED EMPLOYEE: an Employee who is a "covered employee" under Section
162(m)(3) of the Code.
EMPLOYEE: an individual who performs services while in the employ of
the Corporation or one or more Parent or Subsidiary corporations, subject to the
control and direction of the employer entity not only as to the work to be
performed but also as to the manner and method of performance.
EXERCISE DATE: the date on which the Corporation shall have received
written notice of the option exercise.
FAIR MARKET VALUE: the Fair Market Value per share of Common Stock
determined in accordance with the following provisions:
- If the Common Stock is not at the time listed or admitted to trading on
any national stock exchange but is traded on the Nasdaq National
Market, the Fair Market Value shall be the closing selling price per
share on the date in question, as such price is reported by the
National Association of Securities Dealers, Inc. through the Nasdaq
National Market. If there is no reported closing selling price for the
Common Stock on the date in question, then the closing selling price on
the last preceding date for which such quotation exists shall be
determinative of Fair Market Value.
- If the Common Stock is at the time listed or admitted to trading on any
national securities exchange, then the Fair Market Value shall be the
closing selling price per share on the date in question on the exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no reported sale of
Common Stock on such exchange on the date in question, then the Fair
Market Value shall be the closing selling price on the exchange on the
last preceding date for which such quotation exists.
- For purposes of any option grants which are made at the time the
Underwriting Agreement for the initial public offering of the Common
Stock is executed and priced but prior to the time the Common Stock is
first traded on either a national securities exchange or the Nasdaq
National Market, the Fair Market Value per share of Common Stock shall
be deemed to be equal to the price per share at which the Common Stock
is to be sold in the initial public offering pursuant to the
Underwriting Agreement.
HOSTILE TAKE-OVER: a change in ownership of the Corporation effected
through the following transaction:
(i) the direct or indirect acquisition by any person or related group of
persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control
with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept, and
(ii) the acceptance of more than fifty percent (50%) of the securities
so acquired in such tender or exchange offer from holders other
than the officers and directors of the Corporation subject to the
short-swing profit restrictions of Section 16 of the 1934 Act.
INCENTIVE OPTION: a stock option which satisfies the requirements of
Code Section 422.
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INVOLUNTARY TERMINATION: the termination of the Service of any
individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a change in
his or her position with the Corporation which materially reduces
his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of
such individual's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is
effected by the Corporation without the individual's consent.
MISCONDUCT: the commission of any act of fraud, embezzlement or
dishonesty by the Optionee, Participant or other person in the Service of the
Corporation (or any Parent or Subsidiary), any unauthorized use or disclosure by
such person of confidential information or trade secrets of the Corporation (or
any Parent or Subsidiary), or any other intentional misconduct by such person
adversely affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).
1934 ACT: the Securities and Exchange Act of 1934, as amended from time
to time.
NON-STATUTORY OPTION: a stock option not intended to meet the
requirements of Code Section 422.
OPTIONEE: a person to whom an option is granted under the Discretionary
Option Grant Program or Automatic Option Grant Program.
PARTICIPANT: a person who is issued Common Stock under the Stock
Issuance Program.
PERFORMANCE-BASED COMPENSATION: compensation qualifying as
"performance-based compensation" under Section 162(m) of the Code.
PERMANENT DISABILITY OR PERMANENTLY DISABLED: the inability of the
Optionee or the Participant to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
However, solely for the purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.
PLAN ADMINISTRATOR: the particular entity, whether the Primary
Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
PRIMARY COMMITTEE: the committee of two (2) or more non-employee Board
members appointed by the Board to administer the Discretionary Option Grant, the
Automatic Option Grant and Stock Issuance Programs with respect to Section 16
Insiders.
35
SECONDARY COMMITTEE: a committee of two (2) or more Board members
appointed by the Board to administer the Discretionary Option Grant and Stock
Issuance Programs with respect to eligible persons other than Section 16
Insiders.
SECTION 16 INSIDER: an officer or director of the Corporation subject
to the short-swing profit liabilities of Section 16 of the 1934 Act.
SECTION 12(g) REGISTRATION DATE: the date on which the initial
registration of the Common Stock under Section 12(g) of the 1934 Act becomes
effective.
SERVICE: the performance of services on a periodic basis for the
Corporation (or any parent or subsidiary corporation) in the capacity of an
Employee, a non-employee member of the board of directors or an independent
consultant or advisor, except to the extent otherwise specifically provided in
the applicable stock option or stock issuance agreement.
TAKE-OVER PRICE: the greater of (i) the Fair Market Value per share of
Common Stock on the date the particular option to purchase such stock is
surrendered to the Corporation in connection with a Hostile Take-Over or
(ii) the highest reported price per share of Common Stock paid by the tender
offeror in effecting such Hostile Take-Over. However, if the surrendered option
is an Incentive Option, the Take-Over Price shall not exceed the clause
(i) price per share.
B. The following provisions shall be applicable in determining the parent
and subsidiary corporations of the Corporation:
Any corporation (other than the Corporation) in an unbroken chain of
corporations ending with the Corporation shall be considered to be a Parent of
the Corporation, provided each such corporation in the unbroken chain (other
than the Corporation) owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
Each corporation (other than the Corporation) in an unbroken chain of
corporations beginning with the Corporation shall be considered to be a
Subsidiary of the Corporation, provided each such corporation (other than the
last corporation) in the unbroken chain owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
III. STRUCTURE OF THE PLAN
A. STOCK PROGRAMS. The Plan shall be divided into three separate
components: the Discretionary Option Grant Program specified in Article Two, the
Automatic Option Grant Program specified in Article Three and the Stock Issuance
Program specified in Article Four. Under the Discretionary Option Grant Program,
eligible individuals may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock in accordance with the
provisions of Article Two. Under the Automatic Option Grant Program, each
individual serving as a non-employee Board member on the Plan Effective Date and
each individual who first joins the Board as a non-employee director at any time
after such Plan Effective Date shall at periodic intervals receive option grants
to purchase shares of Common Stock in accordance with the provisions of
Article Three, with the first such grants to be made on the Plan Effective Date.
Under the Stock Issuance Program, eligible individuals may be issued shares of
Common Stock directly, either through the immediate purchase of such shares at a
price per share not less than eighty-five percent (85%) of the fair market value
per share of Common Stock at the time of issuance or as a bonus for past
services rendered the Corporation or the Corporation's attainment of financial
objectives.
B. GENERAL PROVISIONS. Unless the context clearly indicates otherwise, the
provisions of Articles One and Five shall apply to the Discretionary Option
Grant Program, Automatic Option Grant
36
Program and the Stock Issuance Program and shall accordingly govern the
interests of all individuals under the Plan.
IV. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant, the Automatic Option Grant and Stock
Issuance Programs with respect to Section 16 Insiders. The Primary Committee
shall be constituted in such a manner as to satisfy all applicable laws and to
permit such grants and related transactions under the Plan to be exempt from
Section 16(b) of the Exchange Act in accordance with Rule 16b-3.
B. Administration of the Discretionary Option Grant, the Automatic Option
Grant and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs, if any, may, at the Board's discretion, be vested
in the Primary Committee or a Secondary Committee, or the Board may retain the
power to administer those programs with respect to all such persons.
C. Notwithstanding the foregoing, grants of stock options, separately
exercisable stock appreciation rights or direct stock issuances to any Covered
Employee intended to qualify as Performance-Based Compensation shall be made
only by a committee (or subcommittee of a committee) which is comprised solely
of two or more Board members eligible to serve on a committee making grants
qualifying as Performance-Based Compensation. In the case of such grants to
Covered Employees, references to the "Plan Administrator", the "Primary
Committee", or to a "Secondary Committee" shall be deemed to be references to
such committee or subcommittee.
D. Members of the Primary Committee or any Secondary Committee shall serve
for such period of time as the Board may determine and may be removed by the
Board at any time. The Board may also at any time terminate the functions of the
Primary Committee and any Secondary Committee and reassume all powers and
authority previously delegated to such committee.
E. Each Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority to establish such rules
and regulations as it may deem appropriate for proper administration of the
Discretionary Option Grant, the Automatic Option Grant and Stock Issuance
Programs and to make such determinations under, and issue such interpretations
of, the provisions of such programs and any outstanding options or stock
issuances thereunder as it may deem necessary or advisable. Decisions of the
Plan Administrator within the scope of its administrative functions under the
Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant Program, the Automatic Option Grant Program or Stock
Issuance Program under its jurisdiction or any stock option or stock issuance
thereunder.
F. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
V. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option Grant
Program under Article Two and the Stock Issuance Program under Article Four
shall be limited to the following:
(i) officers and other employees of the Corporation (or its parent or
subsidiary corporations) who render services which contribute to the
management, growth and financial success of the Corporation (or its
parent or subsidiary corporations);
(ii) non-employee members of the Board; and
37
(iii) those consultants or other independent advisors who provide
valuable services to the Corporation (or its parent or subsidiary
corporations).
B. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority (subject to the provisions of
the Plan) to determine, (i) with respect to the option grants under the
Discretionary Option Grant Program, which eligible persons are to receive option
grants, the time or times when such option grants are to be made, the number of
shares to be covered by each such grant, the status of the granted option as
either an Incentive Option or a Non-Statutory Option, the time or times at which
each option is to become exercisable, the vesting schedule (if any) applicable
to the option shares and the maximum term for which the option is to remain
outstanding and (ii) with respect to stock issuances under the Stock Issuance
Program, which eligible persons are to receive stock issuances, the time or
times when such issuances are to be made, the number of shares to be issued to
each Participant, the vesting schedule (if any) applicable to the issued shares
and the consideration to be paid for such shares.
VI. STOCK SUBJECT TO THE PLAN
A. Shares of Common Stock shall be available for issuance under the Plan and
shall be drawn from either the Corporation's authorized but unissued shares of
Common Stock or from reacquired shares of Common Stock, including shares
repurchased by the Corporation on the open market. The maximum number of shares
of Common Stock which may be issued over the term of the Plan shall not exceed
1,033,812 shares, subject to adjustment from time to time in accordance with the
provisions of this Section VI.
B. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year. To
the extent required by Section 162(m) of the Code or the regulations thereunder,
in applying the foregoing limitation with respect to a person participating in
the Plan, if any stock option, separately exercisable stock appreciation right
or direct stock issuance is canceled, the canceled stock option, stock
appreciation right or direct stock issuance shall continue to count against the
maximum number of shares with respect to which stock options, stock appreciation
rights and direct stock issuances may be granted to such person. For this
purpose, the repricing of an option (or in the case of a stock appreciation
right, the base amount on which the stock appreciation is calculated is reduced
to reflect a reduction in the Fair Market Value of the Common Stock) shall be
treated as the cancellation of the existing option or stock appreciation right
and the grant of a new option or stock appreciation right.
C. Except to the extent required by Section 162(m) of the Code or the
regulations thereunder, as discussed immediately above, should one or more
outstanding options under this Plan expire or terminate for any reason prior to
exercise in full (including any option cancelled in accordance with the
cancellation-regrant provisions of Section IV of Article Two of the Plan), then
the shares subject to the portion of each option not so exercised shall be
available for subsequent issuance under the Plan. Shares subject to any stock
appreciation rights exercised under the Plan and all share issuances under the
Plan, whether or not the shares are subsequently repurchased by the Corporation
pursuant to its repurchase rights under the Plan, shall reduce on a
share-for-share basis the number of shares of Common Stock available for
subsequent issuance under the Plan. In addition, should the exercise price of an
outstanding option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an outstanding option under the Plan or the vesting of a direct
share issuance made under the Plan, then the number of shares of Common Stock
available for issuance under the Plan shall be reduced by the gross number of
shares for which the option is exercised or which vest under the share issuance,
and not by the net number of shares of Common Stock actually issued to the
holder of such option or share issuance.
38
D. Should any change be made to the Common Stock issuable under the Plan by
reason of any stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one individual participating in the Plan may be granted
stock options, separately exercisable stock appreciation rights and direct stock
issuances in the aggregate per calendar year, (iii) the number and/or class of
securities for which automatic-option grants are to be subsequently made per
eligible non-employee Board member under the Automatic Option Grant Program,
(iv) the number and/or class of securities and price per share in effect under
each option outstanding under either the Discretionary Option Grant Program or
Automatic Option Grant Program, and (v) such other provisions of the Plan as the
Plan Administrator determines is appropriate. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
39
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Discretionary Option Grant Program shall be
authorized by action of the Plan Administrator and may, at the Plan
Administrator's discretion, be either Incentive Options or Non-Statutory
Options. Individuals who are not Employees of the Corporation or its Parent or
Subsidiary corporations may only be granted non-statutory options. Each granted
option shall be evidenced by one or more instruments in the form approved by the
Plan Administrator; PROVIDED, however, that each such instrument shall comply
with the terms and conditions specified below. Each instrument evidencing an
Incentive Option shall, in addition, be subject to the applicable provisions of
Section II of this Article Two.
A. OPTION PRICE.
1. The option price per share shall be fixed by the Plan Administrator
in accordance with the following provisions:
(i) The option price per share of Common Stock subject to an
Incentive Option shall in no event be less than one hundred
percent (100%) of the Fair Market Value of such Common Stock on
the grant date.
(ii) The option price per share of Common Stock subject to a
Non-Statutory Option shall in no event be less than eighty-five
percent (85%) of the Fair Market Value of such Common Stock on
the grant date.
(iii) In the case of an option intended to qualify as
Performance-Based Compensation, the option price per share of
Common Stock shall in no event be less than one hundred percent
(100%) of the Fair Market Value of such Common Stock on the
grant date.
2. The option price shall become immediately due upon exercise of the
option and, subject to the provisions of Section I of Article Five and the
instrument evidencing the grant, shall be payable in one of the following
alternative forms specified below:
(i) full payment in cash or check drawn to the Corporation's order;
(ii) full payment in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair
Market Value on the Exercise Date (as such term is defined
below);
(iii) full payment in a combination of shares of Common Stock held
for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date and cash or
check drawn to the Corporation's order; or
(iv) full payment through a broker-dealer sale and remittance
procedure pursuant to which the Optionee shall provide
irrevocable written instructions to (A) a Corporation-
designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to
cover the aggregate option price payable for the purchased
shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation in
connection with such purchase and (B) the Corporation to
deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale transaction.
40
Except to the extent the sale and remittance procedure is used in
connection with the exercise of the option, payment of the option price
for the purchased shares must accompany such notice.
B. TERM AND EXERCISE OF OPTIONS.
Each option granted under this Discretionary Option Grant Program shall
be exercisable at such time or times and during such period as is determined
by the Plan Administrator and set forth in the instrument evidencing the
grant. No such option, however, shall have a maximum term in excess of ten
(10) years from the grant date.
C. TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise period applicable
to any outstanding option held by the Optionee at the time of cessation of
Service or death.
(i) Should an Optionee cease Service for any reason (including death
or Permanent Disability) while holding one or more outstanding
options under this Article Two, then none of those options shall
(except to the extent otherwise provided pursuant to
subparagraph 2 below) remain exercisable for more than a twelve
(12)-month period (or such shorter period determined by the Plan
Administrator and set forth in the instrument evidencing the
grant) measured from the date of such cessation of Service.
(ii) Any option held by the Optionee under this Article Two and
exercisable in whole or in part on the date of his or her death
may be subsequently exercised by the personal representative of
the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution. However,
the right to exercise such option shall lapse upon the earlier
of (A) the first anniversary of the date of the Optionee's
death (or such shorter period determined by the Plan
Administrator and set forth in the instrument evidencing the
grant) or (B) the specified expiration date of the option term.
Accordingly, upon the occurrence of the earlier event, the
option shall terminate and cease to remain outstanding.
(iii) Under no circumstances shall any such option be exercisable
after the specified expiration date of the option term.
(iv) During the applicable post-Service exercise period, the option
may not be exercised in the aggregate for more than the number
of shares (if any), in which the Optionee is vested at the time
of his or her cessation of Service. Upon the expiration of the
limited post-Service exercise period or (if earlier) upon the
specified expiration date of the option term, each such option
shall terminate and cease to remain outstanding with respect to
any vested shares for which the option has not otherwise been
exercised. However, each outstanding option shall immediately
terminate and cease to remain outstanding, at the time of the
Optionee's cessation of Service, with respect to any shares for
which the option is not otherwise at that time exercisable or
in which the Optionee is not otherwise vested.
(v) Should the Optionee's Service be terminated for Misconduct, then
all outstanding options held by the Optionee under this
Article Two shall terminate immediately and cease to remain
outstanding.
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2. The Plan Administrator shall have the discretion, exercisable either
at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from
the period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option
is exercisable at the time of the Optionee's cessation of
Service but also with respect to one or more additional
installments in which the Optionee would have vested under the
option had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS.
An Optionee shall have no stockholder rights with respect to any shares
covered by the option until such individual shall have exercised the option,
paid the option price for the purchased shares and become the holder of
record of those shares.
E. TRANSFERABILITY
During the lifetime of the Optionee, any Incentive Option shall be
exercisable only by the Optionee and shall not be assignable or transferable
other than by will or by the laws of descent and distribution following the
Optionee's death. However, a Non-Statutory Option may be assigned in whole
or in part during the Optionee's lifetime in accordance with the terms of
the instrument evidencing the grant. The terms applicable to the assigned
portion of any Non-Statutory Option shall be the same as those in effect for
the option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Plan Administrator may deem
appropriate.
F. REPURCHASE RIGHTS
The shares of Common Stock acquired upon the exercise of any Article Two
option grant may be subject to repurchase by the Corporation in accordance
with the following provisions:
(i) The Plan Administrator shall have the discretion to authorize the
issuance of unvested shares of Common Stock under this Article Two.
Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase any or
all of those unvested shares at the option price paid per share. The
terms and conditions upon which such repurchase right shall be
exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the
instrument evidencing such repurchase right.
(ii) All of the Corporation's outstanding repurchase rights under this
Article Two shall automatically terminate, and all shares subject
to such terminated rights shall immediately vest in full, upon the
occurrence of a Corporate Transaction, except to the extent:
(A) any such repurchase right is expressly assigned to the
successor corporation (or parent thereof) in connection with the
Corporate Transaction or (B) such termination is precluded by other
limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
(iii) The Plan Administrator shall have the discretionary authority,
exercisable either before or after the Optionee's cessation of
Service, to cancel the Corporation's outstanding repurchase rights
with respect to one or more shares purchased or purchasable by the
Optionee under this Article Two and thereby accelerate the vesting
of such shares in whole or in part at any time.
42
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Article Two. Incentive Options may only be
granted to individuals who are Employees. Options which are specifically
designated as Non-Statutory Options when issued under the Plan shall NOT be
subject to such terms and conditions.
A. DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of
the respective date or dates of grant) of the Common Stock for which one or more
options granted to any Employee under this Plan (or any other option plan of the
Corporation or its parent or subsidiary corporations) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted. Should the number of
shares of Common Stock for which any Incentive Option first becomes exercisable
in any calendar year exceed the applicable One Hundred Thousand Dollar
($100,000) limitation, then that option may nevertheless be exercised in that
calendar year for the excess number of shares as a Non-Statutory Option.
B. 10% STOCKHOLDER. If any individual to whom an Incentive Option is
granted is the owner of stock (as determined under Section 424(d) of the Code)
possessing ten percent (10%) or more of the total combined voting power of all
classes of stock of the Corporation or any one of its Parent or Subsidiary
corporations, then the option price per share shall not be less than one hundred
ten percent (110%) of the Fair Market Value per share of Common Stock on the
grant date, and the option term shall not exceed five (5) years, measured from
the grant date.
Except as modified by the preceding provisions of this Section II, the
provisions of Articles One, Two and Five of the Plan shall apply to all
Incentive Options granted hereunder.
III. CORPORATE TRANSACTIONS/CHANGES IN CONTROL
A. In the event of any Corporate Transaction, each option which is at the
time outstanding under this Article Two shall automatically accelerate so that
each such option shall, immediately prior to the specified effective date for
the Corporate Transaction, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of such shares. However, an outstanding option
under this Article Two shall NOT so accelerate if and to the extent: (i) such
option is, in connection with the Corporate Transaction, either to be assumed by
the successor corporation or parent thereof or to be replaced with a comparable
option to purchase shares of the capital stock of the successor corporation or
parent thereof, (ii) such option is to be replaced with a cash incentive program
of the successor corporation which preserves the option spread existing at the
time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to such option, or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant. The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.
B. Immediately following the consummation of the Corporate Transaction, all
outstanding options under this Article Two shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation or its
parent company.
C. Each outstanding option under this Article Two which is assumed in
connection with the Corporate Transaction or is otherwise to continue in effect
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply and pertain to the number and class of securities which would have been
issued to the option holder, in consummation of such Corporate Transaction, had
such person
43
exercised the option immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the option price payable per
share, provided the aggregate option price payable for such securities shall
remain the same. In addition, the class and number of securities available for
issuance under the Plan on both an aggregate and per participant basis following
the consummation of the Corporate Transaction shall be appropriately adjusted.
D. The Plan Administrator shall have full power and authority to grant
options under the Discretionary Option Grant Program which will automatically
accelerate in whole or in part in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed twelve (12) months) following the effective date of any Corporate
Transaction in which those options are assumed or replaced and do not otherwise
accelerate. Any options so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the twelve (12) month period measured from the effective date of
the Involuntary Termination. In addition, the Plan Administrator may provide
that one or more of the Corporation's outstanding repurchase rights with respect
to shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate in whole or in part, and the shares subject to those
terminated rights shall accordingly vest.
E. The Plan Administrator shall have full power and authority to grant
options under the Discretionary Option Grant Program which will automatically
accelerate in whole or in part in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed twelve (12) months) following the effective date of any Change in
Control. Each option so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the twelve (12)-month period measured from the effective date of
the Involuntary Termination. In addition, the Plan Administrator may provide
that one or more of the Corporation's outstanding repurchase rights with respect
to shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate in whole or in part, and the shares subject to those
terminated rights shall accordingly vest.
F. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Qualified Option.
G. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, the cancellation
of any or all outstanding options under this Article Two and to grant in
substitution new options under the Plan covering the same or different numbers
of shares of Common Stock but with an option price per share not less than
(i) one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the new grant date in the case of a grant of an Incentive Option,
(ii) one hundred ten percent (110%) of such Fair Market Value in the case of a
grant of an Incentive Option to a 10% Stockholder or (iii) eighty-five percent
(85%) of such Fair Market Value in the case of all other grants.
V. STOCK APPRECIATION RIGHTS
A. Provided and only if the Plan Administrator determines in its discretion
to implement the stock appreciation right provisions of this Section V, one or
more Optionees may be granted the right, exercisable upon such terms and
conditions as the Plan Administrator may establish, to surrender all or
44
part of an unexercised option under this Article Two in exchange for a
distribution from the Corporation in an amount equal to the excess of (i) the
Fair Market Value (on the option surrender date) of the number of shares in
which the Optionee is at the time vested under the surrendered option (or
surrendered portion thereof) over (ii) the aggregate exercise price payable for
such vested shares.
B. No surrender of an option shall be effective hereunder unless it is
approved by the Plan Administrator. If the surrender is so approved, then the
distribution to which the Optionee shall accordingly become entitled under this
Section V may be made in shares of Common Stock valued at Fair Market Value on
the option surrender date, in cash, or partly in shares and partly in cash, as
the Plan Administrator shall in its sole discretion deem appropriate.
C. If the surrender of an option is rejected by the Plan Administrator,
then the Optionee shall retain whatever rights the Optionee had under the
surrendered option (or surrendered portion thereof) on the option surrender date
and may exercise such rights at any time prior to the later of (i) five (5)
business days after the receipt of the rejection notice or (ii) the last day on
which the option is otherwise exercisable in accordance with the terms of the
instrument evidencing such option, but in no event may such rights be exercised
more than ten (10) years after the date of the option grant.
D. One or more officers of the Corporation subject to the short-swing profit
restrictions of the 1934 Act may, in the Plan Administrator's sole discretion,
be granted limited stock appreciation rights in tandem with their outstanding
options under this Article Two. Upon the occurrence of a Hostile Take-Over, the
officer shall have a thirty (30)-day period in which he or she may surrender any
outstanding options with such a limited stock appreciation right in effect for
at least six (6) months to the Corporation, to the extent such option is at the
time exercisable for fully vested shares of Common Stock. The officer shall in
return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the vested shares of Common
Stock at the time subject to each surrendered option (or surrendered portion of
such option) over (ii) the aggregate exercise price payable for such shares. The
cash distribution shall be made within five (5) days following the date the
option is surrendered to the Corporation, and neither the approval of the Plan
Administrator nor the consent of the Board shall be required in connection with
the option surrender and cash distribution. Any unsurrendered portion of the
option shall continue to remain outstanding and become exercisable in accordance
with the terms of the instrument evidencing such grant.
E. The shares of Common Stock subject to any option surrendered for an
appreciation distribution pursuant to this Section V shall not be available for
subsequent issuance under the Plan.
45
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
The individuals eligible to receive automatic option grants pursuant to the
provisions of this Article Three program shall be limited to those individuals
who are serving as non-employee Board members on the Plan Effective Date or who
are first elected or appointed as non-employee Board members on or after the
Plan Effective Date, whether through appointment by the Board or election by the
Corporation's stockholders. Each non-employee Board member eligible to
participate in the Automatic Option Grant Program pursuant to the foregoing
criteria shall be designated an Eligible Director for purposes of the Plan.
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. GRANT DATES. Option grants shall be made under this Article Three on
the dates specified below:
1. INITIAL GRANT. Each Eligible Director who is a non-employee Board
member on the Plan Effective Date and each Eligible Director who is first
elected or appointed as a non-employee Board member after such date shall
automatically be granted, on the Plan Effective Date or on the date of such
initial election or appointment (as the case may be), a Non-Statutory Option
to purchase 3,000 shares of Common Stock upon the terms and conditions of
this Article Three. In no event, however, shall a non-employee Board member
be eligible to receive such an initial option grant if such individual has
at any time been in the prior employ of the Corporation (or any Parent or
Subsidiary corporation).
2. ANNUAL GRANT. On the date of each Annual Stockholders Meeting,
beginning with the 1997 Annual Meeting, each individual who will continue to
serve as an Eligible Director shall automatically be granted, whether or not
such individual is standing for re-election as a Board member at that Annual
Meeting, a Non-Statutory Option to purchase an additional 3,000 shares of
Common Stock upon the terms and conditions of this Article Three, provided
he or she has served as a non-employee Board member for at least six
(6) months. There shall be no limit on the number of such annual option
grants any one Eligible Director may receive over his or her period of Board
service, and non-employee Board members who have previously been in the
employ of the Corporation (or any parent or subsidiary corporation) shall be
eligible to receive such annual option grants over their period of continued
Board service.
B. EXERCISE PRICE. The exercise price per share of Common Stock subject to
each automatic option grant made under this Article Three shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
automatic grant date.
C. PAYMENT. The exercise price shall be payable in one of the alternative
forms specified below:
(i) full payment in cash or check drawn to the Corporation's order;
(ii) full payment in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market Value on
the Exercise Date (as such term is defined below);
(iii) full payment in a combination of shares of Common Stock held for
the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued
at Fair Market Value on the Exercise Date and cash or check drawn
to the Corporation's order; or
46
(iv) full payment through a sale and remittance procedure pursuant to
which the Optionee shall provide irrevocable written instructions
to (A) a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate exercise price
payable for the purchased shares and (B) the Corporation to deliver
the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale transaction.
Except to the extent the sale and remittance procedure specified above is
used for the exercise of the option for vested shares, payment of the exercise
price for the purchased shares must accompany the exercise notice.
D. OPTION TERM. Each automatic grant under this Article Three shall have a
maximum term of ten (10) years measured from the automatic grant date.
E. EXERCISABILITY. Each automatic grant shall become fully exercisable for
the option shares upon the Optionee's completion of one year of Board service
measured from the automatic grant date. The exercisability of each automatic
grant outstanding under this Article Three shall be accelerated as provided in
Section II.G and Section III of this Article Three.
F. TRANSFERABILITY. Any automatic option grant may be assigned in whole or
in part during the Optionee's lifetime in accordance with the terms of the
instrument evidencing the grant. The terms applicable to the assigned portion of
the automatic option grant shall be the same as those in effect for the option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Plan Administrator may deem appropriate.
G. EFFECT OF TERMINATION OF BOARD MEMBERSHIP.
1. Should the Optionee cease to serve as a Board member for any reason
(other than death or Permanent Disability) while holding one or more
automatic option grants under this Article Three, then such individual shall
have a twelve (12)-month period following the date of such cessation of
Board membership in which to exercise each such option for any or all of the
shares of Common Stock for which that option is exercisable at the time of
such cessation of Board service. Each such option shall immediately
terminate and cease to be outstanding, at the time of such cessation of
Board service, with respect to any shares for which the option is not
otherwise at that time exercisable,
2. Should the Optionee die within twelve (12) months after cessation of
Board service, then any automatic option grant held by the Optionee at the
time of death may subsequently be exercised, for any or all of the shares of
Common Stock for which such option is exercisable at the time of the
Optionee's cessation of Board membership (less any option shares
subsequently purchased by the Optionee prior to death), by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution. Any such exercise must occur
within twelve (12) months after the date of the Optionee's cessation of
Board service.
3. Should the Optionee die or become Permanently Disabled while serving
as a Board member, then any automatic option grant held by such Optionee
under this Article Three shall accelerate in full, and the Optionee (or the
representative of the Optionee's estate or the person or persons to whom the
option is transferred upon the Optionee's death) shall have a twelve
(12)-month period following the date of the Optionee's cessation of Board
membership in which to exercise such option for any or all of the shares of
Common Stock subject to the option at the time of such cessation of Board
membership.
4. In no event shall any automatic grant under this Article Three
remain exercisable after the expiration date of the ten (10)-year option
term. Upon the expiration of the applicable post-service
47
exercise period under subparagraph 1, 2 or 3 above or (if earlier) upon the
expiration of the ten (10)-year option term, the automatic grant shall
terminate and cease to be outstanding for any unexercised shares for which
the option was otherwise exercisable at the time of the Optionee's cessation
of Board membership.
H. STOCKHOLDER RIGHTS. The holder of an automatic option grant under this
Article Three shall have none of the rights of a stockholder with respect to any
shares subject to such option until such individual shall have exercised the
option, paid the exercise price for the purchased shares and become the holder
of record of those shares.
III. CORPORATE TRANSACTION/CHANGES IN CONTROL
A. In the event of any Corporate Transaction, each automatic option grant at
the time outstanding under this Article Three shall automatically accelerate so
that each such option shall, immediately prior to the specified effective date
for the Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of such shares. Immediately after the
consummation of the Corporate Transaction, all automatic option grants under
this Article Three shall terminate and cease to be outstanding, except to the
extent assumed by the successor entity or its parent company.
B. In connection with any Change in Control, each automatic option grant at
the time outstanding under this Article Three shall automatically accelerate so
that each such option shall, immediately prior to the specified effective date
for the Change in Control, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of such shares. Any option accelerated in
connection with the Change in Control shall remain fully exercisable until the
expiration or sooner termination of the option term.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each option held
by him or her under this Article Three for a period of at least six (6) months.
The Optionee shall in return be entitled to a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over Price of the
shares of Common Stock at the time subject to the surrendered option (whether or
not the option is otherwise at the time exercisable for those shares) over (ii)
the aggregate exercise price payable for such shares. Such cash distribution
shall be paid within five (5) days following the surrender of the option to the
Corporation. Neither the approval of the Plan Administrator nor the consent of
the Board shall be required in connection with such option surrender and cash
distribution. The shares of Common Stock subject to each option surrendered in
connection with the Hostile Take-Over shall not be available for subsequent
issuance under the Plan.
D. The automatic option grants outstanding under this Article Three shall in
no way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option Grant
Program shall be the same as the terms in effect for option grants made under
the Discretionary Option Grant Program or as the Plan Administrator otherwise
determines.
48
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. TERMS AND CONDITIONS OF STOCK ISSUANCES
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate purchases without any intervening stock option
grants. The issued shares shall be evidenced by a Stock Issuance Agreement
("Issuance Agreement") that complies with the terms and conditions of this
Article Four.
A. CONSIDERATION.
1. Shares of Common Stock drawn from the Corporation's authorized but
unissued shares of Common Stock ("Newly Issued Shares") shall be issued
under the Stock Issuance Program for one or more of the following items of
consideration which the Plan Administrator may deem appropriate in each
individual instance:
a. full payment in cash or check made payable to the Corporation's
order;
b. a promissory note payable to the Corporation's order in one or
more installments, which may be subject to cancellation in whole or in
part upon terms and conditions established by the Plan Administrator; or
c. past services rendered to the Corporation or any parent or
subsidiary corporation.
2. Newly Issued Shares may, in the absolute discretion of the Plan
Administrator, be issued for consideration with a value less than one
hundred percent (100%) of the Fair Market Value of such shares at the time
of issuance, but in no event less than eighty-five percent (85%) of such
Fair Market Value.
3. Shares of Common Stock reacquired by the Corporation and held as
treasury shares ("Treasury Shares") may be issued under the Stock Issuance
Program for such consideration (including one or more of the items of
consideration specified in subparagraph 1. above) as the Plan Administrator
may deem appropriate, whether such consideration is in an amount less than,
equal to or greater than the Fair Market Value of the Treasury Shares at the
time of issuance. Treasury Shares may, in lieu of any cash consideration, be
issued subject to such vesting requirements tied to the Participant's period
of future Service or the Corporation's attainment of specified performance
objectives as the Plan Administrator may establish at the time of issuance.
4. In the case of shares of Common Stock issued under the Stock
Issuance Program that are intended to qualify as Performance-Based
Compensation, the price per share of such shares shall in no event be less
than one hundred percent (100%) of the Fair Market Value of such shares on
the grant date.
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance Program may,
in the absolute discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments
over the Participant's period of Service. The elements of the vesting
schedule applicable to any unvested shares of Common Stock issued under the
Stock Issuance Program, namely:
a. the Service period to be completed by the Participant or the
performance objectives to be achieved by the Corporation,
b. the number of installments in which the shares are to vest,
c. the interval or intervals (if any) which are to lapse between
installments, and
49
d. the effect which death, Permanent Disability or other event
designated by the Plan Administrator is to have upon the vesting
schedule, shall be determined by the Plan Administrator and incorporated
into the Issuance Agreement executed by the Corporation and the
Participant at the time such unvested shares are issued.
2. The Participant shall have full stockholder rights with respect to
any shares of Common Stock issued to him or her under the Plan, whether or
not his or her interest in those shares is vested. Accordingly, the
Participant shall have the right to vote such shares and to receive any
regular cash dividends paid on such shares. Any new, additional or different
shares of stock or other property (including money paid other than as a
regular cash dividend) which the Participant may have the right to receive
with respect to his or her unvested shares by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration or by reason of any Corporate
Transaction shall be issued, subject to (i) the same vesting requirements
applicable to his or her unvested shares and (ii) such escrow arrangements
as the Plan Administrator shall deem appropriate.
3. Should the Participant cease to remain in Service while holding one
or more unvested shares of Common Stock under the Stock Issuance Program,
then those shares shall be immediately surrendered to the Corporation for
cancellation, and the Participant shall have no further stockholder rights
with respect to those shares. To the extent the surrendered shares were
previously issued to the Participant for consideration paid in cash or cash
equivalent (including the Participant's purchase-money promissory note), the
Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to such
surrendered shares. The surrendered shares may, at the Plan Administrator's
discretion, be retained by the Corporation as Treasury Shares or may be
retired to authorized but unissued share status.
4. The Plan Administrator may in its discretion elect to waive the
surrender and cancellation of one or more unvested shares of Common Stock
(or other assets attributable thereto) which would otherwise occur upon the
non-completion of the vesting schedule applicable to such shares. Such
waiver shall result in the immediate vesting of the Participant's interest
in the shares of Common Stock as to which the waiver applies. Such waiver
may be effected at any time, whether before or after the Participant's
cessation of Service or the attainment or non-attainment of the applicable
performance objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. Upon the occurrence of any Corporate Transaction, all unvested shares of
Common Stock at the time outstanding under this Stock Issuance Program shall
immediately vest in full and the Corporation's repurchase/cancellation rights
shall terminate, except to the extent: (i) any such right is expressly assigned
to the successor corporation (or parent thereof) in connection with the
Corporate Transaction or (ii) such termination is precluded by other limitations
imposed in the Issuance Agreement.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase/cancellation rights remain outstanding under the
Stock Issuance Program, to provide that those rights shall automatically
terminate in whole or in part, and the shares of Common Stock subject to those
terminated rights shall immediately vest, in the event the Participant's Service
should subsequently terminate by reason of an Involuntary Termination within
twelve (12) months following the effective date of any Corporate Transaction in
which those repurchase/cancellation rights are assigned to the successor
corporation (or parent thereof).
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase/cancellation rights remain
50
outstanding under the Stock Issuance Program, to provide that those rights shall
automatically terminate in whole or in part, and the shares of Common Stock
subject to those terminated rights shall immediately vest, in the event the
Participant's Service should subsequently terminate by reason of an Involuntary
Termination within twelve (12) months following the effective date of any Change
in Control.
III. TRANSFER RESTRICTIONS/SHARE ESCROW
A. Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing such unvested shares. To the extent an escrow
arrangement is utilized, the unvested shares and any securities or other assets
distributed with respect to such shares (other than regular cash dividends)
shall be delivered in escrow to the Corporation to be held until the
Participant's interest in such shares (or the distributed securities or assets)
vests. If the unvested shares are issued directly to the Participant, the
restrictive legend on the certificates for such shares shall read substantially
as follows:
'THE SHARES REPRESENTED BY THIS CERTIFICATE ARE UNVESTED AND ARE ACCORDINGLY
SUBJECT TO (I) CERTAIN TRANSFER RESTRICTIONS AND (II) CANCELLATION OR REPURCHASE
IN THE EVENT THE REGISTERED HOLDER (OR HIS/ HER PREDECESSOR IN INTEREST) CEASES
TO REMAIN IN THE CORPORATION'S SERVICE. SUCH TRANSFER RESTRICTIONS AND THE TERMS
AND CONDITIONS OF SUCH CANCELLATION OR REPURCHASE ARE SET FORTH IN A STOCK
ISSUANCE AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER (OR HIS/HER
PREDECESSOR IN INTEREST) DATED , , A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL OFFICE OF THE CORPORATION.'
B. The Participant shall have no right to transfer any unvested shares of
Common Stock issued to him or her under the Stock Issuance Program. For purposes
of this restriction, the term "transfer" shall include (without limitation) any
sale, pledge, assignment, encumbrance, gift or other disposition of such shares,
whether voluntary or involuntary. Upon any such attempted transfer, the unvested
shares shall immediately be cancelled in accordance with substantially the same
procedure in effect under Section I.B.3 of this Article Four, and neither the
Participant nor the proposed transferee shall have any rights with respect to
such cancelled shares. However, the Participant shall have the right to make a
gift of unvested shares acquired under the Stock Issuance Program to his or her
spouse or issue, including adopted children, or to a trust established for the
benefit of such spouse or issue, provided the donee of such shares delivers to
the Corporation a written agreement to be bound by all the provisions of the
Stock Issuance Program and the Issuance Agreement applicable to the gifted
shares.
51
ARTICLE FIVE
MISCELLANEOUS
I. LOANS OR INSTALLMENT PAYMENTS
A. The Plan Administrator may, in its discretion, assist any Optionee or
Participant (including an Optionee or Participant who is an officer of the
Corporation) in the exercise of one or more options granted to such Optionee
under the Discretionary Option Grant Program or the purchase of one or more
shares issued to such Participant under the Stock Issuance Program, including
the satisfaction of any Federal and state income and employment tax obligations
arising therefrom, by (i) authorizing the extension of a loan from the
Corporation to such Optionee or Participant or (ii) permitting the Optionee or
Participant to pay the option price or purchase price for the purchased Common
Stock in installments over a period of years. The terms of any loan or
installment method of payment (including the interest rate and terms of
repayment) shall be upon such terms as the Plan Administrator specifies in the
applicable option or issuance agreement or otherwise deems appropriate at the
time such option price or purchase price becomes due and payable. Loans or
installment payments may be authorized with or without security or collateral.
In all events, the maximum credit available to the Optionee or Participant may
not exceed the option or purchase price of the acquired shares (less the par
value of such shares) plus any Federal, state and local income and employment
tax liability incurred by the Optionee or Participant in connection with the
acquisition of such shares.
B. The Plan Administrator may, in its absolute discretion, determine that
one or more loans extended under this financial assistance program shall be
subject to forgiveness by the Corporation in whole or in part upon such terms
and conditions as the Plan Administrator may deem appropriate.
II. AMENDMENT OF THE PLAN AND AWARDS
The Board has complete and exclusive power and authority to amend or modify
the Plan (or any component thereof) in any or all respects whatsoever, However,
no such amendment or modification shall adversely affect rights and obligations
with respect to options at the time outstanding under the Plan, nor adversely
affect the rights of any Participant with respect to Common Stock issued under
the Stock Issuance Program prior to such action, unless the Optionee or
Participant consents to such amendment. In addition, the Board may not, without
the approval of the Corporation's stockholders, amend the Plan to (i) increase
the maximum number of shares issuable under the Plan or (ii) the maximum number
of shares for which any one individual participating in the Plan may be granted
stock options, separately exercisable stock appreciation rights and direct stock
issuances in the aggregate per calendar year, except for permissible adjustments
under Section VI subsection C of Article One.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon the
exercise of stock options for such shares or the vesting of such shares under
the Plan shall be subject to the satisfaction of all applicable Federal, foreign
state and local income tax and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion and in accordance with the
provisions of this Section III of Article Five and such supplemental rules as
the Plan Administrator may from time to time adopt, provide any or all holders
of Non-Statutory Options or unvested shares under the Plan with the right to use
shares of Common Stock in satisfaction of no more than the minimum amount of the
Federal, foreign state and local income and employment tax liabilities that the
Corporation is required to withhold from such holders in connection with the
exercise of their options or the vesting of their shares (the "Taxes"). Such
right may be provided to any such holder in either or both of the following
formats:
1. STOCK WITHHOLDING: The holder of the Non-Statutory Option or
unvested shares may be provided with the election to have the Corporation
withhold, from the shares of Common
52
Stock otherwise issuable upon the exercise of such non-statutory option or
the vesting of such shares, a portion of those shares with an aggregate Fair
Market Value equal to the percentage of the applicable Taxes (not to exceed
one hundred percent (100%)) designated by the holder.
2. STOCK DELIVERY: The Plan Administrator may, in its discretion,
provide the holder of the Non-Statutory Option or the unvested shares with
the election to deliver to the Corporation, at the time the Non-Statutory
Option is exercised or the shares vest, one or more shares of Common Stock
previously acquired by such individual (other than in connection with the
option exercise or share vesting triggering the Taxes) with an aggregate
Fair Market Value equal to the percentage of the Taxes incurred in
connection with such option exercise or share vesting (not to exceed one
hundred percent (100%)) designated by the holder.
IV. EFFECTIVE DATE AND TERM OF PLAN
A. This Plan became effective on April 30, 1996 and was approved by
stockholders on April 26, 1996. In February 1998, the Board adopted and approved
amendments to the Plan to provide for an increase in the number of shares
subject to grants under the Automatic Option Grant Program from 1,000 to 2,000
shares and to reflect the amendments promulgated by the Securities and Exchange
Commission to Rule 16b-3 which allow for greater transferability of
Non-Statutory Options (collectively, the "February 1998 Amendments"). The
February 1998 Amendments became effective when approved by the Corporation's
stockholders on March 26, 1998. In March 2000, the Board adopted and approved
amendments to the Plan pertaining to: (i) the name of the Corporation; (ii) the
administration of the Plan; and (iii) the limit imposed by Section 162(m) of the
Code, on certain highly-compensated employees (collectively, the "March 2000
Amendments"). None of the March 2000 Amendments shall be given effect until they
shall have been approved by the Corporation's stockholders.
B. The Plan shall terminate upon the earlier of (i) ten (10) years
following the Plan Effective Date or (ii) the date on which all shares available
for issuance under the Plan shall have been issued pursuant to the exercise of
the options granted under the Plan or the issuance of shares (whether vested or
unvested) under the Stock Issuance Program. If the date of termination is
determined under clause (i) above, then all option grants and unvested share
issuances outstanding on such date shall thereafter continue to have force and
effect in accordance with the provisions of the instruments evidencing such
grants or issuance.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
pursuant to option grants or share issuances under the Plan shall be used for
general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option under the
Plan, the issuance of any shares under the Stock Issuance Program, and the
issuance of Common Stock upon the exercise or surrender of the option grants
made hereunder shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it, and the Common Stock issued
pursuant to it.
B. No shares of Common Stock or other assets shall be issued or delivered
under this Plan unless and until there shall have been compliance with all
applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any securities exchange on which stock of the same class is then listed.
53
VII. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing the Plan, nor any
action taken by the Plan Administrator hereunder, nor any provision of the Plan
shall be construed so as to grant any individual the right to remain in the
employ or service of the Corporation (or any Parent or Subsidiary corporation)
for any period of specific duration, and the Corporation (or any Parent or
Subsidiary corporation retaining the services of such individual) may terminate
such individual's employment or service at any time and for any reason, with or
without cause.
VIII. MISCELLANEOUS PROVISIONS
A. Except as provided in the Plan, the right to acquire Common Stock or
other assets under the Plan may not be assigned, encumbered or otherwise
transferred by any Optionee or Participant.
B. The provisions of the Plan relating to the exercise of options and the
vesting of shares shall be governed by the laws of the State of California, as
such laws are applied to contracts entered into and performed in such State.
C. The provisions of the Plan shall inure to the benefit of, and be binding
upon, the Corporation and its successors or assigns, whether by Corporate
Transaction or otherwise, and the Participants and Optionees, the legal
representatives of their respective estates, their respective heirs or legatees
and their permitted assignees.
54
Please Detach and Mail in the Envelope Provided
WESTAFF, INC.
PROXY
The undersigned, revoking previous proxies relating to these shares,
hereby acknowledges receipt of the Notice and Proxy Statement dated February 28,
2000 in connection with the 2000 Annual Meeting of stockholders to be
held at 10:00 a.m. on May 17, 2000 at the Company's administrative offices,
220 N. Wiget Lane, Walnut Creek, California, and hereby appoints W. Robert
Stover and Robin A. Herman, and each of them, (with full power to act alone),
the attorneys and proxies of the undersigned, with power of substitution to
each to vote all shares of the Common Stock of WESTAFF, INC. registered in
the name provided herein which the undersigned is entitled to vote at the
2000 Annual Meeting of stockholders, and at any adjournment or adjournments
thereof, with all the powers the undersigned would have if personally
present. Without limiting the general authorization hereby given, the
proxies are, and each of them is, instructed to vote or act as follows on the
on the proposals set forth in the Proxy Statement.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO
DIRECTION IS MADE THIS PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR
THE RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS, AND FOR AMENDMENT OF 1996
STOCK OPTION/STOCK ISSUANCE PLAN.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, AND 3.
SEE REVERSE SIDE. IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF
DIRECTORS' RECOMMENDATION, SIMPLY SIGN ON THE REVERSE SIDE. YOU NEED NOT
MARK ANY BOXES.
(CONTINUED, AND TO BE DATED AND SIGNED ON OTHER SIDE)
Please Detach and Mail in the Envelope Provided
/X/ Please mark your votes as in this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3
1. ELECTION OF
DIRECTORS:
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST AT RIGHT.)
FOR
the nominees listed at right (except as indicated) / /
WITHHOLD AUTHORITY
to vote for the nominees listed at right / /
Nominees:
Jack D. Samuelson
Gilbert L. Sheffield
2. PROPOSAL TO RATIFY THE SELECTION OF ARTHUR ANDERSEN LLP AS THE
INDEPENDENT PUBLIC ACCOUNTANTS OF THE COMPANY FOR FISCAL 2000.
FOR AGAINST ABSTAIN
/ / / / / /
3. PROPOSAL TO APPROVE THE AMENDED AND RESTATED 1996 STOCK
OPTION/STOCK ISSUANCE PLAN.
/ / / / / /
PLEASE SIGN, DATE AND MAIL THIS PROXY IMMEDIATELY.
Signature_____________________ Signature____________________ Date_____________
NOTE: This Proxy should be marked, dated and signed by the stockholder(s)
exactly as his or her name appears hereon, and returned promptly in the
enclosed envelope. Persons signing in a fiduciary capacity should so
indicate. If shares are held by joint tenants or as community property, both
should sign.