<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
NOVACARE EMPLOYEE SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] 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:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
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<PAGE> 2
[NOVACARE LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held December 8, 1998
Norristown, Pennsylvania
October 28, 1998
To the Holders of Common Stock of
NovaCare Employee Services, Inc.:
The Annual Meeting (the "Meeting") of the Stockholders of NovaCare Employee
Services, Inc. (the "Company") will be held at the DoubleTree Guest Suites, 640
West Germantown Pike, Plymouth Meeting, Pennsylvania 19462, on Tuesday, December
8, 1998 at 10:00 A.M., local time, to consider and act upon the following
matters:
1. Election of directors for the ensuing year.
2. Proposal to increase the number of shares of Common Stock issuable
under the Company's stock option plan.
3. Ratify selection of independent accountants.
4. Such other business as may properly come before the Meeting or any
postponements or adjournments thereof.
Only stockholders of record at the close of business on October 13, 1998
are entitled to notice of and to vote at the Meeting. A list of the stockholders
entitled to vote at the Meeting may be examined at the Company's executive
offices in Norristown, Pennsylvania during the ten-day period preceding the
Meeting.
By order of the Board of Directors,
Richard S. Binstein,
Secretary
Stockholders are cordially invited to attend the Meeting in person. Whether
or not you plan to attend, please mark, sign and date the enclosed proxy and
mail it promptly in the enclosed return envelope so that your vote can be
recorded. The envelope does not require any postage if mailed in the United
States.
<PAGE> 3
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by and on behalf of the Board of Directors of NovaCare Employee
Services, Inc. (the "Company") for use at the 1998 Annual Meeting of
Stockholders (the "Meeting") to be held on December 8, 1998, and at any
postponements or adjournments thereof. If properly signed and returned to the
Company and not revoked, the proxy will be voted in accordance with the
instructions it contains. The persons named in the accompanying proxy will vote
the proxy for the Board of Directors' slate of directors and as recommended by
the Board of Directors unless contrary instructions are given. This Proxy
Statement and the enclosed proxy are first being sent to stockholders on or
about October 28, 1998. The Company's principal executive offices are located at
the Valley Forge Corporate Center, 2621 Van Buren Avenue, Norristown,
Pennsylvania 19403.
Any proxy may be revoked at any time before it is exercised. The casting of
a ballot at the Meeting by a stockholder who may theretofore have given a proxy
will not have the effect of revoking that proxy.
Only stockholders of record at the close of business on October 13, 1998
are entitled to vote at the Meeting or any adjournments thereof. As of October
13, 1998, the Company had 27,813,718 outstanding shares of common stock, $.01
par value (the "Common Stock"), each holder of which is entitled to one vote per
share with respect to each matter to be voted on at the Meeting. The Company has
no class or series of stock outstanding other than the Common Stock.
Directors are elected by plurality vote. Approval of the proposal to
increase the number of shares of Common Stock issuable under the Company's stock
option plan, and ratification of the selection of independent accountants for
the Company will require the affirmative vote of the holders of a majority of
the Common Stock entitled to vote on the proposals and present in person or
represented by proxy. With respect to such proposals, abstentions will be
included, but broker non-votes will not be included, in the calculation of the
number of holders who are present at the Meeting.
<PAGE> 4
I. ELECTION OF DIRECTORS
Seven directors will be elected at the Meeting. It is the intention of each
of the persons named in the accompanying proxy to vote the shares represented
thereby in favor of the seven nominees listed in the following table, unless
contrary instructions are given. All of such nominees, other than William F.
Weld, are presently serving as directors. In case any of the nominees is unable
or declines to serve, such persons reserve the right to vote the shares
represented by such proxy for another person duly nominated by the Board of
Directors in his stead or, if no other person is so nominated, to vote such
shares only for the remaining nominees. The Board of Directors has no reason to
believe that any person named will be unable or will decline to serve. The
directors elected by the stockholders will serve until the 1999 Annual Meeting
of Stockholders and until their respective successors are duly elected and shall
have qualified. Certain information concerning the nominees for election as
directors is set forth below. Such information was furnished by them to the
Company.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
NAME OF NOMINEE AND BENEFICIALLY AS OF PERCENT
BIOGRAPHICAL INFORMATION AUGUST 31, 1998(1) OF CLASS
------------------------ ------------------ --------
<S> <C> <C>
HARVEY V. FINEBERG, M.D., Ph.D., age 53, has been a director
of the Company since March 3, 1997. He was named Provost of
Harvard University in July 1997. Until then, he had been
Dean of the Harvard School of Public Health since 1984 and a
Professor of Health Policy and Management there since 1982.
From 1995 to 1996, he served as President of the Association
of Schools of Public Health. He is also a member of the
Institute of Medicine. Dr. Fineberg is a director of
Integra, Inc., a national mental health services company
incorporated in 1991 ("Integra"). 6,667(2) *
JOHN H. FOSTER, age 56, has been a director of the Company
since March 3, 1997. Mr. Foster is a director of Corning
Incorporated, an international corporation with business
interests in specialty materials and communications. Since
March 1991, Mr. Foster also has been Chairman of the Board
and Chief Executive Officer of Integra. He is also Chairman
of the Board of NovaCare, Inc., the Company's parent
corporation ("NovaCare"), since 1984 and served as
NovaCare's Chief Executive Officer from 1984 through May
1997. Mr. Foster is founder and Chairman of Foster
Management Company, an investment advisor, and general
partner of various venture capital investment funds. 4,000(3) *
TIMOTHY E. FOSTER, age 46, has been a director of the
Company since March 3, 1997. Since February 1995, he has
also been a director of Integra, Inc., a national mental
health services company. Mr. Foster has been Chief Executive
Officer of NovaCare since May 1997 and a director of
NovaCare since December 1984. 14,000(4) *
E. MARTIN GIBSON, age 60, has been Chairman of the Board of
the Company since March 3, 1997. Mr. Gibson, who is retired,
served as Chairman and Chief Executive Officer of Corning
Lab Services, Inc., a subsidiary of Corning Incorporated,
from 1990 until December 1994. He currently serves as a
director of International Technology Corp., an environmental
management company, Hardinge Brothers, Inc., a manufacturer
of machine tools, Pharmerica Corp., an institutional
pharmacy company, and Sensus Corp., a private biotechnology
company. Mr. Gibson has been a director of NovaCare since
March 1992. 13,334(5) *
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
NAME OF NOMINEE AND BENEFICIALLY AS OF PERCENT
BIOGRAPHICAL INFORMATION AUGUST 31, 1998(1) OF CLASS
------------------------ ------------------ --------
<S> <C> <C>
LOREN J. HULBER, age 56, has been the President, Chief
Executive Officer and a director of the Company since March
3, 1997. For the previous ten years, he served in various
capacities for Fortune Brands, Inc., most recently as
President and Chief Executive Officer of Day-Timers, Inc., a
subsidiary specializing in time management and personal
organization. From 1973 until 1981, Mr. Hulber was President
and Chief Executive Officer of Durand Corporation, an office
products company. Upon Durand Corporation's acquisition by
Jostens, Inc. in 1981 and until 1987, Mr. Hulber was
President of that company's Business Products Group, a
provider of business products and services. Mr. Hulber
currently serves as Vice Chairman of the Board of Trustees
of Lehigh Valley Hospital and Health Network. 375,000(6) 1.35%
STEPHEN E. O'NEIL, age 65, has been a director of the
Company since March 3, 1997. Mr. O'Neil has been a Principal
of The O'Neil Group, a private investment firm, since 1981.
He is a director of Brown-Forman Corporation, Castle
Convertible Fund, Inc., Spectra Fund, Inc., Alger Fund,
Inc., Alger American Funds and NovaCare. 6,667(7) *
WILLIAM F. WELD, Esq., age 53, is Counsel to McDermott, Will
& Emery, a national law firm. From 1991 through 1997, Mr.
Weld served as Governor of the Commonwealth of
Massachusetts. Mr. Weld served as Assistant U.S. Attorney
General from 1986 through 1988 and he served as United
States Attorney for Massachusetts from 1981 through 1986. He
is a director of Affiliated Managers Group, Inc. -0-(8) *
</TABLE>
- ---------------
* Less than one percent.
(1) As of August 31, 1998, each director had sole voting and investment power
with respect to all shares shown in the table as beneficially owned by him,
except as indicated below.
(2) Consists of 6,667 shares of the Company's Common Stock presently issuable
upon exercise of options.
(3) Consists of 4,000 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, Mr. Foster beneficially owns
4,151,214 shares (approximately 6.5%) of the common stock (the "NovaCare
Common Stock") of NovaCare, presently issuable upon exercise of options.
(4) Includes 4,000 shares of the Company's Common Stock presently issuable upon
exercise of options. In addition, Mr. Foster owns 910,001 shares
(approximately 1.4%) of NovaCare Common Stock, presently issuable upon
exercise of options.
(5) Consists of 13,334 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, Mr. Gibson owns 39,333 shares (less
than one percent) of NovaCare Common Stock, 36,733 of such shares presently
issuable upon exercise of options.
(6) In addition, Mr. Hulber owns 10,000 shares (less than one percent) of
NovaCare Common Stock.
(7) Consists of 6,667 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, Mr. O'Neil owns 36,833 shares (less
than one percent) of NovaCare Common Stock, 36,733 of such shares presently
issuable upon exercise of options.
(8) Mr. Weld does not own any shares of the Company's Common Stock or NovaCare
Common Stock.
No family relationship exists among any of the directors or executive
officers of the Company.
During the fiscal year ended June 30, 1998, the Board met six times and
convened three times by means of unanimous written consent. Each of the nominees
listed above presently serving as a director of the Company attended at least
75% of the meetings of the Board and meetings of any committees of the Board on
which such person served which were held during the time that such person
served, except as follows: Harvey V. Fineberg, M.D., Ph.D. attended 66% of such
Board and committee meetings.
3
<PAGE> 6
The Board has a Compensation Committee and an Audit Committee. The members
of the Compensation Committee are E. Martin Gibson, who serves as Chairman,
Harvey V. Fineberg, M.D., Ph.D. and Stephen E. O'Neil. The Compensation
Committee determines the compensation of senior management, administers the
Company's 1997 Stock Option Plan and determines the persons who are to receive
options and the number of shares subject to each option. The Compensation
Committee met three times and convened once by unanimous written consent during
the fiscal year ended June 30, 1998.
The members of the Audit Committee are Stephen E. O'Neil, who serves as
Chairman, Harvey V. Fineberg, M.D., Ph.D. and E. Martin Gibson. The Audit
Committee acts as a liaison between the Board and the independent accountants
and annually recommends to the Board the appointment of the independent
accountants. The Audit Committee reviews, with the independent accountants, the
planning and scope of the audits of the financial statements, the results of
those audits and the adequacy of internal accounting controls and monitors the
Company's compliance programs and other corporate and financial policies. The
Audit Committee met twice during the fiscal year ended June 30, 1998.
COMPENSATION OF DIRECTORS OF THE COMPANY
In consideration for each director's services during fiscal years 1997 and
1998, the Company granted each director options to purchase 20,000 shares of the
Company's Common Stock at a price of $2.80 per share, except for E. Martin
Gibson, Chairman of the Board of Directors, who was granted options to purchase
40,000 shares of the Company's Common Stock. All of the foregoing options were
granted on February 28, 1997, and all such options vest over five years at the
rate of 20% annually.
COMPENSATION OF EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information for the fiscal years ended June
30, 1998 and 1997 concerning the compensation paid or awarded to the Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company during each such year, together with one additional
executive officer whose employment with the Company terminated during fiscal
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
NAME AND --------------------------------------- OPTIONS
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OTHER($)(1) (#)
- ----------------------------------- ---- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Loren J. Hulber(2)................. 1998 $204,878.74 $216,999.94 $20,222.88 150,000
President and Chief Executive 1997 69,230.00 31,500.00 1,884.61 --
Officer
Thomas D. Schubert(3).............. 1998 155,210.85 63,472.50 8,347.52 75,000
Senior Vice President and Chief 1997 5,769.23 -- -- 25,000
Financial Officer
Andrew W. Stith (4)................ 1998 148,212.33 60,606.00 3,977.22 100,000
Senior Vice President of 1997 18,216.65 -- 1,764.45 30,000
Marketing and Sales
Arthur T. Locilento, Jr. (5)....... 1998 141,931.05 -- 32,391.36 --
Formerly Senior Vice President 1997 51,923.07 26,845.08 7,934.81 --
of Human Resources
Aven A. Kerr (6)................... 1998 119,947.05 61,424.98 31,762.86 125,000
Executive Vice President and 1997 -- -- -- 10,000
Chief Operating Officer
Christina D. Harris, Esq. (7)...... 1998 110,000.02 41,679.50 1,914.39 60,000
Senior Vice President of 1997 -- -- -- --
Regulatory Affairs and Compliance
and General Counsel
</TABLE>
- ---------------
(1) Represents the Company's contributions for various benefit plans, including
401(k) Plan, Supplemental Benefit Plan, Long Term Disability Plan and Life
Insurance Plan.
(2) Mr. Hulber became President and Chief Executive Officer of the Company in
January 1997.
4
<PAGE> 7
(3) Mr. Schubert became Senior Vice President and Chief Financial Officer of the
Company in June 1997.
(4) Mr. Stith became Senior Vice President of Marketing and Sales of the Company
in April 1997.
(5) Mr. Locilento was the Company's Senior Vice President of Human Resources
from October 1996 to May 1998. Mr. Locilento left the Company in May 1998.
(6) Ms. Kerr became an Executive Vice President and the Chief Operating Officer
of the Company in June 1998. From September 1997 to May 1998, Ms. Kerr was
Senior Vice President of Operations Administration of the Company.
(7) Ms. Harris became the Senior Vice President of Regulatory Affairs and
Compliance of the Company in July 1997. During 1998, Ms. Harris was also
appointed to serve as the Company's General Counsel.
The following table sets forth the number and value of options exercised by
the executive officers of the Company named in the Summary Compensation Table
during the fiscal year ended June 30, 1998 and the number and value of options
held by such executive officers at June 30, 1998.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
JUNE 30, 1998(#) AT JUNE 30, 1998($)(1)
---------------- ----------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME UPON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------- ---------------- ----------------------
<S> <C> <C> <C> <C>
Christina D. Harris,Esq......... -- -- 2,000/ 58,000 $13,400/$72,350
Loren J. Hulber................. -- -- 0/150,000 0/ 56,250
Aven A. Kerr.................... -- -- 2,000/133,000 13,400/119,225
Arthur T. Locilento, Jr......... 5,000 27,640 -- --
Thomas D. Schubert.............. -- -- 5,000/ 95,000 33,500/162,125
Andrew W. Stith................. -- -- 6,000/124,000 40,200/198,300
</TABLE>
- ---------------
(1) In-the-money options are those for which the fair market value of the
underlying Common Stock exceeds the exercise price of the option. The value
of in-the-money options is determined in accordance with regulations of the
Securities and Exchange Commission by subtracting the aggregate exercise
price of the option from the aggregate year-end value of the underlying
Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
E. Martin Gibson, as Chairman, Harvey V. Fineberg, M.D., Ph.D. and Stephen
E. O'Neil served on the Compensation Committee of the Board of Directors for the
entire 1998 fiscal year. No insider served on the Committee and there were no
interlocks.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors (the "Committee")
presently is composed of three independent non-employee directors. The Committee
is responsible for setting and monitoring the effectiveness of the compensation
provided to the Company's officers, directors and senior management employees.
In its decision-making, the Committee is guided by a compensation
philosophy designed to reward employees for the achievement of organizational
goals and for the maximization of stockholder return. Specific levels of pay and
incentive opportunity are determined by the competitive market for executive
talent and, where appropriate, the need to invest in the future growth of the
business.
5
<PAGE> 8
The compensation program, which provides incentives for executives to
achieve the short-term and long-term goals of the Company, comprises three
components: base salary, cash incentives and stock option awards.
Base Salary
Executive and management base salaries provide fixed compensation to retain
talent to launch a new business venture.
Incentive Compensation
Based on organizational level and performance, incentive opportunities are
available to a wide range of Company employees. These programs are effective in
reinforcing both the overall values of the Company and the specific operating
goals of the various business units.
Executive incentive plans are designed to focus executive attention on the
key performance goals of the Company, to identify the expected levels of
performance and to reward individuals who meet or exceed such expectations. The
aggregate amounts available for incentive awards are determined by the overall
financial performance of the Company. The actual awards paid to individual
recipients under the plans are based on the achievement of weighted performance
goals.
For the Chief Executive Officer and other executives and management
employees, including the executives named in this Proxy Statement, incentive
awards were performance-driven. A minimum of 60% of the incentive award was
based on financial performance, and the remainder was based on achievement of
specific business objectives. To earn incentive awards based on financial
performance, the Company's performance must at a minimum have reached 70% of the
financial performance targets established by the Board of Directors, at which
level of performance 50% of the targeted incentive opportunity would be earned.
Earned awards increased proportionally and reached 100% at achievement of 100%
of the performance goal. Performance awards over 100% increased on a formula
basis up to 200% of the targeted incentive opportunity at 130% of such
performance goal; awards were capped at 200% of the targeted amount.
Stock Option Awards
The Company's 1997 Stock Option Plan (the "Plan") was approved by the Board
of Directors and the stockholders of the Company to align executives' interests
with stockholders' interests, to provide incentives for key employees of the
Company and its subsidiaries by encouraging their ownership of Common Stock and
to aid the Company in attracting and retaining such key employees, upon whose
efforts the Company's success and future growth depends.
Options are granted at the discretion of the Committee. Individual grant
sizes are determined based on a variety of factors, which include practices for
similar positions in the market and organizational and individual performance.
At the discretion of the Committee, and based on the recommendation of
management, options may also be used as an incentive for candidates recruited to
fill key positions, or as special retention incentives for employees with
significant future potential.
All options under the Plan are granted at 100% of the fair market value on
date of grant. The term of the option is 10 years from the date of grant and
vested options can be exercised at any time during such period. Options
generally vest and become exercisable in cumulative annual installments of 20%
over five years commencing one year after the date of grant. If an employee
leaves the Company before options are vested, the unexercised options are
forfeited and may be reissued under the Plan. On February 3, 1998, the
Compensation Committee approved the grant of options with an alternate
price-based vesting schedule. Under that vesting schedule options vest in 20%
increments either pursuant to the standard five-year schedule or when the market
price of the Company's Common Stock averages $12, $14, $16, $18 and $20 for 20
consecutive trading days, whichever first occurs.
6
<PAGE> 9
Compensation of Chief Executive Officer
For fiscal year 1998, Loren J. Hulber, Chief Executive Officer of the
Company, received $421,878.68 in aggregate cash compensation comprising
$204,878.74 in base salary and $216,999.94 in incentive compensation. His
incentive compensation was targeted at a bonus of 50% of his base salary, in
addition to receiving a one-time bonus in connection with the Company's
completion of its initial public offering. Mr. Hulber's annual base salary
increased from $200,000 in fiscal year 1998 to $250,000 effective as of July 1,
1998.
The decisions of the Committee depend significantly on quantitative market
data and recommendations of impartial third party consultants. The Committee
believes its decisions are consistent with the Company's business objectives and
performance expectations and have been made in the best interests of the Company
and its stockholders.
THE COMPENSATION COMMITTEE
E. Martin Gibson, Chairman
Harvey V. Fineberg, M.D., Ph.D.
Stephen E. O'Neil
Notwithstanding anything set forth in any of the Company's previous filings
under the Securities Act of 1933, as amended (the "Securities Act"), or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which might
incorporate future filings, including this Proxy Statement, in whole or in part,
the preceding report and the performance graph that follows shall not be
incorporated by reference into any such filings.
7
<PAGE> 10
PERFORMANCE GRAPH
The following performance graph compares the cumulative total stockholder
return of the Company's Common Stock to the NASDAQ Stock Market Index and to its
peer group of six publicly traded professional employer organizations (the "Peer
Group") for the period from November 11, 1997 (the first day the Company's
Common Stock was publicly traded) through June 30, 1998. The graph assumes that
$100 was invested in each of the Company's Common Stock, the NASDAQ Stock Market
and the companies listed in the Peer Group on November 11, 1997 and that any
dividends were reinvested.
COMPARISON OF SEVEN MONTH CUMULATIVE TOTAL RETURN
FOR THE PERIOD ENDED JUNE 30, 1998
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
'NOVACARE
EMPLOYEE NASDAQ STOCK
SERVICES, INC.' PEER GROUP MARKET (U.S.)
<S> <C> <C> <C>
11/11/97 100.00 100.00 100.00
6/30/98 105.56 120.97 119.03
</TABLE>
EMPLOYMENT AGREEMENTS
In January 1997, the Company entered into an employment agreement with
Loren J. Hulber, the Company's President and Chief Executive Officer. The
agreement provides for a three-year term of employment and provides for
automatic one-year extensions until either party shall give the other notice of
non-extension. The agreement provides for Mr. Hulber to receive an annual base
salary, currently $250,000, subject to increases in accordance with the policies
of the Company, and to be eligible for an annual cash bonus equal to fifty
percent of his base salary (increased to one hundred percent of base salary as
of July 1, 1998). Under this agreement, Mr. Hulber was given the opportunity to
purchase 375,000 shares of the Company's Common Stock at a price of $1.92 per
share, subject to certain restrictions on resale. The agreement provides that if
Mr. Hulber is terminated by the Company without cause or if Mr. Hulber resigns
subsequent to a change in control of the Company, a material diminution of his
position, authority or compensation or his removal by the Company as President
and Chief Executive Officer, then Mr. Hulber shall be entitled to his base
salary and certain other benefits for a period of one year from the date of such
event in
8
<PAGE> 11
periodic installments (which cease if Mr. Hulber obtains alternative employment,
unless the rate of compensation is less, in which case the Company shall pay the
difference for the remainder of the severance period) and bonus compensation in
an amount equal to (a) the lesser of the bonus earned in the preceding fiscal
year or one hundred percent of his salary during the year of termination (the
"Final Bonus"), plus (b) an amount based on the Final Bonus and the number of
months in the severance period provided in Mr. Hulber's employment agreement. In
addition, Mr. Hulber will become fully vested in all options granted and be
eligible to receive benefits during the severance period.
In September 1997, NovaCare entered into an Employment Agreement with Aven
A. Kerr as Senior Vice President, Human Resources. In May 1998, Ms. Kerr was
appointed Executive Vice President and Chief Operating Officer of the Company.
The agreement provides for a three-year term of employment and provides for
automatic one-year extensions. The agreement provides for Ms. Kerr to receive an
annual base salary of $210,000, subject to increases in accordance with the
policies of the Company, and to be eligible for an annual cash bonus equal to
fifty percent of base salary, in accordance with the Company's incentive
compensation plan. The agreement provides that if Ms. Kerr is terminated without
cause, Ms. Kerr will continue to receive base salary for a period of six months
unless she obtains alternative employment. If Ms. Kerr's alternative employment
compensation is less than base salary at termination, and such alternative
employment does not violate any of the restrictive covenants of her employment
agreement with the Company, the Company will continue to pay the difference for
the severance period. Ms. Kerr will vest in all options and receive benefits for
the severance period. In case of a change of control, Ms. Kerr may terminate
employment and receive severance payments in a lump sum.
In May 1997, the Company entered into an Employment Agreement with Thomas
D. Schubert, the Company's Senior Vice President and Chief Financial Officer.
The agreement provides for Mr. Schubert to receive an annual base salary,
currently at $200,000, subject to increases in accordance with the policies of
the Company, and to be eligible for an annual cash bonus equal to thirty-five
percent of base salary, in accordance with the Company's incentive compensation
plan. Pursuant to this agreement, Mr. Schubert was granted options to purchase
25,000 shares of the Company's Common Stock, at a price of $2.80 per share,
pursuant to a vesting schedule of 20% per annum. The agreement provides that if
Mr. Schubert is terminated without cause, Mr. Schubert will receive outplacement
benefits and will be entitled to a lump sum severance payment in an amount
determined in accordance with the Company's standard severance policies and
procedures.
In Apri1 1997, the Company entered into an Employment Agreement with Andrew
W. Stith, Senior Vice President of Marketing and Sales. The agreement provides
for Mr. Stith to receive an annual base salary, currently at $180,000, subject
to increases in accordance with policies of the Company, and to be eligible for
an annual cash bonus equal to thirty-five percent of base salary, in accordance
with the Company's incentive compensation plan. Pursuant to this agreement, Mr.
Stith was granted options to purchase 30,000 shares of the Company's Common
Stock, at a price of $2.80 per share, pursuant to a vesting schedule of 20% per
annum. The agreement also provided Mr. Stith with an opportunity to purchase an
additional 5,000 shares of the Company's Common Stock at a price of $2.80 per
share, with the Company loaning Mr. Stith the funds to purchase such additional
stock, pursuant to a promissory note having deferred interest at a rate equal to
the prime rate plus 1%.
In June 1997, the Company entered into an Employment Agreement with
Christina D. Harris, Esq., the Company's Senior Vice President of Regulatory
Affairs and Compliance and General Counsel. The agreement provides for Ms.
Harris to receive an annual base salary, currently at $135,000, subject to
increases in accordance with the policies of the Company, and to be eligible for
an annual cash bonus equal to thirty percent of base salary, in accordance with
the Company's incentive compensation plan. Pursuant to this agreement, Ms.
Harris was granted options to purchase 10,000 shares of the Company's Common
Stock, at a price of $2.80 per share, pursuant to a vesting schedule of 20% per
annum. Ms. Harris was also provided certain benefits relating to her relocation.
9
<PAGE> 12
CERTAIN TRANSACTIONS
In February 1997, the Company entered into an agreement with NovaCare (the
"NovaCare Contract"), whereby substantially all of NovaCare's employees became
co-employed by the Company under a five-year term with automatic annual
renewals. Under the NovaCare Contract, the Company provides traditional PEO
services such as payroll and benefits management, worksite safety evaluation,
employment-related risk management and compensation and benefits consultation.
NovaCare paid the Company a fee for its services equal to the salary and Federal
payroll costs plus an average base fee of 9.7% of gross earnings of employees,
or approximately 117% of the gross payroll covered by the NovaCare Contract.
Effective July 1, 1998, the NovaCare Contract was amended, whereby the Company
agreed to provide the existing PEO services and a broader array of services,
including recruiting, employee training and orientation, outplacement and human
resource consulting. The new contract is principally a fee-for-service contract,
replacing the previous payment arrangement, which was priced as a percentage of
payroll, as described above. The new contract has a four-year term.
During fiscal 1998 and 1997, NovaCare subleased office space to the
Company. The sublease was a month-to-month arrangement, terminable on 30 days'
notice by either party, under which the Company paid NovaCare approximately
$9,000 per month. The agreement was terminated in October 1997, concurrent with
the Company's relocation to the new corporate headquarters.
NovaCare also provides information systems, consulting services and general
administrative and financial services to the Company on an as-needed basis at
NovaCare's cost. During fiscal 1998, the Company reimbursed NovaCare for certain
expenses, in the amount of $220,000, based upon estimates of time incurred by
NovaCare's personnel on behalf of the Company.
Effective July 1, 1997, the Company issued 1,200,000 shares of its common
stock, valued at $5,400,000, to acquire the assets and liabilities of NovaPro,
formerly a business of NovaCare.
Timothy E. Foster and Harvey V. Fineberg, M.D., Ph.D., directors of the
Company, serve as directors of Integra, Inc., which is controlled by John H.
Foster.
INFORMATION CONCERNING CERTAIN STOCKHOLDERS
The shareholdings as of August 31, 1998 of the only persons known to the
Company to own beneficially more than five percent (5%) of the outstanding
shares of the Common Stock, and the shareholdings as of August 31, 1998 of all
directors and officers of the Company as of such date as a group (according to
information furnished by them to the Company) are set forth in the following
table. The shareholdings of the six named executive officers of the Company
(except for Loren J. Hulber, whose shareholdings are set forth above under "I.
Election of Directors" and Mr. Locilento, who is no longer employed by the
Company) are set forth in the table below. Except as indicated in the footnotes
to the table, all of such shares are owned with sole voting and investment
power.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
NAME OWNED BENEFICIALLY PERCENT OF CLASS
- ---- ---------------------- ----------------
<S> <C> <C>
NovaCare................................................. 19,400,000 70%
GeoCapital............................................... 1,880,220 6.75%
Christina D. Harris, Esq. ............................... 2,800(3) *
Aven A. Kerr............................................. 2,000(4) *
Thomas D. Schubert....................................... 15,000(5) *
Andrew W. Stith.......................................... 11,000(6) *
All Directors and Officers As a Group (14 persons)....... 1,078,220(1)(2) 3.9%
</TABLE>
- ---------------
* Less than one percent.
(1) See footnotes 1 through 7 on pages 4 and 5.
10
<PAGE> 13
(2) Includes 49,668 shares of the Company's Common Stock presently issuable upon
exercise of options. In addition, all directors and officers of the Company
as a group beneficially own 5,164,516 shares of NovaCare Common Stock,
2,644,468 of such shares presently issuable upon exercise of options.
(3) Includes 2,000 shares of the Company's Common Stock presently issuable upon
exercise of options. In addition, Ms. Harris owns 73 shares of NovaCare
Common Stock
(4) Consists of shares of the Company's Common Stock presently issuable upon
exercise of options. In addition, Ms. Kerr owns 22,000 shares of NovaCare
Common Stock, 20,000 of such shares presently issuable upon exercise of
options.
(5) Includes 5,000 shares of the Company's Common Stock presently issuable upon
exercise of options. In addition, Mr. Schubert owns 62 shares of NovaCare
Common Stock.
(6) Includes 6,000 shares of the Company's Common Stock presently issuable upon
exercise of options.
II. APPROVAL OF INCREASE IN NUMBER OF SHARES
ISSUABLE UNDER STOCK OPTION PLAN
Under the Company's 1997 Stock Option Plan, as amended (the "1997 Option
Plan"), which provides for annual option grants to management-level employees
based on such employees' job level and scope of responsibilities, the Company
currently is authorized to issue options to purchase up to 1,625,000 shares of
the Company's Common Stock in the aggregate.
Management of the Company has determined that in order to provide
incentives to key employees, retain qualified people and meet the demands of the
marketplace the Company needs to increase the number of shares for which the
Company is authorized to issue options pursuant to the 1997 Option Plan. The
Company proposes to increase the authorized shares under the 1997 Option Plan by
1,500,000. The closing price of the Common Stock on the Nasdaq National Market
on October 20, 1998 was $3.625.
The Compensation Committee of the Board of Directors administers the 1997
Option Plan. The Compensation Committee is made up of three members of the Board
of Directors. No current member of the Compensation Committee is or has been an
employee or officer of the Company.
Options granted under the 1997 Option Plan may be either incentive stock
options designed to meet the requirements of Section 422 of the Internal Revenue
Code (the "Code") or non-statutory options not intended to comply with such
requirements. There are no tax consequences upon issuance of a non-statutory
option. Upon exercise of a non-statutory option, the holder will realize taxable
income to the extent of the difference between the exercise price and the market
price of the Common Stock on the date of exercise, and the Company will have a
deductible expense equal to the option holder's realized taxable income. Upon
the sale of shares purchased upon such exercise, the optionee will realize
capital gain or loss measured by the difference between the amount realized on
the sale and the fair market value of the shares at the time of exercise of the
option. In the case of options granted to executive officers and other principal
officers, directors and greater than ten percent stockholders of the Company,
income will be recognized upon exercise of a non-qualified option only if the
option has been held for at least six months prior to exercise. If such option
is exercised within six months after the date of grant, an officer, director or
greater than ten percent stockholder will recognize income on the date six
months after the date of grant, unless he or she files an election under Section
83(b) of the Code to be taxed on the date of exercise.
In contrast, an optionee will not be taxed upon exercise of an incentive
stock option and the Company will not be entitled to a deduction from income in
respect thereof. If the optionee retains the shares transferred to him or her
upon exercise of an incentive stock option for more than one year after the date
of issuance of the stock and two years after the date of grant of the option,
any gain or loss realized on a subsequent sale of the shares by the optionee
will be treated as long-term capital gain or loss. If, on the other hand, the
optionee sells the shares within one year after the date of transfer or two
years after the date of grant of the option, the optionee will realize ordinary
income, and the Company will be entitled to a deduction from income, to the
extent of the excess of the value of the shares on the date of exercise or the
amount realized on the sale (whichever is less) over the exercise price. Any
excess of the sale price over the value of the shares on the date
11
<PAGE> 14
of exercise will be treated as capital gain. The spread between the fair market
value of the shares on the date of exercise and the exercise price constitutes
an item of tax preference for purposes of the alternative minimum tax which,
under certain circumstances, could cause tax liability as a result of the
exercise.
The term of options granted under the 1997 Option Plan is determined by the
Compensation Committee, but may not exceed ten years. The vesting schedule, if
any, is determined by the Compensation Committee. Options may be transferable by
will and the laws of descent and distribution, or in certain circumstances to
individuals related to the optionee.
Options under the 1997 Option Plan may be granted to key employees,
including officers or directors of the Company or any subsidiary or parent of
the Company. The exercise price of options granted under the 1997 Option Plan is
determined by the Compensation Committee, but cannot be less than the fair
market value of the underlying stock on the date of grant. The purchase price
for an option may be paid in cash, in Common Stock of the Company, or in a
combination of both. The Company may lend an employee the purchase price or may
guarantee a loan by a third party to the employee for the purchase price. It is
not possible to determine in advance which eligible individuals will receive
options.
Options may not be exercised after termination of employment, except that
options exercisable on the date of termination may be exercised within three
months after termination, if termination is by the Company or by reason of
disability or retirement under any retirement plan maintained by the Company.
All options become fully vested and may be exercised for three months following
termination, if termination is caused by death. The maximum number of shares
subject to options that may be granted to any one person under the 1997 Option
Plan is 200,000 per year.
The Board of Directors believes that increasing the authorized shares under
the 1997 Option Plan is in the best interests of the Company. THE BOARD OF
DIRECTORS RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS VOTE FOR INCREASING THE
AUTHORIZED SHARES UNDER THE 1997 OPTION PLAN. It is the intention of the persons
named in the accompanying form of proxy to vote the shares represented thereby
in favor of increasing the number of shares issuable under the 1997 Option Plan,
unless otherwise instructed therein. If the increasing of the authorized shares
under the 1997 Option Plan is not approved, the Board of Directors will consider
the appropriateness of alternative compensation for management level employees.
III. RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board has selected PricewaterhouseCoopers LLP to serve as independent
accountants for the Company for the fiscal year ending June 30, 1999.
PricewaterhouseCoopers LLP has served as independent accountants for the
Company since 1996 and, although it is not required to do so, the Board is
submitting its selection of the Company's independent accountants for
ratification at the Meeting, in order to ascertain the views of stockholders
regarding such selection. If the selection is not ratified, the Board will
reconsider its selection.
THE BOARD RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS VOTE FOR RATIFICATION
OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP TO AUDIT THE FINANCIAL STATEMENTS
OF THE COMPANY FOR THE COMPANY'S FISCAL YEAR ENDING JUNE 30, 1999. It is the
intention of the persons named in the accompanying form of proxy to vote the
shares represented thereby in favor of such ratification unless otherwise
instructed therein.
A representative of PricewaterhouseCoopers LLP will be present at the
Meeting with the opportunity to make a statement if such representative desires
to do so and will be available to respond to appropriate questions.
IV. OTHER MATTERS
The Board does not know of any other matters which may be brought before
the Meeting. However, if any such other matters are properly presented for
action, it is the intention of the persons named in the
12
<PAGE> 15
accompanying form of proxy to vote the shares represented thereby in accordance
with their judgment on such matters.
V. MISCELLANEOUS
All costs relating to the solicitation of proxies of holders of Common
Stock will be borne by the Company. Proxies may be solicited by officers,
directors and regular employees of the Company and its subsidiaries personally,
by mail or by telephone or otherwise. The Company may pay brokers and other
persons holding shares of stock in their names or those of their nominees for
their reasonable expenses in sending soliciting material to their principals.
It is important that proxies be returned promptly. Stockholders who do not
expect to attend the Meeting in person are urged to mark, sign and date the
accompanying proxy and mail it in the enclosed return envelope, which requires
no postage if mailed in the United States, so that their votes can be recorded.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Exchange Act, directors and executive officers
of the Company are required to make certain filings on a timely basis with the
Securities and Exchange Commission. To date all required filings have been made
on a timely basis, except that one executive officer, Kenneth J. Jankowski,
failed to make a timely filing of a report on Form 3 required upon his election
as an executive officer. Subsequently, Mr. Jankowski filed the report.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the next Annual Meeting
of Stockholders of the Company must be received by the Company at its principal
executive offices by July 1, 1999 in order to be considered for inclusion in the
Company's proxy statement relating to such meeting. In the event that a
stockholder fails to notify the Company by September 13, 1999 of an intent to be
present at the Company's 1999 Annual Meeting of Stockholders in order to present
a proposal for a vote, the Company will have the right to exercise its
discretionary authority to vote against the proposal, if presented, without
including any information about the proposal in its proxy materials.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998, which has been filed with the Securities and Exchange
Commission, is included in the Annual Report accompanying this Proxy Statement.
October 28, 1998
13
<PAGE> 16
AMENDMENT NO. 1 TO THE
NOVACARE EMPLOYEE SERVICES, INC.
1997 STOCK OPTION PLAN
Amendment made as of November 24, 1997 by NovaCare Employee Services, Inc.
(the "Company") to the NovaCare Employee Services, Inc. 1997 Stock Option Plan
(the "Plan").
W I T N E S S E T H:
WHEREAS, the Company adopted the Plan as of February 28, 1997 to provide
incentives for key employees of the Company and its subsidiary or parent
corporations; and
WHEREAS, the Company desires to amend the Plan to (i) increase the number
of shares of common stock, $.01 par value, of the Company available for options
and other awards under the Plan from 625,000 to 1,625,000 and (ii) limit the
maximum number of options which may be granted to any person under the Plan
during any fiscal year of the Company to 200,000 shares.
NOW THEREFORE, the Company hereby amends the Plan as follows:
1. Section 3 of the Plan is hereby deleted in its entirety and the
following substituted therefor:
"3. Stock Available for Options. There shall be available for options under
the Plan a total of 1,625,000 shares of Stock, subject to any adjustments
which may be made pursuant to Section 5(f). Shares of Stock used for
purposes of the Plan may be either authorized and unissued shares or
previously issued shares held in the treasury of the Company, or both.
Shares of Stock covered by options which have terminated or expired prior
to exercise shall be available for further options hereunder. The maximum
number of options which may be granted to any person under the Plan during
any fiscal year of the Company shall not exceed 200,000 shares."
2. In all other respects, the Plan shall remain in full force and effect as
previously written.
IN WITNESS WHEREOF, the undersigned has executed this Amendment as of the
date first above written.
NOVACARE EMPLOYEE SERVICES, INC.
By___________________________________
Secretary
<PAGE> 17
NOVACARE EMPLOYEE SERVICES, INC.
1997 Stock Option Plan
1. Purposes of Plan. The purposes of this Plan, which shall be known
as the 1997 Stock Option Plan and is hereinafter referred to as the "Plan", are
(i) to provide incentives for key employees of NovaCare Employee Services, Inc.
(the "Company") and its subsidiary or parent corporations (within the respective
meanings of Section 424(f) and 424(e) of the Internal Revenue Code of 1986, as
amended (the "Code"), and referred to herein as "Subsidiary" and "Parent",
respectively) by encouraging their ownership of the common stock, $.01 par
value, of the Company (the "Stock") and (ii) to aid the Company in retaining
such key employees, upon whose efforts the Company's success and future growth
depends, and attracting other such employees.
2. Administration. The Plan shall be administered by the Board of
Directors, which may delegate authority to administer the Plan to the
Compensation Committee of the Board of Directors ("Committee"), as hereinafter
provided. For purposes of administration, the Committee, subject to the terms of
the Plan, shall have plenary authority to establish such rules and regulations,
make such determinations and interpretations, and take such other administrative
actions as it deems necessary or advisable. All determinations and
interpretations made by the Committee shall be final, conclusive and binding on
all persons, including Optionees (as hereinafter defined) and their legal
representatives and beneficiaries.
The Committee shall be appointed from time to time by the Board of
Directors and shall consist of not fewer than two of its members. All members of
the Committee shall be directors who are "Non-Employee Directors" as that term
is defined in 17 C.F.R. Section 240.16b-
<PAGE> 18
2
3(b)(3)(i). The Board of Directors shall designate one of the members of the
Committee as its Chairman. The Committee shall hold its meetings at such times
and places as it may determine. A majority of its members shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members. Any decision or determination reduced to writing and signed by all
members shall be as effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee may appoint a secretary (who need
not be a member of the Committee). No member of the Committee shall be liable
for any act or omission with respect to his service on the Committee, if he acts
in good faith and in a manner he reasonably believes to be in or not opposed to
the best interests of the Company. Service on the Committee shall constitute
service as a director of the Company for all purposes.
3. Stock Available for Options. There shall be available for options
under the Plan a total of 625,000 shares of Stock, subject to any adjustments
which may be made pursuant to Section 5(f). Shares of Stock used for purposes of
the Plan may be either authorized and unissued shares, or previously issued
shares held in the treasury of the Company, or both. Shares of Stock covered by
options which have terminated or expired prior to exercise shall be available
for further options hereunder.
4. Eligibility. Options under the Plan may be granted to key employees
of the Company or any Subsidiary or Parent, including officers or directors of
the Company or any Subsidiary or Parent. Options may be granted to eligible
employees whether or not they hold or have held options previously granted under
the Plan or otherwise granted or assumed by the Company. In selecting employees
for options, the Committee may take into consideration any factors it may deem
relevant, including its estimate of the employee's present and potential
contributions to the success of the Company and its Subsidiaries. Service as a
director or officer
<PAGE> 19
3
of the Company or any Parent or Subsidiary shall be considered employment for
purposes of the Plan. In the event the Company becomes obligated to grant
options, through the assumption of, or in substitution for, outstanding awards
previously granted by an acquired company or a company with which the Company
combines, options may be granted to a non-continuing director of such acquired
or combining company who does not become an employee or director of the Company
or any Subsidiary or Parent.
5. Terms and Conditions of Options. The Committee shall, in its
discretion, prescribed the terms and conditions of the options to be granted
hereunder, which terms and conditions need not be the same in each case, subject
to the following:
(a) Option Price. Except in the case of an option granted in
assumption of or substitution for an outstanding award of a company acquired by
the Company or with which the Company combines, the price at which each share of
Stock covered by an option granted under the Plan may be purchased shall be
determined by the Committee and shall not be less than the market value per
share of Stock on the date of grant of an option as determined pursuant to
Section 5(c). The date of the grant of an option shall be the date specified by
the Committee in its grant of the option.
(b) Option Period. The period for exercise of an option shall in no
event be more than ten years from the date of grant. Options may, in the
discretion of the Committee, be made exercisable in installments during the
option period. Any shares not purchased on any applicable installment date may
be purchased thereafter at any time before the expiration of the option period.
(c) Exercise of Options. In order to exercise an option, the holder
thereof (the "Optionee") shall deliver to the Company written notice specifying
the number of shares of Stock
<PAGE> 20
4
to be purchased, together with cash or a certified or bank cashier's check
payable to the order of the Company in the full amount of the purchase price
therefor; provided that, for the purpose of assisting an Optionee to exercise an
option, the Company may make loans to the Optionee or guarantee loans made by
third parties to the Optionee, on such terms and conditions as the Board of
Directors may authorize; and provided further that such purchase price may be
paid in shares of Stock owned by the Optionee having a market value on the date
of exercise equal to the aggregate purchase price, or in a combination of cash
and Stock. For purposes of the Plan, the market value per share of Stock shall
be the last sale price regular way on the date of reference, or, in case no sale
takes place on such date, the average of the closing high bid and low asked
prices regular way, in either case on the principal national securities exchange
on which the Stock is listed or admitted to trading, or if the Stock is not
listed or admitted to trading on any national securities exchange, the last sale
price reported on the National Market System or the Small Cap Market of the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
on such date, whichever is applicable, or if there are no such prices reported
on NASDAQ on such date, as furnished to the Committee by any New York Stock
Exchange member selected from time to time by the Committee for such purpose. If
there is no bid or asked price reported on any such date, the market value shall
be determined by the Committee in accordance with the regulations promulgated
under Section 2031 of the Code, or by any other appropriate method selected by
the Committee. If the Optionee so requests, shares of Stock purchased upon
exercise of an option may be issued in the name of the Optionee or another
person. An Optionee shall have none of the rights of a stockholder until the
shares of Stock are issued to him. An option may not be exercised for less than
ten shares of Stock, or the number of shares of Stock remaining subject to such
option, whichever is smaller.
<PAGE> 21
5
(d) Effect of Termination of Employment. An option may not be
exercised after the Optionee has ceased to be in the full-time employ of the
Company or any Subsidiary or Parent, except in the following circumstances:
(i) If the Optionee's employment is terminated by
action of his employer, or by reason of disability or
retirement under any retirement plan maintained by the Company
or any Subsidiary or Parent, the option may be exercised by
the Optionee within three months after such termination, but
only as to any shares exercisable on the date the Optionee's
employment so terminates;
(ii) In the event of the death of the Optionee during
the three month period after termination of employment covered
by (i) above, the person or persons to whom his rights are
transferred by will or the laws of descent and distribution
shall have a period of one year from the date of his death to
exercise any options which were exercisable by the Optionee at
the time of his death;
(iii)In the event of the death of the Optionee while
employed, the option shall thereupon become exercisable in
full, and the person or persons to whom the Optionee's rights
are transferred by will or the laws of descent and
distribution shal1 have a period of one year from the date of
the Optionee's death to exercise such option. The provisions
of the foregoing sentence shall apply to any outstanding
options which are incentive stock options to the extent
permitted by Section 422(d) of the Code and
<PAGE> 22
6
such outstanding options in excess thereof shall, immediately
upon the occurrence of the event described in the foregoing
sentence, be treated for all purposes of the plan as
nonstatutory stock options and shall be immediately
exercisable as such as provided in the foregoing sentence.
(iv) If the Optionee is not an employee or director
of the Company or any Subsidiary or Parent and is a
non-continuing director of a company acquired by the Company
or with which the Company has combined and the Company has
become obligated to grant options to such Optionee as a result
of such acquisition or combination.
In no event shall any option be exercisable more than ten years from
the date of grant thereof. Nothing in the Plan or in any option granted pursuant
to the Plan (in the absence of an express provision to the contrary) shall
confer on any individual any right to continue in the employ of the Company or
any Subsidiary or Parent or interfere in any way with the right of the Company
to terminate his employment at any time.
(e) Transferability of Options. During the lifetime of an Optionee,
options held by such Optionee may not be transferred otherwise than by will or
by the laws of descent and distribution without the written consent of the
Committee, except that nonstatutory options may be transferred to members of
such Optionee's immediate family, trusts for the benefit of such Optionee or
such family members or charitable organizations under Section 501(c)(3) of the
Code, subject to continuing compliance by the Optionee with the terms and
conditions of the option, including, but not limited to, continued employment.
<PAGE> 23
7
(f) Adjustments for Change in Stock Subject to Plan and Other Events.
In the event of a reorganization, recapitalization, stock split, stock dividend,
combination of shares, merger, consolidation, rights offering, or any other
change in the corporate structure or shares of the Company, the Committee shall
make such adjustments, if any, as it deems appropriate in the number and kind of
shares subject to the Plan, in the number and kind of shares covered by
outstanding options, or in the option price per share, or both.
In connection with any merger or consolidation in which the Company is
not the surviving corporation or any sale or transfer by the Company of all or
substantially all of its assets or any tender offer or exchange offer for or the
acquisition, directly or indirectly, by any person or group of all or a majority
of the then outstanding voting securities of the Company, all outstanding
options granted to any Optionee on or before February 28, 1997 or to a director
during the period of his directorship at any time before or after February 28,
1997 shall become exercisable in full, notwithstanding any other provision of
the Plan or of any such outstanding options granted thereunder, on and after (i)
the fifteenth day prior to the effective date of such merger, consolidation,
sale, transfer, acquisition or change in control or (ii) the date of
commencement of such tender offer or exchange offer, as the case may be. The
Committee may, in its sole discretion determine that certain other options
granted after February 28, 1997 shall become exercisable in full under such
circumstances determined by the Committee. The provisions of this paragraph
shall apply to any outstanding options which are incentive stock options to the
extent permitted by Section 422(d) of the Code and such outstanding options in
excess thereof shall, immediately upon the occurrence of the event described in
clause (i) or (ii) of the foregoing sentence, be treated for all purposes of the
Plan as nonstatutory stock options and shall be immediately exercisable as such
as provided in the foregoing sentence.
<PAGE> 24
8
Notwithstanding the foregoing, in no event shall any option be exercisable after
the date of termination of the exercise period of such option specified in
Sections 5(b)and 5(d).
(g) Registration, Listing and Qualification of Shares of Stock. Each
option shall be subject to the requirement that if at any time the Board of
Directors shall determine that the registration, listing or qualification of the
shares of Stock covered thereby upon any securities exchange or under any
federal or state law, or the consent or approval of any governmental regulatory
body is necessary or desirable as a condition of, or in connection with, the
granting of such option or the purchase of shares of Stock thereunder, no such
option may be exercised unless and until such registration, listing,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board of Directors. The Company may require
that any person exercising an option shall make such representations and
agreements and furnish such information as it deems appropriate to assure
compliance with the foregoing or any other applicable legal requirement.
(h) Other Terms and Conditions. The Committee may impose such other
terms and conditions, not inconsistent with the terms hereof, on the grant or
exercise of options, as it deems advisable.
6. Provisions Applicable to Incentive Stock Options. The Committee
may, in its discretion, grant options under the Plan to eligible employees which
constitute "incentive stock options" (within the meaning of Section 422(d) of
the Code), provided, however, that the aggregate fair market value of the Stock
with respect to which incentive stock options are exercisable for the first time
by the Optionee during any calendar year shall not exceed the limitation set
forth in Section 422(d) of the Code, and provided further that Section 5(d)(ii)
hereof shall not apply to any incentive stock option.
<PAGE> 25
9
7. Amendment and Termination. Unless the Plan shall theretofore have
been terminated as hereinafter provided, the Plan shall terminate on, and no
option shall be granted hereunder after, February 27, 2007; provided, however,
that the Board of Directors may at any time prior to that date terminate the
Plan. The Board of Directors may at any time amend the Plan. No termination or
amendment of the Plan may, without the consent of an Optionee, adversely affect
the rights of such Optionee under any option held by such Optionee.
8. Effectiveness of Plan. The Plan will not be made effective unless
approved by a majority of the votes cast by the stockholders of the Company at a
meeting of stockholders duly called and held for such purpose or pursuant to a
written consent signed by the holders of a majority of the Stock, and no option
granted hereunder shall be exercisable prior to such approval.
9. Other Actions. Nothing contained in the Plan shall be construed to
limit the authority of the Company to exercise its corporate rights and powers,
including but not by way of limitation, the right of the Company to grant or
assume options for proper corporate purposes other than under the Plan with
respect to any employee or other person, firm, corporation or association.
