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Reporting Period: Dec 30, 2016
Under Section 162(m) of the Internal Revenue Code (the “Code”), a portion of annual compensation payable to any of our Chief Executive Officer and three other highest paid executive officers (other than our Chief Financial Officer) generally would not be deductible by us for federal income tax purposes to the extent such officer’s overall compensation exceeds $1,000,000 for the year. Qualifying performance‑based incentive compensation (including performance‑based compensation awards under our Equity and Cash Incentive Plans), however, would be excluded for purposes of determining if the executive’s compensation exceeded the $1,000,000 cap. We believe the annual cash incentive program satisfies the requirements for performance‑based compensation as defined in Section 162(m) and is therefore a tax deductible expense. For payments under our annual cash incentive program to be considered performance‑based compensation under Section 162(m), the Committee can only exercise negative discretion relative to actual performance when determining the amount to be paid. In order to ensure compliance with Section 162(m), the Committee has established a target in excess of the maximum individual payout allowed to Named Executive Officers under our annual cash incentive program. Reductions are made each year and are not a reflection of the performance of the Named Executive Officers but rather ensure flexibility with respect to making payments based upon performance.
However, the rules and regulations promulgated under Section 162(m) are complicated and subject to change from time to time, sometimes with retroactive effect. There can be no guarantee, therefore, that amounts potentially subject to Section 162(m) limitations will be treated by the Internal Revenue Service as qualified performance‑based compensation under Section 162(m) and deductible by us. A number of requirements must be met under Section 162(m) in order for particular compensation to so qualify such that there can be no assurance that qualified performance‑based compensation under our 2011 Equity and Cash Incentive Plan will be fully deductible under all circumstances. The Committee addresses this issue when considering compensation arrangements for our executive officers. However, the Committee still believes that it is important that it have the flexibility to offer compensation that may not be deductible because of the Section 162(m) cap if deemed appropriate in attracting and retaining qualified executive officers. The Committee also is aware that the Company has accumulated large net operating loss carry forwards to offset or reduce our future income tax obligations and, therefore, the deduction limitations imposed by Section 162(m) would not significantly impact our financial results at this time.
In 2016, the compensation to the Chief Executive Officer exceeded the Section 162(m) deductibility limits. Mr. Eazor’s total compensation exceeded the deductibility limit by $815,031. The Committee believes that these amounts are justifiable in light of the need to retain one of our key executives and our large net operating loss carryforwards and were approved to incentivize further progress in the transformation of the Company.
We entered into an employment agreement with Mr. Eazor in connection with his appointment as our Chief Executive Officer and President. In order to retain his services in light of his performance as Chief Executive Officer, the independent members of the Board of Directors and the Committee approved an amended and restated employment agreement with Joseph F. Eazor. The employment agreement has a term of August 31, 2019. If not terminated prior to the end of a term, the employment agreement renews for an additional year. However, upon a “change in control,” the term automatically extends until 24 months following the change in control. Our providing a notice of nonrenewal would permit Mr. Eazor to terminate the employment agreement for “good reason.” The employment agreement also incorporates into one document all benefits that Mr. Eazor would receive upon termination of employment, including upon a change in control, and, as a result, Mr. Eazor does not participate in our CIC Plan or our Severance Plan. The employment agreement provides for a minimum annual base salary of $825,000 per year. The employment agreement provides that Mr. Eazor will be entitled to participate in our short term annual incentive plan with a target incentive opportunity of 120% of his eligible earnings, which will be paid if the bonus criteria, as set by the Committee, for the applicable annual period, are met.
The CIC Plan also provides for equity award accelerated vesting benefits. If an executive officer’s stock options are assumed or continued after a Change in Control, all outstanding stock options granted on or before the Change in Control will vest and be exercisable in full, if not already fully vested, on termination of the employee’s employment for any reason after the Change in Control occurs; however, if his or her stock options are not assumed or continued after the Change in Control, all outstanding stock options will vest and be exercisable in full contemporaneously with the Change in Control, if not already fully vested. If an executive officer’s restricted stock units are assumed or continued after a Change in Control, generally all outstanding restricted stock units granted on or before the Change in Control will vest and be earned and payable in full, if not already fully vested, on termination of the employee’s employment for any reason after the Change in Control occurs; however, if his or her restricted stock units are not assumed or continued after the Change in Control, generally all outstanding restricted stock units will vest and be earned and payable in full contemporaneously with the Change in Control, if not already fully vested.
The Audit Committee's policy is that all audit and non-audit services provided by its independent registered public accounting firm shall either be approved before the independent registered public accounting firm is engaged for the particular services or shall be rendered pursuant to pre-approval procedures established by the Audit Committee. These services may include audit services and permissible audit-related services, tax services and other services. Pre-approval spending limits for audit services are established on an annual basis, detailed as to the particular service or category of services to be performed and implemented by our financial officers. Pre-approval spending limits for permissible non‑audit services are established on a quarterly basis, detailed as to the particular service or category of services to be performed and implemented by our financial officers. Any audit or non-audit service fees that may be incurred by us during a quarter that fall outside the limits pre-approved by the Audit Committee for a particular service or category of services must be reviewed and approved by the Chairperson of the Audit Committee prior to the performance of services. On a quarterly basis, the Audit Committee reviews and itemizes all fees paid to its independent registered public accounting firm in the prior quarter (including fees approved by the Chairperson of the Audit Committee between regularly scheduled meetings and fees approved by our financial officers pursuant to the pre-approval policies described above) and further reviews and itemizes all fees expected to be paid in the upcoming quarter. The Audit Committee may revise its pre-approval spending limits and policies at any time. None of the fees paid to the independent registered public accounting firm were approved by the Audit Committee after the services were rendered pursuant to the "de minimis" exception established by the SEC for the provision of non-audit services.