TeleCommunication Systems DEF 14A 2015
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
TeleCommunication Systems, 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):
275 West Street
Annapolis, Maryland 21401
April 30, 2015
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (Annual Meeting) of TeleCommunication Systems, Inc. (TCS) to be held on Thursday, May 28, 2015, at 10:00 a.m. local time, at The Westin Annapolis hotel, 100 Westgate Circle, Annapolis, MD 21401. The business to be conducted at the Annual Meeting is set forth in the formal notice that follows.
The Board of Directors urges you to read the accompanying Notice of Annual Meeting and Proxy Statement, and recommends that you vote:
FOR the election of three Class II director nominees to hold office until the Annual Meeting of Stockholders to be held in 2018 and until their successors are duly elected and qualify; and
FOR the election of one Class III director nominee to hold office until the Annual Meeting of Stockholders to be held in 2016 and until his successor is duly elected and qualifies; and
FOR the election of one Class I director nominee to hold office until the Annual Meeting of Stockholders to be held in 2017 and until his successor is duly elected and qualifies.
Your vote is important. Whether or not you plan to attend the Annual Meeting, it is important that your shares be represented. We rely upon all stockholders to execute and return their proxies in order to avoid proxy solicitation expenses. Therefore, in order to save TCS the unnecessary expense of further proxy solicitation, I ask that you promptly sign and return the enclosed proxy card in the envelope provided.
I look forward to seeing you at the Annual Meeting.
TELECOMMUNICATION SYSTEMS, INC.
275 West Street, Suite 400
Annapolis, Maryland 21401
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (Annual Meeting) of TeleCommunication Systems, Inc. (TCS or the Company), a Maryland corporation, will be held on Thursday, May 28, 2015, at 10:00 A.M. local time, at The Westin Annapolis hotel, 100 Westgate Circle, Annapolis, MD 21401 for the following purposes:
1. To elect each of the Class II director nominees listed in this proxy statement (Proxy Statement) to hold office until the Annual Meeting of the Company to be held in 2018 and until their successors are duly elected and qualify.
2. To elect the Class III director nominee listed in this Proxy Statement to hold office until the Annual Meeting of the Company to be held in 2016 and until his successor is duly elected and qualifies.
3. To elect the Class I director nominee listed in this Proxy Statement to hold office until the Annual Meeting of the Company to be held in 2017 and until his successor is duly elected and qualifies.
4. To transact such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on March 31, 2015 as the record date (the Record Date) for the determination of stockholders who will be entitled to notice of the Annual Meeting and to vote at the Annual Meeting or any adjournments or postponements thereof. Therefore, only record holders of TeleCommunication Systems, Inc. Class A Common Stock and Class B Common Stock at the close of business on that date are entitled to notice of and to vote shares held on the Record Date at the Annual Meeting and any adjournments or postponements thereof.
If you plan to attend the Annual Meeting, please be prepared to present valid picture identification. If you hold your shares through a broker or other nominee, the Company will accept proof of ownership only if you bring either a copy of the voting instruction card provided by your broker or nominee or a copy of a brokerage statement showing your share ownership in the Company as of the Record Date.
Whether or not you expect to attend the Annual Meeting, we urge you to carefully review the enclosed materials. Your vote is important. All stockholders are urged to attend the Annual Meeting in person or by proxy. If you receive more than one proxy card because your shares are registered in different names or at different addresses, please indicate your vote, sign, date and return each proxy card so that all of your shares will be represented at the Annual Meeting. If you attend the Annual Meeting, you may choose to vote in person even if you previously have sent in your proxy card.
Important Notice Regarding the Availability of Proxy Materials for
The Annual Meeting to be held on May 28, 2015
THIS PROXY STATEMENT AND OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2014
ARE AVAILABLE ON THE INTERNET AT HTTPS://WWW.PROXYDOCS.COM/TSYS.
You are receiving this communication because you hold shares in the Company, and the materials you should review before you cast your vote are now available.
This communication presents only an overview of the more complete proxy materials that are available to you on the internet. We encourage you to access and review all of the important information contained in the proxy materials before voting.
TeleCommunication Systems, Inc.
275 West Street, Suite 400
Annapolis, Maryland 21401
Why Am I Receiving this Proxy Statement and Proxy Card?
You are receiving this Proxy Statement and a proxy card because you own shares of common stock, either Class A Common Stock, par value $0.01 per share (the Class A Common Stock), or Class B Common Stock, par value $0.01 per share (the Class B Common Stock, and together with the Class A Common Stock, the Common Stock) of TCS. This Proxy Statement describes the issues on which we would like you as a stockholder to vote. It also gives you information on these issues so that you can make an informed decision.
When you sign the proxy card, you appoint Bruce A. White and Thomas M. Brandt, Jr., as your proxies at the Annual Meeting. Messrs. White and Brandt will vote your shares as you have instructed them on the proxy card at the Annual Meeting. This way, your shares will be voted whether or not you attend the Annual Meeting. Even if you plan to attend the Annual Meeting, it is a good idea to complete, sign and return your proxy card in advance of the Annual Meeting just in case your plans change. This Proxy Statement is being mailed to you on or about April 30, 2015.
If an issue comes up for vote at the Annual Meeting that is not on the proxy card, Messrs. White and Brandt will vote your shares, under your proxy, in accordance with their best judgment.
Who Is Soliciting this Proxy?
The TCS Board of Directors is soliciting your proxy to vote your shares at the Annual Meeting.
What Is the Purpose of the Annual Meeting?
The business to be conducted at the Annual Meeting is set forth in the formal notice. Specifically, the matters include:
What Are The Boards Recommendations?
The Boards recommendation is to vote to elect each of the director nominees listed in this Proxy Statement to hold office until the Annual Meeting of Stockholders to be held in the respective years of the Class term of such director nominee and until their successors are duly elected and qualify.
Unless you give other instructions on your proxy card, Messrs. White and Brandt, in their capacity as proxy holders, will vote in accordance with the recommendations of the Board of Directors.
With respect to any other matter that properly comes before the Annual Meeting, the proxy holders will vote in their own discretion.
Who Is Entitled to Vote?
Only stockholders of record at the close of business on the record date, March 31, 2015 (the Record Date), are entitled to receive notice of the Annual Meeting and to vote the shares of Common Stock that they held on that date at the Annual Meeting, or any adjournments or postponements thereof. At the close of business on March 31, 2015, 56,862,487 shares of TCS Class A Common Stock and 4,801,245 shares of Class B Common Stock were outstanding and entitled to receive notice and to vote at the Annual Meeting.
How Many Votes Does Each Share of Common Stock Entitle its Holder to Cast?
Each share of Class A Common Stock is entitled to one vote per share at the Annual Meeting. Each share of Class B Common Stock is entitled to three votes per share at the Annual Meeting.
Who Can Attend the Annual Meeting?
Only stockholders as of the Record Date, or their duly appointed proxies, may attend the Annual Meeting. Registration and seating will begin at 9:30 a.m. Stockholders may be asked to present valid picture identification, such as a drivers license or passport. Cameras, recording devices and other electronic devices will not be permitted at the Annual Meeting.
Please note that if you hold your shares in street name (that is, through a broker or other nominee), you must bring either a copy of the voting instruction card provided by your broker or nominee or a copy of a brokerage statement reflecting your stock ownership as of the Record Date and check in at the registration desk prior to the start of the Annual Meeting.
How Do I Vote?
You May Vote by Mail. You do this by signing the enclosed proxy card and mailing it in the enclosed, prepaid and addressed envelope. If you mark your voting instructions on the proxy card, your shares will be voted as you instruct.
If you return a signed proxy card but do not provide voting instructions, your shares will be voted to elect each of the director nominees listed in this Proxy Statement to hold office until the Annual Meeting of Stockholders to be held in the respective year of their Class term of such director nominee and until their successors are duly elected and qualify.
You May Vote in Person at the Annual Meeting. Written ballots will be passed out to stockholders entitled to vote at the Annual Meeting. If you hold your shares in street name (through a broker or other nominee), you must request a legal proxy from your stockbroker to vote at the Annual Meeting in order to be able to cast your vote by written ballot.
How Many Votes Do We Need to Hold the Annual Meeting?
In order to conduct business at the Annual Meeting, our Second Amended and Restated Bylaws (the Bylaws) require the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast on the matters to be presented at the Annual Meeting. This is called a quorum. Abstentions, properly executed proxy cards received by us but marked WITHHOLD AUTHORITY and broker non-votes (as defined below) are included in calculating whether a quorum is present.
Election of the Nominees for Director
If a quorum is present, the affirmative vote of a plurality of all the votes cast at the Annual Meeting is required for the election of directors. Plurality means that the individuals who receive the largest number of votes cast are elected as directors. Consequently, abstentions, properly executed proxy cards marked WITHHOLD AUTHORITY and broker non-votes do not have any impact on the election of directors.
Unless a properly executed proxy card is marked WITHHOLD AUTHORITY, the proxy given will be voted FOR each of the nominees for director.
Transaction of Other Business
If a quorum is present, the approval of any other proposal that may properly come before the Annual Meeting generally requires an affirmative vote of a majority of all the votes cast in person or by proxy and entitled to vote. A properly executed proxy card marked ABSTAIN with respect to the transaction of other business and broker non-votes will not be voted. Accordingly, abstentions and broker non-votes will have no impact on the vote concerning the proposal.
Can I Change My Vote or Revoke My Proxy After I Return My Proxy Card?
Yes. Even after you have submitted your proxy card, you may change your vote at any time before the proxy is voted at the Annual Meeting by Messrs. White and Brandt by mailing to the Secretary of TCS, either a written notice of revocation or an executed proxy card with a later date than the one you previously submitted, at TCSs offices, 275 West Street, Annapolis, Maryland 21401. You can also revoke your proxy at the Annual Meeting on a ballot that we will provide at the Annual Meeting, or you can appear in person at the Annual Meeting and vote, in person, the shares to which your proxy relates. Attendance at the Annual Meeting will not by itself revoke a previously granted proxy.
What If I Wish to Withhold Authority from Voting on the Election of a Particular Director Nominee or all of the Director Nominees?
If you wish to withhold authority from voting on the election of a particular director or all of the directors, you may do so by marking WITHHOLD AUTHORITY, as applicable, on the enclosed proxy card.
Will My Shares Be Voted If I Do Not Sign and Return My Proxy Card?
You must return your proxy (or attend the Annual Meeting in person) in order to vote on the proposals if your shares are held in your name. If your shares are held in street name and you do not vote your proxy, your brokerage firm may either: (i) vote your shares on routine matters, or (ii) leave your shares unvoted. Under the rules that govern brokers who have record ownership of shares that are held in street name for their clients, brokers may vote such shares on behalf of their clients with respect to routine matters, but not with respect to non-routine matters. If the proposals to be acted upon at any meeting include both routine and non-routine matters, the broker may turn in a proxy card for uninstructed shares that votes FOR the routine matters, but expressly states that the broker is not voting on non-routine matters. This is called a broker non-vote. Broker non-votes will not be counted for the purpose of determining the number of votes cast.
We encourage you to provide instructions to your brokerage firm if your shares are held in street name. This ensures that your shares will be voted at the Annual Meeting.
Who Pays the Cost of Solicitation of My Proxy?
The expense of soliciting proxies and the cost of preparing, assembling and mailing proxy materials in connection with the solicitation of proxies will be paid for by TCS. In addition to the use of mails, certain directors, officers or employees of TCS, who receive no compensation for their services other than their regular salaries, may solicit proxies. Arrangements may be made with brokers and other custodians, nominees and fiduciaries to send proxies and proxy materials to their principals and TCS may reimburse them for reasonable out-of-pocket and clerical expenses.
When are Stockholder Proposals and Nominations for the Election of Directors for the 2016 Annual Meeting of Stockholders Due?
The Company provides all stockholders with the opportunity, under certain circumstances and consistent with the Bylaws and the rules of the Securities and Exchange Commission (SEC), to participate in the governance of the Company by submitting proposals that they believe merit consideration and nominations for the election of directors at the Annual Meeting of Stockholders to be held in 2016. To enable management adequately to analyze and respond to proposals stockholders wish to have included in the Proxy Statement and proxy card for that meeting, SEC Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), requires that any such proposal be received by the Company in writing no earlier
than December 31, 2015. Any stockholder proposal or director nomination must also be in compliance with the Bylaws. Pursuant to the Bylaws, any stockholder proposal or director nomination for that meeting that is submitted outside the processes of Rule 14a-8 will be considered untimely if it is received by the Company earlier than December 31, 2015 or later than January 30, 2016.
Proxies solicited by the Board of Directors for the Annual Meeting of Stockholders to be held in 2016 may confer discretionary authority to vote on any untimely stockholder proposals or director nominations without express direction from stockholders giving such proxies. All stockholder proposals and director nominations must be addressed to the attention of the Secretary at 275 West Street, Annapolis, Maryland 21401. The Chairman of the Annual Meeting may refuse to acknowledge the introduction of any stockholder proposal or director nomination not made in compliance with the Bylaws or the foregoing procedures.
Can I receive a copy of the Annual Report?
Yes. We will provide a copy of our Annual Report on Form 10K for the year ended December 31, 2014 (the Annual Report) without charge, upon written request, to any registered or beneficial owner of Common Stock entitled to vote at the Annual Meeting. Requests should be made in writing addressed to Investor Relations, TeleCommunication Systems, Inc., 275 West Street, Annapolis, Maryland 21401. A copy of the Annual Report can be downloaded by accessing the Companys website at: http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-reportsAnnual. The SEC also maintains a website at http://www.sec.gov that contains the filings made by TCS with the SEC, including the Annual Report.
Where and When Will I be Able to Find the Results of the Voting?
Preliminary results will be announced at the Annual Meeting and we will publish the final results within four business days after the Annual Meeting via a Current Report on Form 8-K.
Board of Directors
Our Amended and Restated Articles of Incorporation provide that our Board of Directors is divided into three classes based on their terms of office: Class I, Class II and Class III. Such classes shall be as nearly equal in number of directors as possible. Generally, each director serves for a term ending on the third annual meeting of stockholders following the annual meeting at which that director was elected, except when a director is first assigned to a class of director then serving for a term which is shorter than three years. Our Bylaws provide that a majority of the then-existing Board of Directors may fill a vacancy on the Board of Directors at any time, and that such director elected by the Board of Directors serves until the next annual meeting of stockholders and until his or her successor is elected and qualifies. Our Bylaws also provide that a majority of the then existing Board of Directors may increase the number of directors which constitutes our Board of Directors at any time up to a maximum of fifteen.
On January 30, 2015, the Company entered into an agreement (the Agreement) with Steven R. Becker, Matthew A. Drapkin, BC Advisors, LLC, Becker Drapkin Management, L.P., Becker Drapkin Partners (QP), L.P., and Becker Drapkin Partners, L.P. (collectively, the Shareholder Group) under which the Company agreed to increase the size of the Board of Directors from eight to nine directors and to appoint to the Board of Directors two nominees proposed by the Shareholder Group. On March 1, 2015, Richard A. Young, or Executive Vice President and Chief Operating Officer, resigned from the Board, and Don Carlos Bell, III and Michael P. Madon were appointed to the Board of Directors. Mr. Bell was nominated to serve as a Class III director of the Company and Mr. Madon was nominated to serve as a Class I director of the Company. A Current Report on Form 8-K describing this Agreement was filed with the SEC on April 3, 2015.
Our Board of Directors currently has nine members: Maurice B. Tosé, Don Carlos Bell, III, James M. Bethmann, Thomas M. Brandt, Jr., Jan C. Huly, A. Reza Jafari, Jon B. Kutler, Weldon H. Latham and Michael P. Madon, divided into three classes with staggered three-year terms.
The Board of Directors is soliciting proxies to re-elect Messrs. Huly, Jafari, Latham, Bell and Madon as described herein. Messrs. Huly, Jafari and Latham were elected as Class II directors at the 2012 Annual Meeting of Stockholders to hold office until the 2015 Annual Meeting of Stockholders.
Messrs. Bell and Madon were appointed by the Board of Directors as a Class III and Class I director, respectively, on March 1, 2015 pursuant to the Agreement. According to our By-Laws, each of Messrs. Bell and Madon serve on the Board until the Annual Meeting and, if elected by the Companys stockholders at the Annual Meeting, will serve the remaining term for the Class to which they were assigned.
The current term for Class III directors ends with the Companys annual meeting of stockholders to be held in 2016. If elected at the Annual Meeting, Mr. Bell will serve until the Companys annual meeting of stockholders to be held in 2016, at which time, if he is nominated to continue to serve and is elected, he will serve for a three year term ending in 2019 and until his successor is elected and qualifies. The current term for Class I directors ends with the Companys annual meeting of stockholders to be held in 2017. If elected at the Annual Meeting, Mr. Madon will serve until the Companys annual meeting of stockholders to be held in 2017, at which time, if he is nominated to continue to serve and is elected, he will serve for a three year term ending in 2020 and until his successor is elected and qualifies.
Set forth below is information regarding each of the director nominees and the other continuing directors, including background information and information regarding the specific experience, qualifications, attributes and skills that support the conclusion that these nominees should serve as directors of TCS.
Nominees for Director
At the Annual Meeting, the stockholders will have the opportunity to elect (a) three Class II director nominees to hold office until the Companys annual meeting of stockholders to be held in 2018, (b) one Class III director nominee to hold office until the Companys annual meeting of stockholders to be held in 2016, and (c) one Class I director nominee to hold office until the Companys annual meeting of stockholders to be held in 2017, and until their respective successors are duly elected and qualify, except in the event of the directors earlier death, resignation or removal. Unless otherwise specified, your proxy will be voted FOR the election of each of the
Class II, Class III and Class I director nominees listed below, except that in the event any of those named should not continue to be available for election, discretionary authority may be exercised by the proxy holder to vote for a substitute of his choice, subject to certain limitations set forth in the Agreement with respect to the Class III and Class I director nominees. TCS knows of no circumstances that would make any nominee named herein unavailable. Each director nominee is a current member of the Board of Directors.
The following nominees for director will serve until the Annual Meeting of Stockholders in the years indicated and until their respective successors are duly elected and qualify.
THE BOARD RECOMMENDS A VOTE FOR EACH OF THE NOMINEES.
Class II Directors Terms expiring in 2018
Jan C. Huly, 67, Member of the Audit Committee.
Retired Lieutenant General Jan C. Huly was appointed to the Board of Directors in January 2009. Lt. Gen. Huly retired from the Marine Corps in 2006 after nearly 37 years of service. In his last assignment as Deputy Commandant, Plans, Policies and Operations, Lt. Gen. Huly was the principal operations officer for the Marine Corps. This included staff coordination for operational matters, combat readiness, and security. Lt. Gen. Huly is a member of the Department of Defenses Defense Science Board and is a board member for the Marine Corps Scholarship Foundation. He holds a Bachelor of Science degree from the University of California, Berkeley, and a Master of Arts degree from Central Michigan University.
In determining that Lt. Gen. Huly should continue serving as a director of the Company, the Nominating and Governance Committee considered his experience as Deputy Commandant of the Marine Corps and that such a position provides insight into the challenges associated with managing complex organizations and holding management accountable for a companys performance. Familiarity with core customers including requirements for acquisition of products and services were also considered when the Nominating and Governance Committee concluded that Lt. Gen. Huly is qualified to continue serving on our Board of Directors.
A. Reza Jafari, 69, Member of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee
A. Reza Jafari joined the Board of Directors in August 2010. He is currently the Chairman and CEO of e-Development International, a Washington D.C.-based executive advisory group that promotes, facilitates and participates in Information and Communication Technology initiatives for Social Entrepreneurships and Public Private Partnerships worldwide.
He is the Chairman of the Board of Directors of ITU TELECOM (International Telecommunication Union, a UN Agency); a board member of GSMA Ltd., a wholly owned subsidiary of GSM Association; an advisory board member of Digital Health Initiative, and the Chairman of the Board of the India, China and America Institute (ICAI). Mr. Jafari has more than thirty-five years experience in the IT services, telecommunications, media and entertainment, and education industries. His expertise includes mobile health, mobile value-added services, satellite communications, cyber security, IT services and IP communications. Previously, Mr. Jafari held various senior executive positions at Electronic Data Systems Corporation, NeuStar Corporation and was Founder, President and CEO of the Satellite Conference Network and the Bankers-TV Network. He holds an MBA and ABD (PhD) in Instructional Systems Technology from Indiana University.
In determining that Mr. Jafari should continue serving as a director of the Company, the Nominating and Governance Committee considered his previous experience in the IT services and telecommunications industries. Mr. Jafaris experience with satellite communications, cyber security, IT services and IP communications at senior executive positions within important industry companies and his current participation on the international stage also led the Nominating and Governance Committee to conclude that his abilities continue to fit with the needs of our Board of Directors.
Weldon H. Latham, 68, Chairman of the Nominating and Governance Committee, and Member of the Compensation Committee.
Weldon H. Latham joined the Board of Directors in December 1999. Mr. Latham is currently a shareholder and senior partner at the law firm of Jackson Lewis PC. Since 1986, Mr. Latham has been a senior partner with various law firms including Davis Wright Tremaine, Holland & Knight, Shaw Pittman, and Reed Smith. Mr. Latham was Vice President and General Counsel for Sterling Systems Inc., a software company subsequently acquired by Planning Research Corporation (PRC). He became Executive Assistant and Counsel to PRCs Chairman and CEO. He also served as General Deputy Assistant Secretary for the U.S. Department of Housing and Urban Development, and previously as Assistant General Counsel, White House Office of the Air Force Secretary, General Counsels Honors Program. Mr. Latham holds a BA in business administration from Howard University, a J.D. from the Georgetown University Law Center, and an Executive Management Certificate from the Amos Tuck Business School at Dartmouth College.
In determining that Mr. Latham should continue serving as a director of the Company, the Nominating and Governance Committee considered his extensive experience as a senior partner of several law firms and the resources he brings through his relationships and legal knowledge. Mr. Lathams experience working in technology companies such as Sterling Systems/PRC was also considered when the Nominating and Governance Committee determined that his abilities and expertise continue to fit with the needs of our Board of Directors.
Class III Director Term expiring in 2016
Don Carlos Bell, III, 46, Member of the Nominating and Governance Committee.
Don Carlos Bell, III joined the TeleCommunication Systems (TCS) board of directors in March 2015. A technology entrepreneur, Mr. Bell has been a private investor since 2011, and is President of Trigg Partners, a privately held energy company. From 2007 until 2011, he served as the owner and President of Tidal Research, an Internet marketing company he co-founded and subsequently sold. During the ten years prior to launching Tidal Research, Mr. Bell was a senior executive with two portfolio companies of Goldman Sachs Capital Partners (IPC Systems and Clearwire), and a member of the Investment Banking Division of Goldman Sachs Group. He is a board director of Wireless Telecom Group (WTT) and was a board director of NTS Communications (NTS) through its go-private acquisition by Tower Three Partners in June 2014 where he served on the Special Committee of the Board associated with the sale process. Mr. Bell holds a M.B.A. from The Wharton School, University of Pennsylvania, and a B.A. in classics from St. Johns College.
In determining that Mr. Bell should serve as a director of the Company, the Nominating and Governance Committee considered his experience as a senior executive in several technology companies at all stages of a companys life cycle. Mr. Bells investment banking experience and his educational background also were considered when the Nominating and Governance Committee determined that his abilities and expertise fit with the needs of our Board of Directors. In addition, as noted above, the Company is obligated to nominate Mr. Bell to our Board of Directors as a Class III Director pursuant to the terms of the Agreement.
Class I Director Term expiring in 2017
Michael P. Madon, 42, Member of the Compensation Committee.
Michael P. Madon joined the TeleCommunication Systems (TCS) board of directors in March 2015. As Vice President, Business Development for RedOwl Analytics, a behavioral analytics software company, he is responsible for creating long-term value for the company from its customers, strategic alliances and channel partnerships. A recognized senior strategy leader in cyber security and financial intelligence, Mr. Madon previously served as Deputy Assistant Secretary in the U.S. Treasurys Office of Intelligence and Analysis. He currently serves on the Cyber Committee of the Greater Washington Board of Trade, the Business-Government Relations Council, and the Board of Advisors of the Foundation for Defense of Democracies Center on Sanctions and Illicit Finance. Mr. Madon served as an active duty officer in the U.S. Army and remains a member of the active reserves. He is recipient of the Bronze Star. He holds an M.B.A. from the Wharton School of the University of Pennsylvania, a Master of International Affairs from Columbia University, and a B.A. from Cornell University.
In recommending Mr. Madon as a director of the Company, the Nominating and Governance Committee considered his former military background and previous civilian positions in which he developed familiarity with the interworking of the Federal government which is one of our largest customers. His experience a senior
strategy leader in cyber security and financial intelligence in an industry in which we operate also was considered in determining that Mr. Madon is qualified to serve on our Board of Directors. In addition, as noted above, the Company is obligated to nominate Mr. Madon to our Board of Directors as a Class I Director pursuant to the terms of the Agreement.
Class III Directors Terms expiring in 2016:
Maurice B. Tosé, 58, Chairman of the Board, President and Chief Executive Officer.
Maurice B. Tosé founded TeleCommunication Systems (TCS) in 1987 and has been Chairman of the Board, President and CEO since then. Prior to founding TCS, Mr. Tosé was the Director of Department of Defense Programs for Techmatics, Inc. Mr. Tosé graduated from the United States Naval Academy with a Bachelor of Science degree in operations analysis and holds an Honorary Doctor of Sciences from the University of Maryland Eastern Shore. Following his graduation, he served on active duty in the United States Navy for eight years, three and a half of which were as an instructor at the U.S. Naval Academy. He retired from the Navy Reserve as a commander after 30 years of combined active and reserve service. Mr. Tosé serves on the board of directors of the U.S. Naval Academy Foundation. He also serves as a member of the Federal Communications Commissions (FCC) Communications Security, Reliability, and Interoperability Council (CSRIC).
As our co-founder, leader and one of our largest stockholders since the Companys inception, Mr. Tosé possesses a deep understanding and appreciation of all aspects of TCS, its history and its business. The Nominating and Governance Committee has considered this in recommending that he is qualified to serve on and lead our Board of Directors.
James M. Bethmann, 60, Chairman of the Compensation Committee, Member of the Nominating and Governance Committee.
James M. Bethmann joined the Board of Directors in April 2006. He is a Managing Partner of The Caldwell Partners International, a retained executive search firm. Additional prior executive search positions include Vice Chairman of Highland Partners; Managing Director of Heidrick and Struggles; Managing Director and Co-Lead of Korn/Ferry Internationals Advanced Technology practice in North America; and Lead for Russell Reynolds Associates Southwest Technology Practice. He previously served as President of Recognition International, a supplier of high-performance document recognition systems, image, and workflow software solutions to leading businesses in the Americas, the Pacific Rim, and Europe. Mr. Bethmann began his career in the United States Navy, achieving the rank of Lieutenant Commander. He holds a Bachelor of Science degree from the U.S. Naval Academy, for which institution he is a former board trustee.
In determining that Mr. Bethmann is qualified to serve as a director of the Company, the Nominating and Governance Committee considered his background and position at a retained executive search firm, as a result of which he has developed familiarity with the expectations of senior management in our industry, and his experience as Managing Director of the organizations where he has served. Mr. Bethmanns experience running a company which sold into international markets was also considered in determining that Mr. Bethmann is qualified to serve on our Board of Directors.
Class I Directors Terms expiring in 2017
Thomas M. Brandt, Jr., 63, Senior Vice President & Chief Financial Officer.
Thomas M. Brandt, Jr. joined TCS in 1997. As Senior Vice President and Chief Financial Officer, he is responsible for the Companys financial management, reporting, controls, accounting, and administration. He joined the TCS board of directors in 2009. Prior to TCS, he served as Chief Financial Officer of internet service provider Digex, Inc., where he helped lead an IPO. Mr. Brandt previously had been CFO and corporate controller for several other corporations, including a Fortune 500 New York Stock Exchange company. He began his career as an auditor at Price Waterhouse where he worked for 12 years. Mr. Brandt also serves on the boards of Antenna Research Associates, a private communications technology company, and the Y of Central Maryland. Mr. Brandt is a Certified Public Accountant. He earned his BA from Duke University in management science and an MBA from the Wharton School of the University of Pennsylvania.
In determining that Mr. Brandt is qualified to serve as a director of the Company, the Nominating and Governance Committee considered his experience with all aspects of the financial management of our Company since 1997. His experience as CFO of Digex and as CFO and Controller of other publicly traded companies, as well as his experience with an independent auditing firm were instrumental in leading the Nominating and Governance Committee to conclude that his abilities and expertise continue to fit with the needs of our Board of Directors.
Jon B. Kutler, 58, Chairman of the Audit Committee
Jon B. Kutler joined the Board of Directors in February 2011. He is currently chairman and CEO of Admiralty Partners, a private equity investment firm. After service in the U.S. Navy and nearly a decade on Wall Street, Mr. Kutler founded Quarterdeck Investment Partners, an international investment bank focused on the global aerospace and defense markets. He sold Quarterdeck to Jefferies & Company in 2002 to focus on private equity investments under Admiralty Partners. Mr. Kutler is a recognized investor, investment banker and expert in the aerospace and defense industries and has been profiled in leading national and industry media including BusinessWeek, The New York Times, Fortune, CNN and Bloomberg Television. He is a Trustee of the California Institute of Technology, where he serves as chairman of the Jet Propulsion Laboratory and as a member of the Technology Transfer Committee. Mr. Kutler is a graduate of the United States Naval Academy and holds a Bachelor of Science degree in Naval Architecture. He received his Masters of Business Administration from Harvard University.
In determining that Mr. Kutler is qualified to serve as a director of the Company, the Nominating and Governance Committee considered his Wall Street experience as well as his expertise in the aerospace and defense industries in which the Company derives significant business. His experience in financial management as well as being the former owner of Trident Space & Defense LLC, which the Company purchased in 2011, were also instrumental in leading the Nominating and Governance Committee to conclude that his abilities and expertise continue to fit with the needs of our Board of Directors.
Board of Directors and Board Leadership Structure
The Board of Directors oversees the overall performance of the Company. Members of the Board of Directors stay informed of the Companys business by participating in Board and committee meetings, by reviewing materials provided to them prior to meetings and otherwise, and through discussions with the Chief Executive Officer and other members of senior management and staff.
Committees of the Board of Directors met a total of eighteen times in 2014. In addition, the full Board met three times during 2014 to review the actions of the Committees and attend to other TCS business. All of the directors attended 100% of the meetings of the Board of Directors and Board Committees of which they were a member. All of the members of the Board of Directors also attended the 2014 Annual Meeting of Stockholders.
The Board of Directors has determined that each member of the Board of Directors, other than Messrs. Tosé and Brandt, is independent as defined by the listing standards of the Nasdaq, within the meaning of Rule 5605 of the Nasdaq Stock Market.
Mr. Tosé currently serves as the Chairman of the Board of Directors and Chief Executive Officer of the Company. At this time, the Board of Directors believes that the Company and its stockholders are best served by having Mr. Tosé serve as Chairman and Chief Executive Officer. Mr. Tosés tenure as founder and Chief Executive Officer since the Companys formation, his more than 25 years of experience leading TCS and his significant ownership interest in the Company, uniquely qualify him to serve as both Chairman and Chief Executive Officer. In addition, the Board of Directors believes that Mr. Tosés combined role as Chairman and Chief Executive Officer promotes unified leadership and direction for the Board of Directors and executive management, and his knowledge of the Companys business operations makes it appropriate for him to lead the discussions of the Board of Directors.
In March 2015 the Board elected Mr. Latham to serve as its lead independent director. In his capacity as lead independent director, Mr. Lathams duties include serving as chairman of regular meetings of the Board of Directors when the Chairman of the Board of Directors is absent, presiding at executive sessions of the independent directors, providing feedback from executive sessions of the Board of Directors to management, serving as a liaison between Mr. Tosé and the independent directors and performing other duties as delegated by the Board of Directors.
In addition, many key Company actions occur through the Audit Committee, the Compensation Committee or the Nominating and Governance Committee. Each of these committees is comprised solely of independent directors within the meaning of Rule 5605 of the Nasdaq Stock Market. The chairmen of those respective committees lead and direct the matters relating to those committees and thus have indirect responsibility for board agendas, discussions and deliberations relative to those topics. The Board of Directors and each of these committees have access to the Companys senior management and the authority to retain independent legal, financial and other advisors as they deem appropriate without consulting or obtaining the approval of any member of the Companys management.
Role of Board of Directors in Risk Oversight
The Board of Directors oversees our processes to manage risk at the Board and senior management levels. While the Board oversees our Companys risk management, our senior management is responsible for the development, implementation, and maintenance of our risk management processes and provides periodic reports to the Board of Directors and its committees, as appropriate, on its assessment of strategic, operational, legal and compliance, and financial reporting risks to the Company. The Board of Directors and its committees, as appropriate, review and consider the management reports provided on the Companys enterprise risk and risk management strategy, make recommendations, and suggest changes if appropriate.
Code of Ethics and Business Conduct
The Board of Directors has adopted a written code of ethics and business conduct, a copy of which is available on the Companys website at www.telecomsys.com. The Company requires all officers, directors and employees to adhere to this code in addressing the legal and ethical issues encountered in conducting their work. The code requires that employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in the Companys best interest. Employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the code. The Sarbanes-Oxley Act of 2002 requires companies to have procedures to receive, retain and treat complaints received regarding accounting, internal accounting controls or auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Company currently has such procedures in place.
Corporate Governance Guidelines
The Board of Directors believes that adherence to sound corporate governance policies and practices is important in ensuring that our Company is governed and managed with the highest standards of responsibility, ethics and integrity and in the best interests of the stockholders. The Companys Corporate Governance Guidelines are intended to reflect a set of core values that provide the foundation for our governance and management systems and our interactions with others.
Communications with the Board of Directors
Stockholders may send correspondence to the Board of Directors or to any individual Director at the following address: TeleCommunication Systems, Inc., 275 West Street, Suite 400, Annapolis, MD 21401. The communication should indicate that the sender is a stockholder. Based on procedures approved by the Nominating and Governance Committee of the Board of Directors, the General Counsel and Secretary will retain and not send to Directors communications that are purely promotional or commercial in nature or other topics that clearly are unrelated to Director responsibilities. These types of communications will be logged and filed but not circulated to Directors. The General Counsel and Secretary will review and log all other communications and subsequently deliver it to the specified Directors. Further information about communicating with the Board of Directors is available on the Companys website at http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-govHighlights.
Committees of the Board of Directors
The Board of Directors has an Audit Committee, a Nominating and Governance Committee and a Compensation Committee, the membership and functions of which are described below.
The Audit Committee oversees the Companys financial reporting process on behalf of the Board of Directors and is currently comprised of Messrs. Kutler, Huly and Jafari. Each member of the Audit Committee is independent as defined by the listing standards of the Nasdaq. The Board of Directors has determined that Mr. Kutler, Chairman of the Audit Committee, is an audit committee financial expert under the relevant rules of the SEC.
The charter for the Audit Committee may be found on the Companys website (http://www.telecomsys.com). Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed the audited financial statements with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.
The Audit Committee held four quarterly meetings in 2014 to review quarterly operating results, and one additional meeting to review other matters. After consideration at each meeting during 2014, each of the Audit Committee members, Ernst & Young representatives and the Companys internal auditor concluded that no executive session without the presence of management was necessary.
Nominating and Governance Committee
The Board of Directors maintains a Nominating and Governance Committee, which is currently comprised of Messrs. Latham, Bell, Bethmann and Jafari. The Committee has elected Mr. Latham to serve as its Chairman. The Nominating and Governance Committee has the responsibility to recommend persons for membership on the Board of Directors, including consideration of any nominees submitted to the Board of Directors by stockholders, to establish criteria and procedures for the selection of new directors, to assist the Board of Directors with the evaluation of its overall effectiveness, and to develop and recommend any changes to the Corporate Governance Guidelines. The Nominating and Governance Committee met six times in 2014. The Nominating and Governance Committee Charter is available on the Companys website at www.telecomsys.com and will be provided to stockholders upon request.
The Board of Directors believes that the interests of the stockholders are best served by having a substantial number of objective, independent representatives on the Board. For this purpose, a director will be considered to be independent only if the Board affirmatively determines that the director does not have any direct or indirect material relationship with us that may impair or appear to impair the directors ability to make independent judgments.
The Nominating and Governance Committee uses a variety of criteria to evaluate the qualifications and skills necessary for members of the Board of Directors. Under these criteria, members of the Board of Directors should have the highest professional and personal ethics and values, consistent with longstanding values and standards of the Company. Members of the Board of Directors should have broad experience at the policy-making level in business, government, technology or public interest. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience.
In identifying candidates for membership on the Board of Directors, the Nominating and Governance Committee takes into account all factors it considers appropriate, which may include strength of character, conflict of interest, maturity of judgment, career specialization, relevant skills, diversity and the extent to which a particular candidate would fill a present need on the Board of Directors. The Nominating and Governance Committee does not have a formal policy with regard to the consideration of diversity in identifying director nominees. Consistent with the committees charter and the Corporate Governance Guidelines, when identifying
director nominees, the committee considers general principles of diversity, and does so in the broadest sense. At a minimum, director candidates must have unimpeachable character and integrity, sufficient time to carry out their duties, the ability to read and understand financial statements, experience at senior levels in areas relevant to the Company and consistent with the objective of having a diverse and experienced Board, the ability and willingness to exercise sound business judgment, the ability to work well with others and the willingness to assume the responsibilities required of a director of the Company. Each member of the Board of Directors must represent the interests of the stockholders of the Company. The Nominating and Governance Committee also believes it is in the stockholders best interest for certain key members of our current management to participate as members of the Board of Directors.
The Nominating and Governance Committee reviews and determines whether existing members of the Board of Directors should stand for reelection, taking into consideration matters relating to the age and number of terms served by individual directors and changes in the needs of the Board.
Once the Nominating and Governance Committee has selected appropriate candidates for election as a director, it presents the candidates to the full Board of Directors for (a) election, if the selection has occurred during the course of the year, or (b) nomination, if the director is to be elected by the stockholders. Pursuant to our Bylaws, members of at least one class of Directors are nominated each year for election by the stockholders and are included in the Companys Proxy Statement.
The Nominating and Governance Committee assesses the appropriate size of the Board of Directors and whether any vacancies on the Board of Directors are expected due to retirement or otherwise. In the event that vacancies are anticipated or otherwise arise, the Nominating and Governance Committee considers various potential candidates for director. Candidates may come to the attention of the Nominating and Governance Committee through current members of the Board of Directors, professional search firms, stockholders or other persons. These candidates are evaluated by the Nominating and Governance Committee, and may be considered at any point during the year. The Nominating and Governance Committee will consider stockholder recommendations for candidates for the Board of Directors that are properly submitted in accordance with the Bylaws. In evaluating such recommendations, the Nominating and Governance Committee will use the qualifications standards discussed above and seek to achieve a balance of knowledge, experience and capability on the Board of Directors.
The Bylaws provide the procedure for stockholders to make director nominations. A stockholders notice must be delivered to or mailed and received by the Secretary at the principal executive offices of the Company:
A stockholders notice to the Secretary must be in writing and set forth:
Such notice must be accompanied by a written consent of each proposed nominee to be named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Company unless nominated in accordance with the procedures set forth above. If the chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the chairman of the meeting shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. No adjournment or postponement of a meeting of stockholders shall commence a new period for the giving of notice of a stockholder proposal hereunder.
The Compensation Committee, which met seven times in 2014, is currently comprised of Messrs. Bethmann, Jafari, Latham and Madon. The Committee has elected Mr. Bethmann as its chairman. The Compensation Committee approves the design of, assesses the effectiveness of, and administers executive compensation programs in support of stockholder interests. The Compensation Committee has the responsibility and authority to supervise and review the affairs of the Company as they relate to total compensation and benefits, including compensation strategy, philosophy and planning, and policies regarding the acquisition, retention and motivation of personnel. The Compensation Committee determines the compensation of our Chief Executive Officer and President and the compensation of the other Named Executive Officers. In making these determinations, the Compensation Committee takes into account the recommendations of the Chief Executive Officer. The Compensation Committee administers the Stock Incentive Plan, Employee Stock Purchase Plan and other executive officer compensation plans. The Compensation Committees Charter is available on the Companys website (www.telecomsys.com) and will be provided to stockholders upon request.
Our executive compensation programs are designed to achieve the following objectives:
Compensation Committee Interlocks
None of the members of the Compensation Committee is a current or former officer or employee of the Company. During 2014, no member of the Compensation Committee had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K. During 2014, none of the Companys executive officers served on the Compensation Committee (or its equivalent) or board of directors of another entity any of whose executive officers served on the Companys Compensation Committee or Board of Directors.
The Board of Directors, upon recommendation of the Compensation Committee, did not adopt any new fee arrangements for Board participation in 2014, and continued the fee structure that had been adopted in 2012. Under this fee structure, non-employee directors are paid an annual retainer of $30,000, and fee of $3,500 for each Board meeting in which the director participates in person, $3,000 for each Board meeting in which the
director participates via teleconference and $2,000 for each Committee meeting in which the director participates. The Chairman of the Audit Committee is paid an additional annual retainer of $11,000, the Chairman of the Compensation Committee is paid an additional annual retainer of $6,500, and the Chairman of the Nominating and Governance Committee is paid an additional retainer of $5,000. In addition, each non-employee director also receives non-cash compensation valued at approximately $45,000 per year, in the form of stock options or restricted shares with a stated vesting schedule, or a combination of the two.
The Compensation Committee annually evaluates director compensation based on available survey data to determine if changes are necessary based on the median compensation of companies in the same size and market classifications. If changes are recommended, the Compensation Committee makes such recommendations to the full Board, which determines which changes to adopt, if any. Under the current director compensation structure, each non-employee director is granted restricted shares or options to purchase shares of Class A Common Stock under our stock incentive plan annually by the full Board. These restricted shares or options vest over a period of one year in equal amounts at the end of each semi-annual term of service on the Board. In addition, non-employee directors are reimbursed for expenses incurred in connection with their service on the Board of Directors.
The following table summarizes the amounts paid to non-employee directors for fiscal year 2014:
The following table sets forth the aggregate number of stock awards and the aggregate number of stock options held by each of our non-employee Directors at December 31, 2014.
Effective June 11, 2009, the Board adopted amended guidelines that Board members should maintain equity ownership in the Company of a value equal to three times the annual retainer amount for Board members, for each three year term. New directors have three years from the date their service begins to accumulate the appropriate amount. The guideline also provides that in accumulating the equity ownership, a Director should strive to achieve at least one-third of the guideline ownership amount in each year of the three year period.
The Board of Directors has elected the executive officers to serve for indefinite terms. The following table sets forth the name of each executive officer as of December 31, 2014 and the principal positions and offices he holds with the Company. Each of these officers has served as an executive officer of the Company for at least fifteen years.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act. The number of shares beneficially owned by a person includes shares of Class A Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of March 31, 2015. The shares issuable pursuant to these options are deemed outstanding for computing the percentage ownership of the person holding these options but are not deemed outstanding for the purposes of computing the percentage ownership of any other person.
The following table lists the number of shares of Class A Common Stock and Class B Common Stock beneficially owned by directors and our Named Executive Officers (as defined below under Compensation of the Named Executive Officers) of the Company as of March 31, 2015. There were no other 5% holders as of March 31, 2015.
Compensation Discussion and Analysis
We provide what we believe is a competitive total compensation package to our executive management team through a combination of base salary, annual cash incentive, long-term equity incentive compensation and broad-based benefits programs. We place significant emphasis on pay for performance-based incentive compensation programs, which make compensation contingent on the attainment of Company and individual goals.
TCS does not utilize compensation policies or practices that we believe would create risks or encourage decisions that are reasonably likely to have a material adverse effect on the Company. The following Compensation Discussion and Analysis section describes generally our compensation policies and practices that are applicable for executive and management employees. TCS uses common variable compensation designs, with a significant focus on corporate and business financial performance as generally described in this Proxy Statement.
The Objectives of our Executive Compensation Program
We use the following principles to guide our decisions regarding executive compensation:
Provide compensation opportunities competitive with market levels.
To attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance to our stockholders, we strive to provide a total compensation package that is competitive with total compensation provided by our industry peer group, which we construct to include the following companies:
We chose these companies because they are publicly traded companies in the commercial and government sectors in which we operate and/or they are close to our size in terms of revenue and market capitalization. We believe that such companies provide an appropriate peer group because they consist of similar organizations against whom we compete for executive talent. We annually review the companies in our peer group and add or remove companies as appropriate, to allow meaningful peer group comparisons. The current peer group was updated in 2014 to delete Blackberry and Garmin, for which the business models have diverged from comparability to ours, and to add Comverse, Inc. and Mavenir Systems, Inc., which have gone public and are engaged in businesses similar to our technology services to network operators. We used the same peer group when constructing our performance graph that appears in our Annual Report on Form 10-K for 2014.
For each Named Executive Officer, we consider the relevance of data of our peer group, considering:
For 2015 the Compensation Committee engaged The Hay Group as an independent compensation consultant to assist it further with a comprehensive evaluation of its methodology for selecting and utilizing peer companies and to receive further guidance with respect to its executive compensation programs.
We target base salaries to approximate the market median (50th percentile) for our peer group. To arrive at the 50th percentile for the base salaries of our Named Executive Officers, we consider the median of the data gathered from proxy statements for the positions of the Named Executive Officers in our peer group for each position. We also use data from publicly available surveys, when available, in addition to our peer group, in order to have a more complete overview of the competitive market for our executive talent.
Cash incentive award opportunities are targeted to result in Bonus Opportunity Plan payments equal to the market median of cash incentives paid by our peer group assuming our target business objectives are achieved.
Long-Term Equity Compensation
Annual equity grants are targeted at the 75th percentile of the market practices of our peer group for the Named Executive Officer, but may be adjusted in the discretion of the Compensation Committee based on individual performance or other factors. The allocation between long-term and currently paid out compensation reflects consideration of how our peer group companies use long-term and currently paid compensation to pay their named executive officers because we feel it is important to maintain parity with competitors for our management team.
Total compensation is targeted at the 75th percentile of our peer group, considering individual performance and experience. The targets for compensation are set at the beginning of each fiscal year. The Companys operational performance achieved in fiscal year 2014 resulted in the Named Executive Officers earning total compensation below the targeted compensation set forth at the beginning of the year.
After review of the 2014 operational results, the Compensation Committee determined that senior management had delivered results which were comparable to the Companys peers, and the overall Company performance substantially achieved the budgeted target results determined at the beginning of 2014. The Compensation Committee determined that senior management had earned a total compensation package that was appropriate for the performance at the level achieved. The total compensation for 2014 was higher than total compensation in 2013 primarily reflecting the achievement of Bonus Opportunity Plan payments and grants of long-term equity compensation units resulting from company performance.
In evaluating total compensation for 2014, we considered the relative size of the companies in the peer group to determine applicability of data to our executives. We conducted a secondary evaluation of compensation for our Named Executive Officers as compared to the data for Named Executive Officers of a subset of our peer group that did not include Ericsson, General Dynamics, Harris and Rockwell Collins. That secondary evaluation also confirmed that our approach is line with the median of our peer group subset.
Require performance goals to be achieved in order for the majority of the target pay levels to be earned.
Our executive compensation program emphasizes pay for performance. Performance is measured based on achievement of Company and individual performance goals that are aligned with our business strategy and are approved by our Compensation Committee after the annual business plan has been approved by the Board of Directors. If the target level for the performance goals is exceeded, executives have an opportunity to earn cash incentive awards above the median of the market of our peer group pursuant to our Bonus Opportunity Plan. If the target levels for the performance goals are not achieved, executives may earn less or no Bonus Opportunity Plan payments.
Offer a comprehensive benefits package to all full-time employees.
We provide a competitive benefits package to all full-time employees, including the Named Executive Officers, which includes health and welfare benefits, such as medical, dental, vision care, disability insurance, life insurance benefits, and a 401(k) savings plan. We have no structured executive perquisite benefits (e.g., club memberships or Company vehicles) for any executive officer, including the Named Executive Officers, and we currently do not provide any supplemental pensions to any executive officer, including the Named Executive Officers. In December 2008 the Compensation Committee adopted a Deferred Compensation Plan under which certain highly compensated employees, including the Named Executive Officers, are allowed to defer receipt of current income until some future period, which period must be determined prior to making deferrals. The Company also may contribute compensation on behalf of an employee, including a Named Executive Officer, which will vest to the beneficiary employee at the pre-determined date. The Company did not contribute any amounts to the Deferred Compensation Plan in 2014.
Provide fair and equitable compensation.
We provide a total compensation program that we believe will be perceived by both our Named Executive Officers and our stockholders as fair and equitable. In addition to conducting analyses of market pay levels and
considering individual circumstances related to each Named Executive Officer, we also consider the pay of each Named Executive Officer relative to each other Named Executive Officer and relative to other members of the management team. We have designed the total compensation programs to be consistent for our executive management team.
Certain Policies of our Executive Compensation Program
We have adopted the following material policies related to our executive compensation program:
Role of Stockholder Say-on-Pay Votes
At the Companys Annual Meeting of Stockholders held on May 29, 2014, the Company provided its stockholders with the opportunity to cast a nonbinding advisory vote on executive compensation (a say-on-pay proposal). The majority of the votes cast on the say-on-pay proposal at that meeting were voted in favor of the proposal. Our Compensation Committee considered the outcome of that advisory vote, and in making its decisions regarding executive compensation for 2015, the Compensation Committee chose to retain the structure of the executive compensation program while making quantitative adjustments to reflect the performance of the Company and our Named Executive Officers in 2015. The Compensation Committee will continue to consider the outcome of the Companys say-on-pay votes when making future compensation decisions for the Named Executive Officers.
Our Executive Compensation Programs
The basic elements of our executive compensation programs are summarized in the table below, followed by a more detailed discussion of each compensation program.
In general, compensation or amounts realized by executives from prior compensation from us, such as gains from previously awarded stock options or restricted share awards, are not taken into account in setting other elements of compensation, such as base pay, Bonus Opportunity Plan payments, or awards of stock options or restricted shares under our long-term equity incentive program, because we believe that the opportunity for additional cash and equity compensation is a significant motivator and we want our executives to be rewarded for contributing to our success. With respect to Named Executive Officers, however, we do take into account their prior base salary and annual cash incentive, as well as the contribution expected to be made by the Named Executive Officer, the business needs and the role of the Named Executive Officer with us.
Annually we review salary ranges and individual salaries for our Named Executive Officers. We establish the base salary for each Named Executive Officer based on consideration of median pay levels of our peer group and internal factors, such as the individuals performance and experience and the pay of others on the executive team. We also consider CEO and other management recommendations, business requirements for certain skills, individual experience and contributions, the roles and responsibilities of the executive, company performance and other factors. Based on these considerations, the Compensation Committee approved no increase to the 2013 base salaries for fiscal year 2014 for each of our Named Executive Officers. We believe competitive base salary is necessary to attract and retain an executive management team with the appropriate abilities and experience required to lead us.
The base salaries paid to our Named Executive Officers are set forth below in the Summary Compensation Table. For the fiscal year ended December 31, 2014, aggregate cash compensation to our Named Executive Officers in the form of base salary was $2,071,671, with our chief executive officer receiving $640,625 of that amount. We believe that the base salary paid to our Named Executive Officers during 2014 achieves our executive compensation objectives, compares appropriately to our peer group and is within our target of providing a base salary at the market median.
Bonus Opportunity Plan Awards
Consistent with our emphasis on pay for performance incentive compensation programs, we have established a Bonus Opportunity Plan pursuant to which certain of our executive officers, including our Named Executive Officers, are eligible to receive Bonus Opportunity Plan awards based upon annual established performance targets, including financial and other measures, and individual performance, all at the discretion of the Compensation Committee. The Bonus Opportunity Plan is important to focus our Named Executive Officers efforts and reward them for annual operating results that help create value for our stockholders. The Bonus Opportunity Plan for 2014 was designed to create an opportunity for award representing approximately 30% to 70% of a Named Executive Officers total potential cash compensation, depending on the executives role, and included an opportunity for the award to exceed the target amount if certain operational results exceeded the performance metric.
Our Named Executive Officers exceeded some of the target business objectives in 2014, which resulted in the Named Executive Officers as a group earning total cash bonuses representing approximately 15% to 45% of the potential cash compensation. The earned amounts were below the target amounts anticipated under the Bonus Opportunity Plan when the incentive plan targets for the Bonus Opportunity Plan were set through our annual planning process.
The financial measures used to determine annual incentive cash payments for 2014 performance included total revenue and/or specific revenue targets for the operating unit within the executives control; net income/(loss) before depreciation, amortization of non-cash stock-based compensation, amortization of software development costs, property and equipment and other intangibles, and interest expense and other non-cash financing costs (collectively, Adjusted EBITDA) and/or specific Adjusted EBITDA Contribution targets for the operating unit within the executives control; adjusted net income; and, in the case of our Chief Executive, Financial, Technology and Marketing Officers (the CEO CFO CTO and CMO), certain qualitative goals1. The Compensation Committee set individual subjective performance goals for only our CEO, CFO, CTO and CMO
because their respective responsibilities include matters for which the results are more directly within their respective control and on which we want them to apply focused efforts. While these financial measures and individual goals form a framework for awarding incentive payments, the Compensation Committee retains discretion over the final amount of the payouts under the Bonus Opportunity Plan.
For 2014, the individual performance goals included:
Chief Executive Officer
Chief Financial Officer
Chief Technology Officer
Chief Marketing Officer
The targets for our Company and individual performance goals were established so that target attainment was not assured. The attainment of payment for performance at target or above would have required significant effort on the part of our executives. The revenue measure is designed to reflect our objective of developing new products and markets, growing top line revenue, and expanding our market share in existing markets. To ensure we efficiently develop and expand our markets, the Adjusted EBITDA measure motivates our executives to manage our costs and to take into account the appropriate level of expenses expected with our growth. The cash and marketable securities balances at year-end measure is designed to ensure that the appropriate level of attention is paid to the need to fund our operations and investments for the next rolling twelve-month period. The adjusted net income goal is designed to recognize and reward operational results that are aligned with stockholder interests. The subjective goals provide recognition for contributions made to the overall health of the business and are intended to capture how the Named Executive Officer has performed in areas that are not quantified in the major metrics. For example, we believe that maintaining financial analyst coverage is important for the marketability of our public securities, so the CFO has a goal to maintain a specified level of research analyst coverage. Similarly, we set an industry recognition of our technology goal for our CMO because we believe it is important for the overall branding of the Company.
A business plan which contains annual financial and strategic objectives is developed each year by management, reviewed and recommended by the Named Executive Officers, presented to the Board of Directors, and ultimately reviewed and approved by our Board of Directors with such changes as it deems appropriate. The Bonus Opportunity Plan is presented to the Compensation Committee for review and approval with such modifications as it deems appropriate.
Bonus Opportunity Plan awards are determined at year-end based on our performance against the approved Bonus Opportunity Plan targets. The Compensation Committee also has the ability to exercise discretion in adjusting awards based on factors it deems relevant which may include its consideration of each Named Executive Officers individual performance and for each Named Executive Officer other than the Chief Executive Officer, based on a review of such executives performance as communicated to the Compensation Committee by the Chief Executive Officer, internal pay equity among the Named Executive Officers, changing compensation practices within our peer group and other industries against which the Company competes for executive talent, customers and capital, our overall performance during the year, and any unusual or non-recurring business, financial or accounting matters otherwise impacting our performance. The Compensation Committee may modify (increase or decrease) the Bonus Opportunity Plan awards prior to their payment, but no such adjustments were made to the 2014 awards. The targets for our Company and individual performance goals were established so that target attainment was not assured. The attainment of payment for performance at target or above would have required significant effort on part of our executives.
2014 Financial Measures
Shown as a percentage of the total Bonus Opportunity Plan award at target in the following table, is the weighting of the measures used to determine award payments to the Named Executive Officers for the fiscal year ended December 31, 2014:
The year-end cash and marketable securities balances goal applied only to the CEO and CFO because those executives have the most direct influence on the decisions that produce these results. The Adjusted EBITDA contribution for individual operating units goal was significantly more weighted with respect to our COO because he manages the Companys operations and approves the expense and investment decisions that most significantly influence the Adjusted EBITDA results. The operating unit revenue and Adjusted EBITDA contribution goals were significantly more weighted with respect to our CTO to focus his role as executive of the strategic Cyber Intelligence operating unit. The subjective goals for the CMO were significantly more highly weighted because those goals focused his attention on the diverse marketing initiatives that have the potential to be most beneficial to the operating units successes.
Bonus Opportunity Plan Payout for 2014
Subject to the discretion of the Compensation Committee to adjust awards as described above, if a Named Executive Officer does not achieve 95% of his goals, there is no payout of the bonus opportunity. If a Named Executive Officer meets 95%, but not 100% of his goals, the Compensation Committee evaluates what percentage of his goals were met, and adjusts his actual payment downward accordingly. Subject to the discretion of the Compensation Committee to adjust awards as described above, if a Named Executive Officer exceeds his corporate goals and personal objectives, he receives his target payment and is eligible to also receive additional payments to the extent our Adjusted EBITDA results exceed our targets. The payment opportunities under the 2014 annual Bonus Opportunity Plan are shown as a percentage of annual base salary at corresponding levels of performance against our goals as shown in the following table:
The actual annual incentive payments made to our Named Executive Officers pursuant to our Bonus Opportunity Plan for the fiscal year ended December 31, 2014 are set forth below in the Summary Compensation Table and were calculated in consideration of the following operational results:
Long-term Equity Incentive Compensation
We award long-term equity incentive grants to executive officers, including the Named Executive Officers, as part of our total compensation package. These awards are consistent with our pay for performance principles and align the interests of the executive officers to the interests of our stockholders. The Compensation Committee reviews and approves the amount of each award to be granted to each Named Executive Officer. Long-term equity incentive awards are made pursuant to the Stock Incentive Plan.
Our long-term equity incentive compensation currently is primarily in the form of options to acquire shares of our Class A Common Stock and restricted shares. The value of the stock options awarded is dependent upon the performance of our Class A Common Stock price. While the Stock Incentive Plan allows for other forms of equity compensation, the Compensation Committee and management believe that currently stock options and/or
restricted shares are the appropriate vehicles to provide long-term incentive compensation to our executive officers because their characteristics are readily understood by our executives and investors, provide the long term incentive that we believe is important, and there currently is no compelling reason to develop more complex equity incentive programs.
Prior to 2012, the majority of long-term equity incentive compensation was in the form of stock options. The Compensation Committee determined in 2011 that the issuance of restricted shares in combination with stock options would be in the best interest of the Company and has granted both stock options and restricted shares each year since. Stock options have no inherent value on the date of grant because their value depends upon increases in the market performance of our Class A Common Stock. Stock options are granted with an exercise price equal to the market price on the date of the grant. The Compensation Committee determined that granting restricted shares would be less dilutive to other stockholders because they could grant fewer restricted shares than stock options to attain the same calculated value using the Black Sholes calculations. Restricted shares granted to the Named Executive Officers vest ratably over three years like stock options vest, and are forfeited in the event the Named Executive Officer leaves the Company prior to vesting. The Named Executive Officers do not realize value from the restricted shares before they vest. Other types of long-term equity incentive compensation may be considered in the future as our business strategy evolves.
Stock option awards provide our executive officers with the right to purchase shares of our Class A Common Stock at a fixed exercise price for a period of up to ten years under the Stock Incentive Plan. Stock options are earned on the basis of continued service to us and generally vest over three years, with one-third vesting at each one year anniversary of the date of grant. Restricted shares are granted to the individual and may not be transferred, sold or otherwise disposed of until they vest, with one-third vesting at each one year anniversary of the grant date.
The exercise price of each stock option and grant value of each restricted share granted in 2014 is the fair market value of our Class A Common Stock on the grant date. We do not have any program, plan or practice of setting the exercise price or grant value based on a date or price other than the fair market value of our Class A Common Stock on the grant date.
In setting individual grants, the Compensation Committee considers our performance relative to the financial and strategic objectives set forth in the annual business plan, the previous years individual performance of each Named Executive Officer, and the market pay levels for the Named Executive Officer. Annual grants are targeted at the 75th percentile of the market practice for the executive officer, but may be adjusted in the discretion of the Compensation Committee based on individual performance or other factors. This analysis is also used to determine any new hire or promotion-related grants that may be made during the year. The long-term equity incentive grants made to our Named Executive Officers in 2014 are reflected in the 2014 Grants of Plan-Based Awards table this Proxy Statement.
Generally, we do not consider an executive officers stock holdings or previous stock option grants in determining the number of stock options or restricted shares to be granted. Moreover, we believe that our long-term incentive compensation program furthers our significant emphasis on pay for performance compensation.
While the vast majority of stock option awards and restricted share grants to our Named Executive Officers have been made pursuant to our annual grant program or in connection with their hiring or promotion, the Compensation Committee retains discretion to make stock option awards and/or restricted share grants to Named Executive Officers at other times, including in connection with the hiring of a new executive officer, the promotion of an executive officer, to reward executive officers, for retention purposes or for other circumstances recommended by management or the Compensation Committee. The exercise price of any such grant would be the fair market value of our stock on the grant date.
Retirement Savings Opportunity
All employees, including our Named Executive Officers, may participate in our 401(k) Retirement Savings Plan, or 401(k) plan. Each employee may make before-tax contributions up to the current Internal Revenue Service limits. We provide this plan to help our employees save some amount of their cash compensation for retirement in a tax efficient manner. We match contributions made by our employees to the 401(k) plan at discretionary amounts. In 2013 we suspended discretionary contributions until such time as management determined that a discretionary match once again met with our operational plans. We resumed matching contributions of 25% of employee contributions in August 2014 when we management determined that doing so
fit within the budget constraints. If a particular executive is eligible to make catch-up contributions (as defined by the IRS) to the 401(k) plan, the Company does not provide a matching contribution for such catch-up contributions. We currently do not provide an option for our employees to invest in our Companys stock in the 401(k) plan.
We currently offer a nonqualified deferred compensation arrangement to certain highly compensated employees, including our Named Executive Officers. The purpose of the deferred compensation plan is to conform the Companys compensation elements to those of similar companies by providing tax deferred savings opportunities. It is a voluntary, non-qualified plan that allows eligible employees to elect to defer receipt of specified portions of compensation, and to have those deferred amounts treated as if invested in specific hypothetical investment benchmarks.
The Compensation Committee may carve out a portion of an eligible employees cash compensation as subject to deferral at any time or the eligible employees may elect deferral amounts prior to the income being earned. Employee contributions will be 100% vested upon deposit, but Company discretionary contributions may be vested immediately, vested over a specified period of time or upon the achievement of certain performance goals, or in accordance with other requirements set by the Company or the Compensation Committee. Any unvested Company contributions would be forfeited upon separation of employment and can be used to offset future discretionary contributions. All deferred compensation will be subject to withdrawal in accordance with pre-contribution decisions made by the employee and otherwise in accordance with the deferred contribution plan. The Board of Directors or the Compensation Committee may amend or cancel the deferred compensation plan at any time, so long as the termination complies with IRS regulations. We made no discretionary contributions to the deferred compensation plan in 2014.
Health and Welfare Benefits
All full-time employees, including our Named Executive Officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.
Employment Agreements, Severance Benefits and Change in Control Provisions
We have employment agreements in effect with our Named Executive Officers. We entered into these agreements to ensure the Named Executive Officers would perform their respective roles for an extended period of time, considering the critical nature of the positions and our need to retain the individuals.
The agreements with our Named Executive Officers, except for Mr. Tosé, provide that if the executive is terminated for cause or terminates without good reason, we are obligated to pay only those wages and bonuses pursuant to the terms of our annual incentive plan and other compensation then vested. If the executive is terminated without cause or if he terminates the employment agreement for good reason, in addition to the payment of amounts then vested, in exchange for a general release of all claims, he is entitled to salary in an amount which is the greater of the current annual salary for the remaining term of the agreement, or six months salary.
The agreement with Mr. Tosé provides that if he is terminated without cause or if he terminates his employment agreement for good reason, in addition to the salary amounts then earned and accrued, in exchange for a general release of all claims, he is entitled to an amount which is two times the sum of: (1) his annual salary, plus (2) the average amount earned under the Bonus Opportunity Plan for the two most recently completed annual periods, plus (3) the prorated annual target Bonus Opportunity Plan amount for the year of termination. He is entitled also to receive a reimbursement for the difference between the monthly COBRA premium paid for himself and his dependents and the monthly premium paid when an active employee, plus estimated applicable federal, state and local income and payroll taxes due on such amount, for a period of 18 months or when he is no longer eligible to receive COBRA continuation coverage, whichever is earlier. His outstanding incentive stock awards will become fully vested as well.
The agreement with Mr. Tosé provides further that if he is terminated as a result of death or disability, he (or his guardian or personal representative, as the case may be) will continue to receive his salary during the period prior to the effectiveness of a permanent disability plan begins, a prorated annual target Bonus Opportunity Plan amount for the year of termination, reimbursement for COBRA continuation coverage plus related income taxes and payroll withholdings, and vesting of outstanding incentive stock awards.
In addition, if a Named Executive Officers (other than Mr. Tosé) employment with us is terminated because of a change in control, as defined in the agreement, or within twelve months after a change in control, then he is entitled to one years salary (except for Mr. Richard Young, Chief Operating Officer, who is entitled to two years salary). In the event of termination within twenty-four months of a change in control, Mr. Tosé is entitled to three times his base salary plus the target amount of the Bonus Opportunity Plan in effect for the year of termination, and reimbursement for family health coverage premiums plus applicable income and payroll taxes under our group health plan for the period of his life and the life of his spouse. Additionally, all then outstanding stock options for all Named Executive Officers become immediately vested upon a change in control. We do not provide any tax gross-up for these change in control benefits, other than for Mr. Tosé. We believe these provisions are important to ensure that our executives remain with us through the closing of any sale of the business. The terms of these agreements are discussed in greater detail in the Employment Agreements section below.
Compensation Decisions for Fiscal 2015
The Compensation Committee met several times in February and March 2015 to review and approve Named Executive Officer base salary amounts and Bonus Opportunity Plan objectives for 2015 as described below.
Our Named Executive Officers base salaries determinations for 2015 were made by the Compensation Committee based on an analysis of current market conditions, our operational budgets set for 2015 and information available to the Compensation Committee Chairman whose profession is executive recruiting, considering executive salary levels in companies whose businesses intersect with certain facets of ours, including the industry peer group companies. The Compensation Committee approved an increase of 2.5% in base salary for our Named Executive Officers for 2015.
Bonus Opportunity Plan Awards for 2015
Consistent with our emphasis on pay for performance incentive compensation programs, the Compensation Committee has established a Bonus Opportunity Plan for 2015 pursuant to which certain of our executive officers, including our Named Executive Officers, are eligible to receive Bonus Opportunity Plan awards based upon the established performance targets, including financial measures and other factors, including individual performance, all at the discretion of the Compensation Committee.
The Compensation Committee adjusted the formula for 2015 Bonus Opportunity Plan awards after considering inputs from the Hay Group independent compensation consultants. Subject to the discretion of the Compensation Committee to adjust awards as described above, if a Named Executive Officer does not achieve 95% of his goals, there is no amount of the bonus opportunity earned. If a Named Executive Officer meets 95%, but not 100% of his goals, he may earn 50% of the bonus opportunity. If a Named Executive Officer meets 100% of his goals, he may earn 100% of the bonus opportunity, and to the extent he exceeds his goals by more than 110%, he may earn 115% of his bonus opportunity.
Shown as a percentage of the total Bonus Opportunity Plan award at target in the following table, is the weighting of the measures to be used to determine award payments to the Named Executive Officers for the fiscal year ending December 31, 2015:
To better link annual incentive award opportunity to stockholder value creation, the Compensation Committee will introduce an additional performance measure for 2015 that will be derived from earnings per share. The additional performance measure will establish minimum levels that must be satisfied for any bonus to be paid and may result in an increase in a payment of 145% of the calculated earned bonus based on specified targets.
The Compensation Committee will use this performance measure over a three-year period in order for the Named Executive Officers to earn restricted shares granted in 2015. Named Executive Officers have the opportunity to earn 1/3 of granted performance units in any of the three fiscal years beginning with 2015 in which the Company achieves a specified target, an additional 1/3 of the performance units if the Company achieves a specified higher target in any of those fiscal years, and the final 1/3 of the performance units in any of those fiscal year in which the Company achieves an even higher target. The full grant of performance-earned units may be earned in any year (i.e., 1st, 2nd, or 3rd) that the Company achieves the highest specified target level, but the earned shares will not become fully vested until the completion of the 3-year performance cycle, subject to the Named Executive Officer being employed throughout that period.
Section 162(m) of the Internal Revenue Code generally disallows a federal income tax deduction to public corporations for compensation greater than $1 million paid for any fiscal year to the corporations Chief Executive Officer and to the three most highly compensated executive officers other than the Chief Executive Officer or Chief Financial Officer. However, certain forms of performance-based compensation are excluded from the $1 million deduction limit if specific requirements are met. It is the policy of the Compensation Committee to periodically evaluate the qualification of compensation for exclusion from the $1 million deduction limit under Section 162(m) of the Code, as well as other sections of the Code, while maintaining flexibility to take actions with respect to compensation that it deems to be in the interest of the Company and its stockholders which may not qualify for tax deductibility.
So that the Compensation Committee may retain maximum flexibility to structure performance targets based on corporate and individual metrics designed to achieve our various corporate goals, our Bonus Opportunity Plan does not conform to the requirements of Section 162(m). All stock option awards granted to our Named Executive Officers have been structured so that the compensation realized when the stock options are exercised should be treated as performance-based compensation exempt from the deduction limitation of Section 162(m). Restricted shares granted to our Named Executive Officers that vest over a three-year period based on continued service are not performance-based compensation under Section 162(m).
Stock Ownership Guidelines
We have chosen not to require stock ownership by Named Executive Officers given their long tenure and the evolution of our Company; however the employment agreements with the Named Executive Officers contain restrictions on the number of shares that the Named Executive Officers may sell as follows:
(a) In any given calendar year, the Named Executive Officer shall not sell or otherwise dispose of a number of shares of our Class A Common Stock of the Company acquired under incentive stock awards (Incentive Stock Awards) in excess of the product of (i) ten percent (10%) times (ii) the sum of (A) the number of shares of Class A Common Stock to which the Executive holds title, determined as of the date immediately before the
proposed sale or disposition date, that were issued pursuant to an Incentive Stock Award, plus (B) seventy percent (70%) of the number of shares of Class A Common Stock of the Company for which Incentive Stock Awards are exercisable determined as of the date immediately before the proposed sale or disposition date, and
(b) In any given calendar quarter, the Named Executive Officer shall not sell or otherwise dispose of a number of shares of Class A Common Stock of the Company acquired under Incentive Stock Awards in excess of the product of (i) two and one-half percent (2.5%) times (ii) the sum of (A) the number of shares of Class A Common Stock of the Company to which the Executive holds title, determined as of the date immediately before the proposed sale or disposition date, that were issued pursuant to an Incentive Stock Award, plus (B) seventy percent (70%) of the number of shares of Class A Common Stock for which Incentive Stock Awards are exercisable determined as of the date immediately before the proposed sale or disposition date.
Notwithstanding the sale restrictions set forth above, the employment agreements with the Named Executive Officers allow for the sale of the greater of 10,000 shares per quarter (40,000 total per year) or the amount allowed by the formula described above.
We will continue to periodically review best practices and re-evaluate our position with respect to stock ownership guidelines.
Securities Trading Policy
Our securities trading policy states that executive officers, including the Named Executive Officers, and directors may not purchase or sell puts or calls to sell or buy our stock, or engage in short sales with respect to our stock.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with management. Based on these reviews and discussions, the committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Companys Proxy Statement for the 2015 Annual Meeting of Stockholders and incorporated by reference into the Companys Annual Report on Form 10-K for the year ended December 31, 2014.
James M. Bethmann (Chairman)
A. Reza Jafari
Weldon H. Latham
Michael P. Madon
Compensation of the Named Executive Officers
The following table shows all compensation earned by our Chief Executive Officer, Chief Financial Officer and our three other most highly paid executive officers (collectively referred to as our Named Executive Officers) whose annual salary and bonus exceeded $100,000 in the fiscal year ended December 31, 2013:
Summary Compensation Table
The following tables provide information about equity-based awards and non-equity incentive plan award opportunities granted in 2014 to our Named Executive Officers, Named Executive Officer stock options exercised and restricted shares vested in 2014, and equity based awards held by the Named Executive Officers at December 31, 2014.
2014 Grants of Plan-Based Awards
In the following table, we provide information concerning each grant of an award made to a Named Executive Officer in the most recently completed fiscal year. This includes cash compensation under the Bonus Opportunity Plan and stock option and restricted share awards under the Stock Incentive Plan, each of which is discussed in greater detail in this Proxy Statement under the caption, Compensation Discussion and Analysis. The threshold, target and maximum columns reflect the range of estimated payouts under the Bonus Opportunity Plan. In the 8th and 9th columns, we report the number of shares of Class A Common Stock underlying options granted in the fiscal year and corresponding per-share exercise prices. In all cases, the exercise price was equal to the closing market price of our Class A Common Stock on the date of grant. Finally, in the last column, we report the aggregate grant date fair value, calculated in accordance with FASB ASC Topic 718, of all awards made in 2014.
Outstanding Equity Awards at Fiscal Year-End 2014
The following table provides information concerning unexercised options and stock that has not vested under equity plan awards for each Named Executive Officer outstanding as of the end of our most recently completed fiscal year. Each outstanding award is represented by a separate row which indicates the number of securities underlying the award, including awards that have been transferred other than for value (if any).
The value of the restricted share awards was calculated based on the market price of our Class A Common Stock as of December 31, 2014.
Each of the option and stock awards granted to our Named Executive Officers vests in equal annual installments over a three year period on the anniversary of the grant date of the award and become fully vested upon a change in control of the Company.
Vesting dates of unvested option and stock awards are as follows:
2014 Option Exercises and Stock Vested
The following table provides information concerning exercises of stock options and vesting of stock awards during the most recently completed fiscal year for each Named Executive Officer on an aggregated basis.
Equity Compensation Plan Information
The following table provides information for all equity compensation plans at December 31, 2014, under which our equity securities were authorized for issuance:
We have entered into employment agreements with Messrs. Young, Brandt, Morin and Lorello which became effective on February 1, 2010. We entered into an employment agreement with Mr. Tosé which became effective on March 1, 2014. See also the Employment Agreements, Severance Benefits and Change in Control Provisions section of the Compensation Discussion and Analysis portion of this Proxy Statement. The employment agreements provide for the executives annual salaries as adjusted annually by the Board of Directors, and give them the opportunity to participate in bonus or incentive compensation plans of the Company, if any. The agreements, other than the agreement with Mr. Tosé, state an initial term of one year from the effective date, and automatically extend for additional one-year increments until terminated by us or the individuals. The agreement with Mr. Tosé states an initial term of three years, and automatically extends for one-year terms until terminated by us or Mr. Tosé. Either the Company or Mr. Tosé may notify the other of a desire not to enter into the automatic extension by providing written notice thereof at least 90 days prior to the automatic extension.
Agreements with Executives other than Mr. Tosé
The individuals may resign their employment voluntarily by giving 90 days notice to the Board of Directors. If we terminate any of the individuals without cause or if the individual resigns with good reason, he is entitled to receive from us his earned bonus plus an amount equal to the greater of the salary he would have received during the balance of the term of the employment contract, or six months. Under the agreements, cause means committing an act of gross negligence or other willful act that materially adversely affects TCS, acts of dishonesty involving fraud or embezzlement or being convicted or pleading no contest to a felony involving theft or moral turpitude. Under the agreements, good reason includes circumstances that constitute a material diminution in authority, require the individual to physically relocate more than 75 miles and any material breach by the Company of its obligations under the agreement. If we terminate an individuals employment without cause, or if he resigns for good reason, upon or within 12 months after a change in control, he is entitled to receive from us, in addition to the severance described above, an amount based upon his annual salary. Mr. Young is entitled to receive two times his annual salary, and the other individuals are entitled to receive one times their annual salary. The following table summarizes estimated payments to the Named Executive Officers (other than Mr. Tosé) upon termination without cause or resignation for good reason prior to or after a change in control assuming that the termination event was effective as of the last day of the most recently completed fiscal year, or December 31, 2014.
Agreement with Mr. Tosé
The agreement with Mr. Tosé provides that he may resign his employment voluntarily by giving 30 days notice to the Board of Directors. If we terminate Mr. Tosé without cause or if he resigns with good reason, he is entitled to receive from us an amount equal to the sum of (A) two times the sum of his base salary plus the average earned Bonus Opportunity Plan payment for the prior two years, plus (B) the pro-rated target bonus under the Bonus Opportunity Plan expected payment for the year of termination. If we terminate Mr. Tosés employment without cause or if he resigns for good reason, he also is entitled to receive reimbursement for COBRA coverage for himself and his dependents for a period of up to 18 months, with tax gross-up, and 100% vesting of then outstanding incentive stock awards.
Under the agreement, cause means committing an act of gross negligence or other willful act that materially adversely affects TCS, acts of dishonesty involving fraud or embezzlement, being convicted or pleading no contest to a felony involving theft or moral turpitude, or his unauthorized willful or negligent disclosure of proprietary information or trade secrets. The definition of good reason includes circumstances that constitute a material diminution in authority, duties or responsibility, require him to physically relocate more than 20 miles, fail to obtain an assumption of the agreement by a successor corporation, or result in him not being nominated to serve on the Board of Directors. An additional circumstance that would constitute good
reason would result should the Company provide notice that it does not intend to renew the employment agreement after its then-current term, except that if the Company does provide such notice after September 30, 2019, then the amount of severance will be calculated using base salary only, without regard to any past or potential future Bonus Opportunity Plan payments. In any case of cause or good reason, Mr. Tosé must provide notice to the Company of the existence of such circumstance within 90 days of its existence and the Company will have 30 days to correct such circumstance. Notwithstanding any of the circumstances, good reason shall not exist under the agreement if termination of employment occurs after two years following the initial existence of the circumstance giving rise to good reason.
If we terminate Mr. Tosés employment without cause, or if he resigns for good reason, upon or within 24 months after a change in control, he is entitled to receive from us an amount that is three times the sum of his annual salary plus the target amount calculated under the Bonus Opportunity Plan in effect for the year of termination. In addition, all of Mr. Tosés outstanding stock options and restricted stock awards vest upon a termination without cause of if he quits for good reason, which as of December 31, 2014, had a value of $1,756,953. The following table summarizes the estimated payments to Mr. Tosé upon termination without cause or resignation for good reason prior to or after a change in control assuming that the termination event was effective as of the last day of the most recently completed fiscal year, or December 31, 2014.
If we terminate Mr. Tosés employment due to death or disability, the agreement provides that we will continue to provide salary during the elimination period of any disability policy, and that we will purchase a specific policy to provide for continued income during the disability period. We also will pay an amount equal to the target bonus under the Bonus Opportunity Plan in effect for the year of termination, and will provide reimbursement for COBRA premiums to Mr. Tosé or his surviving spouse, as the case may be, grossed up for taxes, for a period of up 18 months following disability termination or up to 36 months for termination because of death. Mr. Tosé is also entitled to full vesting of his stock awards upon death or disability, which as of December 31, 2014, had a value of $1,756,953.
Treatment of Incentive Stock Awards for all Named Executive Officers
Pursuant to all of the agreements, vesting of any outstanding stock options and restricted shares of the individuals shall be immediately accelerated in the event of a change of control as defined in the agreements. The following table summarizes the intrinsic value of stock options and the market value of restricted shares that would be accelerated upon a change of control, assuming that a change of control event occurred on December 31, 2014.
2014 Non-Qualified Deferred Compensation
The following table sets forth information with respect to the non-qualified deferred compensation arrangements in effect during 2014 for the Named Executive Officers.
AUDIT COMMITTEE REPORT
For the fiscal years ended December 31, 2014 and 2013, professional services were performed by Ernst & Young LLP (EY). Total fees paid to EY aggregated $1,366,000 and $923,000 for the fiscal years ended December 31, 2014 and 2013, respectively, and were composed of the following:
Audit Fees: The aggregate fees billed for the audit of the annual financial statements for the fiscal years ended December 31, 2014 and 2013, for reviews of the financial statements included in the TCS Quarterly Reports on Form 10-Q, for testing and evaluating internal controls over financial reporting and for assistance with and review of documents filed with the SEC were $1,264,000 for 2014 and $795,000 for 2013. Audit Fees in 2014 were higher than in 2013 primarily because of billings for out-of-scope work which the auditors ascribed to audit and tax overruns, Sox 404 overruns, consultations and other matters.
Audit-Related Fees: Audit related fees include: attest services that are not required by statute or regulation, internal control reviews and consultations concerning evaluating internal controls over financial reporting and other financial accounting/reporting matters. The aggregate fees billed for audit-related services for the fiscal years ended December 31, 2014 and 2013 were $42,000 and $101,000, respectively.
Tax Fees: Tax fees relate to fees billed for professional services performed by EY with respect to tax compliance, tax advice and tax planning. The Company began recording a provision for income tax in 2009 for the first time. We paid $45,000 fees to EY for tax services for the fiscal year ended December 31, 2014, and $27,000 in 2013.
All Other Fees: All other fees consist of aggregate fees billed by EY for products and services other than the services reported above. We paid EY $15,000 for other services for the fiscal year ended December 31, 2014, and no fees for 2012.
Report of the Audit Committee
The Committee reviewed the adequacy of the Committee charter and recommended administrative updates to the Board which were approved on January 23, 2014.
The Committee also approved the selection of Ernst & Young LLP (EY) as TCSs independent registered public accounting firm for 2014.
The Committee reviewed and discussed with the independent registered public accounting firm, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of TCSs accounting principles and such other matters as are required to be discussed with the Committee under generally accepted auditing standards, as well as the matters required to be discussed by Statement on Auditing Standards No. 61 (Communications with Audit Committees), as amended. The Committee discussed with TCSs independent registered public accounting firm the overall scope and plans for their respective audits. In addition, the Committee has discussed with the independent registered public accounting firm, with and without management present, the results of their examinations, their evaluations of TCSs internal controls, and the overall quality of TCSs financial reporting. The Committee received from the independent registered public accounting firm written disclosures regarding the auditors independence required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and the Committee discussed with the independent registered public accounting firm that firms independence and considered the compatibility of non-audit services with the auditors independence.
The Committee also discussed and assessed with management and EY, managements report and EYs report and attestation on internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. The Companys director of Internal Audit, who reports directly to the Audit Committee, met in executive session with the Committee (without management present) to report on his review of the Companys system of internal controls. In reliance on these reviews and discussions, the Committee recommended to the Board of Directors and the Board has approved the inclusion of the audited financial statements in the Annual Report on Form 10-K for the year ended December 31, 2014 for filing with the SEC.
On February 17, 2015 the Committee began a competitive process to determine which audit firm would serve as our independent registered public accounting firm for the year ended December 31, 2015. On April 3, 2015 the company filed an 8-K reporting that the Committee had dismissed EY and engaged KPMG LLP (KPMG) as the companys independent registered public accounting firm for 2015.
Representatives of KPMG are expected to be present at the Annual Meeting of Stockholders on May 28, 2015 with the opportunity to make a statement if they desire to do so, and they will be available to respond to appropriate questions.
The Audit Committee annually approves each years engagement for audit services in advance. The Committee has also established procedures to require pre-approval of all audit-related, tax and permitted non-audit services provided by KPMG. Fees for any of these services that will exceed the pre-approval fee limits or fees not contemplated by the original pre-approval must be separately approved by the Audit Committee. The Audit Committee may delegate pre-approval authority to one or more of its members. Any such fees pre-approved in this manner shall be reported to the Audit Committee at its next scheduled meeting. All services described above were pre-approved by the Audit Committee in fiscal 2014.
The Audit Committee has designated Mr. Thomas M. Brandt, Jr., Chief Financial Officer, to monitor the performance of all services provided by the independent auditors and to determine whether such services are in compliance with this policy. Mr. Brandt reports to the Audit Committee on a periodic basis the results of this monitoring. Any member of executive management will immediately report to the chairman of the Audit Committee any breach of this policy that comes to the attention of any member of management.
Jon B. Kutler, Chairman
Jan C. Huly
A. Reza Jafari
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our directors and executive officers, and persons that beneficially own more than 10% of our Class A Common Stock, file with the SEC initial reports of ownership and reports of changes in ownership of our Class A Common Stock and other equity securities. Copies of these reports must be filed with us. Based solely on our review of the copies of these reports filed with us, and written representations that no other reports were required, to our knowledge, all reports required by Section 16(a) were timely filed in 2014 except as follows: Messrs. Tosé, Young, Brandt, Morin and Lorello each filed one Form 4 two days late, which resulted from administrative oversight. In addition, Mr. Young filed one Form 4 twenty-one days late and Messrs. Huly and Lorello each filed one Form 4 six days late, all as result of late transaction notice from the respective brokers.
We do not know of any matters to be presented at the Annual Meeting other than those mentioned in this Proxy Statement. If any other matters are properly brought before the Annual Meeting, it is intended that Messrs. White and Brandt will vote the proxies in accordance with their best judgment.
Stockholders Sharing the Same Address
In accordance with notices previously sent to many stockholders who hold their shares through a bank, broker or other holder of record and share a single address, only one Annual Report and Proxy Statement is being delivered to that address unless contrary instructions from any stockholder at that address were received. This practice, known as householding, is intended to reduce our printing and postage costs. However, any such street-name stockholder residing at the same address who wishes to receive a separate copy of this Proxy Statement or accompanying Annual Report may request a copy by contacting the bank, broker or other holder of record, or the Company by telephone at: 410.263.7616. The voting instruction sent to a street-name stockholder should provide information on how to request (1) householding of future Company materials or (2) separate materials if only one set of documents is being sent to a household. If it does not, a stockholder who would like to make one of these requests should contact the Company as indicated above.
Annual Report to Stockholders
The Annual Report of the Company, including financial statements of the Company for the fiscal year ended December 31, 2014 is being mailed to the stockholders with this Proxy Statement. You may request, without charge, a copy of the Annual Report, as filed with the SEC, by addressing a request to TeleCommunication Systems, Inc., 275 West Street, Annapolis, Maryland 21401 Attention: Investor Relations.
ANNUAL MEETING OF STOCKHOLDERS OF
TELECOMMUNICATION SYSTEMS, INC.
May 28, 2015
e-Consent makes it easy to go paperless. With e-Consent, you can quickly access your proxy material, statements and other eligible documents online, while reducing costs, clutter and paper waste. Enroll today via www.amstock.com to enjoy online access.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON May 28, 2015:
The Notice of Meeting, the Proxy Statement and our annual report on Form 10-K
for the year ended December 31, 2014
are available at https://www.proxydocs.com/tsys
Please sign, date and mail
your proxy card in the
envelope provided as soon
i Please detach along perforated line and mail in the envelope provided. i
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE DIRECTOR NOMINEES.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE x
TELECOMMUNICATION SYSTEMS, INC.
Annapolis, Maryland 21401
ANNUAL MEETING MAY 28, 2015
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Bruce A. White and Thomas M. Brandt, Jr., proxy (and if the undersigned is a proxy, as substitute proxy) each with the power to appoint his substitute, and hereby authorizes either to represent and to vote, as designated on the reverse side, all of the shares of Class A Common Stock and Class B Common Stock of TeleCommunication Systems, Inc. which the undersigned is entitled to vote at the Annual Meeting of Stockholders to be held on Thursday, May 28, 2015, at 10:00 a.m. local time, at The Westin Annapolis hotel, 100 Westgate Circle, Annapolis, MD 21401 and any adjournments or postponements thereof.
(Continued and to be signed on the reverse side)