UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the
Securities Exchange Act of 1934
(Amendment No. )
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Filed by the Registrant
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Filed by a Party other than the Registrant
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Preliminary Proxy Statement
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Confidential, For Use of the Commission Only (as Permitted by Rule 14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
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JAKKS Pacific,
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):
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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Aggregate number of securities to which transaction applies:
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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):
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Proposed maximum aggregate value of transaction:
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Fee paid previously with preliminary materials.
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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.
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Amount Previously Paid:
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Form, Schedule or Registration Statement No.:
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Date Filed:
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JAKKS PACIFIC, INC.
2951 28
TH
STREET
SANTA MONICA, CA 90405
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 28, 2019
The Annual Meeting of Stockholders of JAKKS
Pacific, Inc. (the “Company”) will be held at Sherwood Country Club, 320 West Stafford Road, Thousand Oaks, California
91361, on June 28, 2019 at 8:00 a.m. local time, to consider and act upon the following matters:
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(1)
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To elect seven (7) directors to serve for the ensuing year.
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(2)
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To approve an Amendment to the Company’s 2002 Stock Award and Incentive Plan.
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(3)
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To approve a transaction which could result in the issuance of an amount of our common stock in excess of 19.9%
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(4)
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To ratify the selection by the Board of Directors of the firm of BDO USA, LLP, as the Company’s independent auditors for the current fiscal year.
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(5)
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To conduct an advisory vote on executive compensation.
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(6)
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To transact such other business as may properly come before the meeting or any adjournment thereof.
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Stockholders of record as of the close of business
on May 1, 2019 will be entitled to notice of and to vote at the meeting or any adjournment thereof. The stock transfer books of
the Company will remain open.
By Order of the Board of Directors,
Stephen G. Berman,
Secretary
Santa Monica, California
May 14, 2019
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING,
PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY
IN THE ENCLOSED ENVELOPE
IN ORDER TO ENSURE REPRESENTATION OF YOUR SHARES.
YOU MAY REVOKE THE
PROXY AT ANY TIME BEFORE THE AUTHORITY GRANTED
THEREIN IS EXERCISED.
JAKKS PACIFIC, INC.
2951 28
TH
STREET
SANTA MONICA, CA 90405
PROXY STATEMENT FOR THE 2019 ANNUAL MEETING
OF STOCKHOLDERS
TO BE HELD ON JUNE 28, 2019
This Proxy Statement is furnished in connection
with the solicitation of proxies by the Board of Directors of JAKKS Pacific, Inc. (the “Company”) for use at the 2019
Annual Meeting of Stockholders to be held on June 28, 2019, and at any adjournment of that meeting (the “Annual Meeting”).
Throughout this Proxy Statement, “we,” “us” and “our” are used to refer to the Company.
The shares of our common stock represented
by each proxy will be voted in accordance with the stockholder’s instructions as to each matter specified thereon, unless
no instruction is given, in which case, the proxy will be voted in favor of such matter. A proxy may be revoked by the stockholder
at any time before it is exercised by delivery of written revocation or a subsequently dated proxy to our corporate Secretary or
by voting in person at the Annual Meeting.
We are mailing this Proxy Statement to our
stockholders on or about May 14, 2019, accompanied by our Annual Report on Form 10-K for our fiscal year ended December 31, 2018.
Inasmuch as we did not hold an annual meeting in 2018 for the reasons described in our current report on Form 8-K filed on January
11, 2019 (i.e., it was delayed in light of the previously announced continuing discussions with Meisheng Cultural Company Limited
relating to its proposal to purchase shares of the Company’s common stock), upon request of a shareholder, we will send,
at no cost, a copy of our Annual Report on Form 10-K for our fiscal year ended December 31, 2017.
Voting Securities and Votes Required
At the close of business on May 1, 2019, the
record date for the determination of stockholders entitled to vote at the Annual Meeting, there were outstanding and entitled to
vote an aggregate of 26,713,025 shares of our common stock, par value $.001 per share. All holders of our common stock are entitled
to one vote per share.
The affirmative vote of the holders of a majority
of the shares of our common stock present or represented by proxy at the Annual Meeting is required for each of the agenda items,
although with respect to the election of directors, directors receiving less than such number of votes may still be elected to
the board as explained below and the voting on executive compensation is only advisory, all as hereinafter described.
With respect to approval of Proposal No. 5
(executive compensation), while our Board and its Compensation Committee will carefully consider the outcome of the vote expressed
by our stockholders when making future executive compensation decisions, the vote will not be binding upon them.
A majority of the outstanding shares of our
common stock represented in person or by proxy at the Annual Meeting will constitute a quorum at the meeting. All shares of our
common stock represented in person or by proxy (including shares which abstain or do not vote for any reason with respect to one
or more of the matters presented for stockholder approval) will be counted for purposes of determining whether a quorum is present
at the Annual Meeting. Abstentions will be treated as shares that are present and entitled to vote for purposes of determining
the number of shares present and entitled to vote with respect to any particular matter, but will not be counted as a vote in favor
of such matter. Accordingly, an abstention from voting on a matter has the same legal effect as a vote against the matter. If a
broker or nominee holding stock in “street name” indicates on the proxy that it does not have discretionary authority
to vote as to a particular matter (“broker non-votes”), those shares will not be considered as present and entitled
to vote with respect to such matter. Accordingly, a broker non-vote on a matter has no effect on the voting on such matter.
With respect to the election of directors,
we amended our By-Laws to implement a majority voting standard for uncontested director elections, but allowing the board to nonetheless
retain a director who does not receive a majority vote in the event it believes that would serve the best interests of the Company
and its shareholders. This is popularly referred to as the “Intel” procedure named after Intel Corporation that first
adopted such a process in 2006, and which process has been adopted by numerous Fortune 500 companies since then. What this means
in practice is that if a director is not elected by a majority of the votes cast at the annual meeting, the director shall offer
to tender his or her resignation to the Board. The Nominating and Governance Committee will then consider the matter and make a
recommendation to the Board on whether to accept or reject the resignation, or whether other action is to be taken. The Board will
act on the Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from
the date of the certification of the election results. The director who tenders his or her resignation will not participate in
the Board’s decision. Inasmuch as this year there is an uncontested slate of director nominations, this process will be implicated.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain
information as of May 1, 2019 with respect to the beneficial ownership of our common stock by (1) each person known by us to own
beneficially more than 5% of the outstanding shares of our common stock, (2) each of our directors, (3) each of our executive officers
named in the Summary Compensation Table set forth under the caption “Executive Compensation”, below, and (4) all our
directors and executive officers as a group.
Name and Address of
Beneficial Owner (1)(2)
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Amount
and
Nature of
Beneficial
Ownership
(3)
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Percent of
Outstanding
Shares (4)
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Dr. Patrick Soon-Shiong
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2,500,676
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(5)
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8.5
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%
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Oasis Management Company Ltd.
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2,161,459
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(6)
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7.1
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Bank of America Corporation
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1,572,340
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(7)
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5.3
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Benefit Street Partners L.L.C.
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2,061,218
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(7A)
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6.5
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Renaissance Technologies LLC
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2,104,200
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(8)
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7.2
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Hongkong Meisheng Cultural Company Limited
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5,239,538
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(9)
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17.8
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Stephen G. Berman
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2,192,510
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(10)
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7.5
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Rex H. Poulsen
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175,295
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(11)
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*
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Michael S. Sitrick
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187,922
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(12)
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*
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Murray L. Skala
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211,250
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(13)
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*
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Brent T. Novak
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47,148
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(13A)
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*
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John J. McGrath
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617,751
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(14)
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2.1
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Alexander Shoghi
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125,633
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(15)
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*
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Michael J. Gross
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118,072
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(16)
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*
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Zhao Xiaoqiang
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96,285
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(17)
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*
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All Directors and executive officers as a group (9 persons)
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3,771,866
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(18)
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12.9
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*
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Less than 1% of our outstanding
shares.
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(1)
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Unless otherwise indicated,
such person’s address is c/o JAKKS Pacific, Inc., 2951 28
th
Street, Santa Monica, California 90405.
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(2)
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The number of shares of
common stock beneficially owned by each person or entity is determined under the rules promulgated by the Securities and Exchange
Commission. Under such rules, beneficial ownership includes any shares as to which the person or entity has sole or shared voting
power or investment power. The percentage of our outstanding shares is calculated by including among the shares owned by such
person any shares which such person or entity has the right to acquire within 60 days after May 1, 2019. The inclusion herein
of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of such shares.
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(3)
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Except as otherwise indicated, exercises sole voting power and sole investment power with respect to such shares.
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(4)
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Does not include, unless noted otherwise, any shares of common stock issuable upon the conversion of (i) $113.0 million of our 4.875% convertible senior notes due 2020, initially convertible at the rate of 103.7613 shares of common stock per $1,000 principal amount at issuance of the notes (but subject to adjustment under certain circumstances as described in the notes) and (ii) $29.5 million of our 3.25% convertible senior notes due 2020, currently convertible at the rate of 393.7008 shares of common stock per $1,000 principal amount of the notes (but subject to adjustment under certain circumstances as described in the notes). Does include 3,112,840 shares of common stock repurchased by the Company under a prepaid forward purchase contract under which no shares have been returned to the Company.
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(5)
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The address of Dr. Patrick Soon-Shiong is 10182 Culver Blvd., Culver City, CA 90232. Except for 239,622 shares, all of the shares are owned jointly with California Capital Z, LLC. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13D/A filed on July 26, 2016.
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(6)
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The address of Oasis Management Company Ltd. is c/o Oasis Management (Hong Kong) LLC, 21/F Man Yee Building, 68 Des Voeux Road, Central, Hong Kong. Possesses shared voting and dispositive power of such shares. Note that 1,063,553 of such shares underlie convertible senior notes. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13D/A filed on July 26, 2018.
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(7)
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The address of Bank of America Corporation is Bank of America Corporate Center, 100 N Tryon Street, Charlotte, NC 28255. Possesses joint dispositive power with respect to all of such shares and joint voting with respect to 1,572,340 of such shares. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G filed on February 13, 2019.
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(7A)
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The address of Benefit Street Partners L.L.C. is 9 West 57th Street, Suite 4920, New York, NY 10019. Possesses shared voting and dispositive power of such shares, all of which shares underlie convertible senior notes. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G/A filed on January 30, 2019.
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(8)
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The address of Renaissance Technologies LLC is 800 Third Avenue, New York, NY 10022. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G/A filed on February 13, 2019.
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(9)
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The address of Hong Kong Meisheng Culture Company Ltd is Room 1901, 19/F, Lee Garden One, 33 Hysan Avenue, Causeway Bay, Hong Kong. Zhao Xiaoqiang, executive director of this entity, is a director of the Company. Possesses shared voting and dispositive power with respect to all of such shares. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13D/A filed on February 28, 2019.
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(10)
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Does not include 2,380,952 shares of common stock issuable on January 1, 2019 pursuant to the terms of Mr. Berman’s January 1, 2003 Employment Agreement (as amended to date) inasmuch as we do not have sufficient shares available in our 2002 Stock Award and Incentive Plan (the “Plan”). We are soliciting stockholder approval of an amendment to the Plan at our Annual Meeting to increase the number of available shares and if such approval is received to promptly issue such shares. When issued, such shares will be subject to the terms of a Restricted Stock Award Agreement with Mr. Berman (the “Berman Agreement”). The Berman Agreement will provide that Mr. Berman will forfeit his rights to some or all of such 2,380,952 shares unless certain conditions precedent are met, as described in the Berman Agreement, whereupon the forfeited shares will become authorized but unissued shares of our common stock. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors. Includes 1,884,115 unvested shares which do not have voting rights.
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(11)
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Includes 165,295 shares of Common Stock issued pursuant to our 2002 Stock Award and Incentive Plan pursuant to which 54,705 of such shares may not be voted or sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2020. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.
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(12)
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Includes 142,922 shares of Common Stock issued pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which 54,705 of such shares may not be voted or sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2020. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.
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(13)
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Consists of 211,250 shares of Common Stock issued pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which 54,705 of such shares may not be voted or sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2020. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.
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(13A)
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Consists of 47,148 shares of common stock issued following the vesting of restricted stock units granted pursuant to our 2002 Stock Award and Incentive Plan. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.
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(14)
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Does not include 680,272 shares of common stock issuable on January 1, 2019 pursuant to the terms of Mr. McGrath’s March 4, 2010 Employment Agreement (as amended to date) inasmuch as we do not have sufficient shares available in our Plan. We are soliciting stockholder approval of an amendment to the Plan at our Annual Meeting to increase the number of available shares and if such approval is received to promptly issue such shares. When issued, such shares will be subject to the terms of a Restricted Stock Award Agreement with Mr. McGrath (the “McGrath Agreement”). The McGrath Agreement will provide that Mr. McGrath will forfeit his rights to some or all of such 680,272 shares unless certain conditions precedent are met, as described in the McGrath Agreement, whereupon the forfeited shares will become authorized but unissued shares of our common stock. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors. Includes 538,319 unvested shares which do not have voting rights.
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(15)
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Consists of 125,633 shares of common stock issued pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which 54,705 of such shares may not be voted or sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2020. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors. Does not include the 2,162,459 shares owned by Oasis Management Company Ltd. reported above, of which entity Alex Shoghi is a portfolio manager.
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(16)
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Consists of 118,072 shares of common stock issued pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which 54,705 of such shares may not be voted or sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2020. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.
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(17)
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Consists of 96,285 shares of common stock issued pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which 54,705 of such shares may not be voted or sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2020. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors. Does not include the 5,239,538 shares owned by Hong Kong Meisheng Cultural Company Limited reported above, of which entity Zhao Xiaoqiang is executive director.
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(18)
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Does not include the 5,239,538 shares owned by Hong Kong Meisheng Cultural Company Limited reported above, of which entity Zhao Xiaoqiang is executive director, or 2,162,459 shares owned by Oasis Management Company Ltd. reported above, of which entity Alex Shoghi is a portfolio manager. Does not include an aggregate of 3,061,224 shares currently issuable to two executive officers but which we are currently unable to issue as reported above. Includes 2,750,664 unvested shares which do not have voting rights.
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ELECTION OF DIRECTORS
(Proposal No. 1)
The persons named in the enclosed proxy will
vote to elect as directors the seven nominees named below, unless authority to vote for the election of any or all of the nominees
is withheld by marking the proxy to that effect. All of the nominees have indicated their willingness to serve, if elected, but
if any nominee should be unable to serve or for good cause will not serve, the proxies may be voted for a substitute nominee designated
by management. Each director will be elected to hold office until the next annual meeting of stockholders or until his successor
is elected and qualified. There are no family relationships between or among any of our executive officers or directors.
Nominees
Set forth below for each nominee as a director
is his name, age, and position with us, the Committee of the Board upon which he currently sits, his principal occupation and business
experience during at least the past five years and the date of the commencement of his term as a director.
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Name
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Age
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Position with the Company
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Board Committee Membership
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Stephen G. Berman
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54
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Chief Executive Officer, Chairman, President, Secretary and Director
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-
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Murray L. Skala
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72
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Director
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-
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Rex H. Poulsen
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67
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Director
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Audit (Chairman), Compensation, Capital Allocation
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Michael S. Sitrick
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71
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Director
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Compensation (Chairman), Capital Allocation (Chairman), Nominating/Governance,
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Alexander Shoghi
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37
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Director
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Audit
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Michael J. Gross
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43
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Director
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Audit, Compensation, Capital Allocation
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Zhao Xiaoqiang
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51
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Director
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Nominating/Governance (Chairman)
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Stephen G. Berman
has been our Chief
Operating Officer (until August 23, 2011) and Secretary and one of our Directors since co-founding JAKKS in January 1995. From
February 17, 2009 through March 31, 2010 he was also our Co-Chief Executive Officer and has been our Chief Executive Officer
since April 1, 2010. Since January 1, 1999, he has also served as our President, and since October 23, 2015 he has also served
as our Chairman. From the Company’s inception until December 31, 1998, Mr. Berman was also our Executive Vice President.
From October 1991 to August 1995, Mr. Berman was a Vice President and Managing Director of THQ International, Inc., a subsidiary
of THQ. From 1988 to 1991, he was President and an owner of Balanced Approach, Inc., a distributor of personal fitness products
and services.
Michael S. Sitrick
has been a Director
since December 19, 2014. Since November 2009, Mr. Sitrick is the chairman and chief executive officer of Sitrick Brinko LLC, a
subsidiary of Resources Connection, Inc. (NASDAQ: RECN), and the successor to Sitrick And Company, which he founded in 1989 and
was its chairman and chief executive officer until he sold it in 2009 to Resources Connection, Inc., a public relations, strategic
communications and crisis management company providing advice and counseling to some of the country’s largest corporations,
non-profits and governmental agencies, in many areas including mergers and acquisitions, litigation support, corporate positioning
and repositioning, developing and implementing strategies to deal with short sellers, executive transitions and government investigations.
Prior thereto he was Senior Vice President – Communications for Wickes Companies, Inc. (from 1981to1989), head of Communications
and Government Affairs for National Can Corporation (from 1974 to 1981), and Group Supervisor at Selz, Seabolt and Associates before
that. Prior thereto Mr. Sitrick was Assistant Director of Public Information in the Richard J. Daley administration in Chicago
and worked as a reporter. Mr. Sitrick is a published author, frequent lecturer, former Board member at two public companies (both
of which were sold), and current or former Board member of several charitable organizations. He holds a B.S. degree in Business
Administration and a major in Journalism from the University of Maryland, College Park.
Murray L. Skala
has been a Director
since October 1995. Since 1976, Mr. Skala has been a partner of the law firm Feder Kaszovitz LLP, our general counsel.
Alexander Shoghi
has been a Director
since December 18, 2015. Mr. Shoghi is a Portfolio Manager at Oasis Management, a private investment management firm headquartered
in Hong Kong. Mr. Shoghi joined Oasis in 2005, first based in Hong Kong, and subsequently relocating to the U.S. as the founder
and manager of Oasis Capital in Austin, Texas in early 2012. From 2004 to 2005, Mr. Shoghi worked at Lehman Brothers in New York
City. Mr. Shoghi holds a Bachelor of Science of Business Administration in Finance and International Business degree from Georgetown
University.
Rex H. Poulsen
has been a Director since
December 26, 2012. Mr. Poulsen is currently a partner emeritus in the Glendale, California office of Hutchinson and Bloodgood LLP,
a regional certified public accounting and consulting firm registered with the PCAOB. Mr. Poulsen has been continuously licensed
as a Certified Public Accountant since 1974 and spent most of his career with public accounting firms as an independent auditor
of both private and publicly-held companies. Mr. Poulsen has extensive experience in assisting companies in the areas of due diligence,
valuation and other services related to the purchase and sale of businesses, as well as providing services in connection with litigation
matters including forensic accounting assignments and expert witness testimony. Mr. Poulsen holds a Bachelor of Science
degree in Accounting from Weber State University.
Michael J. Gross
has been a Director
since October 19, 2016. Mr. Gross has been the Vice Chairman of WeWork LLC since July 2015 and was its CFO from October 2013 to
July 2015. Prior to joining WeWork LLC, Mr. Gross was appointed to the Board of Directors of Morgans Hotel Group from October 2009
to June 2013 and was its CEO from March 2011 to September 2013. From January 2008 until March 2011, Mr. Gross partnered with The
Yucaipa Companies focusing on retail and consumer investment opportunities. From 1998 to 2007, he focused on consumer, retail and
real estate companies with various investment and research roles at Prentice Capital Management, S.A.C. Capital Advisors, Lehman
Brothers Inc., Salomon Smith Barney and Granite Partners. Mr. Gross holds a Bachelor of Science degree from Cornell University’s
School of Hotel Administration.
Zhao Xiaoqiang
has been a Director since
April 27, 2017. Since 2002 Mr. Zhao has been the Chairman of Meisheng Holding Co., a private holding company selling cultural products,
and since 2007 he has been the Chairman of Meisheng Culture & Creative Corp. Ltd., a public company (listed on the Shenzhen
Stock Exchange in 2012) with 23 subsidiaries in the areas of manufacturing, animation, games, movies, online video, stage performance
art, e-commerce and overseas investments. Mr. Zhao is also a director of two of the Company’s subsidiaries, JAKKS Meisheng
Animation (H.K.) Limited and JAKKS Meisheng Trading (Shanghai) Limited. Mr. Zhao holds an EMBA from Zhejiang University.
Qualifications for All Directors
In considering potential candidates for election
to the Board, the Nominating and Corporate Governance Committee observes the following guidelines, among other considerations:
(i) the Board must include a majority of independent directors; (ii) each candidate shall be selected without regard to age, sex,
race, religion or national origin; (iii) each candidate should have the highest level of personal and professional ethics and integrity
and have the ability to work well with others; (iv) each candidate should only be involved in activities or interests that do not
conflict or interfere with the proper performance of the responsibilities of a director; (v) each candidate should possess substantial
and significant experience that would be of particular importance to the Company in the performance of the duties of a director;
and (vi) each candidate should have sufficient time available, and a willingness to devote the necessary time, to the affairs of
the Company in order to carry out the responsibilities of a director, including, without limitation, consistent attendance at Board
of Directors and committee meetings and advance review of Board of Directors and committee materials. The Chief Executive Officer
will then interview such candidate. The Nominating and Governance Committee then determines whether to recommend to the Board of
Directors that a candidate be nominated for approval by the shareholders. The manner in which the Nominating and Governance Committee
evaluates a potential candidate does not differ based on whether the candidate is recommended by a shareholder of the Company.
With respect to nominating existing directors,
the Nominating and Governance Committee reviews relevant information available to it, including the most recent individual director
evaluations for such candidates, the number of meetings attended, his or her level of participation, biographical information,
professional qualifications, and overall contributions to the Company.
The Board of Directors does not have a specific
diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in
evaluating candidates for Board membership.
The Board of Directors has identified the following
qualifications, attributes, experience, and skills that are important to be represented on the Board as a whole: (i) management,
leadership and strategic vision; (ii) financial expertise; (iii) marketing and consumer experience; and (iv) capital management.
A majority of our directors are “independent,”
as defined under the rules of the Nasdaq Stock Market. Such independent directors are currently Messrs. Sitrick, Poulsen, Shoghi,
Gross and Xiaoqiang. Our directors hold office until the next annual meeting of stockholders and until their successors are elected
and qualified. Our officers are elected annually by our Board of Directors and serve at its discretion. Except for Mr. Poulsen,
none of our current independent directors have served as such for more than the past five years. Our current independent directors
were selected for their experience as businessmen (Sitrick, Gross and Xiaoqiang) or financial expertise (Poulsen and Gross) or
financial management expertise (Shoghi). We believe that our board is best served by benefiting from this blend of business and
financial expertise and experience. Our remaining directors consist of our chief executive officer (Berman) who brings management’s
perspective to the board’s deliberations and, our longest serving director (Skala), who, as an attorney with many years of
experience advising businesses, is able to provide guidance to the board from a legal perspective.
The Board’s Role in Risk Oversight
The Board of Directors is responsible for oversight
of the various risks facing the Company. Risks are considered in virtually every business decision and business strategy. While
the Board recognizes that appropriate risk-taking is essential for the Company to remain competitive and achieve its long-term
goals, it nonetheless strongly believes that risk taking must be closely monitored.
The Board has implemented the following risk
oversight framework: (i) know the major risks inherent in the Company’s business and strategy and compensation policies;
(ii) evaluate risk management processes; (iii) encourage open and regular communication about risks between management and the
Board; and (iv) cultivate a culture of integrity and risk awareness.
While the Board oversees risk, management is
responsible for managing risk. We have developed internal processes to identify and manage risk and communicate appropriately with
the Board. Management communicates routinely with the Board, Board Committees and individual Directors on the significant risks
identified and how they are being managed and Directors are encouraged to communicate directly with senior management.
The Board implements its risk oversight function
both as a whole and through its designated and established Committees, which play significant roles in carrying out the risk oversight
function. At the initial meeting of the Board of Directors following this annual meeting, the elected directors will review the
composition of its various committees. All of our Committees meet regularly and report back to the full Board. The risk oversight
functions are allocated among our Committees as follows:
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The Audit Committee is responsible for overseeing risks associated with the Company’s financial statements, the financial reporting process, accounting and legal matters. The Audit Committee oversees the internal audit function and meets separately with representatives of the Company’s independent accounting firm.
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The Compensation Committee is responsible for overseeing risk associated with the Company’s compensation philosophy and programs.
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The Nominating and Governance Committee is responsible for overseeing risks related to evolving governance legislation and trends.
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The Capital Allocation Committee is responsible for overseeing risks associated with the allocation of the Company’s capital resources.
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Board Leadership Structure; Executive Sessions
Until the untimely passing of Jack Friedman
in May 2010, our board structure featured (i) a combined Chairman of the Board and Chief Executive Officer, and (ii) non-management,
active and effective directors of equal importance and with an equal vote. Since Mr. Friedman’s untimely passing in May 2010
we had not selected a Chairman to succeed him until October 1, 2015 when the board determined to elect Mr. Berman to the position
of Chairman of the Board. The board intends to continue its current practice of having non-management Board members meet without
management present at regularly scheduled executive sessions. Also, at least twice a year, such meetings include only the independent
members of the Board.
Committees of the Board of Directors
We have an Audit Committee, a Compensation
Committee, a Nominating and Corporate Governance Committee, and a Capital Allocation Committee (which was established as a standing
committee in February 2016).
Audit Committee
. In addition to
risk management functions, the primary functions of the Audit Committee are to select or to recommend to our Board the selection
of outside auditors; to monitor our relationships with our outside auditors and their interaction with our management in order
to ensure their independence and objectivity; to review and assess the scope and quality of our outside auditor’s services,
including the audit of our annual financial statements; to review our financial management and accounting procedures; to review
our financial statements with our management and outside auditors; and to review the adequacy of our system of internal accounting
controls. Messrs. Poulsen (Chairman), Gross and Shoghi are the current members of the Audit Committee and are each “independent”
(as defined in NASD Rule 4200(a)(14)) and able to read and understand fundamental financial statements. Mr. Poulsen, our audit
committee financial expert, possesses the financial expertise required under Rule 401(h) of Regulation S-K of the Act and NASD
Rule 4350(d)(2). He is further “independent” as defined under Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act. We will, in the future, continue to have (i) an Audit Committee of at least three members comprised solely of independent
Directors, each of whom will be able to read and understand fundamental financial statements (or will become able to do so within
a reasonable period of time after his or her appointment); and (ii) at least one member of the Audit Committee who will possess
the financial expertise required under NASD Rule 4350(d)(2). Our Board has adopted a written charter for the Audit Committee,
which reviews and reassesses the adequacy of that charter on an annual basis. The full text of the charter is available on our
website at
www.jakks.com
.
Compensation Committee
. In addition
to risk oversight functions, the Compensation Committee makes recommendations to the Board regarding compensation of management
employees and administers plans and programs relating to employee benefits, incentives, compensation and awards under our 2002
Stock Award and Incentive Plan (the “2002 Plan”). Messrs. Sitrick (Chairman), Gross and Poulsen are the current members
of the Compensation Committee. The Board has determined that each of them is “independent,” as defined under the applicable
rules of the Nasdaq Stock Market. A copy of the Compensation Committee’s Charter is available on our website at www.jakks.com.
Executive officers that are members of our Board make recommendations to the Compensation Committee with respect to the compensation
of other executive officers who are not on the Board. Except as otherwise prohibited, the Committee may delegate its responsibilities
to subcommittees or individuals. The Committee has the authority, in its sole discretion, to retain or obtain advice from a compensation
consultant, legal counsel or other advisor and is directly responsible for the appointment, compensation and oversight of such
persons. The Company provides the appropriate funding to such persons as determined by the Committee, which also conducts an independence
assessment of its outside advisors using the six factors contained in Exchange Act Rule 10C-1. The Committee receives legal advice
from our outside general counsel and since 2016 has retained Willis Towers Watson (“WTW”), a compensation consulting
firm, to directly advise the Committee.
The Compensation Committee also annually reviews
the overall compensation of our executive officers to determine whether discretionary bonuses should be granted. In 2015, Lipis
Consulting, Inc. (“LCI”), a compensation consulting firm, presented a report to the Compensation Committee comparing
our performance, size and executive compensation levels to those of peer group companies. LCI also reviewed with the Compensation
Committee the base salaries, annual bonuses, total cash compensation, long-term compensation and total compensation of our senior
executive officers relative to those companies. The performance comparison presented to the Compensation Committee each year includes
a comparison of our total shareholder return, earnings per share growth, sales, net income (and one-year growth of both measures)
to the peer group companies. The Compensation Committee reviews this information along with details about the components of each
executive officer’s compensation. LCI also provided guidance to the Compensation Committee with respect to the extension
of Messrs. McGrath’s and Bennett’s employment agreements (see “Employment Agreements and Termination of Employment
Arrangements”). The Compensation Committee consulted with Frederick W. Cook & Co., Inc. (“FWC"), a compensation
consulting firm, with respect to determination of a portion of Mr. Berman’s bonus criteria for 2012, 2013, and 2014 and Mr.
McGrath’s bonus criteria for 2013 and 2014. The Compensation Committee consulted with LCI with respect to establishing the
bonus criteria for Messrs. Berman and McGrath for 2015 and with WTW with respect to the amendments to the employment agreements
for Messrs. Berman and McGrath in 2016.
Nominating and Corporate Governance Committee
.
In addition to risk oversight functions, the Nominating and Corporate Governance Committee develops our corporate governance system
and reviews proposed new members of our Board of Directors, including those recommended by our stockholders. Messrs. Zhao (Chairman)
and Sitrick are the current members of this Committee, which operates pursuant to a written charter adopted by the Board, the full
text of which is available on our website at www.jakks.com. The Board has determined that each member of this Committee is “independent,”
as defined under the applicable rules of the Nasdaq Stock Market.
The Nominating and Corporate Governance
Committee will annually review the composition of our Board of Directors and the ability of its current members to continue effectively
as Directors for the upcoming fiscal year. The Committee established the position of Chairman of the Board in 2015. In the ordinary
course, absent special circumstances or a change in the criteria for Board membership, the Committee will re-nominate incumbent
Directors who continue to be qualified for Board service and are willing to continue as Directors. If the Committee thinks it is
in the Company’s best interests to nominate a new individual for director in connection with an annual meeting of stockholders,
or if a vacancy on the Board occurs between annual stockholder meetings or an incumbent director chooses not to run, the Committee
will seek out potential candidates for Board appointment who meet the criteria for selection as a nominee and have the specific
qualities or skills being sought. Director candidates will be selected based on input from members of the Board, our senior management
and, if the Committee deems appropriate, a third-party search firm. The Committee will evaluate each candidate’s qualifications
and check relevant references, and each candidate will be interviewed by at least one member of the Committee. Candidates meriting
serious consideration will meet with all members of the Board. Based on this input, the Committee will evaluate whether a prospective
candidate is qualified to serve as a director and whether the Committee should recommend to the Board that this candidate be appointed
to fill a current vacancy on the Board, or be presented for the approval of the stockholders, as appropriate.
Stockholder recommendations for director nominees
are welcome and should be sent to our Chief Financial Officer, who will forward such recommendations to our Nominating and Corporate
Governance Committee, and should include the following information: (a) all information relating to each nominee that is required
to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person’s written consent
to being named in the proxy statement as a nominee and to serving as a director if elected); (b) the names and addresses of the
stockholders making the nomination and the number of shares of our common stock which are owned beneficially and of record by such
stockholders; and (c) appropriate biographical information and a statement as to the qualification of each nominee, all of which
must be submitted in the time frame described under the appropriate caption in our proxy statement. The Committee will evaluate
candidates recommended by stockholders in the same manner as candidates recommended by other sources, using additional criteria,
if any, approved by the Board from time to time. Our stockholder communication policy may be amended at any time with the Committee’s
consent.
Pursuant to the Director Resignation Policy
adopted by our Board following our 2014 Annual Meeting, if a nominee for director in an uncontested election receives less than
a majority of the votes cast, the director must submit his resignation to the Board. The Nominating and Corporate Governance Committee
then considers such resignation and makes a recommendation to our Board concerning the acceptance or rejection of such resignation.
This procedure was implemented following our 2016 Annual Meeting.
Capital Allocation Committee
. In
addition to assisting the Board and management in reviewing the Company’s capital structure and material capital
allocation decisions, the Board established the Capital Allocation Committee to assist the Board and management in reviewing
strategic investments, acquisitions, dispositions and other opportunities for maximizing shareholder value. The
Committee’s responsibilities include review of the Company’s financial strategies (including debt and equity
issuances, repurchases of debt and bank credit facilities) and consideration and, if implemented, review of the Corporation's
dividend and share repurchase policies and programs and other strategies to return capital to stockholders. Messrs. Sitrick
(Chairman), Poulsen and Gross are the current members of our Capital Allocation Committee, each of whom are
“independent” as defined under the applicable rules of the NASDAQ stock market. A copy of the Capital Allocation
Committee’s charter is available on our website at
www.jakks.com
. The Committee has no authority or
responsibility with respect to matters delegated by the Board to the Corporation's Audit, Compensation or Nominating and
Governance Committees. The Committee has the authority, in its discretion, to retain independent consultants, counsel
and other advisors, and the Company pays for the expenses of retaining such persons as determined by the Committee. The
Committee reviewed with management, the Board and financial advisors to the Board the Company’s share and convertible
debt repurchases and convertible note exchange transaction with Oasis Management Company Ltd.
In addition to the above described standing
committees, the Board of Directors establishes special committees as it deems warranted. On January 26, 2018 the Board established
a Special Committee to review the January 25, 2018 letter from Hong Kong Meisheng Cultural Company Limited expressing an interest
in acquiring additional shares of our common stock at a purchase price of $2.95 per share so that upon completion of such a transaction,
its percentage ownership of our common stock would increase to 51%. This Special Committee is authorized to appoint independent
legal counsel and a financial advisor to provide the Special Committee with counsel and advice. The initial members of this
Special Committee were Messrs. Poulsen, Sitrick and Gross and currently are Messrs. Poulsen, Shoghi and Gross.
Meetings of the Board of Directors and Board Member Attendance
at Annual Stockholder Meeting
From January 1, 2018 through December 31, 2018,
the Board of Directors, Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Capital Allocation
Committee each met or acted without a meeting pursuant to unanimous written consent eight times, five times, six times, nil times
and four times, respectively. All directors attended at least 75% of all board meetings and committee meetings of which they are
members.
We do not have a formal written policy with
respect to board members’ attendance at annual stockholder meetings, although we do encourage each of them to attend. All
of the directors then serving and nominated for re-election attended our last Annual Stockholder Meeting held on December 22, 2017.
Stockholder Communications
Stockholders interested in communicating with
our Board may do so by writing to any or all directors, care of our Chief Financial Officer, at our principal executive offices.
Our Chief Financial Officer will log in all stockholder correspondence and forward to the director addressee(s) all communications
that, in his judgment, are appropriate for consideration by the directors. Any director may review the correspondence log and request
copies of any correspondence. Examples of communications that would be considered inappropriate for consideration by the directors
include, but are not limited to, commercial solicitations, trivial, obscene, or profane items, administrative matters, ordinary
business matters, or personal grievances. Correspondence that is not appropriate for Board review will be handled by our Chief
Financial Officer. All appropriate matters pertaining to accounting or internal controls will be brought promptly to the attention
of our Audit Committee Chair.
Stockholder recommendations for director nominees
are welcome and should be sent to our Chief Financial Officer, who will forward such recommendations to our Nominating and Corporate
Governance Committee, and should include the following information: (a) all information relating to each nominee that is required
to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person’s written consent
to being named in the proxy statement as a nominee and to serving as a director if elected); (b) the names and addresses of the
stockholders making the nomination and the number of shares of our common stock which are owned beneficially and of record by such
stockholders; and (c) appropriate biographical information and a statement as to the qualification of each nominee, and must be
submitted in the time frame described under the caption, “Stockholder Proposals for 2020 Annual Meeting,” below. The
Nominating and Corporate Governance Committee will evaluate candidates recommended by stockholders in the same manner as candidates
recommended by other sources, using additional criteria, if any, approved by the Board from time to time. Our stockholder communication
policy may be amended at any time with the consent of our Nominating and Corporate Governance Committee.
Code of Ethics
We have a Code of Ethics (which we call a Code
of Conduct) that applies to all our employees, officers and Directors. This Code was filed as an exhibit to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2003. We have posted on our website, www.jakks.com, the full text of such Code.
We will disclose when there have been waivers of, or amendments to, such Code, as required by the rules and regulations promulgated
by the Securities and Exchange Commission and/or NASDAQ.
Pursuant to our Code of Conduct, all of our
employees are required to disclose to our General Counsel, the Board of Directors or any committee established by the Board of
Directors to receive such information, any material transaction or relationship that reasonably could be expected to give rise
to actual or apparent conflicts of interest between any of them, personally, and the Company. Our Code of Conduct also directs
all employees to avoid any self-interested transactions without full disclosure. This policy, which applies to all of our employees,
is reiterated in our Employee Handbook which states that a violation of this policy could be grounds for termination. In approving
or rejecting a proposed transaction, our General Counsel, Board of Directors or designated committee will consider the facts and
circumstances available and deemed relevant, including but not limited to, the risks, costs and benefits to us, the terms of the
transactions, the availability of other sources for comparable services or products, and, if applicable, the impact on director
independence. Upon concluding their review, they will only approve those agreements that, in light of known circumstances, are
in or are not inconsistent with, our best interests, as they determine in good faith.
Executive Officers
Our executive officers are elected by our Board
of Directors and serve pursuant to the terms of their respective employment agreements. One of our executive officers, Stephen
G. Berman, is also a Director of the Company. See above for biographical information about this officer. The other current executive
officers are John (Jack) McGrath, our Chief Operating Officer and Brent T. Novak, our Executive Vice President and Chief Financial
Officer .
John J. (Jack) McGrath has served as our Chief
Operating Officer since 2011 and is responsible for the Company’s global operations. He brings more than 24 years of experience,
having served as was our Executive Vice President of Operations from December 2007 until August 2011 when he became our Chief Operating
Officer. Mr. McGrath was our Vice President of Marketing from 1999 to August 2003 and Senior Vice President of Operations until
2007. Prior to joining the Company, Mr. McGrath was a Brand Marketer for Hot Wheels
®
at Mattel Inc. and part of
its Asia Pacific marketing team. Mr. McGrath served honorably in the U.S. Army and holds a Bachelor of Science degree in Marketing.
Brent T. Novak became our Executive Vice President
and Chief Financial Officer on April 1, 2018. From April 2004 to April 2017, Mr. Novak worked at Ixia (formerly a NASDAQ listed
company - XXIA) where he most recently served as its Chief Financial Officer until the acquisition of Ixia by Keysight Technologies,
Inc. (NYSE: KEYS) in April 2017. Mr. Novak remained at Keysight Technologies as the Chief Financial Officer of the Ixia Solutions
Group through March 2018. Prior to Ixia, from May 2000, Mr. Novak was the Director of Finance and Corporate Development at Idealab.
Prior thereto, from January 1995 he was at PricewaterhouseCoopers where he most recently served as a Manager. Mr. Novak is a Certified
Public Accountant and received his Bachelor’s Degree in Business Economics summa cum laude from the University of California,
Santa Barbara.
Joel M. Bennett was our Executive Vice President
(from May 2000) and our Chief Financial Officer (from September 1995) until his departure in March 2018.
Certain Relationships and Related Transactions
One of our directors, Murray L. Skala, is a
partner in the law firm of Feder Kaszovitz LLP, which has performed, and is expected to continue to perform, legal services for
us. In 2017 and 2018, we incurred approximately $2.2 million and $1.3 million, respectively, for legal fees and reimbursable expenses
payable to that firm. As of December 31, 2017 and 2018, legal fees and reimbursable expenses of $0.5 million and $0.2 million,
respectively, were payable to this law firm.
The owner of NantWorks, our DreamPlay Toys
joint venture partner, beneficially owns 8.5% of the Company’s outstanding common stock. Pursuant to the joint venture agreements,
the Company is obligated to pay NantWorks a preferred return on joint venture sales. This agreement expired on September 30, 2018.
For the years ended and as of December
31, 2017 and 2018 preferred returns earned and payable to NantWorks were nil. As of December 31, 2017 and 2018, the Company's
receivable balance from NantWorks was nil.
Hong Kong Meisheng Cultural Company Limited (“Meisheng”)
owns 17.8% of our outstanding common stock. On January 25, 2018, Meisheng submitted to our Board of Directors a letter containing
a non-binding proposal (“Expression of Interest”) expressing Meisheng’s interest in acquiring additional shares
of our common stock for $2.95 per share. Upon completion of the transaction, Meisheng’s shareholdings and voting rights would
increase to 51%. The Expression of Interest states that it is subject to due diligence, and to approval by Meisheng’s Board
of Directors, shareholders and Chinese regulatory authorities. As described elsewhere herein, our Board of Directors has authorized
a Special Committee comprised solely of independent directors to evaluate the Expression of Interest.
We have entered into joint ventures in Hong
Kong, China, with Meisheng and Meisheng Culture & Creative Corp. Meisheng Culture & Creative Corp., generated an income
(loss) of $57,000 and ($57,000) in 2017 and 2018, respectively. Zhao Xiaoqiang, the control person of Meisheng, is one of our directors.
Meisheng also serves as a significant manufacturer
of ours. For the years ended December 31, 2017 and 2018, we made inventory-related payments to Meisheng of approximately $35.1
million and $36.2 million, respectively. As of December 31, 2017 and 2018, amounts due Meisheng for inventory received us,
but not paid totaled $3.3 million and $3.6 million, respectively.
A director of the Company is a portfolio manager
at Oasis Management. In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., the holder
of approximately $21.5 million face amount of its 4.25% convertible senior notes due in 2018, to exchange and extend the maturity
date of these notes to November 1, 2020. The transaction closed on November 7, 2017. In July 2018, the Company closed a transaction
with Oasis Management and Oasis Investments II Master Fund Ltd., to exchange $8.0 million face amount of the 4.25% convertible
senior notes due in August 2018 with convertible senior notes.
Pursuant to our Ethical Code of Conduct
(a copy of which may be found on our website, www.jakks.com), all of our employees are required to disclose to our General Counsel,
the Board of Directors or any committee established by the Board of Directors to receive such information, any material transaction
or relationship that reasonably could be expected to give rise to actual or apparent conflicts of interest between any of them,
personally, and us. In addition, our Ethical Code of Conduct also directs all employees to avoid any self-interested transactions
without full disclosure. This policy, which applies to all of our employees, is reiterated in our Employee Handbook which states
that a violation of this policy could be grounds for termination. In approving or rejecting a proposed transaction, our General
Counsel, Board of Directors or designated committee will consider the facts and circumstances available and deemed relevant, including
but not limited to, the risks, costs and benefits to us, the terms of the transactions, the availability of other sources for comparable
services or products, and, if applicable, the impact on director independence. Upon concluding their review, they will only approve
those agreements that, in light of known circumstances, are in or are not inconsistent with, our best interests, as they determine
in good faith.
Legal Proceedings
We are a party to, and certain of our property
is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of our business, but
we do not believe that any of these claims or proceedings will have a material effect on our business, financial condition or results
of operations.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3 and 4
and amendments thereto furnished to us during 2018 and Forms 5 and amendments thereto furnished to us with respect to 2018, one
of our executive officers filed a Form 3 and a Form 4 late, and another executive officer filed a Form 4 late, but all other Forms
3, 4 and 5 required to be filed during 2018 by our directors and executive officers were done so on a timely basis.
COMPENSATION DISCUSSION AND ANALYSIS
We believe that a strong management team comprised
of highly talented individuals in key positions is critical to our ability to deliver sustained growth and profitability, and our
executive compensation program is an important tool for attracting and retaining such individuals. We also believe that our people
are our most important resource. While some companies may enjoy an exclusive or limited franchise or are able to exploit unique
assets or proprietary technology, we depend fundamentally on the skills, energy and dedication of our employees to drive our business.
It is only through their constant efforts that we are able to innovate through the creation of new products and the continual rejuvenation
of our product lines, to maintain operating efficiencies, and to develop and exploit marketing channels. With this in mind, we
have consistently sought to employ the most talented, accomplished and energetic people available in the industry. Therefore, we
believe it is vital that our named executive officers receive an aggregate compensation package that is both highly competitive
with the compensation received by similarly-situated executive officers at peer group companies, and also reflective of each individual
named executive officer’s contributions to our success on both a long-term and short-term basis. As discussed in greater
depth below, the objectives of our compensation program are designed to execute this philosophy by compensating our executives
at the top quartile of their peers.
Our executive compensation program is designed
with three main objectives:
● to offer a competitive
total compensation opportunity that will allow us to continue to retain and motivate highly talented individuals to fill key positions;
● to align a significant
portion of each executive’s total compensation with our annual performance and the interests of our stockholders; and
● reflect the
qualifications, skills, experience and responsibilities of our executives.
Administration and Process
Our executive compensation program is administered
by the Compensation Committee. The Compensation Committee receives legal advice from our outside general counsel and has retained
Willis Towers Watson (“WTW”), a compensation consulting firm, which provides advice directly to the Compensation Committee.
Historically, the base salary, bonus structure and long-term equity compensation of our executive officers are governed by the
terms of their individual employment agreements (see “Employment Agreements and Termination of Employment Arrangements”)
and we expect that to continue in the future. With respect to our chief executive officer and president and our chief operating
officer, the Compensation Committee, with input from WTW, establishes target performance levels for incentive bonuses based on
a number of factors that are designed to further our executive compensation objectives, including our performance, the compensation
received by similarly-situated executive officers at peer group companies, the conditions of the markets in which we operate and
the relative earnings performance of peer group companies.
Historically, factors given considerable weight
in establishing bonus performance criteria are Net Sales, Adjusted EPS, which is the net income per share of our common stock calculated
on a fully-diluted basis in accordance with GAAP, and Adjusted EBITDA applied on a basis consistent with past periods, as adjusted
in the sole discretion of the Compensation Committee to take account of extraordinary or special items.
As explained in greater detail below (see “Employment
Agreements and Termination of Employment Arrangements”), pursuant to a September 2012 amendment to Mr. Berman’s employment
agreement, commencing in 2013 his annual bonus was restructured so that part of it was capped at 300% of his base salary, and the
performance criteria and vesting are solely within the discretion of the Compensation Committee, which establishes all of the criteria
during the first quarter of each fiscal year for that year’s bonus, based upon financial and non-financial factors selected
by the Compensation Committee, and another part of his annual performance bonus is based upon the success of a joint venture entity
we initiated in September 2012. The portion of the bonus equal to the first 200% of base salary is payable in cash and the balance
in restricted stock vesting over three years. In addition, the annual grant of $500,000 of restricted stock was changed to $3,500,000
of restricted stock and the vesting criteria was changed from being solely based upon established EPS targets to being based upon
performance standards established by the Compensation Committee during the first quarter of each year. On June 7, 2016 we further
amended the employment agreement to provide, among other things, for (i) extension of the term to December 31, 2020; (ii) modification
of the performance and vesting standards for each $3.5 million Annual Restricted Stock Grant (“Berman Annual Stock Grant”)
provided for under Section 3(b) of his Employment Agreement, effective as of January 1, 2017, so that 40% ($1.4 million) of each
Berman Annual Stock Grant will be subject to time vesting in four equal annual installments over four years and 60% ($2.1 million)
of each Berman Annual Stock Grant will be subject to three year “cliff vesting” (i.e. payment is based upon performance
at the close of the three year performance period), with vesting of each Berman Annual Stock Grant determined by the following
performance measures: (a) total shareholder return as compared to the Russell 2000 Index (weighted 50%), (b) net revenue growth
as compared to our peer group (weighted 25%) and (c) EBITDA growth as compared to our peer group (weighted 25%); and (iii) modification
of the performance measures for award of his Annual Performance Bonus equal to up to 300% of Base Salary (“Berman Annual
Bonus”) provided for under Section 3(d) of his Employment Agreement, effective as of January 1, 2017, so that the performance
measures will be based only upon net revenues and EBITDA, with each performance measure weighted 50%, and with the specific performance
criteria applicable to each Berman Annual Bonus determined by the Compensation Committee during the first quarter of each fiscal
year; and (iv) increase Mr. Berman’s base salary to $1,450,000 effective June 1, 2016 subject to annual increases of at least
$25,000 per year thereafter.
On August 23, 2011 we entered into an amended
employment agreement with John J. (Jack) McGrath whereby he became Chief Operating Officer. As disclosed in greater detail below,
Mr. McGrath’s employment agreement also provides for fixed and adjustable bonuses payable based upon adjusted EPS targets
set in the agreement, based upon input from our outside consulting firm, with the adjustable bonus capped at a maximum of 125%
of base salary. On March 31, 2015, the Compensation Committee increased for 2015 the performance bonus that can be earned by Mr.
McGrath from a maximum of up to 125% of his base salary to a maximum of up to 150% of his base salary, subject to achievement of
certain performance based conditions established by the Committee, and also awarded Mr. McGrath the opportunity to earn an additional
$925,000 of restricted stock subject to achievement of certain performance based vesting conditions. On September 29, 2016 we entered
into a Fourth Amendment to the employment agreement with Mr. McGrath which provides, among other things, for (i) extension of the
term to December 31, 2020; (i) modification of the performance and vesting standards for each Annual Restricted Stock Grant (“McGrath
Annual Stock Grant”) provided for under Section 3(d) of his Employment Agreement, effective as of January 1, 2017, as follows:
each McGrath Annual Stock Grant will be equal to $1 million, and 40% ($0.4 million) of each McGrath Annual Stock Grant will be
subject to time vesting in four equal annual installments over four years, and 60% ($0.6 million) of each McGrath Annual Stock
Grant will be subject to three year “cliff vesting” (i.e. vesting is based upon satisfaction of the performance measures
at the close of the three year performance period), determined by the following performance measures: (A) total shareholder return
as compared to the Russell 2000 Index (weighted 50%), (B) net revenue growth as compared to our peer group (weighted 25%) and (C)
growth in Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) as compared to our peer group (weighted
25%); and (iii) modification of the Annual Performance Bonus (“McGrath Annual Bonus”) provided for under Section 3(e)
of his Employment Agreement, effective as of January 1, 2017, as follows: the McGrath Annual Bonus will be equal to up to 125%
of base salary, and the actual amount will be determined by performance measures based upon net revenues and EBITDA, each performance
measure weighted 50%, and with the specific performance criteria applicable to each McGrath Annual Bonus determined by the Compensation
Committee during the first quarter of each fiscal year, and payable in cash (up to 100% of base salary) and shares of our common
stock (any excess over 100% of base salary) with the shares of stock vesting over three years in equal quarterly installments.
Effective April 1, 2018, we entered into
an employment agreement with Brent T. Novak whereby he became our Executive Vice President and Chief Financial Officer. As disclosed
in greater detail below, Mr. Novak’s employment agreement provides for a performance-based bonus award equal to up to 125%
of his base salary for the 2018-2020 fiscal years, which annual bonus shall be determined by the same performance criteria as established
by the Compensation Committee of the Board for the applicable fiscal year for the Company’s Chairman/CEO and its Chief Operating
Officer each year pursuant to their respective employment agreements, and shall be payable in cash and Restricted Stock Units in
the same proportions and calculated in the same manner as provided for the Company’s Chief Operating Officer under such officer’s
employment agreement, or if no such employment agreement is in effect, then as provided for in the employment agreement with the
Company’s Chairman/CEO, except that the portion payable in Restricted Stock would be payable in Restricted Stock Units (“RSUs”).
While the Compensation Committee did not establish
target performance levels for our former Chief Financial Officer, Joel Bennett, it did consider similar factors when determining
such officer’s bonus. On February 18, 2014, we entered into a Continuation and Extension of Term of Employment Agreement
with respect to Mr. Bennett’s Employment Agreement dated October 21, 2011 such that it is deemed to have been renewed and
continued from January 1, 2014 without interruption and it was extended through December 31, 2015. On June 11, 2015 Mr. Bennett’s
employment agreement was extended through December 31, 2017. On December 27, 2017, we entered into a letter agreement with our
Mr. Bennett (the “Letter Agreement”), which provided for his stepping down from his position following completion of
our annual report for the 2017 fiscal year or such earlier date that a successor has been named and transitioned to the office
of Chief Financial Officer. The Letter Agreement provides, among other things, that Mr. Bennett will receive a severance payment
in a maximum amount of up to 15 month’s salary, accelerated vesting of a portion of his restricted stock units and continued
health care coverage for up to 12 months, and it requires Mr. Bennett to comply with confidentiality, non-disparagement and cooperation
obligations.
The current employment agreements with our
named executive officers also give the Compensation Committee the authority to award additional compensation to each of them as
it determines in the Committee’s sole discretion based upon criteria it establishes.
The Compensation Committee also annually reviews
the overall compensation of our named executive officers for the purpose of determining whether discretionary bonuses should be
granted. The Compensation Committee annually reviews the base salaries, annual bonuses, total cash compensation, long-term compensation
and total compensation of our senior executive officers relative to those companies. The performance comparison utilized by the
Compensation Committee includes a comparison of our total shareholder return, earnings per share growth, sales, net income (and
one-year growth of both measures) to the peer group companies. The Compensation Committee reviews this information along with details
about the components of each named executive officer’s compensation. In 2018, after consultation with WTW, the Compensation
Committee determined to continue using the performance criteria presented in WTW’s 2017 report to the Compensation Committee
comparing our performance, size and executive compensation levels to those of peer group companies.
Peer Group
One of the factors considered by the Compensation
Committee is the relative performance and the compensation of executives of peer group companies, which are comprised of a group
of companies selected in conjunction with WTW that we believe provides relevant comparative information and represent a cross-section
of publicly-traded companies with product lines and businesses similar to our own throughout the comparison period. The composition
of the peer group is reviewed annually and adjusted as circumstances warrant. For the last fiscal year, the peer group companies
utilized for executive compensation analysis, which remained the same as in the previous year, were:
|
|
●
|
Activision Blizzard, Inc.
|
|
|
●
|
Deckers Outdoor Corporation
|
|
|
●
|
Take-Two Interactive, Inc.
|
Elements of Executive Compensation
The compensation packages for the Company’s
senior executives have both performance-based and non-performance based elements. Based on its review of each named executive officer’s
total compensation opportunities and performance, and the Company’s performance, the Compensation Committee determines each
year’s compensation in the manner that it considers to be most likely to achieve the objectives of our executive compensation
program. The specific elements, which include base salary, annual cash incentive compensation and long-term equity compensation,
are described below.
The Compensation Committee has negative discretion
to adjust performance results used to determine annual incentive and the vesting schedule of long-term incentive payouts to the
named executive officers and has discretion to grant bonuses even if the performance targets were not met.
Base Salary
Mr. Berman received compensation in 2016 pursuant
to the terms of his employment agreement, Mr. McGrath became an executive officer on August 23, 2011 pursuant to the terms of an
amendment to his employment agreement, and Mr. Novak became an executive officer when he entered into an employment agreement on
April 1, 2018. As discussed in greater detail below, the employment agreement for Mr. Berman was to expire on December 31, 2010.
Effective November 11, 2010, Mr. Berman entered into an amended and restated employment agreement, which was further amended in
2012 and 2016. Pursuant to the terms of their employment agreements as in effect on December 31, 2013, Messrs. Berman and McGrath
each receive a base salary which is increased automatically each year by at least $25,000 for Mr. Berman and $15,000 for Mr. McGrath.
Mr. Novak’s employment agreement does not provide for automatic annual increases in base salary. Any further increase in
base salary, as the case may be, is determined by the Compensation Committee based on the Committee’s analysis of a combination
of two factors: the salaries paid in peer group companies to executives with similar responsibilities, and evaluation of the executive’s
unique role, job performance and other circumstances. Evaluating both of these factors allows us to offer a competitive total compensation
value to each individual named executive officer that takes into account the unique attributes of and circumstances relating to
each individual and marketplace factors. This approach has allowed us to continue to meet our objective of offering a competitive
total compensation value and attracting and retaining key personnel. Based on its review of these factors, the Compensation Committee
determined not to increase the base salary of each of Messrs. Berman, McGrath and Bennett above the contractually required minimum
increase in 2016 -2018 as unnecessary to maintain our competitive total compensation position in the marketplace.
Annual Cash Incentive Compensation
The function of the annual
cash bonus is to establish a direct correlation between the annual incentives awarded to the participants and our financial performance.
This purpose is in keeping with our compensation program’s objective of aligning a significant portion of each executive’s
total compensation with our annual performance and the interests of our shareholders.
The employment agreements in effect during
2018 for Messrs. Berman, McGrath and Novak provided for an incentive bonus award (payable in cash and restricted stock for Messrs.
Berman and McGrath, and in cash and restricted stock units for Mr. Novak) based on a percentage of each participant’s base
salary if the performance goals set by the Compensation Committee are met for that year. The employment agreements for Messrs.
Berman and McGrath mandated that the specific criteria to be used is growth in net sales, EBITDA and total shareholder return,
and the Committee sets the various target thresholds to be met to earn increasing amounts of the bonus up to a maximum of 300%
of base salary for Mr. Berman and 125% for Messrs. McGrath and Novak, although the Compensation Committee has the ability to increase
the maximum in its discretion. Mr. Novak’s employment agreement provides for his criteria to be similar to Mr. McGrath’s.
Commencing in 2012, the Committee is required to meet to establish criteria for earning the annual performance bonus (and with
respect to Mr. Berman, any additional annual performance bonus) during the first quarter of the year. As described elsewhere herein,
Mr. Berman’s employment agreement was further amended in 2016.
The employment agreements in effect on January
1, 2017 for Messrs. Berman, McGrath and Bennett contemplated that the Compensation Committee may grant discretionary bonuses in
situations where, in its sole judgment, it believes they are warranted. The Committee approaches this aspect of the particular
executive’s compensation package by looking at the other components of the executive’s aggregate compensation and then
evaluating if any additional compensation is appropriate to meet our compensation goals. As part of this review, the Committee,
with information from WTW, collects information about the total compensation packages in and various indicia of performance by
the peer group such as sales, one-year sales growth, net income, one-year net income growth, market capitalization, size of companies,
one- and three-year stockholder returns, etc. and then compares such data to our corresponding performance data. Based upon our
philosophy of executive compensation described above, the Committee approved a discretionary bonus for 2016 of $652,500 for Mr.
Berman and discretionary bonuses for 2017 to Messrs. Berman and McGrath of $750,000 and $138,000, respectively. No discretionary
bonuses were awarded for 2018.
Long-Term Compensation
Long-term compensation is an area of particular
emphasis in our executive compensation program because we believe that these incentives foster the long-term perspective necessary
for our continued success. This emphasis is in keeping with our compensation program objective of aligning a significant portion
of each executive’s total compensation with our long-term performance and the interests of our shareholders.
Historically,
our long-term compensation program has focused on the granting of stock options that vested over time. However, commencing in 2006
we began shifting the emphasis of this element of compensation, and we currently favor the issuance of restricted stock awards
or units. The Compensation Committee believes that the award of full-value shares that vest over time is consistent with our overall
compensation philosophy and objectives, as the value of the restricted stock and units vary based upon the performance of our common
stock, thereby aligning the interests of our executives with our shareholders. The Committee has also determined that awards of
restricted stock awards and units are anti-dilutive as compared to stock options inasmuch as it feels that less restricted awards
have to be granted to match the compensation value of stock options.
Mr. Berman’s 2010 amended and restated
employment provided for annual grants of $500,000 of restricted stock which vest in equal annual installments through January 1,
2017, which was one year following the life of the agreement, subject to meeting the 3% vesting condition, as defined in the agreement.
As described in greater detail below, pursuant to the 2012 amendment, commencing in 2013, this bonus changed to $3,500,000 of restricted
stock, part of which vests over four years and part of which are subject to performance milestones with cliff vesting spread out
over three years. Mr. McGrath’s amended employment agreement provides for annual grants of $75,000 of restricted stock which
vests in equal installments over three years subject to meeting certain EPS milestones. As explained in greater detail below (see
“Employment Agreements and Termination of Employment Arrangement”), it was changed to $1,000,000 of restricted stock
effective January 1, 2017 subject in part to time vesting over four years and in part to performance milestones with cliff vesting
spread over three years. Mr. Novak’s employment agreement provides for annual grants of $750,000 of restricted stock units
subject in part to time vesting over three years and in part to performance milestones with cliff vesting spread over three years.
The milestone targets for each of these employment agreements are established by the Compensation Committee during the first quarter
of each year. The Company did not meet the vesting requirements contained in either employment agreement for 2016, so both of Messrs.
Berman and McGrath forfeited their stock awards. As explained in greater detail below (see “Employment Agreements and Termination
of Employment Arrangements”), Mr. Berman’s employment agreement also provides for an annual performance bonus. Commencing
in 2012, the criteria for earning such bonus are to be established by the Compensation Committee. This bonus, if earned, is payable
partially in cash and partially in shares of restricted common stock. Mr. Berman did not earn this bonus for 2018.
After a review of all of the factors discussed
above, the Compensation Committee determined that, in keeping with our compensation objectives, Mr. Berman was not awarded a long
term bonus for 2018.
Other Benefits and Perquisites
Our executive officers participate in the health
and dental coverage, life insurance, paid vacation and holidays, 401(k) retirement savings plans and other programs that are generally
available to all of the Company’s employees.
The provision of any additional perquisites
to each of the named executive officers is subject to review by the Compensation Committee. Historically, these perquisites include
payment of an automobile allowance and matching contributions to a 401(k) defined contribution plan. In 2018, the named executive
officers were granted the following perquisites: automobile allowance and 401(k) plan matching contribution for Messrs. Berman,
McGrath, Novak and Bennett; and a life insurance benefit for Mr. Berman. We value perquisites at their incremental cost in accordance
with SEC regulations.
We believe that the benefits and perquisites
we provide to our named executive officers are within competitive practice and customary for executives in key positions at comparable
companies. Such benefits and perquisites serve our objective of offering competitive compensation that allows us to continue to
attract, retain and motivate highly talented people to these critical positions, ultimately providing a substantial benefit to
our shareholders.
Change of Control/Termination Agreements
We recognize that, as with any public company,
it is possible that a change of control may take place in the future and that the threat or occurrence of a change of control can
result in significant distractions of key management personnel because of the uncertainties inherent in such a situation. We further
believe that it is essential and in the best interests of the Company and our shareholders to retain the services of our key management
personnel in the event of the threat or occurrence of a change of control and to ensure their continued dedication and efforts
in such event without undue concern for their personal financial and employment security. In keeping with this belief and its objective
of retaining and motivating highly talented individuals to fill key positions, which is consistent with our general compensation
philosophy, the employment agreement for named chief executive officers contain provisions which guarantee specific payments and
benefits upon a termination of employment without good reason following a change of control of the Company. In addition, the employment
agreements also contain provisions providing for certain lump-sum payments if the executive is terminated without “cause”
or if we materially breach the agreement leading the affected executive to terminate the agreement for good reason, as applicable.
Additional details of the terms of the change
of control agreements and termination provisions outlined above are provided below.
Impact of Accounting and Tax Treatments
Section 162(m) of the Internal Revenue Code
(the “Code”) prohibits publicly held companies like us from deducting certain compensation to any one named executive
officer in excess of $1,000,000 during the tax year. Under the Tax Cuts and Jobs Act (“the Act”), effective for tax
years beginning after December 31, 2017, the Act modified the application of the $1,000,000 deduction by broadening the definition
of a covered employee and eliminating the exception for performance-based compensation. The Act provides a transition rule, under
which compensation paid pursuant to a written binding contract which was in effect on November 2, 2017 and not modified in any
material respect on or after said date, is “grandfathered” under the prior rules and not subject to the changes in
the law. To constitute a grandfathered plan, there must be a written contract that would be enforceable as of November 2, 2017.
The Company, through the Compensation Committee,
intends to attempt to qualify executive compensation as tax deductible to the extent feasible and where it believes it is in our
best interests and in the best interests of our shareholders. However, the Committee does not intend to permit this arbitrary tax
provision to distort the effective development and execution of our compensation program. Thus, the Committee is permitted to and
will continue to exercise discretion in those instances in which mechanistic approaches necessary to satisfy tax law considerations
could compromise the interests of our shareholders. Because of the uncertainties associated with the application and interpretation
of Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements
for deductibility under Section 162(m) will in fact be deductible.
Compensation Risk Management
As part of its annual review of our executive
compensation program, the Compensation Committee reviews with management the design and operation of our incentive compensation
arrangements for senior management, including executive officers, to determine if such programs might encourage inappropriate risk-taking
that could have a material adverse effect on the Company. The Committee considers, among other things, the features of the Company’s
compensation program that are designed to mitigate compensation-related risk, such as the performance objectives and target levels
for incentive awards (which are based on overall Company performance), and its compensation recoupment policy. The Compensation
Committee also considers our internal control structure which, among other things, limits the number of persons authorized to execute
material agreements, requires approval of our Board of Directors for matters outside of the ordinary course and its whistle blower
program. Based upon the above, the Committee concluded that any risks arising from the Company’s compensation plans, policies
and practices are not reasonably likely to have a material adverse effect on the Company.
Impact of Shareholder Advisory Vote
At our 2017 annual meeting, our shareholders
approved our current executive compensation with over 85% of all shares actually voting on the issue (over 51% of all outstanding
shares whether or not voting) affirmatively giving their approval. Accordingly, we believe that this vote ratifies our executive
compensation philosophy and policies, as currently adopted and implemented, and we intend to continue such philosophy and policies.
Pay Ratio Disclosure Rule
Pursuant to a mandate of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd – Frank Act”), the SEC adopted a rule requiring annual disclosure
of the ratio of the median employee’s annual total compensation to the total annual compensation of the principal executive
officer (‟PEO”). Our PEO is Mr. Berman. Our calculation of the ratio of the median employee compensation to our PEO’s
compensation for the year ended December 31, 2018 is set forth below.
Our calculation of the ratio of the median
employee compensation to our PEO’s compensation for the year ended December 31, 2018 is set forth below.
|
Median Employee total annual compensation (excluding Mr. Berman)
|
|
$
|
72,475
|
|
|
Mr. Berman’s total annual compensation
|
|
$
|
1,737,938
|
|
|
Ratio of PEO to Median Employee Compensation
|
|
|
4.2
|
%
|
Mr. Berman’s total annual compensation
used in the calculation above represents the gross amount reported on Form W-2 for 2018. This amount significantly differs from
the 2018 amount of $3.5 million shown on the Summary Compensation Table. The Summary Compensation table includes $1.9 million of
restricted stock awards granted on January 1, 2018, none of which were earned and vested as of December 31, 2018. The total amount
of compensation earned by Mr. Berman in 2018 related to vested restricted stock awards and included in his total annual compensation
above approximated $189,000.
In determining the median employee, a listing
was prepared of all employees that received compensation for the year ended December 31, 2018. The median amount was selected from
the annualized list. As of December 31, 2018, the Company employed 634 persons, of which 265 are based outside of the United
States.
Compensation Committee Report
The Compensation Committee has reviewed and
discussed with management the Compensation Discussion and Analysis (the “CD&A”) for the year ended December 31,
2018. In reliance on the reviews and discussions referred to above, the compensation committee recommended to the Board, and the
Board has approved, that the CD&A be furnished in the annual report on Form 10-K for the year ended December 31, 2018.
|
|
By the Compensation Committee of the Board of Directors:
|
|
|
|
|
|
Michael S. Sitrick, Chairman
|
|
|
Rex H. Poulsen, Member
|
|
|
Michael J. Gross, Member
|
Summary Compensation Table– 2016-2018
|
Name and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($) (1)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)
|
|
|
All Other
Compensation
($) (2)
|
|
|
Total
($)
|
|
|
Stephen G. Berman
|
|
2018
|
|
|
1,500,000
|
|
|
|
—
|
|
|
|
1,925,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,027
|
|
|
|
3,464,027
|
|
|
Chief Executive Officer,
|
|
2017
|
|
|
1,475,000
|
|
|
|
750,000
|
|
|
|
1,925,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
4,180,000
|
|
|
President and Secretary
|
|
2016
|
|
|
1,372,916
|
|
|
|
652,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
2,055,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John J. McGrath
|
|
2018
|
|
|
705,000
|
|
|
|
—
|
|
|
|
550,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,150
|
|
|
|
1,283,150
|
|
|
Chief Operating Officer
|
|
2017
|
|
|
690,000
|
|
|
|
138,000
|
|
|
|
550,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,400
|
|
|
|
1,404,400
|
|
|
|
|
2016
|
|
|
675,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,400
|
|
|
|
701,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joel M. Bennett (3)
|
|
2018
|
|
|
682,071
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,250
|
|
|
|
710,321
|
|
|
Former Executive Vice President
|
|
2017
|
|
|
505,000
|
|
|
|
—
|
|
|
|
161,700
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,000
|
|
|
|
690,700
|
|
|
and Chief Financial Officer
|
|
2016
|
|
|
490,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,000
|
|
|
|
514,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brent T. Novak
|
|
2018
|
|
|
378,750
|
|
|
|
—
|
|
|
|
525,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,000
|
|
|
|
912,750
|
|
|
Executive Vice President
|
|
2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
and Chief Financial Officer
|
|
2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1)
|
For Messrs. Berman and
McGrath, the grant-date fair value of the awards assuming 100% achievement of the applicable performance conditions totaled $3.5
million and $1.0 million, respectively, in both 2017 and 2018. For Messrs. Bennett and Novak, the grant-date fair value of the
awards assuming 100% achievement of the applicable performance conditions totaled $294,000 in 2017 and $750,000 in 2018, respectively.
|
|
(2)
|
Represents automobile allowances paid in the amount of $18,000, $18,000 and $17,291 for Mr. Berman for 2016, 2017 and 2018, respectively, $14,000 per year for 2016, 2017 and 2018 for Mr. McGrath, $9,000 in 2018 for Mr. Novak and $12,000, $12,000 and $14,500 for Mr. Bennett for 2016, 2017 and 2018, respectively; The amounts include matching contributions made by us to the Named Executive Officer’s 401(k) defined contribution plan in the amount of $12,000, $12,000 and $13,750, respectively, for 2016, 2017 and 2018, for each of Messrs. Berman, McGrath and Bennett and includes $7,985 related to a life insurance policy for Mr. Berman in 2018. See “Employee Pension Plan.”
|
|
|
|
|
(3)
|
Mr. Bennett’s employment terminated in March 2018. Compensation consists of $105,208 of salary, vacation and personal day payout of $71,863 and severance pay of $505,000.
|
The following table sets forth certain information
regarding all equity-based compensation awards outstanding as of December 31, 2018 by the Named Officers:
Outstanding Equity Awards At Fiscal Year-end
- 2018
|
Option Awards
|
|
Stock Awards / Units
|
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
|
|
|
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
|
|
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
|
|
Option
Exercise
Price ($)
|
|
|
Option
Expiration
Date
|
|
|
Number
of Shares
or Units
of Stock
that
Have Not
Vested
(#)
|
|
|
Market
Value of
Shares or
Units of
Stock
that
Have Not
Vested
($) (1)
|
|
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights that
Have Not
Vested (#)
|
|
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
($)
|
|
|
Stephen G. Berman
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,113,880
|
|
|
|
3,107,404
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John J. McGrath
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
603,671
|
|
|
|
887,396
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brent T. Novak
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
357,143
|
|
|
|
525,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1)
|
The product of (x) $1.47
(the closing sale price of the common stock on December 31, 2018) multiplied by (y) the number of unvested restricted shares or
units outstanding.
|
The following table sets forth certain information
regarding amount realized upon the vesting and exercise of any equity-based compensation awards during 2018 by the Named Executive
Officers:
Options Exercises And Stock Vested-2018
|
|
|
Option Awards
|
|
|
Stock Awards / Units
|
|
|
Name
|
|
Number of
Shares
Acquired on
Exercise (#)
|
|
|
Value
Realized on
Exercise
($)
|
|
|
Number of
Shares
Acquired on
Vesting (#)
|
|
|
Value
Realized on
Vesting ($)
|
|
|
Stephen G. Berman
|
|
|
—
|
|
|
|
—
|
|
|
|
80,829
|
|
|
|
188,661
|
|
|
John J. McGrath
|
|
|
—
|
|
|
|
—
|
|
|
|
22,798
|
|
|
|
53,239
|
|
|
Joel M. Bennett
|
|
|
—
|
|
|
|
—
|
|
|
|
22,835
|
|
|
|
51,949
|
|
|
Brent T. Novak
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Potential Payments upon Termination or Change
in Control - 2018
The following tables describe potential payments and other benefits
that would have been received by each Named Officer at, following or in connection with any termination, including, without limitation,
resignation, severance, retirement or a constructive termination of such Named Officer, or a change in control of our Company or
a change in such Named Officer’s responsibilities on December 31, 2018. The potential payments listed below assume that there
is no earned but unpaid base salary at December 31, 2018.
Stephen G. Berman
|
|
|
Upon
Retirement
|
|
|
Quits
For
“Good
Reason”
(3)
|
|
|
Upon
Death
(4)
|
|
|
Upon
“Disability”
(5)
|
|
|
Termination
Without
“Cause”
|
|
|
Termination
For
“Cause”
(6)
|
|
|
Involuntary
Termination
In
Connection
with
Change
of
Control(7)
|
|
|
Base Salary
|
|
$
|
—
|
|
|
$
|
3,033,072
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,033,072
|
|
|
$
|
—
|
|
|
$
|
6,704,941
|
(8)
|
|
Restricted Stock (1)
|
|
|
—
|
|
|
|
3,107,404
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,107,404
|
|
|
|
—
|
|
|
|
3,107,404
|
|
|
Annual Cash Incentive Award (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1) The product of (x) $1.47 (the closing sale price of the common stock on December 31, 2018) multiplied by (y) the number of unvested restricted shares outstanding.
|
|
|
(2) Assumes that if the Named Officer is terminated on December 31, 2018, they were employed through the end of the incentive period and no bonus was earned and unpaid.
|
|
|
(3) Defined as (i) our violation or failure to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by us, or (ii) the material change in the nature, titles or scope of the duties, obligations, rights or powers of the Named Officer’s employment resulting from any action or failure to act by us.
|
|
|
(4) Under the terms of Mr. Berman’s employment agreement (see “Employment Agreements”), the provision of health care coverage for Mr. Berman’s children will continue until they reach the maximum age at which a child can be covered as a matter of law under a parent’s policy in the event of his death during the term of his employment agreement.
|
|
|
(5) Defined as the Named Officer’s inability to perform his duties by reason of any disability or incapacity (due to any physical or mental injury, illness or defect) for an aggregate of 180 days in any consecutive 12-month period.
|
|
|
(6) Defined as (i) the Named Officer’s conviction of, or entering a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense and either the Named Officer’s failure to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if he does perfect such an appeal, the sustaining of his conviction of a felony offense on appeal; or (ii) the determination by our Board of Directors, after due inquiry, based upon convincing evidence, that the Named Officer has:
|
|
|
(A) committed fraud against, or embezzled or misappropriated funds or other assets of, our Company (or any subsidiary);
|
|
|
(B) violated, or caused our Company (or any subsidiary) or any of our officers, employees or other agents, or any other individual or entity to violate, any material law, rule, regulation or ordinance, or any material written policy, rule or directive of our Company or our Board of Directors;
|
|
|
(C) willfully, or because of gross or persistent inaction, failed properly to perform his duties or acted in a manner detrimental to, or adverse to our interests; or
|
|
|
(D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by him under his employment agreement with us; and that, in the case of any violation or failure referred to in clause (B), (C) or (D), above, such violation or failure has caused, or is reasonably likely to cause, us to suffer or incur a substantial casualty, loss, penalty, expense or other liability or cost.
|
|
|
(7) Section 280G of the Code disallows a company’s tax deduction for what are defined as “excess parachute payments” and Section 4999 of the Code imposes a 20% excise tax on any person who receives excess parachute payments. As discussed above, Mr. Berman is entitled to certain payments upon termination of his employment, including termination following a change in control of our Company. Under the terms of his employment agreement (see “Employment Agreements”), Mr. Berman is entitled to the full amount of the payments and benefits payable in the event of a Change in Control (as defined in the employment agreement) even if it triggers an excise tax imposed by the tax code if the net after-tax amount would still be greater than reducing the total payments and benefits to avoid such excise tax.
|
|
|
(8) Under the terms of Mr. Berman’s employment agreement (see “Employment Agreements”), if a change of control occurs and within two years thereafter Mr. Berman is terminated without “Cause” or quits for “Good Reason,” then he has the right to receive a payment equal to 2.99 times his then current base amount as defined in section 280(G) of the Code (which was $2,225,919 in 2018) and continued health care coverage.
|
John J. McGrath
|
|
|
Upon
Retirement
|
|
|
Quits
For
“Good
Reason”
(3)
|
|
|
Upon
Death
|
|
|
Upon
“Disability”
(4)
|
|
|
Termination
Without
“Cause”
|
|
|
Termination
For
“Cause”
(5)
|
|
|
Involuntary
Termination
In
Connection
with
Change
of
Control(6)
|
|
|
Base Salary
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,410,000
|
|
|
$
|
—
|
|
|
$
|
1,410,000
|
|
|
Restricted Stock (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
887,396
|
|
|
|
—
|
|
|
|
887,396
|
|
|
Annual
Cash Incentive Award (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1) The product of (x) $1.47 (the closing sale price of the common stock on December 31, 2018) multiplied by (y) the number of unvested restricted shares outstanding.
|
|
|
(2) Assumes that if the Named Officer is terminated on December 31, 2018, they were employed through the end of the incentive period and no bonus was earned and unpaid.
|
|
|
(3) Defined as following a Change of Control (i) any material reduction of the Named Officer’s base salary, (ii) relocation of the Named Officer’s principal place of employment by more than thirty miles, or (iii) the material change in the nature, titles or scope of the duties, obligations, rights or powers of the Named Officer’s employment resulting from any action or failure to act by us.
|
|
|
(4) Defined as a Named Officer’s inability to perform his duties by reason of any disability or incapacity (due to any physical or mental injury, illness or defect) for an aggregate of 90 days in any consecutive 12-month period.
|
|
|
(5) Defined as (i) the Named Officer’s conviction of, or entering a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense or other crime and either the Named Officer’s failure to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if he does perfect such an appeal, the sustaining of his conviction of a felony offense on appeal; or (ii) the determination by our Board of Directors, after due inquiry, based on convincing evidence, that the Named Officer has:
|
|
|
(A) committed fraud against, or embezzled or misappropriated funds or other assets of, our Company (or any subsidiary);
|
|
|
(B) violated, or caused our Company (or any subsidiary) or any of our officers, employees or other agents, or any other individual or entity to violate, any material law, rule, regulation or ordinance, or any material written policy, rule or directive of our Company or our Board of Directors;
|
|
|
(C) willfully, or because of gross or persistent inaction, failed properly to perform his duties or acted in a manner detrimental to, or adverse to our interests; or
|
|
|
(D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by him under his employment agreement with us; and that, in the case of any violation or failure referred to in clause (B), above, such violation is reasonably expected to have a significant detrimental effect on our Company (or any subsidiary).
|
|
|
(6) Under the terms of Mr. McGrath’s employment agreement (see “Employment Agreements”), if a change of control occurs and within one year thereafter Mr. McGrath is terminated without “Cause” or quits for “Good Reason”, then he has the right to receive a payment equal to the greater of two times his then current base salary or the payments due for the remainder of the term of his employment agreement.
|
Brent T. Novak
|
|
|
Upon
Retirement
|
|
|
Quits
For
“Good
Reason”
(3)
|
|
|
Upon
Death
|
|
|
Upon
“Disability”
|
|
|
Termination
Without
“Cause”
|
|
|
Termination
For
“Cause”
(4)
|
|
|
Involuntary
Termination
In
Connection
with
Change
of
Control(5)
|
|
|
Base Salary
|
|
$
|
—
|
|
|
$
|
1,066,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,066,400
|
|
|
$
|
—
|
|
|
$
|
1,066,400
|
|
|
Restricted Stock Units (1)
|
|
|
—
|
|
|
|
525,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
525,000
|
|
|
|
—
|
|
|
|
525,000
|
|
|
Annual
Cash Incentive
Award
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1) The product of (x) $1.47 (the closing sale price of the common stock on December 31, 2018) multiplied by (y) the number of unvested restricted stock units outstanding.
|
|
|
(2) Assumes that if the Named Officer is terminated on December 31, 2018, they were employed through the end of the incentive period and no bonus was earned and unpaid.
|
|
|
(3) Defined as (i) any material reduction of the Named Officer’s base salary, (ii) relocation of the Named Officer’s principal place of employment by more than thirty miles, or (iii) the material change in the nature, titles or scope of the duties, obligations, rights or powers of the Named Officer’s employment resulting from any action or failure to act by us.
|
|
|
(4) Defined as (i) the Named Officer’s conviction of, or entering a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense and either the Named Officer’s failure to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if he does perfect such an appeal, the sustaining of his conviction of a felony offense on appeal; or (ii) the determination by our Board of Directors, after due inquiry, based on convincing evidence, that the Named Officer has:
|
|
|
(A) committed fraud against, or embezzled or misappropriated funds or other assets of, our Company (or any subsidiary);
|
|
|
(B) violated, or caused our Company (or any subsidiary) or any of our officers, employees or other agents, or any other individual or entity to violate, any material law, rule, regulation or ordinance, or any material written policy, rule or directive of our Company or our Board of Directors;
|
|
|
(C) willfully, or because of gross or persistent inaction, failed properly to perform his duties or acted in a manner detrimental to, or adverse to our interests; or
|
|
|
(D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by him under his employment agreement with us; and that, in the case of any violation or failure referred to in clause (B), (C) or (D), above, such violation or failure has caused, or is reasonably likely to cause, us to suffer or incur a substantial casualty, loss, penalty, expense or other liability or cost.
|
|
|
(5) Under the terms of Mr. Novak’s employment agreement (see “Employment Agreements”), if a change of control occurs and within one year thereafter Mr. Novak is terminated without “Cause” or quits for “Good Reason”, then he has the right to receive a payment equal to two times his then current base salary and continued health care coverage.
|
Compensation of Directors
Analogous to our executive compensation philosophy,
it is our desire to similarly compensate our non-employee Directors for their services in a way that will serve to attract and
retain highly qualified members of the Board. As changes in securities laws require greater involvement by, and places additional
burdens on, a company’s Directors, it becomes even more necessary to locate and retain highly qualified Directors. As such,
after consulting with Lipis Consulting Inc., the Compensation Committee developed and the Board approved a structure for the compensation
package of our non-employee Directors so that the total compensation package of our non-employee Directors would be at approximately
the median total compensation package for non-employee Directors in our peer group.
In December 2009, our Board of Directors, after
consulting with our prior consultant, changed the compensation package for non-employee Directors as of January 1, 2010 by
(i) increasing the annual cash stipend to $75,000, (ii) eliminating meeting fees for attendance at both Board and committee meetings,
(iii) increasing the annual fees paid to committee chairs and the members of the audit committee, (iv) decreasing by $25,000 the
value of the annual grant of restricted shares of our common stock to $100,000 and (v) imposing minimum shareholding requirements.
Specifically, the chair of the Audit Committee receives an annual fee of $30,000, each member of the Audit Committee receives a
$15,000 annual fee (including the chair), the chair of the Compensation Committee and the Nominating and Governance Committee each
receives an annual fee of $15,000, and each member of such committees (including the chair) receives an annual fee of $10,000.
Newly-elected non-employee Directors will receive a portion of the foregoing annual consideration, prorated according to the portion
of the year in which they serve in such capacity.
In
February 2010 our Board determined the terms for the minimum shareholding requirements. Pursuant to the new minimum shareholding
requirements, each director will be required to hold shares with a value equal to at least two times the average annual cash
stipend paid to the director during the prior two calendar years. To illustrate: if an average Director wishes to sell shares
in 2019, he will have to hold shares with a market value of at least $205,411 prior to and following any sale of shares calculated
as of the date of the sale, such $205,411 minimum calculated by taking the average cash stipend of $102,706 paid during the prior
two years multiplied by two.
The following table sets forth the compensation
we paid to our non-employee Directors for our fiscal year ended December 31, 2018:
Director Compensation
|
Name
|
|
Year
|
|
|
Fees
Earned
or Paid
in
Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
Murray L. Skala
|
|
|
2018
|
|
|
|
75,000
|
|
|
|
97,713
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
172,713
|
|
|
Rex H. Poulsen
|
|
|
2018
|
|
|
|
130,000
|
|
|
|
97,713
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
227,713
|
|
|
Michael S. Sitrick
|
|
|
2018
|
|
|
|
110,000
|
|
|
|
97,713
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
207,713
|
|
|
Alexander Shoghi
|
|
|
2018
|
|
|
|
90,000
|
|
|
|
97,713
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
187,713
|
|
|
Michael J. Gross
|
|
|
2018
|
|
|
|
100,000
|
|
|
|
97,713
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
197,713
|
|
|
Zhao Xiaoqiang
|
|
|
2018
|
|
|
|
100,000
|
|
|
|
97,713
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
197,713
|
|
|
|
(1) The value of the shares was determined by taking the product of (a) 41,580 shares of restricted stock multiplied by (b) $2.35, the last sales price of our common stock on January 1, 2018, as reported by Nasdaq, the date prior to the date the shares were granted, all of which shares vested on January 1, 2019.
|
Employment Agreements and Termination of Employment Arrangements
We entered into an amended and restated employment
agreement with Mr. Berman on November 11, 2010. We entered into an amended employment agreement with Mr. McGrath on August 23,
2011 when he became our Chief Operating Officer. We entered into a new employment agreement with Mr. Novak on April 1, 2018 when
he became our Chief Financial Officer.
On November 11, 2010, we entered into a second
amended and restated employment agreement with Mr. Berman that extended the term of his agreement to December 31, 2015 and provides,
among other things, new provisions for (i) an annual salary of $1,140,000 in 2011 and annual increases thereafter at the discretion
of the Board but no less than $25,000; (ii) an annual restricted stock award of $500,000 of our common stock commencing January
1, 2011, subject to vesting in equal installments through January 1, 2017, except that the vesting of each annual $500,000 award
is conditioned on EPS (defined as our net income per share of our common stock, calculated on a fully diluted basis) for the fiscal
year in which the shares are issued being equal to minimum EPS as follows: $1.41 for 2011, $1.45 for 2012, $1.49 for 2013, $1.54
for 2014, and $1.59 for 2015. If the minimum EPS vesting condition for the first tranche is not met, then the $500,000 grant lapses,
but if the vesting condition is satisfied for the first tranche of the $500,000 grant, then each subsequent tranche of the $500,000
grant will vest; (iii) an annual performance bonus as follows: (x) 2010 bonus (previously established in March 2010) remains unchanged
except that 20% of the bonus will be paid in restricted stock which will vest in six equal annual installments of 14.5% of the
number of shares, the first on the date in 2011 that the bonus is determined to have been earned, and a seventh and final installment
of 13% of the shares on January 1, 2017, and (y) for years commencing January 1, 2011, an amount equal to up to 200% of base salary,
to be paid in stock and cash (20-40% in stock, in the percentages set forth on Exhibit E to the agreement), bonus criteria using
“Adjusted” EPS growth (as defined in the agreement) to be determined by our Compensation Committee in the first quarter
of each fiscal year, except that "Adjusted" EPS criteria (but not vesting) for 2011 shall range from $1.37 - $1.78 as
stated in Exhibit D to the agreement, and shares will vest in equal annual installments commencing with the date the Bonus for
a fiscal year is determined to have been earned and thereafter on January 1 in each subsequent year until the final installment
on January 1, 2017, and (z) an additional bonus equal to 100% of base salary to be paid entirely in restricted stock; the criteria
and vesting schedules to be determined by our Compensation Committee in the first fiscal quarter of each year, using criteria to
be selected by such Committee which are in its discretion such as grown in net sales, return on invested capital, growth in free
cash flow, total shareholder return (or any combination); (iv) restrictions on sale of our securities such that he cannot sell
any shares of our common stock if his shares remaining after a sale are not equal to at least three times his then base salary;
(v) life insurance in the amount of $1.5 million; (vi) severance if we terminate the agreement without cause (as defined in the
agreement) or Mr. Berman terminates it for Good Reason (as defined in the agreement), in an amount equal to the base salary at
termination date multiplied by the number of years and partial years remaining in the term; and (vii) restrictive covenants, change
of control provisions and our ownership of certain intellectual property.
On October 19, 2011, we clarified our employment
agreement with Mr. Berman and entered into a letter amendment dated October 20, 2011 which corrects and clarifies certain cross
references relating to Mr. Berman’s entitlement to severance upon a qualifying termination following a change of control
(as defined in his employment agreement). It also clarifies that a material change in the nature and/or scope of the duties, obligations,
rights or powers of his employment under the agreement would be deemed to include his ceasing to be the Chief Executive Officer
and President of a publicly traded company (one of the standards for determining whether Mr. Berman has “good reason”
to terminate his employment under his employment agreement), and further provides that Mr. Berman's post-change of control severance
benefits shall be payable upon a qualifying termination of employment within a two year period following a change of control (the
agreement originally provided for a one year period).
On September 21, 2012, in connection with our
entry into agreements dated September 10, 2012 with NantWorks LLC to form DreamPlay Toys LLC and DreamPlay LLC, all Delaware limited
liability companies, we entered into Amendment Number One to Mr. Berman’s Second Amended and Restated Employment Agreement
dated November 11, 2012 (as previously modified by the October 20, 2011 letter amendment); DreamPlay Toys LLC will develop, market
and sell toys and consumer products incorporating NantWorks’ proprietary iD (iDream) image recognition technology and DreamPlay
LLC’s business is the extension of such image recognition technology to non-toy consumer products and applications.
The following description modifies and supersedes,
to the extent inconsistent with, the disclosure in the preceding paragraphs. The term of Mr. Berman’s employment agreement
has been extended to December 31, 2018 and provides (i) that commencing on January 1, 2013 the amount of the annual restricted
stock award shall increase to up to $3.5 million, with the vesting of each annual grant to be determined by the Compensation Committee
based upon performance criteria it establishes during the first quarter of the year of grant; (ii) commencing with 2013 Mr. Berman
can earn an annual performance bonus described below. Part of the annual performance bonus in an amount not exceeding 300% of that
year’s base salary can be earned based upon financial and non-financial factors determined annually by the Compensation Committee
during the first quarter of each year. The other part of the additional annual performance bonus can be earned in an amount equal
to one-half of the cash distributions we receive from DreamPlay LLC, subject to satisfaction of the following three conditions:
(1) we have positive net income after deducting the aggregate annual performance bonus, (2) the aggregate annual performance bonus
cannot exceed 2.9% of our net income for such year except that if our net income exceeds $385,000 for the year the percentage limitation
shall be reduced to 1% and if our net income for the year exceeds $770,000 the percentage limitation is reduced to 0.5% and (3)
we have received an aggregate of at least $15 million of net income from DreamPlay Toys LLC and DreamPlay LLC. The amendment also
provides (i) that the portion of the annual performance bonus up to an amount equal to 200% of that year’s base salary shall
be paid in cash, and any excess over 200% of such base salary shall be paid in shares of restricted stock vesting in equal quarterly
installments with the initial installment vesting upon grant and the balance over three years following the award date; (ii) for
a life insurance policy of $5 million or such lesser amount we can obtain for an annual premium of up to $10,000; (iii) for the
reimbursement of legal fees in negotiating this amendment of up to $25,000, (iv) that the full amount of the payments and benefits
payable in the event of a Change in Control (as defined in the employment agreement) shall be paid, even if it triggers an excise
tax imposed by the tax code if the net after-tax amount would still be greater than reducing the total payments and benefits to
avoid such excise tax, and (vi) the term “Good Reason Event” has been expanded to include a change in the composition
of our Board of Directors where the majority of the Directors were not in office on September 15, 2012. This provision would have
been triggered if management’s slate of nominee Directors at our 2014 Annual Meeting were elected so prior to such meeting,
Mr. Berman waived such provision of his employment agreement with respect to the slate of nominees at such meeting. Mr. Berman
waived the provision again following our 2017 Annual Meeting.
On June 7, 2016, we amended the employment
agreement between us and Mr. Berman, our Chairman, CEO and President, and entered into Amendment Number Two to Mr. Berman’s
Second Amended and Restated Employment Agreement dated November 11, 2010 (the “Employment Agreement”). The terms of
Mr. Berman’s Employment Agreement have been amended as follows: (i) extension of the term until December 31, 2020; (ii) increase
of Mr. Berman’s Base Salary to $1,450,000 effective June 1, 2016, subject to annual increases thereafter as determined by
the Compensation Committee, with annual minimum increases of $25,000 commencing January 1, 2017; (iii) modification of the performance
and vesting standards for each $3.5 million Annual Restricted Stock Grant (“Annual Stock Grant”) provided for under
Section 3(b) of the Employment Agreement, effective as of January 1, 2017, so that 40% ($1.4 million) of each Annual Stock Grant
will be subject to time vesting in four equal annual installments over four years and 60% ($2.1 million) of each Annual Stock Grant
will be subject to three year “cliff vesting” (i.e. payment is based upon performance at the close of the three year
performance period), with vesting of each Annual Stock Grant determined by the following performance measures: (a) total shareholder
return as compared to the Russell 2000 Index (weighted 50%), (b) net revenue growth as compared to our peer group (weighted 25%)
and (c) EBITDA growth as compared to our peer group (weighted 25%); (iv) modification of the performance measures for award of
the Annual Performance Bonus equal to up to 300% of Base Salary (“Annual Bonus”) provided for under Section 3(d) of
the Employment Agreement, effective as of January 1, 2017, so that the performance measures will be based only upon net revenues
and EBITDA, each performance measure weighted 50%, and with the specific performance criteria applicable to each Annual Bonus determined
by the Compensation Committee during the first quarter of each fiscal year; and (v) provision of health and dental insurance coverage
for Mr. Berman’s children in the event of his death during the term of the Employment Agreement.
On August 23, 2011, we entered into an amended
employment agreement with Mr. McGrath whereby he became our Chief Operating Officer. The amended employment agreement, which ran
through December 31, 2013, provided for an annual salary of $600,000; an annual increase over the prior year’s base salary
of at least $15,000; an annual award of $75,000 of restricted stock, subject to vesting in equal installments over three years,
provided, however, that the initial vesting of the first installment of each year’s award is conditioned on “Adjusted”
EPS (as defined in the amended agreement) for the fiscal year in which the shares are issued being equal to minimum “Adjusted”
EPS as follows: 2011 vesting condition: greater of $1.41 or 3% higher than 2010 “Adjusted” EPS; 2012 vesting: greater
of $1.45 or 3% higher than 2011“Adjusted” EPS; and 2013 vesting condition: greater of $1.49 or 3% higher than “Adjusted”
2012 EPS. The amended agreement also provides for an annual bonus opportunity of up to 125% of salary payable 50% in cash and 50%
in restricted stock (with a four year vesting) based upon “Adjusted” EPS growth. Bonus targets for 2011 ranged from
$1.37 -$1.78. Commencing in 2012 the bonus targets are to be set by the Compensation Committee.
On May 15, 2013, we entered a Second Amendment
to Mr. McGrath’s Employment Agreement dated March 4, 2010 (effective January 1, 2010), as previously amended on August
23, 2011. Mr. McGrath’s employment agreement was amended as follows: (i) the term was extended by two years to December 31,
2015; (ii) it provides for two annual grants of $75,000 worth of restricted shares of common stock of the Company (A) the first
such grant to be made on January 1, 2014, which grant shall vest in three annual equal installments as set forth on Exhibit B to
the amendment, provided that "Adjusted" EPS (as defined in the employment agreement) for the 2014 fiscal year is equal
to the greater of $1.05 or an amount that is 3% higher than the actual "Adjusted" EPS for the 2014 fiscal year; (B) the
second grant to be made on January 1, 2015, which grant shall vest in two annual equal installments as set forth on Exhibit B to
the amendment, provided that "Adjusted" EPS for the 2015 fiscal year is equal to the greater of $2.10 or an amount that
is 3% higher than the actual "Adjusted" EPS for the 2015 fiscal year; and (iii) in each of 2014 and 2015 Mr. McGrath
can earn an annual performance bonus of up to 125% of his then base salary based upon such financial (e.g., growth in EPS, return
on equity, growth in the Common Stock price) and non-financial (e.g., organic growth, personnel development) factors determined
annually by the Compensation Committee of the Board of Directors during the first quarter of the relevant calendar year for which
the annual performance bonus criteria are being established; one-half of such bonus shall be paid in cash, and one-half in shares
of restricted common stock, which shall vest in two equal annual installments, the first installment of which shall vest on
the Annual Performance Bonus Award Date (as defined in the employment agreement) and thereafter on January 1 in each subsequent
year until the final vesting date on January 1, 2017. On June 11, 2016, we extended Mr. McGrath’s employment agreement through
December 31, 2017.
On September 29, 2016, we entered into a Fourth
Amendment to the employment agreement between us and Mr. McGrath, dated March 4, 2010 (which was effective January 1, 2010) (the
“Employment Agreement”). The terms of Mr. McGrath’s Employment Agreement were amended as follows: (i) extension
of the term until December 31, 2020; (ii) modification of the performance and vesting standards for each Annual Restricted Stock
Grant (“Annual Stock Grant”) provided for under Section 3(d) of the Employment Agreement, effective as of January 1,
2017, as follows: each Annual Stock Grant will be equal to $1 million, and 40% ($0.4 million) of each Annual Stock Grant will be
subject to time vesting in four equal annual installments over four years, and 60% ($0.6 million) of each Annual Stock Grant will
be subject to three year “cliff vesting” (i.e. vesting is based upon satisfaction of the performance measures at the
close of the three year performance period), determined by the following performance measures: (A) total shareholder return as
compared to the Russell 2000 Index (weighted 50%), (B) net revenue growth as compared to our peer group (weighted 25%) and (C)
growth in Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) as compared to our peer group (weighted
25%); and (iii) modification of the Annual Performance Bonus (“Annual Bonus”) provided for under Section 3(e) of the
Employment Agreement, effective as of January 1, 2017, as follows: the Annual Bonus will be equal to up to 125% of Base Salary,
and the actual amount will be determined by performance measures based upon net revenues and EBITDA, each performance measure weighted
50%, and with the specific performance criteria applicable to each Annual Bonus determined by the Compensation Committee during
the first quarter of each fiscal year, and payable in cash (up to 100% of Base Salary) and shares of our common stock (any excess
over 100% of Base Salary) with the shares of stock vesting over three years in equal quarterly installments.
Effective February 28, 2018, we entered into
a Fifth Amendment to Mr. McGrath’s Employment Agreement, to provide that if a change of control occurs and within one year
thereafter Mr. McGrath is terminated without “Cause” or quits with “Good Reason”, then he has the right
to receive a payment equal to the greater of two times his then current base salary or the payments due for the remainder of the
term of his Employment Agreement. The Fifth Amendment amended the definition of “Cause” to mean (i) Mr. McGrath’s
conviction of, or entering a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court)
to, a felony offense or other crime and either Mr. McGrath’s failure to perfect an appeal of such conviction prior to the
expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or,
if he does perfect such an appeal, the sustaining of his conviction of a felony offense on appeal; or (ii) the determination by
our Board of Directors, after due inquiry, based on convincing evidence, that Mr. McGrath has: (A) committed fraud against, or
embezzled or misappropriated funds or other assets of, our Company (or any subsidiary); (B) violated, or caused our Company (or
any subsidiary) or any of our officers, employees or other agents, or any other individual or entity to violate, any material law,
regulation or ordinance, or any material policy, rule, regulation or practice established by our Company or our Board of Directors;
(C) willfully, or because of gross or persistent inaction, failed properly to perform his duties or acted in a manner detrimental
to, or adverse to our interests; or (D) violated, or failed to perform or satisfy any material covenant, condition or obligation
required to be performed or satisfied by him under his employment agreement with the Company; and that, in the case of any violation
or failure referred to in clause (B), above, such violation is reasonably expected to have a significant detrimental effect on
our Company (or any subsidiary). The Fifth Amendment provided for definition of the term “Good Reason” to mean i) any
material reduction of Mr. McGrath’s base salary, (ii) relocation of Mr. McGrath’s principal place of employment by
more than thirty miles, or (iii) the material change in the nature, titles or scope of the duties, obligations, rights or powers
of Mr. McGrath’s employment resulting from any action or failure to act by the Company.
Effective April 1, 2018, we entered into an
employment agreement with Brent T. Novak which provides that Mr. Novak will be our Executive Vice President and Chief Financial
Officer at an annual salary of $505,000. Mr. Novak will also receive annual grants of $750,000 of RSUs. The number of
shares in each annual grant of RSUs will be determined by the closing price of our common stock on the last trading day prior to
the day of each annual grant. Forty percent (40%), or $300,000 of each annual grant of RSUs, will be subject to three year
“cliff vesting” (i.e., vesting is based upon performance at the close of the three year performance period), with vesting
of each annual grant of RSUs determined by the following performance measures: (i) Total shareholder return as compared to the
Russell 2000 Index (weighted 50%); (ii) Net revenue growth as compared to the Company’s peer group (weighted 25%), and (iii) EBITDA
growth as compared to the Company’s peer group (weighted 25%). The remaining sixty percent (60%), or $450,000 of each
annual grant of RSUs, will vest in three equal annual installments commencing on the first anniversary of the date of grant and
on the second and third anniversaries thereafter. The employment agreement also contains provisions relating to benefits,
change of control, and an annual performance-based bonus award equal to up to 125% of base salary for the 2018-2020 fiscal years.
The annual performance bonus shall be determined by the same performance criteria as established by the Compensation Committee
of the Board for the applicable fiscal year for the Company’s Chairman/CEO and its Chief Operating Officer each year pursuant
to their respective employment agreements, and shall be payable in cash and Restricted Stock Units in the same proportions and
calculated in the same manner as provided for the Company’s Chief Operating Officer under such officer’s employment
agreement, or if no such employment agreement is in effect, then as provided for in the employment agreement with the Company’s
Chairman/CEO, except that the portion payable in Restricted Stock would be payable to Mr. Novak in RSUs.
On October 21, 2011, we entered into an employment
agreement with Joel M. Bennett, the Company’s former Executive Vice President and Chief Financial Officer, with a term ending
on December 31, 2013. Pursuant to the new agreement, Mr. Bennett is entitled to an annual base salary of $420,000, to be increased
annually by at least $15,000 over the prior year’s base salary, and will be eligible at the discretion of the Compensation
Committee to receive bonuses or other compensation in the form of cash or equity-based awards upon the achievement of performance
goals determined by the Board or the Compensation Committee. In the event of Mr. Bennett’s termination of employment by the
Company without “cause” or by Mr. Bennett for “good reason,” in each case other than within two years following
a “change in control” (each as defined in the agreement), Mr. Bennett would be entitled to receive, in addition to
accrued benefits, cash severance equal to the amount of base salary payable for the remainder of his term and continuation of his
medical, hospitalization and dental insurance through the remainder of his term. In the event of Mr. Bennett’s termination
of employment by the Company without “cause” or by Mr. Bennett for “good reason” within two years following
a “change of control,” Mr. Bennett would be entitled to receive, in addition to accrued benefits, severance equal to
the higher of two times his annual base salary and his base salary payable for the remainder of his term.
On February 18, 2014, we entered into a Continuation
and Extension of Term of Employment Agreement with respect to Mr. Bennett’s Employment Agreement dated October 21, 2011
such that it is deemed to have been renewed and continued from January 1, 2014 without interruption through December 31, 2015.
On June 11, 2016, we extended Mr. Bennett’s employment agreement through December 31, 2017. On December 27, 2017, we entered
into a letter agreement with Mr. Bennett (the “Letter Agreement”), which provided for his stepping down from his position
as chief financial officer after completion of our annual report for the 2017 fiscal year or such earlier date that a successor
has been named and transitioned to the office of Chief Financial Officer. The Letter Agreement provides, among other things, that
Mr. Bennett will receive a severance payment in a maximum amount of up to 15 month’s salary, accelerated vesting of a portion
of his restricted stock units and continued health care coverage for up to 12 months. The Letter Agreement also requires Mr. Bennett
to comply with confidentiality, non-disparagement and cooperation obligations.
The foregoing is only a summary of the material
terms of our employment agreements with the Named Executive Officers. For a complete description, copies of such agreements are
publicly available as exhibits to our public filings with the Securities and Exchange Commission.
On October 19, 2011, our Board of Directors
approved the material terms of and adoption of our Company’s Change in Control Severance Plan (the “Severance Plan”),
which applies to certain of our key employees. None of our named executive officers participate in the Severance Plan. The Severance
Plan provides that if, within the two year period immediately following the “change in control” date (as defined in
the Severance Plan), a participant has a qualifying termination of employment, the participant will be entitled to severance equal
to a multiple of monthly base salary, which multiple is the greater of (i) the number of months remaining in the participant’s
term of employment under his or her employment agreement and (ii) a number ranging between 12 and 18; accelerated vesting of all
unvested equity awards; and continued health care coverage for the number of months equal to the multiple used to determine the
severance payment.
Employee Benefits Plan
We sponsor for all of our U.S. employees a
defined contribution plan under Section 401(k) of the Internal Revenue Code that provides that employees may defer a portion of
their annual compensation subject to annual dollar limitations, and that we will make a matching contribution equal to 100% of
each employee’s deferral, up to 5% of the employee’s annual compensation and further subject to federal limitations.
Company matching contributions, which vest immediately, totaled $2.5 million, $2.3 million and $2.4 million for 2016, 2017 and
2018, respectively.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as
a director or member of a compensation committee (or other Board committee performing equivalent functions) of any other entity,
one of whose executive officers served as a director or a member of our Compensation Committee.
RATIFICATION AND APPROVAL OF THE 2019 AMENDMENT
TO OUR 2002 STOCK AWARD AND INCENTIVE PLAN
(Proposal No. 2)
On April 24 2019, our Board of Directors unanimously
adopted an amendment (the “2019 Amendment”) to our 2002 Stock Award and Incentive Plan (the “2002 Plan”)
which, if approved by our stockholders, would increase the number of shares of our common stock issuable under the 2002 Plan to
16,008,000 shares from the 12,425,000 shares currently provided for under the 2002 Plan, an increase of 3,583,000 shares, or approximately
10.8% of our outstanding number of shares, if all such additional shares are issued. A total of 113,510 shares remain available
under the 2002 Plan, and if stockholders approve the proposed amendment to the 2002 Plan, the total number of shares available
would be 3,696,510, which number may be increased if any outstanding awards are forfeited because performance targets are not met.
The full text of the 2019 Amendment is presented in Appendix A to this proxy statement and a full copy of the 2002 Plan is included
in the materials prepared for the shareholders for this meeting.
All of our employees (including our executive
officers) and our non-employee directors are eligible to receive awards under the 2002 Plan and our Board of Directors grants
awards under the 2002 Plan to our employees from time to time. Messrs. Berman, McGrath and Novak are entitled to receive awards
from the 2002 Plan pursuant to the terms of their employment agreements, as otherwise disclosed herein (see “
Employment
Agreements and Termination of Employment Arrangements
”) and we currently also issue stock, on an annual basis, worth
$100,000, to each of our non-employee directors, as compensation. At a price of $1.02 per share (based upon the closing price
on May 1, 2019) this would result in the issuance on January 1, 2020 of an aggregate of 588,235 shares to our anticipated six
non-employee directors, 3,431,373 shares to Mr. Berman, 980,392 shares to Mr. McGrath, and 735,294 shares underlying RSUs to Mr.
Novak. Other than the awards to Messrs. Berman, McGrath and Novak mandated by their employment agreements, our Board of Directors
has complete discretion on the issuance of any awards under the 2002 Plan. With respect to the awards to Messrs. Berman, McGrath
and Novak, as described herein (see “
Employment Agreements and Termination of Employment Arrangements
”), the
Compensation Committee has discretion to select the performance target for each performance goal. The performance goals, as disclosed
above, consist of various metrics including, net revenues, EBITDA, total shareholder returns, net revenue growth, and EBITDA growth.
While we currently compensate our non-employee directors as described above, this policy is subject to change from time-to-time
at the Board’s discretion. Even if the current Board compensation policy remains unchanged, since the compensation is tied
to the market price of our stock, we cannot predict how many shares we will issue to each director in any given year.
The 2019 Amendment will not become effective
unless it is ratified and approved by the holders of a majority of the shares of our common stock present in person or represented
by proxy at the Annual Meeting. We did not have sufficient shares available in the 2002 Plan to issue on January 1, 2019 an aggregate
of 3,061,224 shares to Messrs. Berman and McGrath (2,380,952 shares to Mr. Berman and 680,272 shares to Mr. McGrath) pursuant to
the terms of their employment agreements. Under the proposed amendment, we expect to have a sufficient number of shares to issue
the aggregate 3,061,224 shares to Messrs. Berman and McGrath that should have been issued to them on January 1, 2019 under their
employment agreements, and we do not expect to have a sufficient number of shares available in the 2002 Plan to issue on January
1, 2020 to issue the aggregate $5,250,000 of shares issuable to Messrs. Berman, McGrath and Novak required under their respective
employment agreements.
General
In 2002 the Board of Directors adopted, subject
to stockholder approval, which was received, the 2002 Stock Award and Incentive Plan (the “2002 Plan”). With the approval
of stockholders, the 2002 Plan was amended in 2007 and again in 2013, 2016 and 2017. We now seek to amend it again as described
below.
Reasons for Stockholder Approval
The Board and Compensation Committee seek stockholder
approval of an amendment to the 2002 Plan to increase the amount of shares covered by the 2002 Plan in order to allow us to meet
our commitments, both contractual and otherwise, to our executive officers and non-employee Board members and to have shares available
as incentive awards to other employees. While approval of the amendment could result in the issuance of additional causing greater
dilution, our Board of Directors believes that the 2002 Plan continues to provide an important mechanism enabling the Company to
attract, retain and motivate employees. Accordingly, our Board of Directors has determined that it would be appropriate to increase
the total number of shares issued or issuable under the 2002 Plan to 16,008,000 shares in order to allow for additional grants
of incentive awards for issuance to our non-employee Board members and that are required to be issued under employment agreements
with our executive officers.
Description of the 2002 Plan
The following is a brief description of the
material features of the 2002 Plan, as amended to date. This description is qualified in its entirety by reference to the full
text of the Plan, a copy of which is included in the package of annual meeting materials prepared for the stockholders. The actual
amendment of the 2002 Plan is attached to this Proxy Statement as Appendix A.
Shares Available and Award Limitations.
Under
the 2002 Plan, the number of shares of common stock currently reserved and issuable for awards is 12,425,000. As discussed below,
this number is subject to adjustment in the event of stock splits, stock dividends, and other extraordinary events. A total of
113,510 shares remain available under the 2002 Plan. Accordingly, if stockholders approve the proposed amendment to the 2002
Plan, the total number of shares available would be 3,696,510 which number may be increased if any outstanding awards are forfeited
because performance targets are not met. Any shares of stock delivered under the 2002 Plan shall consist of authorized and unissued
shares or treasury shares.
Shares subject to forfeited or expired Awards
or to Awards settled in cash or otherwise terminated without issuance of shares to the participant, and shares withheld by or
surrendered to us to satisfy withholding tax obligations or in payment of the exercise price of an Award, will be deemed to be
available for new Awards under the 2002 Plan. Under the 2002 Plan, shares subject to an Award granted in substitution for an award
of a company or business acquired by us or a subsidiary will not count against the number of shares reserved and available. Shares
delivered under the 2002 Plan may be either newly issued or treasury shares. On May 1, 2019, the last reported sale price of our
common stock by NASDAQ was $1.02 per share.
The 2002 Plan includes a limitation on the
amount of Awards that may be granted to any one participant in a given year to qualify Awards as “performance-based”
compensation not subject to the limitation on deductibility under the old Section 162(m) rules, prior to the Act. Under this annual
per-person limitation, no Participant may in any year be granted share-denominated Awards under the 2002 Plan relating to more
than his or her “Annual Limit” for each type of Award. The Annual Limit equals 1,000,000 shares plus the amount of
the Participant’s unused Annual Limit relating to the same type of Award as of the close of the previous year, subject to
adjustment for splits and other extraordinary corporate events. For purposes of this limitation, options, SARs, restricted stock,
deferred stock, and other stock-based awards are each considered separate types of awards for purposes of the Annual Limit. In
the case of Awards not relating to shares in a way in which the share limitation can apply, no Participant may be granted Awards
authorizing the earning during any year of an amount that exceeds the Participant’s Annual Limit, which for this purpose
equals $5,000,000 plus the amount of the Participant’s unused cash Annual Limit as of the close of the previous year. The
Annual Limit for non-share-based Awards is separate from the Annual Limit for each type of share-based Award.
Adjustments to the number and kind
of shares subject to the share limitations and specified in the Annual Limits are authorized in the event of a large, special or
non-recurring dividend or distribution, recapitalization, stock split, stock dividend, reorganization, business combination, or
other similar corporate transaction or event affecting the common stock. The Committee is also authorized to adjust performance
conditions and other terms of Awards in response to these kinds of events or to changes in applicable laws, regulations, or accounting
principles). Due to the negative discretion in the 2002 Plan, it is unlikely that the plan would be grandfathered in under the
old Section 162(m) rules prior to the Act.
Eligibility.
Our and our subsidiaries’
executive officers and other employees and non-employee directors, consultants and others who provide substantial services to us
and our subsidiaries, are eligible to be granted Awards under the 2002 Plan. In addition, any person who has been offered employment
by us or one of our subsidiaries may be granted Awards, but such prospective employee may not receive any payment or exercise any
right relating to the Award until he or she has commenced employment. As of December 31, 2018 we employed 634 persons and had six
non-employee members of the Board of Directors, all of which are eligible for Awards under the 2002 Plan.
Administration.
The 2002 Plan is
administered by the Committee, except that the Board may appoint any other committee to administer the 2002 Plan or may itself
act to administer the 2002 Plan. The Board must perform the functions of the Committee for purposes of granting Awards to
non-employee directors. (References to the “Committee” below mean the committee or the full Board exercising authority
with respect to a given Award.) The Committee is authorized to select participants, determine the type and number of Awards to
be granted and the number of shares to which Awards will relate or the amount of a performance award, specify times at which Awards
will be exercisable or settled, including performance conditions that may be required as a condition thereof, set other terms and
conditions of such Awards, prescribe forms of Award agreements, interpret and specify rules and regulations relating to the 2002 Plan,
and make all other determinations which may be necessary or advisable for the administration of the 2002 Plan. Nothing in
the 2002 Plan precludes the Committee from authorizing payment of other compensation, including bonuses based upon performance,
to any Participant, including executive officers. The 2002 Plan provides that Committee members shall not be personally liable,
and shall be fully indemnified, in connection with any action, determination, or interpretation taken or made in good faith under
the 2002 Plan.
Stock Options and SARs.
The Committee
is authorized to grant stock options, including both incentive stock options (“ISOs”), which can result in potentially
favorable tax treatment to the participant, and non-qualified stock options, and SARs entitling the participant to receive the
excess of the fair market value of a share on the date of exercise or other specified date over the grant price of the SAR. The
exercise price of an option and the grant price of an SAR is determined by the Committee, but generally may not be less than the
fair market value of the shares on the date of grant (except as described below). The maximum term of each option or SAR, the times
at which each option or SAR will be exercisable, and provisions requiring forfeiture of unexercised options at or following termination
of employment or upon the occurrence of other events, generally are fixed by the Committee, subject to a restriction that no ISO,
or SAR in tandem therewith, may have a term exceeding ten years. Options may be exercised by payment of the exercise price in cash,
shares or other property (possibly including notes or obligations to make payment on a deferred basis, or through broker-assisted
cashless exercise procedures) or by surrender of other outstanding awards having a fair market value equal to the exercise price.
Methods of exercise and settlement and other terms of SARs will be determined by the Committee. SARs granted under the 2002 Plan
may include “limited SARs” exercisable for a stated period of time following a “Change in Control”, as
discussed below. There are currently no outstanding stock options or SARs.
Restricted and Deferred Stock.
The
Committee is authorized to make Awards of restricted stock and deferred stock. Prior to the end of the restricted period, shares
received as restricted stock may not be sold or disposed of by participants, and may be forfeited in the event of termination of
employment. The restricted period generally is established by the Committee. An Award of restricted stock entitles the participant
to all of the rights of a stockholder of ours, including the right to vote the shares and the right to receive any dividends thereon,
unless otherwise determined by the Committee. Deferred stock gives participants the right to receive shares at the end of a specified
deferral period, subject to forfeiture of the Award in the event of termination of employment under certain circumstances prior
to the end of a specified restricted period (which need not be the same as the deferral period). Prior to settlement, deferred
stock Awards carry no voting or dividend rights or other rights associated with stock ownership, but dividend equivalents may be
paid on such deferred stock.
Other Stock-Based Awards, Bonus Shares,
and Awards in lieu of Cash Obligations.
The 2002 Plan authorizes the Committee to grant Awards that are denominated or
payable in, valued in whole or in part by reference to, or otherwise based on or related to shares. The Committee will determine
the terms and conditions of such Awards, including the consideration to be paid to exercise Awards in the nature of purchase rights,
the periods during which Awards will be outstanding, and any forfeiture conditions and restrictions on Awards. In addition, the
Committee is authorized to grant shares as a bonus free of restrictions, or to grant shares or other Awards in lieu of our obligations
under other plans or compensatory arrangements, subject to such terms as the Committee may specify. The number of shares granted
to an executive officer or non-employee director in place of salary, fees or other cash compensation must be reasonable, as determined
by the Committee.
Annual Incentive Awards.
The Committee
is authorized to grant annual incentive awards, which can be settled in cash or in shares upon achievement of pre-established performance
objectives achieved during a specified period of up to one year. The performance objectives will be one or more of the performance
objectives available for other performance awards under the 2002 Plan, as described in the preceding paragraph. As discussed above,
annual incentive awards granted to named executive officers may be intended as “performance-based compensation” not
subject to the limitation on deductibility under Section 162(m). The Committee generally must establish the performance objectives,
the corresponding amounts payable (subject to per-person limits), other terms of settlement, and all other terms of such awards
not later than 90 days after the beginning of the fiscal year.
Other Terms of Awards.
Awards may
be settled in cash, shares, other Awards or other property, in the discretion of the Committee. The Committee may require or permit
participants to defer the settlement of all or part of an Award in accordance with such terms and conditions as the Committee may
establish, including payment or crediting of interest or dividend equivalents on any deferred amounts. The Committee is authorized
to place cash, shares or other property in trusts or make other arrangements to provide for payment of the Company’s obligations
under the 2002 Plan. The Committee may condition Awards on the payment of taxes such as by withholding a portion of the shares
or other property to be distributed (or receiving previously acquired shares or other property surrendered by the participant)
to satisfy tax obligations. Awards granted under the 2002 Plan generally may not be pledged or otherwise encumbered and are not
transferable except by will or by the laws of descent and distribution, or to a designated beneficiary upon the participant’s
death, except that the Committee may permit transfers in individual cases, including for estate planning purposes.
Awards under the 2002 Plan are generally granted
without a requirement that the participant pay consideration in the form of cash or property for the grant (as distinguished from
the exercise), except to the extent required by law. The Committee may, however, grant Awards in substitution for, exchange for
or as a buyout of other Awards under the 2002 Plan, awards under our other plans, or other rights to payment from us, and may exchange
or buyout outstanding Awards for cash or other property. The Committee also may grant Awards in addition to and in tandem with
other Awards, awards, or rights as well. In granting a new Award, the Committee may determine that the in-the-money value of any
surrendered Award may be applied to reduce the exercise price of any option, grant price of any SAR, or purchase price of any other
Award.
Vesting, Forfeitures, and Acceleration Thereof.
The
Committee may, in its discretion determine the vesting schedule of options and other Awards, the circumstances that will result
in forfeiture of the Awards, the post-termination exercise periods of options and similar Awards, and the events that will result
in acceleration of the ability to exercise and the lapse of restrictions, or the expiration of any deferral period, on any Award.
In addition, the 2002 Plan provides that, unless otherwise provided by the Committee in writing at the time of the Award, in the
event of a Change in Control of the Company, most outstanding Awards will immediately vest and be fully exercisable, any restrictions,
deferral of settlement and forfeiture conditions of such Awards will lapse, and goals relating to performance-based awards will
be deemed met or exceeded to the extent specified in the performance-award documents. A Change in Control means generally (i) any
person or group becomes a beneficial owner of 30% or more of the voting power of our voting securities, (ii) a change in the
Board’s membership such that the current members, or those elected or nominated by vote of two-thirds of the current members
and successors elected or nominated by them, cease to represent a majority of the Board in any period of less than two years, (iii) certain
mergers or consolidations substantially reducing the percentage of voting power held by shareholders prior to such transactions,
and (iv) shareholder approval of a sale or liquidation of all or substantially all of our assets.
Automatic Grants of Options to Non-Employee
Directors.
Our non-employee directors are currently compensated by delivery of an amount of shares with a value equal
to $100,000.
Amendment and Termination of the 2002 Plan.
The
Board may amend, alter, suspend, discontinue, or terminate the 2002 Plan or the Committee’s authority to grant awards thereunder
without stockholder approval unless stockholder approval is required by law, regulation, or stock exchange rule. The Board may,
in its discretion, submit other amendments to stockholders for approval. Under these provisions, stockholder approval will not
necessarily be required for amendments, which might increase the cost of the 2002 Plan or broaden eligibility. Unless earlier terminated,
the 2002 Plan will terminate at such time that no shares reserved under the Plan remain available and we have no further rights
or obligations with respect to any outstanding Award.
Federal Income Tax Implications of the 2002 Plan
The following is a brief description of the
federal income tax consequences generally arising with respect to Awards that may be granted under the 2002 Plan.
With respect to Awards granted under the 2002
Plan that result in a transfer to the participant of cash or shares or other property that is either not restricted as to transferability
or not subject to a substantial risk of forfeiture, the participant must generally recognize ordinary income equal to the cash
or the fair market value of shares or other property actually received. Except as discussed below, we generally will be entitled
to a deduction for the same amount. With respect to Awards involving shares or other property that is restricted as to transferability
and subject to a substantial risk of forfeiture, the participant must generally recognize ordinary income equal to the fair market
value of the shares or other property received at the earliest time the shares or other property become transferable or not subject
to a substantial risk of forfeiture. Except as discussed below, we generally will be entitled to a deduction in an amount equal
to the ordinary income recognized by the participant. A participant may elect to be taxed at the time of receipt of shares (
e.g.,
restricted
stock) or other property rather than upon lapse of restrictions on transferability or the substantial risk of forfeiture, but if
the participant subsequently forfeits such shares or property he or she would not be entitled to any tax deduction, including as
a capital loss, for the value of the shares or property on which he or she previously paid tax.
As discussed above, due to the new 162(m) rules
under the Act, compensation that qualifies as “performance-based” compensation is no longer excluded from the $1 million
deductibility cap. Accordingly, there can be no assurance that such compensation under the 2002 Plan will be deductible under all
circumstances. In addition, other Awards under the 2002 Plan generally will not qualify, so that compensation paid to certain executives
in connection with such Awards may, to the extent it and other compensation subject to Section 162(m)’s deductibility cap
exceed $1 million in a given year, be subject to the tax deductibility limitation of Section 162(m). In addition, compensation
may be paid to executives outside of the 2002 Plan or which may exceed the Annual Limit which also may result in limited deductibility.
The foregoing provides only a general description
of the application of federal income tax laws to certain types of Awards under the 2002 Plan. This discussion is intended for the
information of stockholders considering how to vote at the Annual Meeting and not as tax guidance to participants in the 2002 Plan,
as the consequences may vary with the types of awards made, the identity of the recipients and the method of payment or settlement.
Different tax rules may apply, including in the case of variations in transactions that are permitted under the 2002 Plan (such
as payment of the exercise price of an option by surrender of previously acquired shares). The summary does not address the effects
of other federal taxes (including possible “golden parachute” excise taxes) or taxes imposed under state, local, or
foreign tax laws.
New Plan Benefits
The following table shows the number of shares
of our common stock that we expect to grant under the 2002 Plan during 2020.
2002 STOCK AWARD AND INCENTIVE PLAN
|
Name and Current Position
|
|
Number of
Shares
|
|
|
Dollar Value
|
|
|
Stephen G. Berman, Chairman, CEO, President, Secretary
|
|
|
3,431,373
|
(1)
|
|
$
|
3,500,000
|
(1)
|
|
John J. (Jack) McGrath, COO
|
|
|
980,392
|
(1)
|
|
$
|
1,000,000
|
(1)
|
|
Brent T. Novak, CFO
|
|
|
735,294
|
(1)
|
|
|
750,000
|
(1)
|
|
Executive Group
|
|
|
5,147,059
|
(1)
|
|
$
|
5,250,000
|
(1)
|
|
Non-Executive Director Group
|
|
|
588,235
|
(2)
|
|
$
|
600,000
|
(2)
|
|
Non-Executive Officer Employee Group
|
|
|
|
(3)
|
|
$
|
|
(3)
|
|
|
(1)
|
The
shares issued to the Executive Group (i.e., Messrs. Berman, McGrath and Novak) will be issued pursuant to the terms of their respective
employment agreements which mandate the issuance of $3.5 million worth of shares, $1.0 million worth of shares, and $750,000 worth
of RSUs, respectively, for 2020. The dollar value of the shares will fluctuate based on the market price of our common stock. For
purposes of this disclosure, we have calculated the number of shares that may be awarded based on the closing price of our common
stock on May 1, 2019 ($1.02)
. Does not include an additional aggregate of 3,061,224 shares to be issued Messrs.
Berman and McGrath (2,380,952 shares to Mr. Berman and 680,272 shares to Mr. McGrath) for awards due on January 1, 2019 pursuant
to the terms of their employment agreements but which were not issued due to an insufficient number of shares available in the
2002 Plan at such date.
|
|
(2)
|
The shares issued to the Non-Executive Director Group (currently comprised of our six non-employee
directors) assumes that we will maintain during 2020, our current policy of compensating each of our non-employee directors annually
with $100,000 worth of our common stock. Based on that assumption the number of shares that may be awarded to our non-employee
directors will fluctuate based on the market price of our common stock. For purposes of this disclosure also, we have calculated
the number of shares that may be awarded based on the closing price of our common stock on May 1, 2019 ($1.02).
|
|
|
|
|
(3)
|
Awards under the 2002 Plan to all other employees is solely within the discretion of our Board of Directors and cannot be determined at this time.
|
Equity Compensation Plan Information
The table below sets forth the following information
as of the year ended December 31, 2018 for (i) all compensation plans previously approved by our stockholders and (ii) all compensation
plans not previously approved by our stockholders, if any:
(a) the number of securities to be issued
upon the exercise of outstanding options, warrants and rights;
(b) the weighted-average exercise
price of such outstanding options, warrants and rights; and
(c) other than securities to be
issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for
future issuance under the plans.
|
Plan Category
|
|
Number of
Securities to
be Issued
upon release of
restricted stock,
Exercise of
Outstanding
Options,
Warrants
and Rights
(a)
|
|
|
Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
(b)
|
|
|
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities Reflected
in Column (a & b))
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
―
|
|
|
$
|
―
|
|
|
|
1,157,210
|
|
|
Equity compensation plans not approved by security holders
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
Total
|
|
|
―
|
|
|
$
|
―
|
|
|
|
1,157,210
|
|
Equity compensation plans approved by our stockholders
consists of the 2002 Stock Award and Incentive Plan. An additional 1.4 million and 2.5 million shares were added to the number
of total issuable shares under the Plan and approved by the Board in 2013 and 2017, respectively. Additionally, 2,950,782 shares
of restricted stock awards remained unvested as of December 31, 2018. Disclosures with respect to equity issuable to certain of
our executive officers pursuant to the terms of their employment agreements are disclosed above. In January 2019, we were obligated
to issue an aggregate of 3,061,224 shares of restricted stock awards to two executive officers pursuant to the applicable employment
agreements. Such awards have not yet been issued due to insufficient securities available under the 2002 Stock Award and Incentive
Plan.
TO APPROVE A TRANSACTION WHICH COULD RESULT
IN THE ISSUANCE OF AN AMOUNT OF OUR
COMMON STOCK IN EXCESS OF 19.9%
(Proposal No. 3)
On July 25, 2018 we entered into an Exchange
Agreement (the “Exchange Agreement”) with Oasis Investments II Master Fund Ltd. (“Oasis”), which provides
for the exchange of $8,000,000 of our existing 4.25% Convertible Senior Notes due 2018 owned by Oasis for a Convertible Note due
November 1, 2020 with an equal face value (the “Note”). Interest on the Note, payable on each November 1 and May 1
until maturity, is at an annual rate of 3.25% if paid in cash and 5% if paid in stock. This transaction is very similar to the
transaction approved by the shareholders at our annual meeting on December 22, 2017.
Under NASDAQ rules, a company may not issue,
or enter into an arrangement whereby it could possibly issue, an amount of shares which will be (i) greater than 19.9% of the pre-issuance
or pre-arrangement number of issued and outstanding shares of common stock for less than the greater of book or market value of
the stock, in connection with a transaction other than a public offering or (ii) would result in a shareholder owning more than
19.9% of issued and outstanding stock. Inasmuch as the conversion feature of the Note could result in the issuance over time of
an aggregate of more than 19.9% of our issued and outstanding stock to Oasis, we are hereby seeking shareholder approval to potentially
issue more than 19.9% of our currently issued and outstanding shares to Oasis pursuant to the terms of the Note. Until shareholder
approval is obtained (which approval we are obligated to seek pursuant to the terms of the Exchange Agreement), limitations are
in place will prevent us from issuing to Oasis more than 19.9% of our pre-closing number of issued and outstanding shares.
The Note provides, among other things, that
the initial conversion price is $3.103. The conversion price will be reset on November 1, 2018 and November 1, 2019 (each, a “reset
date”) to a price equal to 105% above the 5-day VWAP preceding the reset date, provided however that if the conversion price
resulting from such reset is lower than 90 percent of the average VWAP (volume weighted average price) during the 90 calendar days
preceding the reset date, then the reset price shall be the 30-day VWAP preceding the reset date. Under no circumstances shall
the reset result in a conversion price below the greater of the closing price on the reset date or 30% of the stock price at the
date of the initial closing and will not be greater than the conversion price in effect immediately before such reset. In the event
the reset price is less than 90% of the initial conversion price, Oasis may only convert the Note if the closing market price of
our common stock is above 110% of the reset price. We may trigger a mandatory conversion of the Note if the market price exceeds
150% of the then conversion price for 20 consecutive days and Oasis may require repayment of the Note upon the occurrence of certain
fundamental changes, as such term is defined in the Note. On November 1, 2018 the conversion price was reset to $2.54.
The Note also provides that (i) it is nontransferable
for 12 months, (ii) until November 1, 2018 we may not issue any convertible securities unless our stock price exceeds $6.00 for
20 consecutive trading days, and (iii) in the event we repurchase our outstanding convertible notes due in 2018 and 2020 for cash
and/or stock, the stock component is limited to the amount of stock equal to the noteholder’s short position.
Another limitation will limit Oasis’
ability to submit for conversion any part of the Note if the potential number of shares of our stock issuable upon such conversion
of the Note which, when added to all other shares of our stock deemed to be beneficially owned by Oasis, would result in their
ownership of more than 9.99% of our issued and outstanding stock. We have the discretion to repay the Note and accrued interest
thereon in stock, in cash and/or in a combination thereof, provided that any payment in stock is contingent upon the satisfaction
of certain equity conditions.
Pursuant to the terms of a Registration Rights
Agreement with Oasis entered into concurrently with the Purchase Agreement and the Note, we also agreed to provide Oasis with customary
registration rights with respect to any potential shares we determine to issue pursuant to the terms of the Note.
One of our directors, Alex Shoghi, is a portfolio
manager at a fund related to Oasis.
The foregoing description of the Note is qualified
in its entirety by reference to the actual Note, a copy of which has been previously filed (along with the Exchange Agreement and
Registration Rights Agreement) as exhibits to a Current Report on Form 8-K we filed with the Securities and Exchange Commission
on July 26, 2018 and is available online at no cost and can also be obtained at no cost from the Company as described below under
“Other Matters”.
Management recommends a vote “FOR”
this resolution as it believes that, even though it could lead to greater dilution, it provides us with greater flexibility in
addressing repayment of our current debt.
RATIFICATION OF THE APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
(Proposal No. 4)
Upon the recommendation of our Audit Committee,
our Board of Directors has appointed the firm of BDO USA, LLP as our principal independent auditors for the fiscal year ending
December 31, 2019. BDO USA, LLP has been our independent auditors since June 2006.
If the appointment of BDO USA, LLP is not ratified
or if it declines to act or their engagement is otherwise discontinued, the Board of Directors will appoint other independent auditors.
Representatives of BDO USA, LLP are expected to be present at the Annual Meeting, will have the opportunity to make a statement
at the Annual Meeting, if they so desire, and will be available to respond to appropriate questions from stockholders.
Before our principal accountant is engaged
by us to render audit or non-audit services, as required by the rules and regulations promulgated by the Securities and Exchange
Commission and/or NASDAQ, such engagement is approved by the Audit Committee.
The following are the fees of BDO USA, LLP,
our principal accountant, for the two years ended December 31, 2018, for services rendered in connection with the audit for those
respective years (all of which have been pre-approved by the Audit Committee):
|
|
|
2017
|
|
|
2018
|
|
|
Audit Fees
|
|
$
|
1,468,199
|
|
|
$
|
1,384,406
|
|
|
Audit Related Fees
|
|
|
32,292
|
|
|
|
32,718
|
|
|
Tax Fees
|
|
|
2,103
|
|
|
|
-
|
|
|
|
|
$
|
1,502,594
|
|
|
$
|
1,417,124
|
|
Audit Fees
consist of the aggregate
fees for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements
included in our Forms 10-Q and for any other services that were normally provided by our auditors in connection with our statutory
and regulatory filings or engagements.
Audit Related Fees
consist of the aggregate
fees billed for professional services rendered for assurance and related services that were reasonably related to the performance
of the audit or review of our financial statements and were not otherwise included in Audit Fees. These fees primarily relate to
statutory audit requirements and audits of employee benefit plans.
Tax Fees
consist of the aggregate fees
billed for professional services rendered for tax consulting. Included in such Tax Fees were fees for consultancy and review of
foreign tax filings.
All Other Fees
consist of the aggregate
fees billed for products and services provided by our auditors and not otherwise included in Audit Fees, Audit Related Fees or
Tax Fees.
Our Audit Committee has considered whether
the provision of the non-audit services described above is compatible with maintaining our auditors’ independence and determined
that such services are appropriate.
AUDIT COMMITTEE REPORT
The following Report of the Audit Committee shall not be deemed
to be “soliciting material” or to be “filed” with the Securities and Exchange Commission nor shall this
information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into a filing.
Management is responsible for our system of
internal control over financial reporting. Our independent registered public accounting firm, BDO USA, LLP, is responsible for
performing an independent audit of our consolidated financial statements and the effectiveness of our internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States), and to issue a report
thereon. The Audit Committee is responsible for overseeing management's conduct of the financial reporting process and our system
of internal control over financial reporting.
The Audit Committee has reviewed and discussed
with both management and our independent registered public accounting firm all annual financial statements prior to their issuance.
In connection with these reviews, management advised the Audit Committee that each set of financial statements reviewed had been
prepared in accordance with generally accepted accounting principles, and reviewed significant accounting and disclosure issues
with the Audit Committee. These reviews included discussion with the independent registered public accounting firm of matters required
to be discussed pursuant to Public Company Accounting Oversight Board auditing standard AU 380, including the quality of our accounting
principles, the reasonableness of significant judgments and the clarity of disclosure in the financial statements. The Audit Committee
also discussed with our independent registered public accounting firm matters relating to such firm's independence, including a
review of audit and non-audit fees and the written disclosures and letter from BDO USA, LLP to the Audit Committee as required
by applicable requirements of the Public Company Accounting Oversight Board (Independence Discussions with Audit Committees).
Taking all of these reviews and discussions
into account, all of the Audit Committee members, whose names are listed below, recommended to our Board that it approve the inclusion
of our audited financial statements in our Annual Report on Form 10-K for the period ended December 31, 2018 for filing with the
SEC.
Members of the Audit Committee
Rex Poulsen (Chairman), Alexander Shoghi, Michael J. Gross
ADVISORY VOTE ON THE COMPANY'S EXECUTIVE
COMPENSATION
(Proposal No. 5)
Our stockholders are being provided the opportunity
to cast a non-binding, advisory vote (commonly known as "say on pay") on the compensation of the executive officers named
in the "Summary Compensation Table" above (collectively, the "named executive officers"). This vote is not
intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and
the executive compensation policies and practices described in this proxy statement, through consideration of the following non-binding
advisory resolution:
“Resolved, that the stockholders advise that they
approve the compensation of the Company's named executive officers as disclosed pursuant to Item 402 of Regulation S-K, including
the Compensation Discussion and Analysis and the compensation tables and related narrative discussion.”
Our executive compensation program is designed
to attract, reward and retain talented executives to lead our company in a highly competitive market, while maximizing shareholder
returns. We believe that our compensation program, which ties a significant portion of pay to performance, provides competitive
compensation to our executives and utilizes components that align the interests of our executives with shareholders. We believe
this approach helps make our management team a key driver in the company’s market leadership and financial performance. Please
see the “Compensation Discussion and Analysis” and the compensation tables and related narrative discussion relating
to compensation paid to our named executive officers.
STOCKHOLDERS PROPOSALS FOR 2020 ANNUAL MEETING
We must receive a stockholder proposal (and
any supporting statement) to be considered for inclusion in our proxy statement and proxy for our annual meeting in 2020 at our
principal executive offices on or before January 14, 2020. Any other proposal that a stockholder intends to present at that meeting
may be deemed untimely unless we have received written notice of such proposal on or before March 30, 2020. Stockholders should
send proposals and notices addressed to JAKKS Pacific, Inc., 2951 28
th
Street, Santa Monica, California 90405, Attention:
Stephen G. Berman, Secretary.
OTHER MATTERS
We have not received any other proposal or
notice of any stockholder’s intention to present any proposal at our annual meeting, and we are not aware of any matter,
other than those discussed above in this Proxy Statement, to be presented at the meeting. If any other matter is properly brought
before the annual meeting, the persons named in the attached proxy intend to vote on such matter as directed by our Board of Directors.
We will bear all costs of solicitation of proxies.
In addition to solicitations by mail, our directors, officers and regular employees, without additional remuneration, may solicit
proxies by telephone, telegraph, facsimile, mail and personal interviews, and we reserve the right to compensate outside agencies
for the purpose of soliciting proxies. We will request brokers, custodians and fiduciaries to forward proxy soliciting material
to the owners of shares held in their names and we will reimburse them for out-of-pocket expenses incurred on our behalf.
We will provide, without charge, upon the
written request of any person from whom proxies for this meeting were solicited, a copy of our Annual Reports on Form 10-K for
the fiscal years ended December 31, 2018 and 2017, including the financial statements and financial statement schedules as well
as the Note referred to in Proposal 3. Anyone requesting such documents shall submit the request in writing to: JAKKS Pacific,
Inc., 2951 28
th
Street, Santa Monica, CA 90405, Attn.: Brent T. Novak, Chief Financial Officer.
|
By Order of the Board of Directors,
|
|
|
Stephen G. Berman,
|
|
|
Secretary
|
|
|
May 14, 2019
|
|
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS
WILL
ATTEND THE ANNUAL MEETING. WHETHER OR NOT
YOU PLAN TO
ATTEND, YOU ARE URGED TO COMPLETE, DATE,
SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE.
STOCKHOLDERS WHO ATTEND THE ANNUAL MEETING
MAY VOTE THEIR
SHARES PERSONALLY, EVEN THOUGH THEY HAVE
SENT IN THEIR PROXIES.
APPENDIX A
2019 AMENDMENT TO 2002 STOCK AWARD
AND INCENTIVE PLAN OF JAKKS PACIFIC, INC.
The 2002 Stock Award and Incentive Plan is
hereby amended as follows:
|
|
1.
|
Capitalized terms are used
herein as defined in the 2002 Stock Award and Incentive Plan of JAKKS Pacific, Inc.
|
|
|
2.
|
Section 4(a) of the 2002
Stock Award and Incentive Plan is amended and restated in its entirety as follows:
|
4(a)
Overall Number of Shares Available for Delivery.
Subject
to adjustment as provided in Section 11(c), the total number of shares of Stock reserved and available for delivery in connection
with Awards under the Plan shall be 16,008,000, of which not more than 6,025,000 shares may be granted with respect to ISOs.
|
|
3.
|
This 2019 Amendment to
the 2002 Stock Award and Incentive Plan was adopted by the Board on April 24, 2019, but shall become effective only if and as
of the date on which it is ratified and approved by the Company's stockholders in accordance with Section 11(e) thereof.
|
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