prlb20180320_def14a.htm

Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. )

 

Filed by the Registrant 

Filed by a Party other than the Registrant  ☐

 

Check the appropriate box:

 

Preliminary Proxy Statement 
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to §240.14a-12

 

 

Proto Labs, 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):

 

No fee required.
     
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
     
 

(1)

Title of each class of securities to which transaction applies:

     
  (2) Aggregate number of securities to which transaction applies:
     
  (3) Per unit price of other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
     
  (4) Proposed maximum aggregate value of transaction:
     
  (5) Total fee paid:
     
Fee paid previously with preliminary materials.
   
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11 (a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
     
  (1) Amount Previously Paid:
     
  (2) Form, Schedule or Registration Statement No.:
     
  (3) Filing Party:
     
  (4) Date Filed:
     


 

 

 

Proto Labs, Inc.

5540 Pioneer Creek Drive

Maple Plain, Minnesota 55359

(763) 479-3680

Fax: (763) 479-2679

 

April 6, 2018

 

 

Dear Fellow Shareholder:

 

The Board of Directors of Proto Labs, Inc. joins me in extending a cordial invitation to attend our 2018 Annual Meeting of Shareholders (the “Annual Meeting”), which will be held at our headquarters, 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359, on Wednesday, May 16, 2018 at 8:30 a.m. local time.

 

We will be using the “Notice and Access” method of furnishing proxy materials via the Internet to our shareholders. We believe that this process will provide you with a convenient and quick way to access your proxy materials and vote your shares, while allowing us to reduce the environmental impact of our Annual Meeting and the costs of printing and distributing the proxy materials. On or about April 6, 2018, we will mail to our shareholders a Notice of Internet Availability of Proxy Materials (the “Notice”) containing instructions on how to access our Proxy Statement and Annual Report on Form 10-K and vote electronically via the Internet. The Notice also contains instructions on how to receive a paper copy of your proxy materials.

 

It is important that your shares be represented at the Annual Meeting whether or not you plan to attend in person. Please vote electronically via the Internet or, if you receive a paper copy of the proxy card by mail, you may vote by Internet or telephone or by returning your signed proxy card in the envelope provided. If you do attend the Annual Meeting and desire to vote in person, you may do so by following the procedures described in the Proxy Statement even if you have previously sent a proxy.

 

We hope that you will be able to attend the Annual Meeting and we look forward to seeing you.

 

Very truly yours,

 

 

Sven A. Wehrwein

Chairman of the Board

 

 

 

 

PROTO LABS, INC.

5540 Pioneer Creek Drive

Maple Plain, Minnesota 55359

 


 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD MAY 16, 2018

 


 

Proto Labs, Inc. will hold its 2018 Annual Meeting of Shareholders at its headquarters, 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359, on Wednesday, May 16, 2018. The Annual Meeting will begin at 8:30 a.m. local time. The proxy materials were made available to you via the Internet or mailed to you beginning on or about April 6, 2018. At the Annual Meeting, our shareholders will:

 

 

1.

Elect seven directors to hold office until the next Annual Meeting of Shareholders or until their successors are duly elected.

 

 

2.

Vote on the ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2018.

 

 

3.

Vote on an advisory basis to approve the compensation of the officers disclosed in the accompanying Proxy Statement, which we refer to as a “say-on-pay” vote.

  

 

4.

Act on any other matters that may properly come before the Annual Meeting, or any adjournment or postponement thereof.

 

The board of directors recommends that shareholders vote FOR each of the following:

 

 

1.

The director nominees named in the accompanying Proxy Statement.

 

 

2.

The ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2018.

 

 

3.

The approval of the say-on-pay proposal.

  

Only shareholders of record at the close of business on March 21, 2018 may vote at the Annual Meeting or any adjournment or postponement thereof.

 

By Order of the Board of Directors

 

 

 

 

 

 

Jason Frankman

Secretary

 

 

 

 

YOUR VOTE IS IMPORTANT

 

Whether or not you plan to attend the Annual Meeting, we urge you to vote as soon as possible. If you received the Notice of Internet Availability of Proxy Materials (the “Notice”), you may vote via the Internet as described in the Notice. If you received a copy of the proxy card by mail, you may vote by Internet or telephone as instructed on the proxy card, or you may sign, date and mail the proxy card in the envelope provided.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2018 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 16, 2018.

 

Our Proxy Statement for the 2018 Annual Meeting of Shareholders and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 are available at www.proxyvote.com.

 

 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

1

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

6

CORPORATE GOVERNANCE

8

Board Leadership Structure

8

Risk Oversight

8

Nominating Process and Board Diversity

8

Proxy Access

9

Director Independence

9

Code of Business Conduct and Ethics

9

Communications with the Board and Corporate Governance Guidelines

9

Board Meetings

9

Committees of the Board

10

Certain Relationships and Related Party Transactions

11

Compensation Committee Interlocks and Insider Participation

11

Section 16(a) Beneficial Ownership Reporting Compliance

12

PROPOSAL 1 ELECTION OF DIRECTORS

13

General Information

13

Nominees

13

Voting Information and Board Voting Recommendation

15

COMPENSATION DISCUSSION AND ANALYSIS

16

Named Executive Officers

16

EXECUTIVE SUMMARY 16

Summary of Proto Labs’ Performance

16

Executive Compensation Philosophy and Objectives

18

Compensation Decisions and Processes

19

Peer Group

19

Elements of Executive Compensation

20

Severance and Change in Control Benefits

25

Other Compensation and Equity-Related Policies

25

Summary Compensation Table

26

Grants of Plan-Based Awards

27

Outstanding Equity Awards at 2017 Year-End

28

Option Exercises and Stock Vested in 2017

29

Pension Benefits

29

Nonqualified Deferred Compensation

29

Potential Payments upon Termination or Change in Control

29

CEO Pay Ratio 34

COMPENSATION COMMITTEE REPORT

35

Compensation Risk Assessment

35

Conflict of Interest Analysis

35

DIRECTOR COMPENSATION

36

Non-Employee Director Compensation for 2017

37

Non-Employee Directors - Outstanding Equity Awards at 2017 Fiscal Year-End

37

PROPOSAL 2 RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

38

AUDIT COMMITTEE REPORT

39

FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

40

PROPOSAL 3 ADVISORY VOTE ON EXECUTIVE COMPENSATION

41

OTHER MATTERS

42

SUBMISSION OF SHAREHOLDER PROPOSALS AND NOMINATIONS

42

Proposals Included in the Proxy Statement

42

Proposals Not Included in the Proxy Statement

42

ADDITIONAL INFORMATION

42

 

 

 

PROTO LABS, INC.

5540 Pioneer Creek Drive

Maple Plain, Minnesota 55359

 


 

PROXY STATEMENT

 


 

The board of directors of Proto Labs, Inc. is soliciting proxies for use at the Annual Meeting to be held on May 16, 2018, and at any adjournment or postponement of the meeting.

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

 

Q:

Who can vote? 

 

A: 

You can vote if you were a shareholder at the close of business on the record date of March 21, 2018 (the “Record Date”). There were a total of 26,931,451 shares of our common stock outstanding on the Record Date. The Notice of Internet Availability of Proxy Materials (the “Notice”), notice of annual meeting, this Proxy Statement and accompanying proxy card and the Annual Report on Form 10-K for 2017 were first mailed or made available to you beginning on or about April 6, 2018. This Proxy Statement summarizes the information you need to vote at the Annual Meeting.

 

Q:

Who can attend the Annual Meeting?

 

A:

All shareholders as of the Record Date, or their duly appointed proxies, may attend the Annual Meeting. If you hold your shares in street name, then you must request a legal proxy from your broker or nominee to attend and vote at the Annual Meeting.

 

Q: 

What am I voting on? 

 

A: 

You are voting on:

 

 

Election of seven nominees as directors to hold office until the next Annual Meeting of Shareholders or until their successors are duly elected.

 

 

Ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2018.

 

 

Approval on an advisory basis of the compensation of our officers disclosed in this Proxy Statement, which we refer to as a “say-on-pay” vote.

  

Q: 

How does the board of directors recommend I vote on the proposals? 

 

A: 

The board is soliciting your proxy and recommends you vote:

 

 

FOR the director nominees;

 

 

FOR the ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2018; and

 

 

FOR the say-on-pay proposal.

 

1

 

Q: 

Why did I receive a notice in the mail regarding the Internet availability of proxy materials instead of a paper copy of the proxy materials? 

 

A:

“Notice and Access” rules adopted by the United States Securities and Exchange Commission (the “SEC”) permit us to furnish proxy materials, including this Proxy Statement and our Annual Report on Form 10-K for 2017, to our shareholders by providing access to such documents on the Internet instead of mailing printed copies. Shareholders will not receive printed copies of the proxy materials unless they request them. Instead, the Notice will instruct you as to how you may access and review all of the proxy materials on the Internet. The Notice also instructs you as to how you may submit your proxy on the Internet. If you would like to receive a paper or email copy of our proxy materials, you should follow the instructions for requesting such materials in the Notice. Any request to receive proxy materials by mail will remain in effect until you revoke it.

 

Q: 

How many shares must be voted to approve each proposal? 

 

A: 

Quorum. A majority of the shares entitled to vote, represented in person or by proxy, is necessary to constitute a quorum for the transaction of business at the Annual Meeting. As of the Record Date, 26,931,451 shares of our common stock were issued and outstanding. A majority of those shares will constitute a quorum for the purpose of electing directors and adopting proposals at the Annual Meeting. If you submit a valid proxy or attend the Annual Meeting, your shares will be counted to determine whether there is a quorum.

 

 

Vote Required. Generally, directors are elected by a majority of the votes cast with respect to the director, meaning that the votes cast “for” a director must exceed the votes cast “against” the director. However, in a contested election of directors in which the number of nominees exceeds the number of directors to be elected, the directors are elected by a plurality of the votes present in person or by proxy at the meeting. A plurality means that the nominees with the greatest number of votes are elected as directors up to the maximum number of directors to be chosen at the Annual Meeting. The proposal to ratify the selection of our independent registered public accounting firm and, other than the say-on-pay proposal, all other items that are properly presented at the Annual Meeting, will be determined by the affirmative vote of the greater of (a) the holders of a majority of the shares of our common stock present in person or by proxy at the Annual Meeting and entitled to vote or (b) a majority of the minimum number of shares of common stock entitled to vote that would constitute a quorum. If the advisory say-on-pay resolution in this Proxy Statement receives more votes “for” than “against,” then it will be deemed to be approved. The say-on-pay vote is advisory and is not binding on the board of directors.

 

Q: 

What is the effect of broker non-votes and abstentions? 

 

A: 

A “broker non-vote” occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have or does not exercise discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner. If a broker returns a “non-vote” proxy indicating a lack of authority to vote on a proposal, then the shares covered by such a “non-vote” proxy will be deemed present at the Annual Meeting for purposes of determining a quorum, but not present for purposes of calculating the vote with respect to any non-discretionary proposals. Nominees will not have discretionary voting power with respect to any matter to be voted upon at the Annual Meeting, other than the ratification of the selection of our independent registered public accounting firm. Broker non-votes will have no effect on the election of directors, the ratification of the independent registered accounting firm, approval of the advisory say-on-pay resolution, or any other item properly presented at the Annual Meeting.

 

 

A properly executed proxy marked “ABSTAIN” with respect to a proposal will be counted for purposes of determining whether there is a quorum and will be considered present in person or by proxy and entitled to vote, but will not be deemed to have been voted in favor of such proposal. Abstentions will have no effect on the voting for the election of directors or approval of the advisory say-on-pay resolution. Abstentions will have the same effect as voting against the proposal to ratify the selection of our independent registered public accounting firm and any other item properly presented at the Annual Meeting.

 

Q: 

How will the proxies vote on any other business brought up at the Annual Meeting? 

 

A: 

By submitting your proxy, you authorize the proxies to use their judgment to determine how to vote on any other matter brought before the Annual Meeting, or any adjournments or postponements thereof. We do not know of any other business to be considered at the Annual Meeting. The proxies’ authority to vote according to their judgment applies only to shares you own as the shareholder of record.

 

2

 

Q: 

How do I cast my vote?

 

A: 

If you are a shareholder whose shares are registered in your name, you may vote using any of the following methods:

 

 

Internet. You may vote by going to the web address www.proxyvote.com 24 hours a day, seven days a week, until 11:59 p.m. Eastern Time on May 15, 2018 and following the instructions for Internet voting shown on your proxy card.

 

 

Telephone. You may vote by dialing 1-800-690-6903 24 hours a day, seven days a week, until 11:59 p.m. Eastern Time on May 15, 2018 and following the instructions for telephone voting shown on your proxy card.

 

 

Mail. If you requested printed proxy materials and you receive a paper copy of the proxy card, then you may vote by completing, signing, dating and mailing the proxy card in the envelope provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. If you vote by Internet or telephone, please do not mail your proxy card.

 

 

In person at the Annual Meeting. If you are a shareholder whose shares are registered in your name, you may vote in person at the Annual Meeting.

 

 

If your shares are held on account at a brokerage firm, bank or similar organization you will receive voting instructions from your bank, broker or other nominee describing how to vote your shares. You must follow those instructions to vote your shares. You will receive the Notice that will tell you how to access our proxy materials on the Internet and vote your shares via the Internet. It will also tell you how to request a paper copy of our proxy materials.

 

 

Proxies that are voted via the Internet or by telephone in accordance with the voting instructions provided, and proxy cards that are properly signed, dated and returned, will be voted in the manner specified.

 

Q: 

Can I vote my shares by filling out and returning the Notice? 

 

A: 

No. The Notice identifies the items to be voted on at the Annual Meeting, but you cannot vote by marking the Notice and returning it. The Notice provides instructions on how to vote by Internet, by requesting and returning a paper proxy card or voting instruction card, or by submitting a ballot in person at the Annual Meeting.

 

Q: 

Can I revoke or change my vote? 

 

A: 

You can revoke your proxy at any time before it is voted at the Annual Meeting by:

 

 

submitting a new proxy with a more recent date than that of the first proxy given before 11:59 P.M. Eastern Time on May 15, 2018 by (1) following the Internet voting instructions or (2) following the telephone voting instructions;

 

 

completing, signing, dating and returning a new proxy card to us, which must be received by us before the time of the Annual Meeting; or

 

 

if you are a registered shareholder, by attending the Annual Meeting in person and delivering a proper written notice of revocation of your proxy.

 

 

Attendance at the Annual Meeting will not by itself revoke a previously granted proxy. Unless you decide to vote your shares in person, you should revoke your prior proxy in the same way you initially submitted it—that is, by Internet, telephone or mail.

 

Q: 

Who will count the votes? 

 

A: 

Broadridge Financial Solutions, Inc., our independent proxy tabulator, will count the votes. John Way, our Chief Financial Officer, will act as inspector of election for the Annual Meeting.

 

3

 

Q: 

Is my vote confidential? 

 

A: 

All proxies and all vote tabulations that identify an individual shareholder are confidential. Your vote will not be disclosed except:

 

 

To allow Broadridge Financial Solutions, Inc. to tabulate the vote;

 

 

To allow John Way to certify the results of the vote; and

 

 

To meet applicable legal requirements.

 

Q: 

What shares are included on my proxy? 

 

A: 

Your proxy will represent all shares registered to your account in the same social security number and address.

 

Q: 

What happens if I don’t vote shares that I own? 

 

A: 

For shares registered in your name. If you do not vote shares that are registered in your name by voting in person at the Annual Meeting or by proxy through the Internet, telephone or mail, your shares will not be counted in determining the presence of a quorum or in determining the outcome of the vote on the proposals presented at the Annual Meeting.

 

 

For shares held in street name. If you hold shares through a broker, you will receive voting instructions from your broker. If you do not submit voting instructions to your broker and your broker does not have discretion to vote your shares on a particular matter, then your shares will not be counted in determining the outcome of the vote on that matter at the Annual Meeting. See “What is the effect of broker non-votes and abstentions?” as described above. Your broker will not have discretion to vote your shares for any matter to be voted upon at the Annual Meeting other than the ratification of the selection of our independent registered public accounting firm. Accordingly, it is important that you provide voting instructions to your broker for the matters to be voted upon at the Annual Meeting.

 

Q:

What if I do not specify how I want my shares voted?

 

A:

If you are a registered shareholder and submit a signed proxy card or submit your proxy by Internet or telephone but do not specify how you want to vote your shares on a particular matter, we will vote your shares as follows:

 

 

FOR all of the director nominees;

 

 

FOR the ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2018; and

 

 

FOR the say-on-pay proposal.

 

 

If any matters not described in this Proxy Statement are properly presented at the Annual Meeting, the proxy holders will use their own judgment to determine how to vote your shares. If the Annual Meeting is adjourned, the proxy holders can vote your shares on the new meeting date as well, unless you have revoked your proxy instructions, as described under “Can I revoke or change my vote?”

 

 

If you hold shares through a broker, please see above under “What happens if I don’t vote shares that I own?”

 

Q:

What does it mean if I get more than one Notice or proxy card? 

 

A: 

Your shares are probably registered in more than one account. You should provide voting instructions for all Notices and proxy cards you receive.

 

Q: 

How many votes can I cast? 

 

A: 

You are entitled to one vote per share on all matters presented at the Annual Meeting or any adjournment or postponement thereof. There is no cumulative voting.

 

Q: 

When are shareholder proposals and nominees due for the 2019 Annual Meeting of Shareholders? 

 

A: 

If you want to submit a shareholder proposal or nominee for the 2019 Annual Meeting of Shareholders, you must submit the proposal in writing to our Secretary, Proto Labs, Inc., 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359, so it is received by the relevant dates set forth below under “Submission of Shareholder Proposals and Nominations.”

 

4

 

Q:

What is “householding”?

 

A:

We may send a single Notice, as well as other shareholder communications, to any household at which two or more shareholders reside unless we receive other instruction from you. This practice, known as “householding,” is designed to reduce duplicate mailings and printing and postage costs, and conserve natural resources. If your Notice is being householded and you wish to receive multiple copies of the Notice, or if you are receiving multiple copies and would like to receive a single copy, or if you would like to opt out of this practice for future mailings, you may contact:

 

Broadridge Financial Solutions, Inc.

Householding Department

51 Mercedes Way

Edgewood, New York 11717

1-800-542-1061

 

 

Broadridge will deliver the requested documents to you promptly upon receipt of your request.

 

Q: 

How is this proxy solicitation being conducted? 

 

A: 

We will pay for the cost of soliciting proxies and we will reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation materials to our shareholders. In addition, some of our employees may solicit proxies. We may solicit proxies in person, via the Internet, by telephone and by mail. Our employees will not receive special compensation for these services, which the employees will perform as part of their regular duties.

 

5

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information as of March 21, 2018 regarding the beneficial ownership of our common stock by:

 

 

each person or group who is known by us to own beneficially more than 5% of our outstanding shares of common stock;

 

 

each of our named executive officers named in the Summary Compensation Table below;

 

 

each of our directors and each director nominee; and

 

 

all of the executive officers, directors and director nominees as a group.

 

The percentage of beneficial ownership is based on 26,931,451 shares of common stock outstanding as of March 21, 2018. Except as disclosed in the footnotes to this table and subject to applicable community property laws, we believe that each shareholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the shareholder. Unless otherwise indicated in the table or footnotes below, the address for each beneficial owner is c/o Proto Labs, Inc., 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359.

 

   

Beneficial Ownership on March 21,

2018

 

Name and Address of Beneficial Owner

 

Number

   

Percent

 

Greater than 5% shareholders:

               

Brown Capital Management, LLC

1201 N. Calvert Street

               

Baltimore, Maryland 21202

    3,896,579 (1)     14.47 %

BlackRock, Inc.

55 East 52nd Street

               

New York, NY 10055

    3,053,965 (2)     11.34 %

The Vanguard Group

100 Vanguard Blvd.

               

Malvern, PA 19355

    2,248,199 (3)     8.35 %

Riverbridge Partners LLC

80 South Eighth St., Suite 1200

               

Minneapolis, MN 55402

    1,777,782 (4)     6.60 %

 

Directors and named executive officers:

               

Archie C. Black

    4,737 (5)     *  

Sujeet Chand

    3,172 (5)     *  

Rainer Gawlick

    26,742 (6)     *  

John B. Goodman

    12,740 (7)     *  

Donald G. Krantz

    3,172 (5)     *  

Sven A. Wehrwein

    22,631 (8)     *  

Victoria M. Holt

    41,458 (9)     *  

Arthur R. Baker III

    9,641 (10)     *  

Robert Bodor

    21,339 (11)     *  

David M. Fein

    3,048 (12)     *  

John A. Way

    24,782 (13)     *  

All directors and executive officers as a group (11 persons)

    173,462 (14)     *  

 

 

*

Represents beneficial ownership of less than one percent.

 

 

(1)

Information is based on a Schedule 13G/A filed with the SEC by Brown Capital Management LLC (“Brown”) on February 14, 2018. Brown has sole voting power over 2,532,109 shares of our common stock and sole dispositive power over 3,896,579 shares of our common stock.

 

6

 

 

(2)

Information is based on a Schedule 13G filed with the SEC by BlackRock, Inc. (“BlackRock”) on January 19, 2018. BlackRock has sole voting power over 3,006,149 shares of our common stock and sole dispositive power over 3,053,965 shares of our common stock.

 

 

(3)

Information is based on a Schedule 13G/A filed with the SEC by Vanguard Group Inc. (“Vanguard”) on February 12, 2018. Vanguard has sole voting power over 47,897 shares of our common stock, shared voting power over 5,275 shares of our common stock, sole dispositive power over 2,196,799 shares of our common stock and shared dispositive power over 51,400 shares of our common stock.

 

 

(4)

Information is based on a Schedule 13G/A filed with the SEC by Riverbridge Partners LLC (“Riverbridge”) on January 29, 2018. Riverbridge has sole voting power over 1,369,940 shares of our common stock and sole dispositive power over 1,777,782 shares of our common stock.

 

 

(5)

Includes 1,586 shares of restricted stock units that vest on May 18, 2018.

 

 

(6)

Includes 16,317 shares that Dr. Gawlick has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock options and 1,586 shares of restricted stock units that vest on May 18, 2018.

 

 

(7)

Includes 2,226 shares that Mr. Goodman has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock options and 1,586 shares of restricted stock units that vest on May 18, 2018.

 

 

(8)

Includes 10,817 shares that Mr. Wehrwein has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock options and 1,586 shares of restricted stock units that vest on May 18, 2018.

 

 

(9)

Includes 20,172 shares that Ms. Holt has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock options.

 

 

(10)

Includes 4,381 shares that Dr. Baker has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock options and 821 shares of restricted stock units that vest May 4, 2018.

 

 

(11)

Includes 13,432 shares that Dr. Bodor has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock options.

     

 

(12)

Includes 1,674 shares that Mr. Fein has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock options.

     

 

(13)

Includes 16,944 shares that Mr. Way has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock options.

     

 

(14)

Includes 85,963 shares held by our executive officers and directors, in the aggregate, that can be acquired from us within 60 days of the date of the table pursuant to the exercise of stock options, 9,516 shares of restricted stock units, in the aggregate, that vest on May 18, 2018 and 821 shares of restricted stock units that vest on May 4, 2018.

 

7

 

CORPORATE GOVERNANCE

 

Board Leadership Structure

 

Sven Wehrwein leads our board of directors in his role as Chairman. Our board of directors believes that its leadership structure is the appropriate one for our company in light of the importance of maintaining independent board leadership and engagement and Mr. Wehrwein’s experience as lead independent director during the tenure of Larry Lukis, our founder and former Chief Technology Officer, who ceased serving as our Chairman and as a director upon conclusion of our 2017 Annual Meeting of Shareholders.

 

As Chairman, Mr. Wehrwein:

 

 

presides at all meetings of the board of directors, including executive sessions of the independent directors;

  

 

conducts the annual performance review of the Chief Executive Officer, with input from the other independent directors;

 

 

sets the board agenda and frequency of meetings, in consultation with the committee chairs as applicable; and

 

 

has the authority to convene meetings of the independent directors at every meeting.

 

Risk Oversight

 

Our management is responsible for defining the various risks facing our company, formulating risk management policies and procedures, and managing our risk exposures on a day-to-day basis. The board’s responsibility is to monitor our risk management processes by using board meetings, management presentations and other opportunities to educate itself concerning our material risks and evaluating whether management has reasonable controls in place to address the material risks; the board is not responsible, however, for defining or managing our various risks. The full board is responsible for monitoring management’s responsibility in the area of risk oversight. In addition, the audit committee and compensation committee have risk oversight responsibilities in their respective areas of focus, on which they report to the full board. Management reports from time to time to the full board, audit committee and compensation committee on risk management. The board focuses on the material risks facing our company, including operational, credit, liquidity, legal and cybersecurity risks, to assess whether management has reasonable controls in place to address these risks.

 

Nominating Process and Board Diversity

 

In consultation with other members of the board of directors, the nominating and governance committee is responsible for identifying individuals who it considers qualified to become board members. The nominating and governance committee will screen potential director candidates, including those recommended by shareholders, and recommend to the board of directors suitable nominees for the election to the board of directors. The nominating and governance committee uses a variety of methods for identifying and evaluating nominees for directors. The nominating and governance committee regularly assesses the appropriate size and composition of the board of directors, the needs of the board of directors and the respective committees of the board of directors, and the qualifications of candidates in light of these needs. Candidates may come to the attention of the nominating and governance committee through shareholders, management, current members of the board of directors, or search firms. The evaluation of these candidates may be based solely upon information provided to the committee or may include discussions with persons familiar with the candidate, an interview of the candidate or other actions the committee deems appropriate, including the use of third parties to review candidates. 

 

In considering whether to recommend an individual for election to the board, the nominating and governance committee considers, as required by the corporate governance guidelines and its charter, the board’s overall balance of diversity of perspectives, backgrounds and experiences, although it does not have a formal policy regarding the consideration of diversity of board members. The nominating and governance committee views diversity expansively and considers among other things, breadth and depth of relevant business and board skills and experiences, educational background, employment experience and leadership performance as well as those intangible factors that it deems appropriate to develop a heterogeneous and cohesive board such as integrity, achievements, judgment, intelligence, personal character, the interplay of the candidate’s relevant experience with the experience of other board members, the willingness of the candidate to devote sufficient time to board duties, and likelihood that he or she will be willing and able to serve on the board for an extended period of time.

 

8

 

The nominating and governance committee will consider a recommendation by a shareholder of a candidate for election as a Proto Labs director. Shareholders who wish to recommend individuals for consideration by the nominating and governance committee to become nominees for election to the board may do so by submitting a written recommendation to our Secretary. Recommendations must be received by the Secretary within the timelines specified in our by-laws to be considered by the nominating and governance committee for possible nomination at our Annual Meeting of Shareholders the following year. Our by-laws provide that such notice should be received no less than 90 days prior to the first anniversary of the preceding year’s Annual Meeting, except in certain circumstances. All recommendations must contain the information required in our by-laws and corporate governance guidelines, including, among other things, the identification of the nominee, a written consent by the recommended individual to agree to be named in our proxy statement and to serve as director if elected, and the name and address of the shareholder submitting the nomination. Shareholders may also have the opportunity to include nominees in our proxy statement by complying with the requirements set forth in Section 2.17 of our by-laws. Recommendations must be received by the Secretary within the timeframes noted under “Proposals Not Included in the Proxy Statement.”

 

Proxy Access

 

Our by-laws include a “proxy access” provision for director nominations under which eligible shareholders may nominate candidates for election to our board and inclusion in our proxy statement. The “proxy access” provision permits an eligible shareholder, or an eligible group of up to 20 shareholders, owning continuously for at least three years shares of our company representing an aggregate of at least three percent of the voting power entitled to vote in the election of directors, to nominate and include in our annual meeting proxy materials director nominees not to exceed the greater of (i) two or (ii) 25 percent of the number of directors then serving on our board, or, if such amount is not a whole number, the closest whole number below 25 percent, but not less than two. Such nominations are subject to certain eligibility, procedural, and disclosure requirements set forth in section 2.17 of our by-laws, including the requirement that our company must receive notice of such nominations not less than 120 calendar days prior to the anniversary date of the prior year’s annual proxy materials mailing, except as otherwise provided in section 2.17 of our by-laws.

 

Director Independence

 

Our board of directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, our board has determined that, with the exception of Victoria M. Holt, our current Chief Executive Officer, and Donald G. Krantz, who served as our Executive Vice President and Technology Officer from January 2015 until his retirement in June 2016, all of the directors are “independent directors” as defined by Section 303A.02 of the New York Stock Exchange Listed Company Manual.

 

Code of Business Conduct and Ethics

 

We have adopted a code of ethics and business conduct relating to the conduct of our business by our employees, officers and directors, which is posted on our website at www.protolabs.com under the investor relations section. We plan to post to our website at the address described above any future amendments or waivers to our code of ethics and business conduct.

 

Communications with the Board and Corporate Governance Guidelines

 

Under our Corporate Governance Guidelines, a process has been established by which shareholders and other interested parties may communicate with members of the board of directors. Any shareholder or other interested party who desires to communicate with the board, individually or as a group, may do so by writing to the intended member or members of the board, c/o Secretary, Proto Labs, Inc., 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359. A copy of our Corporate Governance Guidelines is available at www.protolabs.com under the investor relations section.

 

All communications received in accordance with these procedures will initially be received and processed by the office of our Secretary to determine that the communication is a message to one or more of our directors and will be relayed to the appropriate director or directors. The director or directors who receive any such communication will have discretion to determine whether the subject matter of the communication should be brought to the attention of the full board or one or more of its committees and whether any response to the person sending the communication is appropriate.

 

Board Meetings

 

During 2017, the full board of directors met 4 times in person and held 3 meetings via teleconference. All four of the in-person meetings were preceded and/or followed by an executive session of the independent directors, chaired by Mr. Wehrwein. Each of our incumbent directors attended at least 75% percent of the meetings of the board and any committee on which they served in 2017. We do not maintain a formal policy regarding the board’s attendance at annual shareholder meetings; however, board members are expected to regularly attend all board meetings and meetings of the committees on which they serve and are encouraged to make every effort to attend the Annual Meeting of Shareholders. All of our directors at the time of the 2017 Annual Meeting of Shareholders attended the meeting, except for Rainer Gawlick, Larry Lukis and Brian Smith.

 

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Committees of the Board

 

Our board of directors has established an audit committee, a compensation committee and a nominating and governance committee. The charters of these committees are posted on our website at www.protolabs.com under the investor relations section.

 

The current composition and responsibilities of each committee, as well as the number of times it met during 2017, are described below.

 

Audit Committee

 

Compensation Committee

 

Nominating and

Governance Committee

Sven A. Wehrwein (chair)

 

Rainer Gawlick (chair)

 

John B. Goodman (chair)

Rainer Gawlick

 

Archie C. Black

 

Sujeet Chand

John B. Goodman

 

Sujeet Chand

 

Sven A. Wehrwein

 

Audit Committee

 

Among other matters, our audit committee:

 

 

oversees management’s processes for ensuring the quality and integrity of our consolidated financial statements, our accounting and financial reporting processes, and other financial information provided by us to any governmental body or to the public;

 

 

evaluates the qualifications, independence and performance of our independent auditor and internal audit function;

 

 

oversees the resolution of any disagreements between management and the auditors regarding financial reporting;

 

 

oversees our investment and cash management policies; and

 

 

supervises management’s processes for ensuring our compliance with legal, ethical and regulatory requirements as set forth in policies established by our board of directors.

 

Each of the members of our audit committee meets the requirements for independence and financial literacy under the applicable rules and regulations of the SEC and the NYSE. Our board of directors has determined that Sven A. Wehrwein is an audit committee financial expert, as defined under the applicable rules of the SEC. The audit committee met 10 times in 2017.

 

Nominating and Governance Committee

 

Among other matters, our nominating and governance committee:

 

 

identifies qualified individuals to become board members, consistent with criteria approved by the board;

 

 

selects director nominees for the next Annual Meeting of Shareholders;

 

 

determines the composition of the board’s committees and evaluates and enhances the effectiveness of the board and individual directors and officers;

 

 

develops and implements the corporate governance guidelines for our company; and

 

 

ensures that succession planning takes place for critical senior management positions.

 

Each member of our nominating and governance committee satisfies the NYSE independence standards. The nominating and governance committee met 2 times in 2017.

 

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Compensation Committee

 

Among other matters, our compensation committee:

 

 

reviews and approves compensation programs, awards and employment arrangements for executive officers;

 

 

administers compensation plans for employees;

 

 

reviews our programs and practices relating to leadership development and continuity; and

 

 

determines the compensation of non-employee directors.

 

In addition, the compensation committee has the authority to select, retain and compensate compensation consulting firms and other experts as it deems necessary to carry out its responsibilities.

 

Each member of our compensation committee satisfies current NYSE independence standards, is a “non-employee director” as that term is defined in Rule 16b-3 under the Securities Exchange Act of 1934, and is an “outside director” as that term is used in Section 162(m) of the Internal Revenue Code. The compensation committee met 6 times in 2017.

 

Certain Relationships and Related Party Transactions

 

Since the beginning of 2017, we have engaged in the following transactions with certain of our executive officers, directors, holders of more than 5% of our voting securities and their affiliates and immediate family members:

 

Karbon Kinetics Limited

 

During the year ended December 31, 2017, we made sales to our customer Karbon Kinetics Limited (“KKL”) on terms consistent with the terms we provide to our other customers. Mr. Lukis is a former director, our former Chairman and Chief Technology Officer and is a 64% shareholder of KKL. Our revenues from sales to KKL did not exceed $120,000 during the year ended December 31, 2017.

   

Employment of Related Person

 

Scott Goodman, the son of Mr. Goodman, a director and member of our audit committee and nominating and governance committee, is employed by us as a Software Developer. He is entitled to receive a base salary, incentive compensation and other employee benefits that are offered to similarly situated employees of our company. Scott Goodman’s compensation during the year ended December 31, 2017 did not exceed $120,000.

 

Related Person Transaction Approval Policy

 

Our board of directors has adopted a written statement of policy regarding transactions with related persons, which we refer to as our related person policy. Subject to the exceptions described below, our related person policy requires our audit committee to review and approve any proposed related person transaction and all material facts with respect thereto. In reviewing a transaction, our audit committee will consider all relevant facts and circumstances, including (1) whether the terms are fair to us, (2) whether the transaction is material to us, (3) the role the related person played in arranging the transaction, (4) the structure of the transaction, (5) the interests of all related persons in the transaction, and (6) whether the transaction has the potential to influence the exercise of business judgment by the related person or others. Our audit committee will not approve or ratify a related person transaction unless it determines that, upon consideration of all relevant information, the transaction is beneficial to us and our shareholders and the terms of the transaction are fair to us. No related person transaction will be consummated without the approval or ratification of our audit committee. Under our related person policy, a related person includes any of our directors, director nominees, executive officers, any beneficial owner of more than 5% of our common stock and any immediate family member of any of the foregoing. Related party transactions exempt from our policy include payment of compensation by us to a related person for the related person’s service to us as an employee, director or executive officer, transactions available to all of our employees and shareholders on the same terms and transactions between us and the related person that, when aggregated with the amount of all other transactions between us and the related person or its affiliates, involve $120,000 or less in a year.

 

Compensation Committee Interlocks and Insider Participation

 

During 2017, Brian K. Smith, who decided not to seek reelection at our 2017 Annual Meeting of Shareholders and ceased serving as a director upon conclusion of such annual meeting, Dr. Gawlick, Mr. Black, and Mr. Chand served as the members of our compensation committee. No current member of our compensation committee has ever been an officer or employee of our company or any of our subsidiaries and affiliates or has had any relationship with our company requiring disclosure in our proxy statement other than service as a director. None of our executive officers has served on the board of directors or on the compensation committee of any other entity, any officer of which served either on our board of directors or on our compensation committee.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

 

The rules of the SEC require us to disclose the identity of directors, executive officers and beneficial owners of more than 10% of our common stock who did not file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934. Based solely on a review of copies of such reports and written representations from reporting persons, we believe that all directors and executive officers complied with all filing requirements applicable to them during fiscal 2017, except Arthur R. Baker III filed one late report with respect to one transaction, which took place on May 8, 2017, Sujeet Chand filed two late reports with respect to three transactions, which took place on May 18, 2017, Robert Bodor filed one late report with respect to four transactions, which took place on September 29, 2017 and October 26, 2017, and John Tumelty filed one late report with respect to four transactions, which took place on November 22, 2017.

  

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PROPOSAL 1

 

ELECTION OF DIRECTORS

 

General Information

 

Seven directors will be elected at the Annual Meeting. Upon the recommendation of the nominating and governance committee, the board of directors has nominated for election the seven persons named below. Each has consented to being named a nominee and will, if elected, serve until the next Annual Meeting of Shareholders or until a successor is duly elected. There are no family relationships between any director and any executive officer. Each nominee listed below is currently a director of Proto Labs and has been duly elected by the shareholders.

 

Nominees

 

The names of the nominees and other information are set forth below:

 

 

Victoria M. Holt - Age 60

Director since 2014

Ms. Holt has served as our President and Chief Executive Officer since February 2014. Prior to joining us, Ms. Holt served as President and Chief Executive Officer of Spartech Corporation, a leading producer of plastic sheet, compounds and packaging products, from September 2010 until Spartech was purchased by PolyOne Corporation in March 2013. Prior to Spartech, Ms. Holt worked at PPG Industries, a leading coatings and specialty products company, serving as Senior Vice President, Glass and Fiber Glass, from May 2005 until September 2010. Ms. Holt also is a member of the board of directors of Waste Management, Inc., and she served as a director of Spartech while she was Chief Executive Officer.

 

 

 

Ms. Holt’s leadership, strategic planning, operational and international experience provide valuable insights to our board of directors. As Chief Executive Officer, she also is responsible for determining our strategy, articulating priorities and managing our continued growth.

 

 

Archie C. Black - Age 56

Director since 2016

Mr. Black has served as a director of our company since March 2016 and serves as a member of the compensation committee. Since 2001, Mr. Black has served as the President and Chief Executive Officer of SPS Commerce, Inc., a provider of cloud-based supply chain management solutions. Mr. Black also serves on the Board of Directors of SPS Commerce, Inc. Prior to joining SPS Commerce, Inc., Mr. Black was a Senior Vice President and Chief Financial Officer at Investment Advisors, Inc. Prior to his time at Investment Advisors, Inc., Mr. Black spent three years at Price Waterhouse.

 

 

 

Mr. Black is qualified to serve on our board because of his extensive management, financial, and operational experience at SPS Commerce, Inc., during which he led the transformation of a tech-driven startup company into a global business and developed a deep knowledge of the requirements involved with being a public company.

 

Sujeet Chand - Age 60

Director since 2017

Mr. Chand has served as a director of our company since May 2017 and serves as a member of the compensation committee and the nominating and governance committee. Mr. Chand has been the Senior Vice President and Chief Technology Officer at Rockwell Automation, Inc. since 2005. Prior to taking on his current role, Mr. Chand served in various leadership positions at Rockwell. Mr. Chand has sat on multiple government, industry, and higher education advisory boards, and has long had significant interaction with the Board of Directors of Rockwell. Mr. Chand earned a Doctor of Philosophy degree in electrical and computer engineering and a master's degree in electrical engineering from the University of Florida.

 

Mr. Chand’s qualifications to serve on our board of directors include, among other skills and qualifications, his deep technical expertise and industry knowledge, particularly his experience at Rockwell. Mr. Chand brings a highly effective balance of strategic insight and technical engineering skills, as well as a unique perspective on technology, innovation and customer needs. He has served on the boards of the National Institute for Standards and Technology (NIST), National Electrical Manufacturers Association (NEMA), FIRST Robotics, Wisconsin Technology Council, University of Wisconsin Foundation, and Robert W. Baird Venture Partners. He has also represented the U.S. as the head of a delegation to Intelligent Manufacturing Systems, a worldwide consortium on manufacturing technology.

 

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Rainer Gawlick - Age 50

Director since 2008

Dr. Gawlick has served as a director of our company since September 2008 and serves as a member of the audit committee and as the chair of the compensation committee. Dr. Gawlick also serves on the boards of Chyronhego, Meltwater, and Progress, a publicly traded company, where he is a member of the compensation committee and the nomination and governance committee. Dr. Gawlick is an Operating Affiliate at Vector Capital, a leading global private equity firm. Previously, from July 2015 to October 2016, Dr. Gawlick was President of Perfecto Mobile, Ltd., a leader in mobile testing. Prior to that he was with IntraLinks, Inc. where he was Executive Vice President of Global Sales. IntraLinks, Inc. is a computer software company providing virtual data rooms and other content management services. From August 2008 to April 2012, Dr. Gawlick served as Chief Marketing Officer of Sophos Ltd, a computer security company providing endpoint, network and data protection software. From April 2005 to August 2008, Dr. Gawlick served as Vice President of Worldwide Marketing and Strategy at SolidWorks Corp., a CAD software company. He also has held a variety of executive positions in other technology businesses and was a consultant with McKinsey & Company.

 

 

 

Dr. Gawlick has extensive sales, marketing and product-management experience in the technology industry. Dr. Gawlick offers expertise in building brand awareness, managing marketing on a global scale and developing growth strategies, which enables him to counsel our company on its global expansion.

 

 

John B. Goodman - Age 58

Director since 2001

Mr. Goodman has served as a director of our company since 2001 and serves as a member of the audit committee and as chair of the nominating and governance committee. Mr. Goodman currently serves on the board of directors of Inclined Biomedical Technologies, Inc. d/b/a Dribank Labs. From December 1982 to October 2010, Mr. Goodman held various positions at Entegris, Inc., a materials supplier, most recently as Senior Vice President and Chief Technology & Innovation Officer.

 

 

 

Mr. Goodman’s technical background and experiences in supply chain networks, logistics and financial planning and reviews enable Mr. Goodman to provide guidance and counsel on our strategic plan, research and development, supplier relationships and finance functions.

 

 

Donald G. Krantz - Age 63

Director since 2017

Dr. Krantz has served as a director of our company since May 2017. Dr. Krantz served as our Executive Vice President and Chief Technology Officer from January 2015 until his retirement in June 2016. From January 2007 to January 2015, Dr. Krantz served as our Chief Operating Officer. From November 2005 to January 2007, Dr. Krantz served as our Vice President of Development. Prior to joining our company, Dr. Krantz served in various roles at MTS Systems, Inc., a builder of custom precision testing and advanced manufacturing systems, including as a business unit Vice President, Vice President of Engineering and Chief Technology Officer. Dr. Krantz was an Engineering Fellow at Alliant Techsystems and Honeywell, Inc., and was named the 2005 Distinguished Alumnus of the Department of Computer Science and Engineering at the University of Minnesota. Dr. Krantz also serves on the board of advisors of Activated Research Company, LLC.

 

 

 

Dr. Krantz has knowledge of and experience in leadership positions within multiple departments of our company, as well as his education and experience, enable him to provide guidance and counsel on strategy, relationships, general business matters and risk management.

   

Sven A. Wehrwein - Age 67

Director since 2011

Mr. Wehrwein has served as a director of our company since June 2011 and serves as Chairman, as chair of the audit committee, and as a member of the nominating and governance committee. Mr. Wehrwein has been an independent financial consultant to emerging companies since 1999. During his 35-plus years in accounting and finance, Mr. Wehrwein has experience as a certified public accountant (inactive), investment banker to emerging growth companies, chief financial officer, and audit committee chair. He currently serves on the board of directors of SPS Commerce, Inc., a publicly traded supply-chain management software company, and Atricure, Inc., a publicly traded medical device company. Mr. Wehrwein also served on the board of directors of Compellent Technologies, Inc. from 2007 until its acquisition by Dell Inc. in 2011, on the board of Vital Images, Inc. from 1997 until its acquisition by Toshiba Medical in 2011, on the board of Synovis Life Technologies, Inc. from 2004 until its acquisition by Baxter International, Inc. in 2012, on the board of Cogentix Medical, Inc. from 2006 to 2016, and on the board of Image Sensing Systems, Inc. from 2006 to 2012.

 

 

 

Mr. Wehrwein’s qualifications to serve on our board of directors include, among other skills and qualifications, his capabilities in financial understanding, strategic planning and auditing expertise, given his experiences in investment banking and in financial leadership positions. As chairman of the audit committee, Mr. Wehrwein also keeps the board abreast of current audit issues and collaborates with our independent auditors and senior management team.

  

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 Voting Information and Board Voting Recommendation

 

As set forth in our Third Amended and Restated Articles of Incorporation, as amended, each director shall be elected by the vote of the majority of the votes cast with respect to the director, provided that directors shall be elected by a plurality of the votes present and entitled to vote on the election of directors at any such meeting for which the number of nominees (other than nominees withdrawn on or prior to the day preceding the date we first mail our notice for such meeting to the shareholders) exceeds the number of directors to be elected. A majority of the votes cast means that the votes cast “for” a director nominee must exceed the votes that are voted “against” that director.

 

THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” EACH NOMINEE LISTED.

 

15

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Named Executive Officers

 

The compensation provided to our named executive officers for 2017 is set forth in detail in the Summary Compensation Table and the other tables, accompanying footnotes and narrative that follow in this section. This Compensation Discussion and Analysis explains our executive compensation philosophy, objectives and design, our compensation-setting process, our executive compensation program components and the decisions made in 2017 affecting the compensation of our named executive officers.

 

Throughout this section, we refer to the following individuals as our “named executive officers”:

 

 

Victoria M. Holt, our President and Chief Executive Officer, or CEO;

 

 

John A. Way, our Chief Financial Officer, or CFO, and Executive Vice President of Development;

 

 

David M. Fein, our Chief Revenue Officer;

 

 

Arthur R. Baker III, our Chief Technology Officer; and

 

 

Robert Bodor, our Vice President/General Manager – Americas.

 

EXECUTIVE SUMMARY

 

This section provides an overview of our performance, key decisions and actions made by our Compensation Committee during the course of the year, a summary of the governance features of our executive compensation program, and a history of our say-on-pay results.

 

Summary of Proto Labs’ Performance

 

2017 Company Performance

 

2017 was an excellent year for our company across a number of financial measures. We also executed on a number of key strategic initiatives, including but not limited to our acquisition of RAPID Manufacturing Group, LLC (RAPID) and launched on-demand manufacturing for our Injection Molding product line in the Americas. Our revenues increased by 15.6% and our net cash provided by operating activities was $81.7 million. In addition, we executed enhancements in our go-to-market models with the goal of delivering sustainable revenue growth over the long term.

 

Growth

Profitability

Cash Generation

Strategic

 

+15.6%

 

Revenue increased to $344.5 million in 2017 compared with $298.1 million in 2016.

 

+21.3%

 

Net income for 2017 increased to $51.8 million, from $42.7 million in 2016.

 

$81.7m

 

Cash generated from operations during the year totaled $81.7 million.

 

RAPID

 

Acquired during the fourth quarter to expand the number of product lines we offer to include sheet metal fabrication and expand our CNC machining capability.

 

Shareholder Value Creation

 

Since our IPO in February 2012, we have delivered higher total shareholder returns (TSR) than companies in our compensation peer group, the S&P 500 and the Russell 2000 Index. Our three-year TSR and one-year TSR have each outperformed our compensation peer group, the S&P 500 and the Russell 2000. Our board of directors and senior management are strongly committed to maintaining our company’s long-term sustainable growth.

 

16

 

 

The information above reflects the period of time ending December 31, 2017, and the “Peer Group” reflected in the chart represents the current compensation peer group developed by Pearl Meyer in late 2017 for 2018 compensation planning purposes. The group includes the following companies: 3D Systems Corporation, Ellie Mae, Inc., ESCO Technologies, FARO Technologies Inc., Gogo Inc., Monotype Imaging Holdings, Inc., NN Inc., Power Integrations Inc., Raven Industries, RBC Bearings, Shutterstock Inc., SPS Commerce, Inc., Sun Hydraulics Corporation, Tessera Technologies Inc., and Universal Display Corp. The Peer Group reflected in the chart above is different from the peer group referenced below, which was developed by Pearl Meyer in late 2016 for 2017 compensation planning purposes. See the “Peer Group” section of this Compensation Discussion & Analysis for further details on the peer group developed by Pearl Meyer in late 2016 when establishing base salaries, annual equity awards and target annual incentive compensation for 2017.

 

Key Actions and Decisions in 2017 and Early 2018

 

In 2017 and early 2018, the Company made a number of important decisions as it relates to our named executive officer compensation program.

 

Topic

Actions / Decision

2017 Compensation Adjustments

 ✔

Adjusted salaries for two of our named executive officers, Mr. Way and Dr. Bodor, to better reflect competitive market levels

  Other named executive officers did not receive increases because they were either competitively positioned or recently hired into their role at the Company

2017 Incentive Grants and Awards

Awarded bonuses to our named executive officers that averaged 112% of their target awards reflecting corporate, and regional where applicable, performance

  Granted our named executive officers 2017 equity awards comprised of stock options and restricted stock units (RSUs)
  Introduced Performance Stock Units (PSUs) as a long-term incentive award for our CEO, which vest based on achieving 3-year organic revenue and Earnings Per Share goals

Compensation Mix and Structure

Continued the use of revenue and adjusted operating income margin (“AOI”) as the two key financial metrics in our Annual Incentive Program

  Modified the annual equity grant mix to 25% stock options and 75% RSUs to better reflect marketplace practices and reduce our overall annual share usage
  For 2018, cascaded the use of PSUs to all other named executive officers

Compensation

Reviewed and approved a new compensation peer group

Governance For 2018, reoriented the compensation decision making process around competitive total compensation

 

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Key Governance Attributes

 

Our Compensation Committee is committed to establishing an executive compensation program that reflects strong corporate governance attributes. The following table summarizes those corporate governance attributes.

 

Things We Do

Things We Don’t Do

“Double-trigger” treatment for cash and accelerated equity vesting upon

a change in control

No tax gross-ups on perquisites, severance or change-in-control payments

Meaningful stock ownership guidelines for our CEO and executive No hedging/pledging of Proto Labs stock
  officers No option repricing without shareholder approval
Compensation recoupment (“clawback”) policy No excessive perquisites for executives
Equity award approval policy    
Independent Compensation Committee    
Independent compensation consultant    
Annual compensation risk assessment    

 

Say-on-Pay Results

 

At our 2017 annual meeting, the say-on-pay proposal received the approval of approximately 94% of the shares voted on the proposal. Our compensation committee considered this result to be an endorsement by our shareholders of our compensation program and maintained the fundamental features of our 2016 program for 2017. Further, since the Company began holding the say-on-pay vote, our shareholders have been overwhelmingly supportive of our program, with the Company receiving greater than 90% in each year.

 

Organizational Changes

 

In October 2017, we announced the hiring of Bjoern Klaas as Vice President/General Manager and Managing Director – Europe in anticipation of the retirement of John B. Tumelty. We negotiated an arm’s-length compensation arrangement with Mr. Klaas that we believe is competitive when compared with the compensation offered by similar growth companies in our industry and that was necessary to induce Mr. Klaas to join our company in light of the other employment opportunities available to him.

 

Executive Compensation Philosophy and Objectives

 

We believe our success depends in large measure on our ability to attract, retain and motivate a talented senior management team to effectively lead our company in a dynamic and changing business environment, and that a competitive executive compensation program is essential to that effort. We believe that our executive compensation program should support our short- and long-term strategic and operational objectives, and reward corporate and individual performance that contributes to creating value for our shareholders.

 

Consistent with this philosophy, our executive compensation program incorporates the following key principles and objectives:

 

 

Structure the compensation program so as to align the interests of our executive officers with those of our customers, employees, and shareholders;

 

 

Provide a competitive total cash compensation opportunity that includes target incentive goals that are reasonably achievable yet represent appreciable and appropriate improvement over prior periods;

 

 

Utilize equity-based awards in a manner designed to motivate long-term company performance, increase shareholder value and emphasize their long-term retentive function;

 

 

Recognize and reward the achievement of company and business unit goals as well as individual performance;

 

 

Provide compensation commensurate with the level of business performance achieved;

 

 

Provide greater compensation opportunities for individuals who have the most significant responsibilities and therefore the greatest ability to influence our achievement of strategic and operational objectives;

 

 

Structure the compensation program so that it is understandable and easily communicated to executives, shareholders and other constituencies;

 

 

Place increasing emphasis on incentive/variable compensation for positions of increasing responsibility; and

 

 

Make benefit programs available to executive officers consistent with those provided to salaried employees.

 

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Compensation Decisions and Processes

 

The compensation committee of our board of directors, which consists solely of independent directors, generally has been responsible for overseeing our executive compensation program, including annually reviewing the ongoing compensation arrangements for each of our executive officers, including our CEO, and reporting those arrangements to our board.

 

Our compensation committee regularly receives and considers input from our CEO regarding the compensation and performance of the other executive officers, including recommendations as to compensation levels that the CEO believes are commensurate with an individual’s job performance, skills, experience, qualifications, criticality to our company and development/career opportunities, as well as with our compensation philosophy, external market data and considerations of internal equity. With the assistance of our CFO, our CEO also has provided recommendations to the compensation committee regarding the establishment of performance goals for the annual cash incentive plan based on the operating budget approved by our board of directors. Our CEO regularly attends meetings of our compensation committee, except where the CEO’s own compensation is being considered or times when the committee meets in executive session. Our CEO makes no recommendations to the compensation committee regarding her own compensation. The compensation committee communicates its views and decisions regarding compensation arrangements for our executive officers to our CEO, who generally has been responsible for implementing the arrangements.

 

In determining executive compensation, our compensation committee reviews and considers a number of factors, including individual and corporate performance, input from our CEO, compensation market data from third party compensation surveys (including Pearl Meyer, our independent compensation consultant), our compensation philosophy and key principles, the pay practices of a set of comparable companies, feedback received from shareholders concerning say-on-pay, and the committee’s collective experience and knowledge. We have used market data primarily as a reference point to assess whether our compensation practices are reasonable, competitive and likely to achieve our objectives, and actually deliver compensation in amounts that are consistent with the compensation committee’s assessment of our company’s relative performance. As part of these assessments, we assumed that base salary and target total cash compensation levels were likely to be reasonable and competitive if together they approximated the market median we calculated from the surveys and other compensation data we utilized which for us generally meant a range between 80% and 125% of the market median. The utilization of a range is largely in recognition of the limitations of the survey data that include companies with limited degrees of comparability to our company and position titles that may encompass positions with responsibilities that differ to varying degrees from the responsibilities of a similarly titled position within our company. As a result, we did not establish specific compensation amounts or parameters for any executive officer position based on market data in 2017, recognizing that factors unique to each individual will ultimately determine that individual’s compensation, which may not necessarily be within the median range.

 

Our compensation committee also approves all awards to our executive officers under our 2012 Long-Term Incentive Plan (the “LTIP”), including the award of performance stock units to our CEO in 2017 and certain of our named executive officers in 2018 as summarized below in “Elements of Executive Compensation—Performance-Based Equity Grants.” Our compensation committee has delegated authority to our CEO and the chair of the compensation committee under the LTIP to award stock options to employees (other than our executive officers) at their discretion, subject to individual and aggregate maximum amounts in each year. The CEO and the chair of the compensation committee typically exercise their discretion to grant these awards in connection with new hires and promotions, to invest in and retain our future leaders, and in recognition of extraordinary individual achievements. All awards granted pursuant to this delegated authority must have a vesting period that is market competitive and must be made in accordance with our equity grant timing policy described below in “Other Compensation and Equity-Related Policies—Equity Award Approval Policy.” Awards granted in 2017 had a vesting period of five years. All option awards granted pursuant to this delegated authority must have an exercise price at least equal to the closing price of our common stock on the New York Stock Exchange on the date of grant.

 

Peer Group

 

In late 2016, the compensation committee requested that its independent compensation consultant, Pearl Meyer, review our peer group used for executive compensation. Pearl Meyer used a multi-step process to construct a peer group that we believe fits our market position and profile. The compensation committee and our board of directors reviewed information relating to this peer group when establishing base salaries, annual equity awards and target annual incentive compensation for 2017. 

 

When constructing the peer group, Pearl Meyer first identified U.S.-based, publicly-traded technology hardware and equipment, software and services, and capital goods companies. Second, it looked at companies with scope criteria approximately 1/3 to 3 times that of Proto Labs: annual revenues between $100 million and $800 million, and with market capitalizations between $500 million and $4.5 billion. Then, Pearl Meyer filtered for companies with high growth profiles, as indicated by a market capitalization-to-revenue ratio greater than three times, and positive EBITDA margins. Finally, Pearl Meyer gave preference to companies meeting these screens that (i) were in our existing peer group, (ii) have a similar profile in terms of use of technology, assets and customers, or (iii) are believed to offer disruptive technologies.

 

19

 

Pearl Meyer’s review resulted in a peer group of the following 16 companies:

 

3D Systems Corporation

Monotype Imaging Holdings, Inc.

Sun Hydraulics Corporation

Cognex Corporation

NN Inc.

Tessera Technologies

Coherent, Inc.

Power Integrations, Inc.

Ultimate Software Group, Inc.

FARO Technologies, Inc.

Shutterstock, Inc.

Ultratech, Inc.

Gogo, Inc.

SPS Commerce, Inc.

Universal Display Corp.

InvenSense Inc.

   

 

Below is selected information about the companies in the peer group that Pearl Meyer used when constructing the group:

 

   

Annual Revenue

 

Market Capitalization

25th percentile

 

$197 million

 

$648 million

75th percentile

 

$560 million

 

$1.6 billion

 

The compensation committee uses data about executive compensation at peer group companies as a tool to assess the reasonableness of the total compensation paid to our executive officers. As discussed above, we do not establish a percentile which any part of our executive’s compensation or any executive’s overall compensation must meet or exceed.

 

Elements of Executive Compensation

 

Our executive compensation program historically has been comprised of three primary elements—base salary, annual cash incentive, and equity-based long-term incentives. The primary elements of our compensation program for 2017 were consistent with our 2016 compensation program. While all elements of our executive compensation program are intended to collectively achieve our overriding purpose of attracting, retaining and motivating talented executives, the table below identifies the form and additional specific purposes of each element as reflected in our 2017 compensation program. 

 

Compensation
Component

 

Form of

Compensation

 

Purpose

Base Salary

 

Cash

 

Compensate each named executive officer relative to individual responsibilities, experience and performance

 

 

 

 

 

 
 

 

 

 

Provide steady cash flow not contingent on short-term variations in company performance

 

 

 

 

 

 

Annual Incentive

 

Cash

 

Align compensation with our annual corporate financial performance

 

 

 

 

 

 
 

 

 

 

Reward achievement of short-term financial objectives

 

 

 

 

 

 
 

 

 

 

Provide participants with a meaningful total cash compensation opportunity (base salary plus annual incentive)

 

 

 

 

 

 

Long-Term Incentives

 

Stock Options,

Restricted Stock Units

 

Align compensation with our long-term returns to shareholders

 

 

and Performance

 

 

 

   

Stock Units

 

Encourage long-term retention

 

 

 

 

   
 

 

 

 

Create a long-term performance focus

 

 

 

 

   
 

 

 

 

Provide executive ownership opportunities

 

Our compensation committee has not adopted a formal or informal policy for allocating compensation among the various elements, or between cash and non-cash elements or between long- and short-term compensation; however, the committee considers total compensation and then adjusts the mix among each element of such compensation based on market comparisons, individual role and performance. As noted earlier, however, we do place greater emphasis on incentive-based and variable forms of compensation for executives with more significant responsibilities, reflecting their greater capacity to affect our performance and results.

 

Base Salaries

 

At the time an executive officer is first hired, his or her base salary generally is established through individual negotiations between us and the executive officer, taking into account judgments as to the executive officer’s qualifications, experience, responsibilities, prior salary history, internal pay equity considerations and market factors.

 

20

 

The compensation committee annually reviews the base salaries of our executive officers near the end of each year and bases any adjustments for the following year on merit and market considerations. Merit-based adjustments primarily reflect an assessment of an individual’s performance. Any market-based adjustments reflect an assessment of the competitive positioning of an individual’s salary with comparable positions in the market based on market data provided to the compensation committee by the compensation consultant and other market surveys the compensation committee might use.

 

Name

 

2017 Annual

Base Salary(1)

   

2016 Annual

Base Salary

   

Percentage

Change from

2016 Annual

Base Salary to

2017 Annual

Base Salary

 

Victoria M. Holt

  $ 530,450     $ 530,450       0.00

%

John A. Way

  $ 335,124     $ 313,200       7.00

%

David M. Fein

  $ 350,000     $ 350,000 (2)     0.00

%

Arthur R. Baker III

  $ 286,000     $ 286,000 (3)     0.00

%

Robert Bodor

  $ 278,200     $ 267,500       4.00

%

 

(1)

The annual base salary of each of Mr. Way and Dr. Bodor was increased for 2017 compared to 2016 as a result of merit-based increases based on such officer’s contributions to our company and our company’s overall success in 2016 and expected success in 2017. Mr. Fein’s annual base salary for 2017 was the product of negotiations with him at the time of his hiring. Dr. Baker’s annual base salary for 2016 was the product of negotiations with him at the time of his hiring. Ms. Holt’s annual base salary for 2017 was reviewed by the compensation committee and was determined to be market competitive.

 

(2)

Mr. Fein commenced his employment with us in December 2016. Base salary amounts in the table above have been annualized for Mr. Fein to facilitate comparison.

 

(3)

Dr. Baker commenced his employment with us in May 2016. Base salary amounts in the table above have been annualized for Dr. Baker to facilitate comparison.

 

Annual Incentive Program

 

2017 Annual Incentive Program

 

All of our named executive officers participate in our annual incentive program. In 2016, modifications were made to the annual incentive plan design to include adjusted operating income margin (“AOI”) as a target component. The annual incentive program payouts were a function of two metrics:

 

 

75% of the annual bonus target was based on annual revenue growth, calculated without regard to foreign currency exchange rates. We refer to this aspect of the annual incentive program as the revenue factor.

 

 

25% of the annual bonus target was based on budgeted adjusted operating income margin. We refer to this aspect of the annual incentive program as the AOI factor. For purposes of calculating attainment of the AOI portion of the annual incentives, AOI is defined as operating income before incentive compensation expense, stock-based compensation expense, amortization expense, acquisition expenses and other one-time expenses not indicative of core operations, expressed as a percentage of revenue.

 

Revenue growth and AOI were selected as the primary financial objectives for determining the 2017 annual incentive payouts because our primary objective continues to be to grow our company profitably.

 

The compensation committee approved 2017 revenue and AOI objectives for our company as a whole and for each of our major geographic business units (the United States, Europe and Japan). Including business unit performance objectives enables us to tailor annual incentive opportunities so as to reward each executive officer for the performance of those portion(s) of our company for which the officer had the most direct responsibility. All of our named executive officers had an AOI target based on our consolidated company-wide results. All of our named executive officers other than Dr. Bodor had a revenue target based on our consolidated company-wide results. Dr. Bodor had a revenue target based 65% on our operating results in the United States, the region for which he is primarily responsible, and 35% on consolidated results.

 

21

 

A target payout expressed as a percentage of annual base salary is established for each named executive officer annually. For 2017, their target payout percentages were as follows:

 

Name

 

Target Payout as %

of 2017 Salary

Victoria M. Holt

 

100%

John A. Way

 

75%

David M. Fein

 

75%

Arthur R. Baker III

 

50%

Robert Bodor

 

50%

 

The target payout percentages for each named executive officer remained unchanged from the 2016 percentages in light of the compensation committee’s determination that the target percentages from 2016 remained competitive.

 

The payout is zero for 2017 revenue below specified threshold amounts for our company as a whole and each of its business units, is 30% at those threshold amounts, and increases (with no maximum) in amounts specified by the compensation committee to the degree revenue exceeds the respective threshold amounts. The revenue factor is 100% at targeted revenue growth on a consolidated basis or for each region, as applicable, for each individual.

 

For the AOI factor, the payout is zero for 2017 AOI below a specified threshold amount for our company as a whole, is 40% at the threshold amount, and increases in amounts specified by the compensation committee to the degree that AOI exceeds the threshold amount. The AOI factor is 100% at targeted AOI on a consolidated basis for each individual.

 

For 2017, the compensation committee approved the following thresholds and targets for the revenue factor. Because our acquisition of RAPID Manufacturing Group, LLC was not contemplated in establishing 2017 targets, the actual performance and the threshold and target amounts reflected in the tables below exclude that acquisition for purposes of consistency.

 

Objective(1)

2017 Threshold

Growth

 

2017 Threshold

Amount

2017 Target

Growth

 

2017 Target

Amount

Consolidated Revenue Growth

 

2.3

%

$

304.90M

 

10.7

%

$

330.00M

United States Revenue Growth

 

0.1

%

$

224.06M

 

8.3

%

$

242.50M

 

(1)

The final payout factor for 2017 was based on the dollar amount of actual performance, as opposed to the growth percentage.

 

The following table summarizes our actual performance during 2017 and the related payout factors:

 

Objective

 

Actual
Performance
(1)

 

 

Final
Payout
Factor
 

 

Consolidated Revenue(2)

 

$

338.70M

 

 

 

105.8

%(3)

United States Revenue(4)

 

$

259.56M

 

 

 

129.0

%

AOI

 

 

34.8

%

 

 

132.9

%

 

 

(1)

Our actual performance is equal to our 2017 revenue calculated using 2017 budgeted foreign currency exchange rates.

 

 

 

 

(2)

For consolidated revenue performance between threshold and target, the payout factor would increase proportionately between 30% and 100%, or about 2.8 percentage points for each $1 million in additional consolidated revenue.

 

 

 

 

(3)

The final payout factor represents the percentage of the target payout that would be made based on the actual company-wide or business unit revenue for 2017, without regard to foreign currency exchange rates. Each named executive officer other than Dr. Bodor received an incentive of approximately 2.9% less based on base salary than they would have received had exchange rate fluctuations been included in the revenue factor. Dr. Bodor received an incentive of approximately 1.0% less based on base salary than he would have received had exchange rate fluctuations been included in the revenue factor.

 

 

 

 

(4)

For United States revenue performance between threshold and target, the payout factor would increase proportionately between 30% and 100%, or about 3.8 percentage points for each $1 million in additional United States revenue.

 

22

 

Name

 

2017 Actual

Salary

Amount

 

2017

Actual

Incentive

Amount

 

2017 Total

Cash

Compensation Amount

 

Market 50th Percentile
Total Cash Compensation
(1)

Victoria M. Holt

  $ 530,450  

$

597,154   $ 1,127,604  

$

1,011,000

John A. Way

 

$

335,124   $ 282,949   $ 618,073  

$

545,000

David M. Fein

 

$

350,000  

$

295,509  

$

645,509  

$

N/A(2)

Arthur R. Baker III

 

$

286,000  

$

160,982  

$

446,982  

$

444,000

Robert Bodor

  $ 278,200   $ 172,324  

$

450,524  

$

494,000

 

(1)

Market compensation figures based on the peer group developed by Pearl Meyer in late 2016 for 2017 compensation planning purposes.

 

(2)

Because Mr. Fein did not commence his employment with us until December 2016, Pearl Meyer did not prepare market compensation figures for his position based on the peer group developed in late 2016 for 2017 compensation planning purposes.

 

Long-Term Equity-Based Compensation

 

In 2017, we made a significant adjustment to the long-term equity-based compensation of Ms. Holt, our CEO. As shown in the table above, Ms. Holt's base salary and target short-term incentive compensation is competitive with the market peer group; however, her total direct compensation was significantly lower than the market peer group. The additional long-term equity adjustment was made in the form of a performance-based equity grant to incentivize Ms. Holt to create long-term shareholder value.

 

Annual Equity Grants

 

The annual equity grants made to our named executive officers for 2017 are summarized below in "Elements of Executive Compensation – Performance-Based Equity Grants." The long-term incentive portion of our executive compensation program historically has taken the form of annual equity grants that have a longer vesting period than most companies in our peer group. The compensation committee believes that a longer vesting period is more closely aligned with the creation of long-term shareholder value. Further, the committee understands that none of the companies in our peer group have the same business model or financial performance as our company.

 

We generally have not utilized a formulaic approach to determine the size of individual equity awards to our executives. Our compensation committee considers the employee’s total compensation and then adjusts the mix among base salary, annual incentive and long-term incentive based on market comparisons, individual role and performance. Our compensation committee generally has determined the size of individual grants using its collective business judgment and experience, taking into account factors such as the role and responsibility of the individual executive, the size and value of the unvested portion of existing equity awards and of existing holdings of our common stock, an evaluation of the expected and actual performance of each executive, internal pay equity considerations and market factors. The size of equity awards granted to our executives is inherently subjective in light of the discretion granted to the compensation committee and the various factors the committee considers when granting equity awards.

 

Beginning in 2014, we modified our historic practice of granting equity compensation only in the form of stock options and granted awards in the form of both stock options and time-based restricted stock units, or RSUs. 65% of the annual equity awards we granted in 2014 and 2015 were made in the form of stock options, based on the Black-Scholes value of the options on the grant date, and 35% were made in the form of RSUs, based on the closing price of the stock on the date of grant. For 2016, the compensation committee changed the mix of long-term equity grants to 50% stock options and 50% RSUs. For 2017, the compensation committee changed the mix of long-term equity grants to 25% stock options and 75% RSUs. The compensation committee decided to increase the portion of our annual equity awards that is awarded in the form of RSUs for the following reasons: 

 

 

To mitigate the incentive our executive officers have to take excessive risks because, unlike stock options, RSUs provide value to the recipient regardless of whether our stock appreciates above a certain price (i.e., the exercise price of a stock option); and

 

 

To be competitive with comparable companies, many of which grant restricted stock or restricted stock units in addition to or in lieu of stock options.

 

23

 

In addition to annual equity awards, in certain cases we have granted equity awards in connection with an individual’s initial employment with us, upon promotions or other changes in responsibilities, or in recognition of significant achievements. These additional equity awards are made outside our typical annual grant cycle, and are subject to our equity award approval policy summarized below in “Other Compensation and Equity-Related Policies—Equity Award Approval Policy.”

 

Performance-Based Equity Grants

 

The annual and performance-based equity grants made to our named executive officers for 2017 were granted in February 2017 and were as follows:

 

Name

 

Grant Date

Fair
Value

   

Number
of RSUs

   

Number of

Shares

Subject
to Stock

Option

   

Number
of PSUs

Victoria M. Holt

 

$

2,500,154

     

12,855

     

9,070

     

25,707

John A. Way

 

$

750,403

     

9,645

     

6,805

     

-     

David M. Fein

 

$

500,223

     

6,430

     

4,535

     

-     

Arthur R. Baker III

 

$

500,223

     

6,430

     

4,535

     

-     

Robert Bodor

 

$

500,223

     

6,430

     

4,535

     

-     

 

 

The February 2017 award of PSUs to Ms. Holt was approved by our board of directors under the terms of the LTIP. The grant served the purpose of aligning Ms. Holt's target long term incentive to that of the peer group and the compensation committee believes that this grant of PSUs to Ms. Holt will incent the achievement of long-term shareholder value, because the PSUs are only earned and vest upon achievement of the revenue growth targets and adjusted Earnings Per Share (EPS) growth targets set forth in the Performance Stock Unit Agreement approved by our board of directors. Under the terms of the LTIP and a form of Performance Stock Unit Agreement approved by our board of directors, an award of PSUs is expressed in terms of a target number of PSUs (in the case of Ms. Holt’s award, 25,707), with between 0% and 150% of that target number capable of being earned and vesting at the end of a three-year performance period (in the case of Ms. Holt’s award, January 1, 2017 to December 31, 2019) depending on our company’s organic revenue and adjusted EPS performance in the final year of the performance period and the award recipient’s continued employment. The number of PSUs determined to have been earned at the end of the performance period will vest at that time. Each vested PSU will be paid out in one share of our common stock.

 

In February 2018, our compensation committee approved awards of PSUs to each of our named executive officers under the terms of the LTIP. The compensation committee believes that these grants of PSUs will incent the achievement of long-term shareholder value, because the PSUs are only earned and vest upon achievement of the revenue growth targets and adjusted EPS growth targets set forth in the corresponding Performance Stock Unit Agreements for each award of PSUs. The target number of PSUs and three-year performance periods for the awards of PSUs approved in February 2018 are set forth below:

 

Name

 

Target Number
of PSUs

 

Three-Year Performance Period

Victoria M. Holt

 

14,185

 

January 1, 2018 to December 31, 2020

John A. Way

 

1,892

 

January 1, 2018 to December 31, 2020

David M. Fein

 

1,183

 

January 1, 2018 to December 31, 2020

Arthur R. Baker III

 

1,419

 

January 1, 2018 to December 31, 2020

Robert Bodor

 

1,324

 

January 1, 2018 to December 31, 2020

 

The number of PSUs determined to have been earned at the end of the performance period will vest at that time. Each vested PSU will be paid out in one share of our common stock.

 

A PSU award will be forfeited if the award recipient’s employment ends before the scheduled vesting date except in situations involving retirement, disability, a qualifying termination under a severance agreement, death or a change in control. If employment ends due to retirement, disability or a qualifying termination under a severance agreement before the scheduled vesting date, a pro rata portion of the number of PSUs that would have been earned at the end of the performance period if employment had continued will vest on the scheduled vesting date. The pro rata portion will be based on the portion of the performance period that elapsed prior to the date of termination. If employment ends due to an award recipient’s death, a pro rata portion (determined in the same manner) of the target number of PSUs will vest at that time.

 

If a change in control of our company occurs before the scheduled vesting dates of the award, the performance period will be truncated and a pro rata portion of the number of PSUs determined to have been earned during the truncated performance period will vest as of the date of the change in control. The pro rata portion will be based on the portion of original performance period that elapsed prior to the date of the change in control.

 

Other Executive Benefits

 

Our named executive officers generally receive health and welfare benefits under the same programs and subject to the same terms as our other salaried employees. These benefits include medical, dental and vision benefits, short- and long-term disability insurance, accidental death and dismemberment insurance and basic life insurance. Our named executive officers are also eligible to participate in our 401(k) retirement plan, under which our company provides a matching contribution in an amount equal to 100% of the first 3% of compensation contributed by a participant and 50% of the next 2% of compensation contributed. We also provide supplemental benefits to our executive officers who are based outside of the United States as part of compensation packages that are intended to be competitive in the respective local markets.

 

24

 

Severance and Change in Control Benefits

 

In connection with hiring Ms. Holt and Mr. Way in 2014, we entered into agreements with each of them in recognition of the need to provide these executives with certain protection if the executive’s employment with us is involuntarily terminated without “cause” or terminated by the executive for “good reason,” including in connection with a change in control of our company. The agreements provide Ms. Holt and Mr. Way certain cash payments based on the executive’s base salary and target annual incentive payments and the continuation of certain benefits following termination. We believe this protection was necessary to induce the executive to forego other employment opportunities and assume a critical position in our organization. We also believe the change in control-related benefits are beneficial to our shareholders by encouraging Ms. Holt and Mr. Way to remain focused on shareholders’ interests in the face of a potential change in control, and the benefits promote stable leadership during a possible transition period.

 

We have entered into severance agreements with each of our executive officers other than Ms. Holt and Mr. Way. We entered into a severance agreement with Dr. Bodor in 2015. We entered into severance agreements with Dr. Baker and Mr. Fein in connection with their hiring in May 2016 and December 2016, respectively. For a summary of the material terms and conditions of our agreements with the named executive officers providing for payments in connection with termination of employment and changes in control of our company, see “Potential Payments upon Termination or Change in Control.”

 

The award agreements under the LTIP provide for “double trigger” acceleration of vesting and exercisability of stock options in connection with a change in control, meaning that both a change in control and either a failure to continue, assume or replace outstanding awards or a termination of employment are necessary before acceleration will occur. The compensation committee believes that the double trigger structure avoids an unintended windfall to executives who retain their employment and their equity awards in the event of a friendly change in control, but still provides them appropriate incentives to cooperate in negotiating any change in control in which they believe they could lose their jobs.

 

Other Compensation and Equity-Related Policies

 

Clawback Policy

 

During 2014, we adopted an Executive Officer Incentive Compensation Recovery Policy (the “Clawback Policy”) for recovery of incentive compensation from our executive officers under certain circumstances. The Clawback Policy provides that we will, in all appropriate circumstances as determined by the compensation committee, and to the extent permitted by applicable law, require reimbursement or forfeiture of all or a portion of any incentive compensation awarded to our executive officers after November 12, 2014, which is the date our board adopted the Clawback Policy, where the compensation committee has determined that all of the following factors are present:

 

 

We are required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws;

 

 

The award, vesting or payment of the incentive compensation was predicated upon the achievement of certain financial results that were the subject of the restatement and such award, vesting or payment occurred or was received during the three-year period preceding the date on which we were required to prepare the restatement; and

 

 

A smaller award, vesting or payment would have occurred or been made to the executive officer based upon the restated financial results.

 

In those circumstances, we will, to the extent deemed appropriate by the compensation committee, seek to recover or cancel the amount(s) by which an executive officer’s incentive compensation that was awarded, vested or paid during the three-year period referenced above exceeded the amount(s) that would have been awarded, vested or paid based on the restated financial results, net of taxes paid or payable by the executive officer with respect to the recoverable compensation.

 

Executive Stock Ownership Guidelines

 

During 2014, we adopted stock ownership guidelines applicable to our executive officers. The guidelines are applicable to each of our executive officers and provide that each executive officer is expected to own shares of our common stock with a value at least equal to the amount shown below:

 

 

CEO – Three times annual base salary

 

 

All other executive officers – One times annual base salary

 

Each executive officer has five years from the date he or she becomes subject to the guidelines to achieve compliance with the guidelines.

 

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Equity Award Approval Policy

 

Our equity award approval policy permits us to make equity-based awards at any time other than during “blackout periods” provided for in our insider trading policy, which generally run from the eleventh of the month in which each fiscal quarter closes through the end of the second trading day following the public release of our financial results for that quarter. The policy does, however, permit us to approve an award during a blackout period, provided the effective date of the grant and the concurrent pricing of the grant occur on the first trading day after the blackout period ends.

 

Other Equity-Related Policies

 

We prohibit our executive officers from engaging in certain types of transactions in our stock, including short sales, pledges of our stock and other hedging transactions with respect to our stock. This policy is intended to prevent our executive officers from reducing the effect that decreases in the value of our stock have on their financial position. The LTIP requires that all stock options granted under the plan have an exercise price that is not less than the fair market value of a share of our common stock on the date the grant is made. The LTIP also prohibits re-pricing or exchanging underwater stock options without shareholder approval.

 

Tax Considerations

 

Section 162(m) of the Code generally precludes a public corporation from taking a federal income tax deduction for compensation paid in excess of $1,000,000 per year to certain covered officers. For 2017, compensation that qualified as performance-based was excludable in determining what compensation amount shall qualify for tax deductibility. Our compensation committee considered our ability to deduct compensation in accordance with the limitations of Section 162(m) in structuring our compensation programs. The Tax Cuts and Jobs Act enacted in December 2017 revised Section 162(m) of the Code to, among other things, eliminate the exception for performance-based compensation beginning January 1, 2018, subject to certain transition rules.

 

Risk Assessment

 

In 2017, we completed an assessment of our compensation policies and practices including the bonus plan eligibility requirements, performance measures, the corporate governance and the framework to mitigate risk. The assessment concluded there are no risks that are likely to cause a material adverse outcome on our company.

 

Summary Compensation Table

 

The following table summarizes the compensation provided to or earned by our named executive officers during our three most recently completed fiscal years:

 

Name and Principal

Position

 

Year

 

Salary
($)

   

Stock

Awards

($)

   

Option

Awards

($)(1)

   

Non-Equity

Incentive Plan Compensation(2)

   

All Other Compensation(3)

   

Total ($)

 

Victoria M. Holt,

 

2017

    530,450       2,250,089 (4)     250,065       597,154       10,800       3,638,558  

President and Chief

 

2016

    530,450       500,083       500,075       302,754       10,600       1,843,962  

Executive Officer

 

2015

    514,539       315,269       585,081       500,903       12,646       1,928,438  
                                                     

John A. Way,

 

2017

    335,124       562,786       187,618       282,949       10,800       1,379,277  

Chief Financial Officer

 

2016

    313,200       375,062       375,123       133,860       10,600       1,207,845  

 

 

2015

    290,000       175,262       325,063       211,736       9,369       1,011,430  
                                                     

David M. Fein,

 

2017

    350,000       375,191       125,033       295,509       10,800       1,156,533  

Chief Revenue Officer(5)

 

2016

    -       -       -       -       -       -  
                                                     

Arthur R. Baker III,

 

2017

    286,000       375,191       125,033       160,982       10,800       958,006  

Chief Technology Officer(6)

 

2016

    181,500       250,241       250,042       92,500       3,520       777,803  
                                                     

Robert Bodor

 

2017

    278,200       375,191       125,033       172,324       10,800       961,548  

Vice President/General

 

2016

    267,500       250,042       250,038       66,874       10,600       845,054  

Manager Americas

 

2015

    249,323       175,262       325,063       124,162       10,646       884,456  

 

(1)

Amounts shown in this column represent the grant date fair values computed in accordance with ASC Topic 718, Compensation—Stock Compensation (ASC 718) utilizing the assumptions discussed in Note 12 to our Consolidated Financial Statements for the year ended December 31, 2017 contained in our Annual Report on Form 10-K for the year ended December 31, 2017, and disregarding the effects of any estimates of forfeitures related to service-based vesting.

 

26

 

(2)

Amounts shown in this column represent amounts earned under our annual incentive program during each respective year and paid early in the following year.

 

(3)

Amounts shown in this column for all named executive officers for 2017 include company contributions to our 401(k) retirement plan.

 

(4)

This amount reflects the aggregate grant date fair value of the RSUs and performance shares (at target) granted in 2017 and are computed in accordance with ASC 718, based on the closing stock price on the grant date. The grant date fair value of RSUs granted in 2017 and the grant date fair value of the performance shares granted in 2017 if target performance and maximum performance is achieved are as follows:

 

Year   Restricted Stock Units     Performance Shares  
            Target     Maximum  
2017   $ 750,089     $ 1,500,000     $ 2,250,000  

 

 

(5)

We hired Mr. Fein as our Chief Revenue Officer on December 19, 2016.

 

(6)

We hired Dr. Baker as our Chief Technology Officer on May 2, 2016.

 

Grants of Plan-Based Awards

 

The following table summarizes the grants of plan-based awards made to our named executive officers during the year ended December 31, 2017:

 

 

 

 

 

Compensation Committee

 

Estimated Future Payouts Under
Non-Equity Incentive
Plan Awards

   

 

 

 

 

Estimated Future Payouts Under
Equity Incentive
Plan Awards
(3)

   

All Other Stock Awards: Number of Shares of Stock or Units

   

All Other Option Awards: Number of Securities Underlying Options

   

Exercise or Base Price of Option Awards

($)

 

 

Grant Date Fair Value of Stock and Option Awards

($)(4)

 
Name   Grant Date   Approval Date(1)  

Threshold

($)

   

Target

($)

   

Maximum

($)(2)

   

Threshold

(#)

   

Target

(#)

   

Maximum

(#)

                                 

Victoria M. Holt

  $ 172,396     $ 530,450       n/a                                                          
   

2/13/2017

 

2/8/2017

                                                    12,855                     $ 750,089  
   

2/13/2017

 

2/8/2017

                                                            9,070     $ 58.35     $ 250,065  
   

2/13/2017

 

2/8/2017

                            12,854       25,707       38,561                             $ 1,500,000  

John A. Way

  $ 81,686     $ 251,343       n/a                                                          
   

2/13/2017

 

2/8/2017

                                                    9,645                     $ 562,786  
   

2/13/2017

 

2/8/2017

                                                            6,805     $ 58.35     $ 187,618  

David M. Fein

  $ 85,313     $ 262,500       n/a                                                          
   

2/13/2017

 

2/8/2017

                                                    6,430                     $ 375,191  
   

2/13/2017

 

2/8/2017

                                                            4,535     $ 58.35     $ 125,033  

Arthur R. Baker III

  $ 45,208     $ 139,100       n/a                                                          
   

2/13/2017

 

2/8/2017

                                                    6,430                     $ 375,191  
   

2/13/2017

 

2/8/2017

                                                            4,535     $ 58.35     $ 125,033  

Robert Bodor

  $ 46,475     $ 143,000       n/a                                                          
   

2/13/2017

 

2/8/2017

                                                    6,430                     $ 375,191  
   

2/13/2017

 

2/8/2017

                                                            4,535     $ 58.35     $ 125,033  

 

(1)

In accordance with the terms of our equity grant timing policy, the restricted stock, RSU and stock option grants to our named executive officers identified in the “All Other Stock Awards” and “All Other Option Awards” columns of this table were granted effective as of the end of the second trading day following the public release of our financial results for the fourth quarter of 2016, even though the compensation committee approved the grants on an earlier date.

 

 

(2)

As discussed above in “Compensation Discussion and Analysis—Elements of Executive Compensation—Annual Incentive Program,” amounts paid under our annual incentive program for 2017 were based in part on our revenue growth and AOI for the year. If the target revenue growth or AOI was not achieved for the year, no payment was made. We also did not impose a maximum amount executive officers could receive under the program to reward their ability to grow the revenue of our company, with appropriate AOIs, to the maximum extent possible.

   

(3)

As discussed above in “Compensation Discussion and Analysis—Elements of Executive Compensation—Performance-Based Equity Grants,” amounts in this column represent an award of PSUs expressed in terms of a target number of PSUs, with between 0% and 150% of that target number capable of being earned and vesting at the end of a three year performance period depending on our company’s organic revenue and adjusted EPS performance in the final year of the performance period and the award recipient's continued employment.

   

(4)

Amounts shown in this column represent the grant date fair values of stock and option awards computed in accordance with ASC Topic 718, Compensation—Stock Compensation (ASC 718) utilizing the assumptions discussed in Note 12 to our Consolidated Financial Statements for the year ended December 31, 2017 contained in our Annual Report on Form 10-K for the year ended December 31, 2017, and disregarding the effects of any estimates of forfeitures related to service-based vesting.

 

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Outstanding Equity Awards at 2017 Year-End 

 

The following table provides information on each named executive officer’s outstanding equity awards as of December 31, 2017, the last day of our most recent fiscal year.

 

   

Option Awards

 

Stock Awards

 

Name

 

Option Grant

Date(1)

 

Number of Securities Underlying Unexercised

Options (#) Exercisable

   

Number of Securities Underlying Unexercised

Options (#) Unexercisable

   

Option

Exercise

Price

($/Sh)

 

Option Expiration

Date

 

Number

of Shares

or Units

of Stock

That

Have Not

Vested

(#)

   

Market

Value of

Shares of

Units of

Stock

That

Have Not

Vested

($)(2)

    Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)     Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(2)  

Victoria M. Holt

 

02/09/15

    7,196       10,794       67.15  

02/09/25

                           
   

02/08/16

    3,782       15,128       57.88  

02/08/26

                           
   

02/13/17

    -       9,070       58.35  

02/13/27

                           
                                    3,182       327,746              
                                    2,817       290,151              
                                    6,912       711,936              
                                    12,855       1,324,065              
                                    25,766  (3)     2,653,898              
                                                  25,707 (4)   2,647,821  

John A. Way

 

12/01/14

    3,912       2,608       62.90  

12/01/24

                           
   

02/09/15

    3,998       5,997       67.15  

02/09/25

                           
   

02/08/16

    2,837       11,348       57.88  

02/08/26

                           
   

02/13/17

    -       6,805       58.35  

02/13/27

                           
                                    1,272       131,016              
                                    1,566       161,298              
                                    5,184       533,952              
                                    9,645       993,435              
                                    17,667  (5)     1,819,701              

David M. Fein

 

12/19/16

    -       3,835       54.20  

12/19/26

                           
   

02/13/17

    -       4,535       58.35  

02/13/27

                           
                                    1,850       190,550              
                                    6,430       662,290              
                                    8,280  (6)     852,840              

Arthur R. Baker III

 

05/02/16

    1,737       6,948       60.96  

05/02/26

                           
   

02/13/17

    -       4,535       58.35  

02/13/27

                           
                                    3,284       338,252              
                                    6,430       662,290              
                                    9,714  (7)     1,000,542              

Robert Bodor

 

12/11/12

    -       -       36.41  

12/11/22

                           
   

02/13/14

    4,896       3,264       78.59  

02/13/24

                           
   

02/09/15

    3,998       5,997       67.15  

02/09/25

                           
   

02/08/16

    -       7,564       57.88  

02/08/26

                           
   

02/13/17

    -       4,535       58.35  

02/13/27

                           
                                    892       91,876              
                                    1,566       161,298              
                                    3,456       355,968              
                                    6,430       662,290              
                                    12,344  (8)     1,271,432              

 

(1)

The option awards vest as to 20% of the shares subject to each award on each of the first five anniversaries of the grant date.

(2)

Based on the $103.00 per share closing price of our common stock on the NYSE on December 29, 2017.

 

28

 

(3)

Restricted shares vest as to 3,182 shares on February 13, 2018, and restricted stock units vest as to 939 shares subject to the units on each of February 13, 2018, 2019 and 2020, as to 1,728 shares subject to the units on each of February 13, 2018, 2019, 2020 and 2021 and as to 2,571 shares subject to the units on each of February 13, 2018, 2019, 2020, 2021 and 2022.

(4)

Performance stock units vest on December 31, 2019 depending on our company’s organic revenue and adjusted EPS performance in the final year of the performance period and the award recipient's continued employment. Reported amount reflects target number of units.

(5)

Restricted stock units vest as to 636 shares subject to the units on each of December 1, 2018 and 2019, as to 522 shares subject to the units on each of February 13, 2018, 2019 and 2020, and as to 1,296 shares subject to the units on each of February 13, 2018, 2019, 2020 and 2021 and as to 1,929 shares subject to the units on each of February 13, 2018, 2019, 2020, 2021 and 2022.

(6)

Restricted stock units vest as to 370 shares subject to the units on each of February 13, 2018, 2019, 2020, 2021 and 2022 and as to 1,286 shares subject to the units on each of February 13, 2018, 2019, 2020, 2021 and 2022.

(7)

Restricted stock units vest as to 821 shares subject to the units on each of May 4, 2018, 2019, 2020 and 2021 and as to 1,286 shares subject to the units on each of February 13, 2018, 2019, 2020, 2021 and 2022.

(8)

Restricted stock units vest as to 446 shares subject to the units on each of February 13, 2018 and 2019, as to 522 shares subject to the units on each of February 13, 2018, 2019 and 2020, as to 864 shares subject to the units on each of February 13, 2018, 2019, 2020 and 2021 and as to 1,286 shares subject to the units on each of February 13, 2018, 2019, 2020, 2021 and 2022.

 

Option Exercises and Stock Vested in 2017

 

The following table summarizes the value realized by our named executive officers on option awards exercised and restricted stock units vested during the year ended December 31, 2017.

 

   

Option Awards

   

Stock Awards

 

Name

 

Number of

Shares

Acquired

on Exercise

   

Value

Realized on Exercise(1)

   

Number of

Shares

Acquired

on Vesting

   

Value

Realized

on

Vesting(2)

 

Victoria M. Holt

    -       -       5,849       341,289  

John A. Way

    -       -       2,454       166,182  

David M. Fein

    -       -       -       -  

Arthur R. Baker III

    -       -       821       49,055  

Robert Bodor

    17,891       730,757       1,832       106,897  

 

(1)

The value realized on exercise is calculated as the difference between the closing price of our common stock on the date of exercise as reported by the New York Stock Exchange for the number of shares acquired upon exercise and the applicable option exercise price for those shares.

 

(2)

The value realized on vesting is calculated by multiplying the number of shares vested by closing price of our common stock on the vesting date as reported by the New York Stock Exchange.

 

Pension Benefits

 

We do not offer any defined benefit pension plans.

 

Nonqualified Deferred Compensation 

 

We do not offer any nonqualified deferred compensation plans.

 

Potential Payments upon Termination or Change in Control

 

Below is a description of the agreements, plans and arrangements providing for payments or benefits to our named executive officers upon termination of employment or in connection with a change in control of our company.

 

29

 

Severance Agreements with Executive Officers

 

We have entered into severance agreements with each of our executive officers other than Ms. Holt. We entered into a severance agreement with Mr. Way in connection with his hiring in 2014. We entered into a severance agreement with Dr. Bodor in 2015. We entered into severance agreements with Dr. Baker and Mr. Fein in connection with their hiring in May 2016 and December 2016, respectively. Each such severance agreement supersedes any previous severance agreement such officer had with our company.

 

If we voluntarily terminate the employment of any such officer without “cause” (and other than as a result of his or her disability) or if he or she resigns for “good reason,” each as defined in the applicable severance agreement, provided that such officer complies with certain conditions (including execution of a general waiver and release of claims), then he or she will be entitled to the benefits summarized below.

 

If such officer’s employment with us terminates at a time other than during the transition period, and if the termination is a qualifying termination, then, subject to certain conditions:

 

 

we will pay such officer an amount equal to his or her annualized base salary in substantially equal installments in accordance with our regular payroll practices over the 12-month period immediately following the termination date, subject to limited exceptions;

 

 

we will pay such officer a pro rata cash incentive payment amount, payable in a lump sum;

 

 

we will pay our share of premiums due for such officer and his or her eligible dependents for the first 12 months of coverage under COBRA; and

 

 

if such officer has any unvested equity-based awards as of the termination date, a pro rata portion of any unvested awards scheduled to vest on the next anniversary of the grant date will vest immediately.

 

If such officer’s termination date occurs upon a change in control or during the transition period, and if the termination is a qualifying termination, then, subject to certain conditions:

 

 

we will pay such officer an amount equal to his or her annualized base salary in substantially equal installments in accordance with our regular payroll practices over the 12-month period immediately following the termination date, subject to limited exceptions;

 

 

we will pay such officer an amount equal to the sum of (i) his or her target annual cash incentive payment for the calendar year in which his or her employment with us terminates plus (ii) a pro rata cash incentive payment amount, payable in a lump sum;

 

 

we will pay our share of premiums due for such officer and his or her eligible dependents for the first 12 months of coverage under COBRA; and

 

 

if such officer has any unvested equity-based awards as of the termination date, all such unvested awards will vest immediately on his or her termination date.

 

If such officer’s termination date occurs within 90 days prior to a change in control, and if the termination is a qualifying termination and he or she reasonably demonstrates within 30 days after the change in control that the qualifying termination arose in connection with or in anticipation of the change in control, then, in addition to the compensation he or she otherwise is entitled to receive in connection with a qualifying termination, we will:

 

 

pay such officer an amount equal to his or her target annual cash incentive payment for the calendar year in which his or her employment with us terminates, payable in a lump sum; and

 

 

pay such officer an amount equal to the value of any unvested equity-based awards held by him or her as of the termination date that were forfeited as of the termination date.

 

Victoria M. Holt Employment Agreement

 

Pursuant to our employment agreement with Ms. Holt, if we voluntarily terminate her employment without “cause” (and other than as a result of her disability) or if she resigns for “good reason,” each as defined in the employment agreement, provided that Ms. Holt complies with certain conditions (including execution of a general waiver and release of claims), then she will be entitled to the benefits summarized below.

 

30

 

If Ms. Holt’s employment with us terminates during the term of her employment agreement and prior to any change in control (as defined in the employment agreement) or following any 18-month period following a change in control, which we refer to as the transition period, and if the termination is without cause (other than as a result of death or disability) or for good reason, which we refer to as a qualifying termination, then, subject to certain conditions:

 

 

we will pay Ms. Holt an amount equal to one times her annualized base salary in substantially equal installments in accordance with our regular payroll practices over the 12-month period immediately following the termination date, subject to limited exceptions;

 

 

we will pay Ms. Holt an amount equal to one times her target annual cash incentive payment for the calendar year in which her employment with us terminates, payable in a lump sum;

 

 

we will pay our share of premiums due for Ms. Holt and her eligible dependents for the first 12 months of coverage under COBRA if elected by Ms. Holt; and

 

 

if Ms. Holt has any unvested equity-based awards as of the termination date, a pro rata portion of any unvested awards scheduled to vest on the next anniversary of the grant date will vest immediately.

 

If a change in control occurs during the term of her employment agreement and Ms. Holt’s termination date occurs upon a change in control during the transition period, and if the termination is a qualifying termination, then, subject to certain conditions:

 

 

we will pay Ms. Holt an amount equal to two times her annualized base salary in substantially equal installments in accordance with our regular payroll practices over the 12-month period immediately following the termination date, subject to limited exceptions;

 

 

we will pay Ms. Holt an amount equal to two times her target annual cash incentive payment for the calendar year in which her employment with us terminates, payable in a lump sum;

 

 

we will pay our share of premiums due for Ms. Holt and her eligible dependents for the first 18 months of coverage under COBRA if elected by Ms. Holt; and

 

 

if Ms. Holt has any unvested equity-based awards as of the termination date, all such unvested awards will vest immediately on Ms. Holt’s termination date.

 

If Ms. Holt’s termination date occurs during the term of the employment agreement and within 90 days prior to a change in control, and if the termination is a qualifying termination and Ms. Holt reasonably demonstrates within 30 days after the change in control that the qualifying termination arose in connection with or in anticipation of the change in control, then, in addition to the compensation Ms. Holt otherwise is entitled to receive in connection with a qualifying termination, we will:

 

 

pay Ms. Holt an amount equal to one times her annualized base salary, payable in a lump sum;

 

 

pay Ms. Holt an amount equal to one times her target annual cash incentive payment for the calendar year in which her employment with us terminates, payable in a lump sum;

 

 

pay our share of premiums due for Ms. Holt and her eligible dependents for the first six months of coverage under COBRA if elected by Ms. Holt; and

 

 

pay Ms. Holt an amount equal to the value of any unvested equity-based awards held by her as of the termination date that were forfeited as of the termination date.

 

If Ms. Holt’s employment with us is terminated due to her death or disability, then, in addition to payment of accrued but unpaid salary and benefits, Ms. Holt will be entitled to receive a pro rata portion of her target annual cash incentive award for the then-current year based on the portion of the year she was employed by us prior to termination.

 

2000 Plan

 

Under the 2000 Plan and the option award agreements under that plan, upon the death or disability of a named executive officer, all outstanding options vest in full, and the options remain exercisable until the earlier of (1) one year after the date employment ends or (2) the expiration date of the option. If employment ends for a reason other than death or disability, the then currently vested and exercisable portion of an option will remain exercisable until the earlier of (1) three months after the date employment ends or (2) the expiration date of the option, and may be exercised to the extent it was exercisable at or before employment ended.

 

31

 

The 2000 Plan provides that stock option awards may become fully vested and exercisable upon the occurrence of a change in control of our company, as defined in the 2000 Plan, if provided in the award agreement or by the compensation committee. Generally, stock option award agreements under our 2000 Plan provide that option awards to employees will become fully vested and exercisable upon the occurrence of a change in control of our company. The 2000 Plan also provides our compensation committee with the discretion to cancel some or all outstanding stock options in connection with a change in control that does not involve a change in the majority of the members of our board of directors, and pay each holder of a canceled option an amount in cash equal to the excess of the fair market value of the shares subject to the option immediately prior to the change in control over the aggregate exercise price of the shares subject to the option, which we refer to as the “option spread.” In addition, in the event of a merger, consolidation or statutory share exchange involving our company, a sale of substantially all of its assets, or its liquidation or dissolution, any of which are referred to as an “event,” then our compensation committee will have the discretion to declare, prior to the event, that the exercisability of all options will be accelerated prior to the event and that all options will be canceled at the time of the event. The compensation committee may also, in such circumstances, pay each holder of a canceled option an amount in cash equal to the option spread, calculated using the value of the per share proceeds to be received by our shareholders upon the occurrence of the event. Alternatively, if the event is a merger, consolidation or statutory share exchange, our compensation committee may act to protect outstanding options by substituting for them either options to purchase voting common stock of the surviving corporation (or its parent) or voting common stock of the surviving corporation (or its parent) that have a fair market value equal to the option spread, calculated using the value of the per share proceeds to be received by our shareholders upon the occurrence of the event.

 

The 2000 Plan provides that in the event any payments or benefits provided under our 2000 Plan taken together with other payments an individual may receive in connection with a change in control may constitute a “parachute payment” under Section 280G of the Internal Revenue Code, such payments or benefits may be reduced to provide the individual with the best after-tax result. Specifically, the individual will receive either a reduced amount so that the excise tax imposed under Section 4999 of the Internal Revenue Code is not triggered, or the individual will receive the full amount of the payments and benefits and then be liable for any excise tax.

 

LTIP

 

Under the LTIP, upon termination for cause, all unvested awards and all unexercised stock options and SARs will be forfeited. Upon termination due to death or disability, any unvested portion of an award will immediately become vested and exercisable in full and options and SARs will remain exercisable for twelve months after the date of termination. Upon termination for any other reason, the then currently vested and exercisable portion of any option or SAR will remain exercisable for three months after termination (unless the participant dies during that three-month period, in which case the post-termination exercise period will be extended to twelve months). Any post-termination exercise period may, however, be extended by the compensation committee if the issuance of shares upon such exercise would then violate applicable registration requirements under the Securities Act. Any such post-termination exercise period may not, however, extend beyond the expiration date of any option or SAR. After giving effect to any accelerated vesting as provided above, all unvested and unexercisable portions of outstanding awards will be forfeited in connection with a termination of service.

 

Under the LTIP, unless otherwise provided in an award agreement, if a change in control, as defined in the LTIP, occurs that involves a sale of all or substantially all of our assets or a merger, consolidation, reorganization or statutory share exchange involving our company, our board of directors or compensation committee are to take one or more of the following actions with respect to outstanding awards under the LTIP:

 

 

Arrange for the surviving or successor entity to continue, assume or replace some or all of the outstanding awards under the LTIP.

 

 

Accelerate the vesting and exercisability of outstanding awards prior to and conditioned upon the occurrence of the event and provide that unexercised options and SARs will be terminated at the effective time of the event.

 

 

Cancel any outstanding award in exchange for payment to the holder of the amount of the consideration that would have been received in the event for the number of shares subject to the award, less the aggregate exercise price (if any) of the award.

 

 

Provide that if an award is continued, assumed or replaced in connection with such an event and if within 18 months after the event a participant experiences an involuntary termination of service other than for cause, the participant’s outstanding awards will vest in full, will immediately become fully exercisable and will remain exercisable for one year following termination.

 

 

Make certain adjustments to awards as provided in the LTIP.

 

In the event of a change in control that does not involve a merger, consolidation, reorganization, statutory share exchange or sale of all or substantially all of our company’s assets, our board of directors or compensation committee, in its discretion, may provide (1) that any outstanding award will become fully vested and exercisable upon the change in control or upon the termination of the participant’s service without cause within 18 months after the change in control, (2) that any outstanding option or SAR will remain exercisable during all or some specified portion of its remaining term, or (3) that any outstanding award will be canceled in exchange for payment to the participant of the amount of the consideration that would have been received in the change in control for the number of shares subject to the award less the aggregate exercise price (if any) of the award.

 

The form of option award agreement approved by the compensation committee for use under the LTIP provides that if, within 12 months of a change in control, an optionee’s employment is involuntarily terminated without cause or the optionee resigns for good reason and if the option or a replacement thereof then remains outstanding, it will immediately become exercisable in full and remain exercisable for one year following termination.

 

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 The form of restricted stock unit award agreement approved by the compensation committee for use under the LTIP provides that if, within 12 months of a change in control, a participant’s employment is involuntarily terminated without cause or the participant resigns for good reason and if the award then remains outstanding, any unvested portion of the RSUs or a replacement thereof will immediately become vested.

 The form of performance stock unit award agreement approved by the compensation committee for use under the LTIP provides that if a change in control of our company occurs before the scheduled vesting dates of the award, the performance period will be truncated and a pro rata portion of the number of PSUs determined to have been earned during the truncated performance period will vest as of the date of the change in control. The pro rata portion will be based on the portion of original performance period that elapsed prior to the date of the change in control.

The LTIP provides that in the event any payments or benefits provided under the LTIP taken together with other payments an individual may receive in connection with a change in control may constitute a “parachute payment” under Section 280G of the Internal Revenue Code, such payments or benefits may be reduced to provide the individual with the best after-tax result. Specifically, the individual will receive either a reduced amount so that the excise tax imposed under Section 4999 of the Internal Revenue Code is not triggered, or the individual will receive the full amount of the payments and benefits and then be liable for any excise tax.

 

Potential Payments 

 

The following table sets forth quantitative information with respect to potential payments to be made to each of the named executive officers or their beneficiaries upon termination in various circumstances, assuming termination on December 31, 2017. In the following table, unless indicated otherwise, all equity is listed at its dollar value as of December 31, 2017 and all stock options are valued based on the difference between $103.00, the closing price for one share of our common stock on the NYSE on December 29, 2017, and the applicable exercise price.

 

Name

 

Termination Without

Cause or For

Good Reason

Not During Transition

Period or in Anticipation

of Change in Control

   

Termination Without

Cause or For

Good Reason

Upon a

Change in

Control or

During

Transition

Period(1)

   

Termination Without

Cause or

For Good

Reason in Anticipation

of Change

in Control(2)

   

Death or

Disability

   

Change in

Control

Without Termination

   

Retirement

 

Victoria M. Holt

                                               

Base Salary Payment

    530,450       1,060,900       530,450       -       -       -  

Incentive Payment

    530,450       1,060,900       530,450       530,450       -       -  

Benefits Continuation

    8,691       13,037       4,346       -       -       -  

Accelerated Option Vesting

    348,908       1,474,516       1,474,516       -       -       -  

Accelerated Restricted Stock Vesting

    794,988       2,653,898       2,653,898       2,653,898       -