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PDF provided as a courtesy
GOTTSCHALKS INC.
7 River Park Place East
Fresno, California 93720
(559) 434-4800
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Date: June 25, 2008
Time: 10:00 a.m., Pacific Daylight Time
Place: Gottschalks Inc. corporate headquarters located at 7 River Park Place East, Fresno, California
Matters to be voted on:
1. Election of eleven members of the Board of Directors; and
2. Any other matters properly brought before the stockholders at the meeting.
By order of the Board of Directors,
Jim Famalette
Chairman of the Board, President and Chief Executive Officer
Fresno, California
May 20, 2008
PROXY STATEMENT
Your vote at the annual meeting is important to us. You may vote your shares via the Internet by accessing the voting site
shown on your proxy card, by telephone by calling the toll-free number shown on your proxy card, by mail using the proxy card, or in person by
attending and voting at the meeting.
This proxy statement has information about the annual meeting and was prepared by the Company's management for the
Board of Directors. This proxy statement and the accompanying proxy card are being first mailed to stockholders on or about May 20, 2008.
Table of Contents
Questions and Answers About Voting
Who can vote?
You can vote your shares of common stock if our records show that you owned the shares on May 9, 2008, the record date
for our meeting. A total of 13,282,622 shares of common stock can vote at the annual meeting. You have one vote for each share of common
stock. The enclosed proxy card shows the number of shares you can vote.
How do I vote by proxy?
You have four voting options:
INTERNET: You can vote over the Internet at the web address shown on your proxy card. Internet voting is available 24
hours per day. If you have access to the Internet, we encourage you to vote this way. IF YOU VOTE OVER THE INTERNET, DO NOT RETURN
YOUR PROXY CARD.
TELEPHONE: You can vote by telephone by calling the toll-free telephone number on your proxy card. Telephone voting
is available 24 hours per day. Voice prompts allow you to vote your shares and confirm that your instructions have been properly recorded. IF
YOU VOTE OVER THE TELEPHONE, DO NOT RETURN YOUR PROXY CARD.
PROXY CARD: You can vote by mail by signing, dating and mailing your proxy card in the postage-paid envelope
provided. Follow the instructions on the enclosed proxy card to vote on the proposal to be considered at the annual meeting. The proxyholders
named on the proxy card will vote your shares as you instruct. If you sign and return the proxy card but do not vote on the proposal, the
proxyholders will vote for you on the proposal. Unless you instruct otherwise, the proxyholders will vote for each of the eleven director
nominees.
VOTE IN PERSON: You can attend the annual meeting and vote at that meeting.
What if other matters come up at the annual meeting?
The matters described in this proxy statement are the only matters we know will be voted on at the annual
meeting. If other matters are properly presented at the meeting, the proxyholders will vote your shares as they see fit.
Can I change my vote?
Yes. At any time before the vote on a proposal, you can change your vote. If you originally voted by Internet or telephone,
merely access the website or call the toll-free telephone number originally used, and follow the instructions to change your vote. If you originally
voted by mail, you may change your vote either by giving the Company's secretary a written notice revoking your proxy or by signing, dating and
returning to us a new proxy card. We will honor the proxy card with the latest date. You also may attend the annual meeting and revoke your
proxy card at that meeting. Your attendance alone does not automatically revoke your proxy card.
What do I do if my shares are held in "street name"?
If your shares are held in the name of your broker, a bank, or other nominee, your shares are held in "street
name" and that party should give you instructions for voting your shares. The availability of Internet and telephone voting depends on that
party's voting process. You must also obtain a legal proxy from your broker, bank or other nominee if you wish to vote your shares in person at the
meeting. Please follow the instructions on the voting instruction form they send you.
If you are a participant in the Gottschalks Inc. Retirement Savings Plan (the "401(k) Plan"), you will receive
separate voting instructions from the trustee of the 401(k) Plan. Internet and telephone voting
will not
be available to you. Please follow
the instructions on the voting instruction form they send to you.
1
How are votes counted?
We will hold the annual meeting if holders of a majority of the shares of common stock entitled to vote are
represented at the annual meeting, in person or by proxy. If you properly executed your proxy your shares will be counted to determine whether
we have a quorum, even if you abstain or fail to vote on the proposal listed on the proxy card.
"Broker non-votes" will be counted as present to determine if a quorum exists but will not be counted as present
and entitled to vote on any non-routine proposal. A "broker non-vote" occurs with respect to a proposal when a broker is not permitted
to vote on that proposal without instruction from the beneficial owner of the shares, and no instruction is given.
Who pays for this proxy solicitation?
We do. In addition to sending you these materials, some of our employees may contact you by telephone, by mail or in
person. None of these employees will receive any extra compensation for doing this. We also have asked registered banks and brokers to
forward copies of these materials to shareholders for whom they act as nominees at our expense.
2
MANAGEMENT PROPOSAL
Election of Directors
The entire Board of Directors, consisting of eleven members, will be elected at the annual meeting. The eleven
nominees receiving the highest number of votes will be elected. You are not entitled to cumulate your vote in the election of directors. The
directors elected will hold office until their successors are elected, which should occur at the next annual meeting. All of the nominees are currently
directors of the Company.
At the annual meeting, the persons named in this proxy statement will be nominated as directors by the
Governance/Nominating Committee. Each of the nominees has agreed to be named in this proxy statement and to serve as director if elected.
Although we know of no reason why one or more of these nominees might not be able to serve, the Board of Directors will propose a substitute
nominee if any nominee is not available for election.
Biographical information
regarding each of the nominees is presented below. The ages listed for the nominees are as of March 31, 2008.
Nominee Biographies
James R. Famalette Director since 1997
James R. Famalette, age 55, became Chairman of the Board on August 9, 2007. He was appointed President
and Chief Executive Officer of the Company in 1999 after serving as President and Chief Operating Officer since 1997. Prior to joining the
Company, Mr. Famalette was President and Chief Executive Officer of Liberty House, a department and specialty store chain based in Honolulu,
Hawaii, from 1993 through 1997. Mr. Famalette served in a variety of other positions with Liberty House from 1987 through 1993, including Vice
President, Stores and Vice President, General Merchandise Manager. From 1975 through 1987, he served in various senior management
positions with Village Fashions/Cameo Stores and Colonies, a specialty store chain.
Joe Levy Director since 1986
Joe Levy, age 76, the Chairman emeritus of the Company, was the Chairman of the Board of the Company since
1986 and retired on September 1, 2007. He has served the Company, its predecessor and former subsidiary since 1956. From 1986 until 1999,
he was also Chief Executive Officer of the Company. Prior to this, Mr. Levy served the Company's predecessor and former subsidiary as
Chairman and Chief Executive Officer from 1982 through 1986 and as Executive Vice President from 1972 through 1982. Mr. Levy serves on the
Board of Directors of the National Retail Federation. He was formerly Chairman of the California Transportation Commission and served on the
Executive Committee of Frederick Atkins, Inc. and the Board of Directors of Community Hospitals of Central California. He has also served on
numerous other state and local commissions and public service agencies. Mr. Levy is the husband of Mrs. Sharon Levy.
Joseph J. Penbera Director since 1986
Joseph J. Penbera, age 61, is the Lead Director of the Board. He is also a Fulbright Senior Scholar and Professor
of Business at California State University, Fresno, where he formerly served as Dean and Eaton Fellow at The Craig School of Business. Dr.
Penbera is also a director of Rug Doctor, Inc., one of the largest cleaning and related chemical companies in the world, a director of Blast Energy
Services, Inc., an energy technology firm, and President of EconomistUSA, Inc. He is a former senior economist for several banks, including
California Bank and Trust and WestAmerica.
Sharon Levy Director since 1986
Sharon Levy, age 74, was a director of the Company's predecessor and former subsidiary from 1982 until the time
the Company was formed in 1986. She retired from service as an elected member of the Board of Supervisors of Fresno County in 2000, after
serving on that board since 1975, including serving as Chairman in 1980, 1985, 1990, 1995 and 1999. Mrs. Levy also serves on numerous other
public service agencies. Mrs. Levy is the wife of Mr. Joe Levy.
3
Frederick R. Ruiz Director since 1992
Frederick R. Ruiz, age 65, is the Chairman and CEO of Ruiz Food Products, Inc., a privately held frozen food
company based in Dinuba, California. Mr. Ruiz serves on the Board of Directors of McClatchy Newspapers, The California Chamber of
Commerce and is a Regent for the University of California. Mr. Ruiz also served on the Board of Directors of Blast Energy Services, Inc. until his
resignation on February 27, 2008.
O. James Woodward III Director since 1992
O. James Woodward III, age 72, has been an attorney in the private practice of law in Fresno, California since
1977. He has served as corporate counsel for several public corporations and was Executive Vice President of Glenfed, Inc. from 1988 through
1991. He is now Of Counsel with Baker, Manock & Jensen. In addition to a private law practice, Mr. Woodward has had experience with
financial institutions and in real estate development in California. He currently serves on the Boards of Governors of the California State
University, Fresno Foundation and the Fresno Regional Foundation. Mr. Woodward also served as Chairman of the Board of Directors of Blast
Energy Services, Inc. until his resignation on February 27, 2008.
Jorge Pont Sánchez Director since 1998
Jorge Pont Sánchez, age 70, has been Assistant to the Chairman and International Division Director of El
Corte Inglés since 1997. With the exception of the period from 1997 through 1998, he has also been the President and Chief Executive
Officer of The Harris Company ("Harris") since 1982. Mr. Pont Sánchez is President of Sephora Cosméticos España, serves
on the Boards of Directors of World Wide Retail Exchange, Iberia Líneas Aéreas de España, Parque Temático de
Madrid (Warner Bros. Park), Marco Polo Investments and Fundación Ramón Areces and is past President of the International
Association of Department Stores.
James L. Czech Director since 2002
James L. Czech, age 68, is President of The James L. Czech Company, LLC, a position he has held since August
2002. From 1993 through July 2002 Mr. Czech was President, Development Group of Urban Retail Properties Co., at the time the nation's largest
third-party retail property management company. Also, from 1993 through 2000, Mr. Czech was Executive Vice President of Urban Shopping
Centers, Inc. From 1983 to 1993, he served as President, Development Group of JMB Retail Properties Co. From 1981 to 1983, Mr. Czech was
Senior Vice President and Chief Financial Officer of Federated Stores Realty, Inc., the shopping center subsidiary of Federated Department
Stores, Inc. Prior to 1981, he held senior level positions with various companies in the shopping center industry. Mr. Czech is an Advisor to Caltius
Equity Partners II, LP and Kane & Company, Inc., and serves on the Board of Trustees of DePaul University and the Development Council of
The Chicago Province of The Society of Jesus. He is a certified public accountant.
Thomas H. McPeters, Esq. Director since 2002
Thomas H. McPeters, Esq., age 71, is a senior partner in the law firm of McPeters McAlearney Shimoff & Hatt, and is Chief
Financial Officer and Secretary and a member of the Board of Directors of Harris.
Dale D. Achabal Director since 2004
Dale D. Achabal, age 62, is the L.J. Skaggs Distinguished Professor and Director of the Retail Management
Institute at Santa Clara University. He has published extensively in leading journals and presented papers at industry and professional
conferences throughout the U.S., Europe and Asia Pacific. He is on the CIO Council of the National Retail Federation and Editorial Board of the
Journal of Retailing. Dr. Achabal is a regular lecturer and consultant to a variety of organizations in the areas of retail revenue management and
multi-channel retail strategies. He also serves on the Board of Directors of RivalWatch and Goodwill Industries of Silicon Valley.
Philip S. Schlein Director since 2005
Philip S. Schlein, age 73, has been a partner of US Venture Partners, a venture capital firm since 1985. From 1974 to
1985 he was the President and CEO of Macy's California and began his retail career in 1957 with R. H. Macy, Inc. Mr. Schlein served on the
Board of Directors of Apple Computer from 1979 to 1987 and currently serves on the Boards of Directors of Catalist, Specialtys, Auction Drop, and
Sound ID.
4
Agreements With Nominees
Mr. Famalette
. Under the terms of Mr. Famalette's employment agreement, the Company must cause Mr.
Famalette to continue to be elected as a member of the Board of Directors during his term of employment. (See "Narrative Discussion of
Summary Compensation Table and Grants of Plan Based Awards - Employment Agreements.")
Mr. Pont Sanchez and Mr. McPeters.
Under the terms of the First Amendment to the Stockholders' Agreement, El Corte
Ingles and Harris nominated Mr. Pont Sanchez and Mr. McPeters to the Gottschalks Board. The Company, Mr. Joseph Levy and Mr. Bret Levy,
both as individuals, El Corte Ingles, and Harris entered into a Stockholders' Agreement on August 20, 1998, which was later amended on
December 7, 2004. The Stockholders' Agreement was entered into on the same day the Company acquired substantially all of the assets and
business of Harris pursuant to an Asset Purchase Agreement. Mr. Pont Sanchez is the President and Chief Executive Officer of Harris and is the
International Division Director of El Corte Ingles. Mr. McPeters is the Chief Financial Officer and Secretary of Harris.
Parties to the Stockholders' Agreement agree to the following for the term of the agreement:
-
Cause two El Corte Ingles nominees to be elected to the Gottschalks Board
-
Cause the Board to consist of no more than eleven members, two of whom will be the El Corte Ingles nominees and
the remaining nine will be management and independent nominees. Under the agreement, Joe Levy (or Bret Levy if Joe Levy is deceased or no
longer has the capacity) has the right to designate the management nominees, and the Governance/Nominating Committee has the right to
designate the independent nominees.
-
Accomplish these terms by voting all Gottschalks common stock they own or have the power to vote in favor of the El
Corte Ingles, management, and independent nominees. Gottschalks also agreed to solicit proxies in favor of such nominees
The Stockholders' Agreement provides for the El Corte Ingles nominees to be increased or decreased as a result of
changes in the amount of Gottschalks common stock that El Corte Ingles owns (through Harris) as follows:
Impact of Changes In Ownership of
Gottschalks' Outstanding Common
Stock or Disposal of Common
Stock
(In Either Case Fully Diluted)
|
Change to Number of
El Corte Ingles Nominees
|
Change to Size of Board
|
|
|
|
El Corte Ingles, directly or indirectly, beneficially owns at least 30% of common stock
|
Increased to 3
|
Increased to 12
|
|
|
|
El Corte Ingles disposes of more than 700,000 shares of common stock or El Corte Ingles and its affiliates beneficially own
less than 10% of common stock
|
Decreased to 1
|
Decreased by number of El Corte Ingles nominees that must resign
|
|
|
|
El Corte Ingles disposes of more than 1,350,000 shares of common stock or El Corte Ingles and its affiliates beneficially own
less than 5% of common stock
|
Decreased to 0
|
Decreased by number of El Corte Ingles nominees that must resign
|
5
The Stockholders' Agreement also:
-
Provides for proportional adjustments to the number of El Corte Ingles nominees in the event of an increase in the
Board size (other than as the result of an acquisition transaction approved by the Board),
Contains other agreements between the parties regarding voting on change in control transactions and participation
by Mr. Levy's family in a Gottschalks registration statement, and
Includes a non-compete agreement from Harris and El Corte Ingles.
The Stockholders' Agreement will terminate when El Corte Ingles is no longer entitled to nominees on the Gottschalks Board, per the above
table.
Also on August 20, 1998, Gottschalks and Harris entered into a Registration Rights Agreement granting Harris certain rights to participate in a
registration statement filed by Gottschalks with the Securities and Exchange Commission.
Gottschalks has previously filed all original and amended agreements with the Securities and Exchange Commission.
Dr. Penbera is a director of Blast Energy Services, Inc., a Texas corporation. Messrs. Woodward and Ruiz were directors
of Blast Energy Services, Inc. prior to resigning from their director positions on February 27, 2008. On January 19, 2007, Blast Energy Services,
Inc. filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Code, in the United States Bankruptcy Court for
the Southern District of Texas - Houston Division. On February 27, 2008 Blast Energy Services, Inc. emerged from bankruptcy after having their
plan of reorganization confirmed by the court.
If a quorum is present, the eleven nominees for director receiving the highest number of votes will be elected.
The Board of Directors of the Company
recommends that you vote for the nominees listed above. If you send in your proxy (either by Internet, telephone or by mail), it will be voted in
favor of these nominees unless you specify otherwise.
6
BOARD OF DIRECTORS
Meetings of the Board of Directors
During the fiscal year ended February 2, 2008 ("fiscal 2007"), the Board of Directors held 8 meetings.
Each director attended, either in person or by telephone, at least 75% of the Board meetings and meetings of Board Committees that he or she
was eligible to attend. Annually, pursuant to Section 303A.02(a) of the New York Stock Exchange regulations, the Company and the Board of
Directors undertakes a review of director independence. As a result of this review, and based on information furnished by all members of the
Board regarding their relationships with the Company, and research conducted by management with respect to outside affiliations, the Board
affirmatively determined that six of the eleven current directors, Mr. Dale Achabal, Mr. James Czech, Dr. Joseph Penbera, Mr. Fred Ruiz, Mr.
Philip Schlein and Mr. James Woodward, are independent of the Company and its management under the independence standards set forth under
the New York Stock Exchange independence standards and under the independence standards set forth in Rule 10A-3 under the Securities
Exchange Act of 1934. All directors were present at last year's annual meeting, but the Company does not currently have a policy with regard to
Board members' attendance at annual meetings.
Committees of the Board and Governance Documents.
The Board of Directors has three principal committees. All
members of the three committees are independent under the standards of the New York Stock Exchange and, with respect to the Audit
Committee, the rules of the Securities and Exchange Commission ("SEC"). The Audit Committee, Compensation Committee and
Governance/Nominating Committee have written charters which are available in print free of charge, upon written request to the Company at 7
River Park Place East, Fresno, California 93720, and are available at the Company's website at
http://www.gottschalks.com
. The Company also includes on its website and in print, free of
charge upon written request, the Corporate Governance Guidelines and the Code of Business Conduct and Ethics. The Code of Business
Conduct and Ethics applies to officers and to all employees at Gottschalks, as well as the Directors, temporary workers and other independent
contractors and consultants when engaged by or otherwise representing the Company and its interest. The following chart describes the function
and membership of each committee and the number of times it met in the fiscal year ended February 2, 2008. No member of the Audit Committee
serves on the Audit Committee of more than three other public company boards.
Audit Committee - 4 Meetings
Function
|
Members
|
-
Review report of independent registered public accounting firm
-
Review scope of annual audit and quarterly reviews by independent registered public accounting firm
-
Engage, oversee and, where appropriate, replace the external auditors
-
Evaluate independence and qualifications of independent registered public accounting firm
-
Oversee internal accounting and control systems
-
Review with management and auditors accounting and financial reporting requirements and practices affecting the
Company
-
Evaluate and oversee internal audit staff
-
Assist the Board's oversight of the Company's compliance with legal and regulatory requirements
-
Discuss policies with respect to risk assessment and risk management
-
Report regularly to the Board regarding any issues that arise with respect to the quality or integrity of the Company's
financial statements, performance of the internal audit function, performance and independence of the Company's independent auditors or the
Company's compliance with legal or regulatory requirements
|
Joseph J. Penbera, Chairman
James L. Czech
O. James Woodward III
Dale D. Achabal
|
7
The Board of Directors had determined that Dr. Joseph Penbera is an "audit committee financial expert," as defined in
the applicable rules of the SEC.
Compensation Committee - 4 Meetings
Function
|
Members
|
-
Review and approve executive compensation and employment agreements
-
Review and approve bonuses and stock option grants
|
O. James Woodward III, Chairman
Joseph J. Penbera
Frederick R. Ruiz
Philip S. Schlein
|
The Compensation Committee of Gottschalks Inc. (the "Compensation Committee") is composed of four
directors meeting the independence requirements of the New York Stock Exchange, all of which are "non-employee directors" within the meaning
of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and "outside directors" within the meaning of Section 162(m)
of the Internal Revenue Code. The Compensation Committee operates under a written charter adopted by the Board of Directors. The written
charter was adopted during 2003.
The Compensation Committee is authorized to fix the compensation of executive officers of the Company, to establish and
administer the annual incentive plan or plans applicable to executive officers of the Company, including, without limitation, to administer the stock
option plans of the Company as may from time to time be acquired or adopted, including, without limitation, the 2005 Stock Option Plan. To that
end, the Compensation Committee met and exercised all the powers and authority of the Board of Directors to the extent permitted under Section
141 of the Delaware General Corporation Law.
The only executive officer with a role in the compensation process is the Chief Executive Officer. The Chief Executive
Officer recommends base salary, annual incentive bonus, stock option grant and other benefit amounts for the executive officers of the Company.
The Compensation Committee reviews such recommendations and makes the final determination of actual amounts to be paid to the executive
officers.
No executive officers have a role in the timing of stock option grants, and the Compensation Committee does not delegate
to any other person any aspect of administration of a timing program, plan or practice, with regard to such grants. The Compensation Committee
does, however, reserve the right to delegate some or all of its authority with respect to the 2005 Stock Option Plan to another committee of
directors, and certain limited authority to grant awards to employees may be delegated to one or more of our officers. Such delegation must be
made by a resolution that specifies the total number of options that may be granted under the delegated authority, and no officer may be delegated
the power to designate himself or herself as a recipient of such options.
The Compensation Committee may determine, from time to time, the advisability of retaining a compensation consultant to
assist in the evaluation of Chief Executive Officer or other executive officer compensation. The Compensation Committee has the authority to
retain, at Company expense, and terminate a compensation consultant, including sole authority to approve the consultant's fees and other
retention terms. Mr. Famalette, on behalf of the Compensation Committee, retained Mercer, Inc. as a compensation consultant during fiscal 2007.
Mercer, Inc. was retained to analyze the Company's current incentive pay practices and to develop recommendations for improving
competitiveness of incentive pay.
Compensation Committee Interlocks And Insider Participation.
No member of the current Compensation
Committee is a former or current officer or employee of the Company or its subsidiary, or is employed by a company whose board of directors
includes a member of management of the Company.
8
Governance/Nominating Committee - 4 Meetings
Function
|
Members
|
-
Review qualifications of and nominate candidates for the Board of Directors (other than those
nominated by stockholders)
-
Formalize and revise the Company's corporate governance policies and practices, including recommending to the
Board of Directors Corporate Governance Guidelines
-
Monitor the Company's compliance with the policies and the Corporate Governance Guidelines (the Corporate
Governance Guidelines are available at http://www.gottschalks.com)
|
James L. Czech, Chairman
Dale D. Achabal
Frederick R. Ruiz
Philip S. Schlein
|
The Company sees board recruiting as an opportunity to add someone with a defined set of skills and experience who will
improve the Board's ability to support the business strategy. We take a sophisticated approach to filling director seats that begins with an
examination of the key issues the Company will be facing. The Board then determines the sort of background and experience that will best
position it to address these challenges. After taking stock of the skills the current directors possess, the Board is able to identify gaps that will
need to be filled, and thus define the ideal profile for a new director.
The Governance/Nominating Committee will consider recommending persons identified by stockholders
of the Company if a written recommendation is timely received by the Company's secretary. Such a recommendation must be received no later
than the last day that a stockholder would be permitted to nominate an individual for election as a director pursuant to the Company's Bylaws (See
"Future Stockholder Proposals and Nominations") and such written recommendation must contain at least the same information with respect
to such person as required by the Bylaws. There are no differences in the manner in which the Governance/Nominating Committee evaluates a
candidate that is recommended for nomination by a stockholder.
The Company did not pay any fee to any third party to identify or evaluate or assist in identifying or evaluating potential
nominees for election as directors at the annual meeting.
Other Committees
In the fourth quarter of fiscal 2006, the Company announced that its Board of Directors formed a special strategic
committee, chaired by Dr. Joseph J. Penbera, to identify and evaluate various strategic alternatives to maximize shareholder value including, a
revised business plan, operating partnerships, joint ventures, strategic alliances, share repurchases, a recapitalization, and the sale or merger of
the Company. The special strategic committee was comprised of the Board's six independent directors for the alternative review process.
The Company also announced that the Board of Directors' had retained UBS Investment Bank to assist its special strategic
committee in exploring various alternatives available to the Company. The Company also continued to use the financial advisory services of
Financo, Inc.
On August 30, 2007, the Company announced that the Committee had concluded its evaluation of strategic alternatives
and determined it was in the best interest of Gottschalks' shareholders to aggressively focus on a revised business plan. With this decision, the
special strategic committee was dissolved.
In the fourth quarter of fiscal 2007, the Board of Directors formed a special real estate committee, chaired by Mr. James L.
Czech, to evaluate the Company's owned properties as to how the value of the properties can be maximized for the shareholders. In addition, the
committee will review the Company's leased properties with the purpose of maximizing values through various alternative strategies. The special
real estate committee is comprised of both independent and non-independent Board members.
The non-management directors met in executive session two times in fiscal 2007. Dr. Joseph J. Penbera, the lead
director, presides over the executive sessions.
9
Communication with the Board of Directors
Any shareholder or other interested parties who wish to communicate with the lead director or with the non-management directors as a
group should direct their correspondence addressed to the Board or an individual Board member, to the office of Internal Audit, Gottschalks Inc., 7
River Park Place East, Fresno, CA 93720. Such communication will be directed to the intended director or directors.
10
COMMITTEE REPORTS
Audit Committee Report
The following report does not constitute soliciting material and is not considered filed or incorporated by reference into
any filing by the Company under the Securities Act of 1933 or under the Securities Exchange Act of 1934, unless we specifically state
otherwise.
The Audit Committee of Gottschalks Inc. (the "Audit Committee") is composed of independent directors and
operates under a written charter adopted by the Board of Directors. The written charter was revised and adopted during 2003. The current
members of the Audit Committee are Joseph J. Penbera (Chairman), Dale D. Achabal, James L. Czech and O. James Woodward III. The
members of the Audit Committee meet the standards of independence and other qualifications required by the New York Stock Exchange and the
Securities and Exchange Commission.
The Audit Committee assisted the Board in fulfilling its oversight responsibilities. The Audit Committee reviewed the
financial reporting process, the system of internal control, enterprise risk assessment, the audit process, and the Company's process for
monitoring compliance with laws and regulations. The Audit Committee also provided an open avenue of communication among the external
auditors, management, internal audit and the Board. To effectively perform his or her role, each Audit Committee member has an understanding
of the responsibilities of Audit Committee membership, as well as the Company's business, operations, and risks.
Management is responsible for the Company's internal controls and the financial reporting process. The independent
registered public accounting firm is responsible for performing an independent audit of the Company's financial statements in accordance with
generally accepted auditing standards and to issue a report thereon. The Audit Committee's responsibility is to monitor and oversee these
processes.
In fulfilling the Audit Committee's responsibilities, the Audit Committee met and held various discussions with management
and the independent registered public accounting firm, including meetings conducted prior to the issuance of quarterly and annual earnings to the
public. Management represented to the Audit Committee that the Company's financial statements were prepared in accordance with generally
accepted accounting principles, and the Audit Committee has reviewed and discussed the financial statements with management and the
independent registered public accounting firm. The Audit Committee discussed with the independent registered public accounting firm matters
required to be discussed by Statement on Auditing Standards No. 61, as amended, "Communications with Audit Committees."
The Company's independent registered public accounting firm also provided to the Audit Committee the written disclosures
required by Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees," and the Audit
Committee discussed with the independent registered public accounting firm that firm's independence.
Based upon the Audit Committee's discussion with management and the independent registered public accounting firm
regarding our audited financial statements and the Audit Committee's review of the report of the independent registered public accounting firm,
and the representations of management, the Audit Committee recommended that the Board of Directors approve the inclusion of the audited
financial statements in the Company's Annual Report on Form 10-K for the year ended February 2, 2008 filed with the Securities and Exchange
Commission.
This Audit Committee Report is submitted by the members of the Fiscal 2007 Audit Committee.
Joseph J. Penbera (Chairman)
Dale D. Achabal
James L. Czech
O. James Woodward III
11
Governance/Nominating Committee Report
The following report does not constitute soliciting material and is not considered filed or incorporated by reference into
any filing by the Company under the Securities Act of 1933 or under the Securities Exchange Act of 1934, unless we specifically state
otherwise.
The Governance/Nominating Committee of Gottschalks Inc. is responsible for taking a leadership role in formalizing and
revising the Company's corporate governance policies and practices, including recommending to the Company's Board of Directors corporate
governance guidelines applicable to the Company and for monitoring the Company's compliance with the policies and the Corporate Governance
Guidelines. In addition, the Committee reviews and assesses the adequacy of the Company's Code of Conduct and Ethics and other internal
policies and guidelines.
The Committee is responsible for identifying individuals qualified to become members of the Company's Board; for
recommending director nominees to the Board for the next annual meeting of stockholders; for providing the Board an annual review of the
Board's performance; and for recommending director candidates to the Board for the Board's consideration and appointment to each of the
Board's Committees. The Committee promotes independent Board member education via seminars and conferences to further develop the
knowledge base and expertise needed to fulfill effective governance overview, and several Board members participated in such programs in 2007.
The Governance/Nominating Committee conducts an annual review of the Board's performance, in accordance with
guidelines recommended by the Committee and approved by the Board. This review includes an overview of the talent base of the Board as a
whole as well as an individual assessment of each Director's skills, areas of expertise, qualification as "independent" under the New
York Stock Exchange listing standards and any other applicable laws, rules and regulations, consideration of any changes in a Director's
responsibilities that have occurred since the Director was first elected to the Board, and such other factors as may be determined by the
Committee to be appropriate for review. The results of the Committee's review of Board performance are summarized and presented to the
Board.
In 2007, the Governance/Nominating Committee, presided by its chairman, met four times to assess the Company's
compliance with corporate governance requirements and guidelines. The Independent Directors, all of whom meet the criteria for independence
prescribed by the New York Stock Exchange, met two times without the CEO present. Dr. Joseph J. Penbera, the Lead Director, presides over
the Independent Director meetings and establishes the agenda.
This Governance/Nominating Committee Report is submitted by the members of the Fiscal 2007 Governance/Nominating
Committee.
James L. Czech, Chairman
Dale D. Achabal
Frederick R. Ruiz
Philip S. Schlein
12
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
In this Compensation Discussion and Analysis, we provide an overview and analysis of our executive compensation
program and policies. This analysis includes a discussion regarding the objectives of our program, what our program is designed to reward, each
element of compensation, why we choose to pay each element, how we determine the amount for each element, and how each element aligns
with our overall compensation objectives.
This Compensation Discussion and Analysis provides information regarding the compensation paid to the following
individuals, referred to as the named executive officers, in fiscal 2007:
-
James R. Famalette, Chairman, President and Chief Executive Officer;
-
Daniel T. Warzenski, Vice President, Chief Financial Officer and Secretary;
-
J. Gregory Ambro, Executive Vice President and Chief Operating Officer;
-
Scott G. Manson, Senior Vice President and General Merchandise Manager;
-
Michael J. Schmidt, Senior Vice President and Director of Stores
Oversight of Executive Compensation Program
The Compensation Committee of our Board of Directors (the "Compensation Committee") oversees our
compensation programs designed specifically for our executive officers, including all named executive officers appearing in the Summary
Compensation Table. The Board of Directors established the Compensation Committee for the primary purpose of reviewing and approving
executive compensation and employment agreements, including but not limited to review and approval of salaries, bonuses, stock options and
other benefits for executive officers. All members of the Compensation Committee are independent under the standards of the New York Stock
Exchange. The responsibilities of the Compensation Committee are stated in its charter, which is available on our website at
www.gottschalks.com
.
Objectives of our Executive Compensation Program
Our executive compensation program has been designed with two main objectives in mind:
-
Attract and retain highly qualified executives to better enable us to achieve our financial and operational
goals
-
Align executives' incentives with enhancement of long-term shareholder value
Design of our Executive Compensation Program
We attempt to attract highly qualified executives by designing our compensation packages to be competitive with
comparable employers. We provide a variety of different elements of compensation to our executives in order to remain competitive within the
current marketplace. These elements are identified and discussed in detail below. Retention of our qualified executives is accomplished through
an annual performance review process, which focuses on ensuring that executives are being adequately compensated for improving Company
performance and enhancing shareholder value. The review process also serves to ensure that the executives' current level of compensation
remains competitive with comparable employers on an annual basis. Attainment of earnings targets is rewarded through our annual performance
incentive plan, referred to herein as the Executive Bonus Plan, covering all named executive officers. Rewarding earnings strength and growth
results in the enhancement of long-term shareholder value. In summary, our executive compensation program is designed to reward the
achievement of predetermined financial objectives and overall business growth.
13
Elements of Compensation
Our executive compensation program consists primarily of three elements: base salary, annual performance
incentives and stock options. Other elements of executive compensation include discretionary bonuses, nonqualified deferred compensation,
other compensation and benefits, severance agreements and change in control agreements. The sum of all elements is intended to be a reflection
of the competitive market rate as determined by the corporate compensation environment. The Compensation Committee adjusts individual
elements in accordance with the competitive market rate, as it deems necessary. These adjustments result in a comprehensive compensation
package that adequately reflects current market conditions.
Base Salary.
We choose to pay base salary so that our executive compensation program remains competitive
with similarly positioned companies. Offering base salary assists us in achieving our objective to attract and retain highly qualified executives.
The purpose of base salary is to reward executives for their expertise, and for the time commitment required of them to effectively carry out their
duties.
The initial base salary of the Chief Executive Officer is determined by the Compensation Committee based on factors such
as scope of responsibility, overall performance of the Company, industry specific experience, and locale. The Compensation Committee also
benchmarks salary ranges of chief executive officers at comparable companies
1
. Annual adjustments, if any, to base salary are
determined by the Compensation Committee based on an annual evaluation of the performance of the Chief Executive Officer in light of the
corporate goals and objectives. The Compensation Committee also considers the Company's performance, relative shareholder return, the
amount of compensation paid to chief executive officers at comparable companies, and the compensation paid in prior years.
During fiscal 2007, Mr. Famalette's base annual salary was not adjusted per the discretion of the Compensation
Committee, however, the Compensation Committee did grant Mr. Famalette an additional week of vacation beginning with fiscal 2008, allowing
him to earn a total of five weeks annually. Mr. Famalette's base annual salary remains at $560,000 per year.
The Chief Executive Officer, in turn, recommends an initial base salary for all other executive officers of the Company
based on factors such as scope of responsibility, base salary ranges of similarly positioned executives of the Company, industry specific
experience, and locale. The Chief Executive Officer also benchmarks salary ranges of similarly positioned executive officers at comparable
companies. Annual adjustments, if any, to base salary are recommended by the Chief Executive Officer based on each executive officer's
individual performance, the performance of areas within the executive officer's scope of responsibility, and the overall performance of the
Company. The Compensation Committee reviews the Chief Executive Officer's recommendations for such officers' annual base salary levels and
makes the final determination of such levels based on the factors referred to above and such other factors as it may consider relevant under the
circumstances.
During fiscal 2007, adjustments were made to the following named executive officers' base annual salaries:
-
Mr. Warzenski's base annual salary was increased from $205,000 per year to $225,000 per year. This increase of
9.8% was recommended by the Chief Executive Officer and approved by the Compensation Committee to appropriately compensate Mr.
Warzenski for his August 9, 2007 promotion to Vice President and Chief Financial Officer. Included in the above increase is a merit increase
received by Mr. Warzenski prior to his promotion. Prior to being promoted, Mr. Warzenski was Vice President and Chief Accounting Officer.
-
Mr. Ambro's base annual salary was increased from $365,000 per year to $395,000 per year. This increase of 8.2%
was recommended by the Chief Executive Officer and approved by the Compensation Committee to appropriately compensate Mr. Ambro for his
August 9, 2007 promotion to Executive Vice President and Chief Operating Officer. Included in the above increase is a merit increase received by
Mr. Ambro prior to his
______________________
1
Talbots, Abercrombie, Wet Seal, Charming Shoppes, Chico's, Guess, Goodys, Payless, Ann Taylor, Pacific Sun,
Stage Stores, American Eagle, Christopher Banks, Cato, Brown Shoe, Jos. Banks, Buckle, Family Dollar, Shopko,
Childrens Place, Retail Ventures, Gymboree, Bon Ton, Hot Topic, Aeropostale, United Retail, Shoe Carnival,
Men's Wearhouse, Gadzooks, Wilsons, Steinmart, Cache, Bebe, Mother's Work, Claires, S&K, Duckwall and Freds
14
promotion. Prior to being promoted, Mr. Ambro was Senior Vice President, Chief Financial Officer and Chief Administrative Officer.
-
Mr. Manson's base annual salary was increased from $350,000 per year to $360,000 per year. This merit increase of
2.9% was recommended by the Chief Executive Officer and approved by the Compensation Committee.
-
Mr. Schmidt's base annual salary was increased from $295,000 per year to $315,000 per year. This merit increase of
6.8% was recommended by the Chief Executive Officer and approved by the Compensation Committee.
A fiscal 2008 salary freeze for all named executive officers was recommended by the Chief Executive Officer and approved
by the Compensation Committee. This recommendation was made in response to business conditions and the current economic
environment.
Annual Performance Incentives.
We choose to pay annual performance incentives to encourage and
reward achievement of specified goals established by the Compensation Committee, and to improve the overall performance of the Company.
Offering annual performance incentives assists us in achieving our objective to attract and retain highly qualified employees. In addition, offering
such annual performance incentives provides us with a catalyst that allows us to align executives' incentives with enhancement of long-term
shareholder value.
Our Executive Bonus Plan currently in effect ("Bonus Plan") offers the Chief Executive Officer and our other
executive officers a bonus opportunity linked to Company performance. Under the Bonus Plan, the Compensation Committee establishes a goal
at the beginning of each fiscal year to achieve a targeted net income. The Board of Directors then reviews the Compensation Committee
recommendation and approves a final goal. This final goal represents the threshold for receiving a bonus payment under the Bonus Plan. The
threshold for fiscal 2007 was the opening planned net income for the year. Beginning with the threshold, the Compensation Committee
establishes four additional bonus levels that are incrementally larger than the threshold. The Compensation Committee determines such amounts
based on what they deem to be reasonable given historical Company performance and the state of the economy and retail industry each year. In
total, there are five bonus levels, the first level represents the threshold payout, the third level represents the targeted payout and the fifth level
represents the maximum payout. If the Company achieves the net income goal for the year, the Chief Executive Officer and Executive Vice
President may be paid a bonus in the following fiscal year of up to 50% of their respective base salaries, Senior Vice Presidents may be paid a
bonus in the following fiscal year of up to 25% of their respective base salaries and Vice Presidents and selected officers may be paid a bonus in
the following fiscal year of up to 20% of their respective base salaries. Base salaries, as referred to above, are defined as being the base salary in
place immediately after the conclusion of the annual performance review process which typically occurs during June. Such bonuses are typically
calculated and paid during June following the fiscal year in which the bonus was earned.
The goals established by the Board of Directors are communicated to executive officers immediately after the Board of
Directors approves the annual business plan at a board meeting that occurs near the end of the first fiscal quarter. With respect to the bonus
awarded to the Chief Executive Officer, the Compensation Committee determines the actual bonus amount within the aforementioned ranges
based on the guidelines described below. The Chief Executive Officer, in turn, recommends bonus amounts for the other executive officers of the
Company. Generally, 75% of the potential bonus is based solely on the Company's performance, and 25% of the potential bonus is based on the
executive officer's performance measured against the executive officer's goals. Bonuses are generally not paid if we do not achieve our net
income threshold goal for the applicable year. The executive officer's performance must be rated satisfactory or better on their annual
performance appraisal to receive a bonus payment. Any written disciplinary action received six months prior to the bonus payment constitutes
unsatisfactory performance and causes the executive officer to be ineligible to receive a bonus payment. The executive officer must also be
actively employed at the time of the bonus payout to receive a bonus. The Compensation Committee reviews the Chief Executive Officer's
recommendations for such officers' bonus levels and makes the final determination of such levels based on the factors referred to above and such
other factors as it may consider relevant under the circumstances.
We use net income as the main measure of corporate performance instead of earnings per share because of the potential
effect that dilution of outstanding shares has on the earnings per share calculation, and ultimately the potential effect such dilution would have on
annual performance incentive goals if such goals were linked to earnings per share performance.
15
We do not currently have any policies in place regarding the adjustment or recovery of awards or payments if our relevant
performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce or increase the size of an
award or payment. The Compensation Committee does, however, reserve the right to adjust an award if financial statements are restated due to
unforeseen circumstances and/or new rulings implemented by regulatory bodies.
Stock Options.
We choose to compensate executive officers with stock options for the purpose of motivating our
executive officers to produce results that benefit our shareholders. Granting such options encourages and facilitates key employee stock
ownership of the Company, which achieves our objective of aligning executives' incentives with enhancement of shareholder value.
Stock options are granted to our executive officers at the discretion of the Compensation Committee in accordance with
the 2005 Stock Option Plan (the "2005 Plan") as approved by our shareholders. We also maintain the 1998 Stock Option Plan (the
"1998 Plan") and the 1994 Stock Option Plan (the "1994 Plan") which were also approved by our shareholders. Certain
outstanding options were granted under the 1998 Plan and the 1994 Plan. The determination to grant options is based on factors such as the
current number of unexercised options held by executive officers and employees, the expiration dates of those options, the amount of work
required by the provisions of FASB Statement of Financial Accounting Standards No. 123R (FAS 123R) in order to properly track and report such
options, and the current financial performance of the Company. The amount of options granted is determined based on the individual's
performance, level of responsibility and the performance of the Company. The Compensation Committee determines option grants for the Chief
Executive Officer. Grants for other executive officers are recommended by the Chief Executive Officer and reviewed and approved by the
Compensation Committee. Stock options are granted with an exercise price equal to the closing market price of our common stock on the date of
the grant. Such options vest at a rate of 25% per year beginning on the first anniversary after the date of the grant and expire after ten years.
The Compensation Committee has a meeting in the first fiscal quarter of each year to determine the amount of options to
be granted to existing executive officers. The grant date for those options is generally scheduled for the last business day of the first fiscal quarter,
but is subject to change. The same grant date is typically used each year for all existing executive officers in order to provide consistency. Newly
hired executive officers may be granted options subject to the approval of the Compensation Committee. All options granted to newly hired
executive officers are granted on their hire date.
Beginning in fiscal 2006 the accounting treatment for stock options changed as a result of FAS 123R, making grants of
stock options less attractive. The less attractive accounting treatment combined with the increased time and effort required to account for granted
stock options influenced the Board of Directors to decide to not grant any stock options to existing executive officers and directors under the 2005
Plan during both fiscal 2007 and fiscal 2008. The only exception is that executive officers that begin service during either fiscal 2007 or fiscal 2008
may be granted options upon being hired.
There are currently no programs or plans in place to time stock option grants to executive officers in coordination with the
release of material nonpublic information, or for the purpose of affecting the value of compensation. In addition, no executive officers have a role
in the timing of stock option grants, and the Compensation Committee does not delegate to any other person any aspect of administration of a
timing program, plan or practice, with regard to such grants. The Compensation Committee does, however, reserve the right to delegate some or
all of its authority with respect to the Plan to another committee of directors, and certain limited authority to grant awards to employees may be
delegated to one or more of our officers.
Discretionary Bonuses.
Typically bonuses paid to executive officers are those bonuses provided for by the
Executive Bonus Plan, as described above in the "Annual Performance Incentives" section. The Compensation Committee, however,
does reserve the right to issue discretionary bonuses to individuals who have superior performance within their department or scope of
responsibility, even if the Company's net income goal for the year is not met. The Compensation Committee also reserves the right to reimburse
certain relocation expenses, and issue discretionary signing bonuses as a tool to attract highly qualified executives.
Nonqualified Deferred Compensation Plan.
We do not currently offer a nonqualified deferred compensation
plan to our executive officers. Mr. Schmidt has amounts in a nonqualified deferred compensation plan that originated on February 1, 1984. This
plan was frozen in 1993. Mr. Schmidt continues to earn interest on previously deferred amounts. As noted previously, executive officers, including
Mr. Schmidt, are not allowed to contribute to this
16
nonqualified deferred compensation plan. The plan was originally offered as a tool to attract and
retain highly qualified executives.
Other Compensation and Benefits.
Our executive officers participate in certain benefit plans on the same
terms as other employees. These plans include medical, dental, vision, group term life, and long-term disability insurance, as well as an associate
discount on select merchandise, employee stock purchase plan, 401(k) plan and a Flex 125 cafeteria plan. The Flex 125 cafeteria plan provides
for deferral of employee earnings into an account that may be used to pay for certain future medical and child/dependent care expenses. Car
allowances are provided to Mr. Famalette and Mr. Schmidt. We also pay the premium on a personal life insurance policy for Mr. Famalette.
The amount of other compensation and benefits offered to both the Chief Executive Officer and other named executive
officers is based on industry standards in order to be competitive within the current job market. The purpose of offering such compensation is to
attract and retain highly qualified executives. The Compensation Committee determines and approves these amounts for the Chief Executive
Officer. The Chief Executive Officer, in turn, recommends such compensation levels for other executive officers. The Compensation Committee
reviews such recommendations prior to approval.
Severance Agreements.
See Narrative Discussion of Severance Agreements.
Change in Control Agreements.
See Narrative Discussion of Change in Control Agreements.
Compensation Committee Report
The following report does not constitute soliciting material and is not considered filed or incorporated by reference
into any filing by the Company under the Securities Act of 1933 or under the Securities Exchange Act of 1934, unless we specifically state
otherwise.
The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and
Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee
recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement and the Company's Annual
Report on Form 10-K. This report is provided by the following independent directors, who comprise the committee:
O. James Woodward III, Chairman
Joseph J. Penbera
Frederick R. Ruiz
Philip S. Schlein
17
SUMMARY COMPENSATION TABLE
|
For the fiscal years ended February 2, 2008 and February 3, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
Fiscal
Year
|
Salary
(1)
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
(2)
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in Pension Value
and Nonqualified
Deferred Compensation
Earnings
(3)
($)
|
All Other
Compensation
(4)
($)
|
Total
($)
|
James R. Famalette
Chairman, President and Chief
Executive Officer
|
2007
|
560,000
|
-
|
-
|
31,676
|
-
|
-
|
20,790
|
(5)
|
612,466
|
2006
|
570,769
|
-
|
-
|
59,838
|
-
|
-
|
22,102
|
(5)
|
652,709
|
Daniel T. Warzenski
(7)
Vice President, Chief Financial Officer
and Secretary
|
2007
|
215,680
|
-
|
-
|
3,492
|
-
|
-
|
443
|
|
219,615
|
|
|
|
|
|
|
|
|
|
|
J. Gregory Ambro
Executive Vice President and Chief
Operating Officer
|
2007
|
382,885
|
-
|
-
|
24,718
|
-
|
-
|
7,193
|
|
414,796
|
2006
|
361,423
|
-
|
-
|
47,331
|
-
|
-
|
6,908
|
|
415,662
|
Scott G. Manson
Senior Vice President and General
Merchandise Manager
|
2007
|
357,693
|
-
|
-
|
15,938
|
-
|
-
|
7,193
|
|
380,824
|
2006
|
357,538
|
-
|
-
|
30,064
|
-
|
-
|
4,688
|
|
392,290
|
Michael J. Schmidt
Senior Vice President and Director of
Stores
|
2007
|
308,077
|
-
|
-
|
15,838
|
-
|
1,118
|
18,000
|
(6)
|
343,033
|
2006
|
295,192
|
-
|
-
|
29,919
|
-
|
1,045
|
16,915
|
(6)
|
343,071
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts in this column represent base salary earned during fiscal 2007 (February 4, 2007 through February 2, 2008) and
fiscal 2006 (January 29, 2006 through February 3, 2007), respectively. Fiscal 2007 consisted of a fifty-two week year, while
fiscal 2006 consisted of a fifty-three week year which occurs every six years on the retail calendar. As a result, an
additional week's worth of salary is included for each named executive officer during fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Amounts in this column reflect expense recognized in our financial statements in accordance with FAS 123R with respect to stock
options granted in prior years, with the exception that the above calculation does not reflect the estimate of forfeitures related
to service-based vesting used for financial statement reporting purposes. The assumptions made in the valuation of these awards
are set forth in Note 13 of the financial statements in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
Amounts in this column represent above-market earnings on nonqualified deferred compensation. Details of this calculation
are provided in the Narrative Discussion of Nonqualified Deferred Compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Amounts in this column represent various forms of compensation such as car allowances, 401(k) company match, group term
and individual term life insurance premiums. All items that individually exceed $10,000 are disclosed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
Both the fiscal 2007 and fiscal 2006 amounts include a car allowance of $12,000. Mr. Famalette is currently provided with a car allowance of $1,000 per month.
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
Fiscal 2007 amount includes a car allowance of $10,800, and fiscal 2006 amount includes a car allowance of $10,200. Mr. Schmidt
is currently provided with a car allowance of $900 per month. During the first six months of fiscal 2006, Mr. Schmidt was
provided with a car allowance of $800 per month.
|
|
|
|
|
|
|
|
|
|
|
|
|
(7)
|
Mr. Warzenski was not a named executive officer during fiscal 2006. As such, Mr. Warzenski's compensation information for fiscal 2006 is
not disclosed. Mr. Warzenski became a named executive officer effective August 9, 2007, upon being appointed as Vice President and Chief Financial Officer.
|
18
GRANTS OF PLAN BASED AWARDS
|
For the fiscal year ended February 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
(1)
|
Estimated Future Payouts Under
Equity Incentive Plan Awards
|
|
|
|
|
Name
|
Grant
Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
All Other
Stock Awards:
Number of
Shares of
Stock in Units
(#)
|
All Other
Option Awards:
Number of
Securities
Underlying
Options
(2)
(#)
|
Exercise or
Base Price of
Option Awards
($/Share)
|
Grant Date
Fair Value
of Option
Awards
($)
|
James R. Famalette
|
N/A
|
56,000
|
140,000
|
280,000
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Daniel T. Warzenski
|
N/A
|
8,440
|
21,100
|
42,200
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
J. Gregory Ambro
|
N/A
|
38,500
|
96,250
|
192,500
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Scott G. Manson
|
N/A
|
18,000
|
45,000
|
90,000
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Michael J. Schmidt
|
N/A
|
15,750
|
39,375
|
78,750
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These columns show the potential value of the payout for each named executive officer under the fiscal 2007 Executive Bonus
Plan, "the Plan," if the threshold, target or maximum goals are satisfied. The potential payouts are performance-driven,
and are therefore completely at risk. Because we did not achieve the threshold under the Plan for fiscal 2007, no payouts will be
made under the Plan. The performance goals and the calculation used in determining payout amounts are described in the
"Annual Performance Incentives" section of the Compensation Discussion and Analysis, and are quantified in the
Narrative Discussion of Summary Compensation Table and Grants of Plan Based Awards.
|
(2)
|
No stock options were issued to named executive officers during fiscal 2007.
|
19
NARRATIVE DISCUSSION OF SUMMARY COMPENSATION TABLE AND GRANTS OF PLAN BASED AWARDS
Employment Agreements
We entered into an employment agreement ("the Agreement") with Mr. Famalette, effective December 20,
2005, for his employment as President and Chief Executive Officer of the Company. The Agreement provides that Mr. Famalette will be a member
of the Board of Directors during his term of employment. The term of the Agreement automatically renews each January 1st for successive one-
year terms unless terminated by either party upon written notice. The Agreement provides for the payment of an annual base salary of at least
$560,000, and the ability to earn an annual bonus of up to 50% of base salary if specific goals adopted by the Board are achieved. Mr. Famalette
receives various other benefits including a car allowance, company paid life insurance, and other benefits typically offered to all employees of the
Company. Mr. Famalette also has the right to receive stock option grants subject to the approval of the Compensation Committee. The
Agreement also provides for certain severance and change in control benefits as described in further detail in the Narrative Discussions of
Severance and Change in Control Agreements.
With the exception of the employment agreement with Mr. Famalette, we have no formal written employment agreements
with any other named executive officers. Each other currently employed named executive officer earns a base salary, has the right to earn annual
bonuses, stock option grants and other various benefits which are discussed in further detail in the Compensation Discussion and Analysis.
Messrs. Warzenski, Ambro, Manson and Schmidt each have official agreements providing for severance and change in control benefits. See the
Narrative Discussions of Severance and Change in Control Agreements for detail of these agreements.
Materially Modified Stock Option Awards
No stock option awards were materially modified during fiscal 2007.
Terms of Granted Stock Option Awards
We provide our named executive officers with the opportunity to receive stock option grants through our 2005 Stock Option
Plan. During fiscal 2007, no stock options were granted to named executive officers. Descriptions regarding the criteria applied in determining
grant amounts, and the vesting schedules currently in place are outlined in the "Stock Options" section of the Compensation
Discussion and Analysis.
Terms of Granted Annual Performance Incentive Awards
We provide our named executive officers with the opportunity to receive annual incentive payments through our
Executive Bonus Plan currently in effect. Eligibility to participate in the Executive Bonus Plan begins after the named executive officer completes a
full year as Chief Executive Officer, Executive Vice President, Senior Vice President or Vice President. No annual incentive payments will be paid
to named executive officers in June 2008 related to our Executive Bonus Plan in effect for fiscal 2007.
Descriptions regarding the criteria applied in determining amounts payable under our Executive Bonus Plan, and
descriptions of performance-based conditions related to such amounts payable are outlined in the "Annual Performance Incentives"
section of the Compensation Discussion and Analysis. As noted in the Compensation Discussion and Analysis, the Chief Executive Officer and
Executive Vice President may be paid a bonus in the following fiscal year of up to 50% of their respective base salaries, Senior Vice Presidents
may be paid a bonus in the following fiscal year of up to 25% of their respective base salaries and Vice Presidents and selected officers may be
paid a bonus in the following fiscal year of up to 20% of their respective base salaries. The percentages of base salary an executive officer is
eligible for under each bonus level is detailed below. The threshold bonus level represents the opening planned net income for fiscal 2007. The
total potential value of a payout under the threshold, target and maximum bonus levels are included in the "Estimated Future Payouts Under
Non-Equity Incentive Plan Awards" columns in the Grants of Plan Based Awards table.
20
2007 Executive Bonus Plan Payout Levels for Chief Executive Officer and Executive Vice President:
Bonus Levels (Net Income)
|
% of Base Salary
|
$4.1 Million (Threshold)
|
10%
|
$4.7 Million
|
17.5%
|
$5.4 Million (Target)
|
25%
|
$6.0 Million
|
37.5%
|
$7.0 Million (Maximum)
|
50%
|
2007 Executive Bonus Plan Payout Levels for Senior Vice Presidents:
Bonus Levels (Net Income)
|
% of Base Salary
|
$4.1 Million (Threshold)
|
5%
|
$4.7 Million
|
8.75%
|
$5.4 Million (Target)
|
12.5%
|
$6.0 Million
|
18.75%
|
$7.0 Million (Maximum)
|
25%
|
2007 Executive Bonus Plan Payout Levels for Vice Presidents:
Bonus Levels (Net Income)
|
% of Base Salary
|
$4.1 Million (Threshold)
|
4%
|
$4.7 Million
|
7%
|
$5.4 Million (Target)
|
10%
|
$6.0 Million
|
15%
|
$7.0 Million (Maximum)
|
20%
|
Explanation of Salary and Discretionary Bonus in Proportion to Total Compensation
Total salary and discretionary bonuses for all named executive officers represented between 90%-98% of total
compensation for fiscal 2007. This percentage varies from year to year based upon our performance as a company. The stronger our
performance, the smaller the percentage will be, resulting from increased annual performance incentive and stock option compensation. The
weaker our performance, the larger the percentage will be, resulting from minimal annual performance incentive and stock option compensation.
21
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
For the fiscal year ended February 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
Stock Awards
|
Name
|
Number of
Securities
Underlying Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying Unexercised
Options
(#)
Unexercisable
(1)
|
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
(#)
|
Option
Exercise
Price
($)
|
Option Expiration
Date
|
Number of
Shares or Units
of Stock
That Have
Not Vested
(#)
|
Market Value
of Shares
or Units
of Stock
That Have
Not Vested
($)
|
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
(#)
|
James R. Famalette
|
40,000
|
-
|
|
-
|
7.50
|
11/23/2008
|
-
|
-
|
-
|
-
|
15,000
|
-
|
|
-
|
8.38
|
6/14/2009
|
-
|
-
|
-
|
-
|
40,000
|
-
|
|
-
|
8.88
|
6/25/2009
|
-
|
-
|
-
|
-
|
30,000
|
-
|
|
-
|
5.25
|
3/31/2010
|
-
|
-
|
-
|
-
|
70,000
|
-
|
|
-
|
4.63
|
10/29/2010
|
-
|
-
|
-
|
-
|
30,000
|
-
|
|
-
|
4.25
|
1/2/2011
|
-
|
-
|
-
|
-
|
20,000
|
-
|
|
-
|
2.64
|
5/3/2012
|
-
|
-
|
-
|
-
|
20,000
|
-
|
|
-
|
1.13
|
5/3/2013
|
-
|
-
|
-
|
-
|
15,000
|
5,000
|
(2)
|
-
|
6.03
|
4/30/2014
|
-
|
-
|
-
|
-
|
10,000
|
10,000
|
(3)
|
-
|
10.48
|
5/27/2015
|
-
|
-
|
-
|
-
|
Daniel T. Warzenski
|
625
|
1,875
|
(4)
|
-
|
8.60
|
9/11/2016
|
-
|
-
|
-
|
-
|
J. Gregory Ambro
|
30,000
|
-
|
|
-
|
3.77
|
11/3/2013
|
-
|
-
|
-
|
-
|
7,500
|
2,500
|
(2)
|
-
|
6.03
|
4/30/2014
|
-
|
-
|
-
|
-
|
7,500
|
7,500
|
(3)
|
-
|
10.48
|
5/27/2015
|
-
|
-
|
-
|
-
|
Scott G. Manson
|
5,000
|
-
|
|
-
|
8.38
|
6/14/2009
|
-
|
-
|
-
|
-
|
5,000
|
-
|
|
-
|
6.19
|
7/28/2010
|
-
|
-
|
-
|
-
|
5,000
|
-
|
|
-
|
3.28
|
8/3/2011
|
-
|
-
|
-
|
-
|
6,000
|
-
|
|
-
|
2.64
|
5/3/2012
|
-
|
-
|
-
|
-
|
5,000
|
-
|
|
-
|
1.13
|
5/3/2013
|
-
|
-
|
-
|
-
|
5,000
|
-
|
|
-
|
1.85
|
8/2/2013
|
-
|
-
|
-
|
-
|
7,500
|
2,500
|
(2)
|
-
|
6.03
|
4/30/2014
|
-
|
-
|
-
|
-
|
5,000
|
5,000
|
(3)
|
-
|
10.48
|
5/27/2015
|
-
|
-
|
-
|
-
|
Michael J. Schmidt
|
15,000
|
-
|
|
-
|
5.25
|
3/31/2010
|
-
|
-
|
-
|
-
|
10,000
|
-
|
|
-
|
3.28
|
8/3/2011
|
-
|
-
|
-
|
-
|
10,000
|
-
|
|
-
|
2.64
|
5/3/2012
|
-
|
-
|
-
|
-
|
10,000
|
-
|
|
-
|
1.13
|
5/3/2013
|
-
|
-
|
-
|
-
|
7,500
|
2,500
|
(2)
|
-
|
6.03
|
4/30/2014
|
-
|
-
|
-
|
-
|
5,000
|
5,000
|
(3)
|
-
|
10.48
|
5/27/2015
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(1)
All options are scheduled to vest at a rate of 25% per year beginning on the first anniversary date of the grant.
All options expire 10 years from the grant date.
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Scheduled to vest on April 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
(3)
Scheduled to vest in equal increments on May 27, 2008 and May 27, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
(4)
Scheduled to vest in equal increments on September 11, 2008, September 11, 2009 and September 11, 2010.
|
22
|
OPTION EXERCISES AND STOCK VESTED
(1)
|
|
For the fiscal year ended February 2, 2008
|
|
|
|
|
|
|
|
Option Awards
|
Stock Awards
|
Name
|
Number of Shares
Acquired on Exercise
(#)
|
Value Realized on
Exercise
(2)
($)
|
Number of Shares
Acquired on Vesting
(#)
|
Value Realized on
Vesting
($)
|
James R. Famalette
|
20,000
|
121,799
|
-
|
-
|
Daniel T. Warzenski
|
-
|
-
|
-
|
-
|
J. Gregory Ambro
|
-
|
-
|
-
|
-
|
Scott G. Manson
|
-
|
-
|
-
|
-
|
Michael J. Schmidt
|
14,000
|
72,680
|
-
|
-
|
|
|
|
|
|
|
(1)
|
Information relates to stock option exercises during fiscal 2007.
|
|
|
|
|
|
|
(2)
|
Amounts were calculated by multiplying the number of shares purchased by the difference between the exercise price and
the market price of our common stock on the date of the exercise.
|
|
PENSION BENEFITS
(1)
|
|
|
|
|
(1)
|
The table disclosing the actuarial present value of each named executive officer's accumulated benefit under defined
|
|
|
benefit plans, the number of years of credited service under each plan, and the amount of pension benefits paid to
|
|
|
each named executive officer during the fiscal year is omitted because we do not have such defined benefit plans.
|
|
23
NONQUALIFIED DEFERRED COMPENSATION
|
For the fiscal year ended February 2, 2008
|
|
|
|
|
|
|
|
|
Name
|
Executive
Contributions
in Last FY
($)
|
Registrant
Contributions
in Last FY
($)
|
Aggregate
Earnings in
Last FY
(1)
($)
|
Aggregate
Withdrawals/Distributions
($)
|
Aggregate Balance
at Last FYE
($)
|
James R. Famalette
|
-
|
-
|
-
|
|
-
|
-
|
Daniel T. Warzenski
|
-
|
-
|
-
|
|
-
|
-
|
J. Gregory Ambro
|
-
|
-
|
-
|
|
-
|
-
|
Scott G. Manson
|
-
|
-
|
-
|
|
-
|
-
|
Michael J. Schmidt
|
-
|
-
|
4,389
|
(2)
|
-
|
59,744
|
|
|
|
|
|
|
|
|
(1)
|
Amount in this column reflects interest credited to Mr. Schmidt's previously deferred balance. Interest is credited
on the last day of each fiscal year, and is calculated by multiplying the weighted average prime rate for the fiscal year by
the nonqualified deferred compensation balance as of the first day of such fiscal year.
|
|
|
|
|
|
|
|
|
(2)
|
Mr. Schmidt's deferred balance as of February 4, 2007 (first day of fiscal 2007) was $55,355. The weighted average prime
rate for fiscal 2007 was 7.93%. Aggregate earnings for fiscal 2007 were calculated as noted above. A portion of the interest
credited for fiscal 2007 represents above-market earnings ($1,118). This amount is included in "Change in Pension Value and
Nonqualified Deferred Compensation Earnings" in the Summary Compensation Table. The calculation of this amount is discussed in
the Narrative Discussion of Nonqualified Deferred Compensation.
|
24
NARRATIVE DISCUSSION OF NONQUALIFIED DEFERRED COMPENSATION
We do not currently offer a nonqualified deferred compensation plan to our executive officers. As of February 2, 2008, Mr.
Schmidt has amounts in a nonqualified deferred compensation plan. This plan originated on February 1, 1984, and was subsequently frozen
during 1993. Mr. Schmidt continues to earn interest on previously deferred amounts, but is no longer allowed to contribute to this plan. Upon
retirement, we shall pay Mr. Schmidt an amount equal to the balance in his deferred compensation account as of the effective date of his
retirement. Such payment shall be made in a single payment to Mr. Schmidt within 90 days of his effective retirement date, or, at our election, may
be paid in not more than 60 equal and consecutive monthly installments, including interest earned on the balance retained, with payment
beginning 90 days following his effective retirement date. In the event of death or total disability, payout terms will be similar to those for
retirement. In the event of termination prior to retirement, other than by reason of death or disability, we shall pay Mr. Schmidt a retirement benefit
as described above. In addition, upon judicial determination of or admittal to fraudulent and/or other dishonest activity toward the Company, the
Employee shall forfeit the entire deferred compensation balance in excess of the amount of any compensation deferred at the election of the
Employee and all rights to benefits pursuant to this plan.
Total fiscal year earnings on nonqualified deferred compensation reflects interest credited to Mr. Schmidt's previously
deferred balance. Interest is credited on the last day of each fiscal year, and is calculated by multiplying the weighted average prime rate for the
fiscal year (7.93% for fiscal 2007) by the nonqualified deferred compensation balance as of the first day of such fiscal year ($55,355 as of February
4, 2007). The resulting amount ($4,389 for fiscal 2007) represents total earnings on nonqualified deferred compensation.
Above-market earnings on deferred compensation is calculated by determining the weighted average prime rate (7.93% for
fiscal 2007) and the weighted average 120% applicable federal long-term rate (5.91% for fiscal 2007) for the fiscal year. The difference between
these two rates (2.02% for fiscal 2007) is multiplied by the individual's nonqualified deferred compensation balance as of the first day of such fiscal
year ($55,355 as of February 4, 2007). The resulting amount ($1,118 for fiscal 2007) represents above-market earnings on nonqualified deferred
compensation. Above-market earnings on deferred compensation is reported as named executive officer compensation in the Summary
Compensation Table.
Overview.
We believe that companies should provide reasonable severance benefits to certain executive
officers. With respect to executive officers, these severance benefits reflect the fact that it may be difficult for such officers to find comparable
employment within a short period of time. We offer these benefits in an attempt to achieve our objective of attracting and retaining highly qualified
executives. As such, as of February 2, 2008, we have previously entered into severance agreements with Messrs. Famalette, Warzenski, Ambro,
Manson and Schmidt. The Compensation Committee determines the terms of each severance agreement. They base their decision, in large part,
on severance packages being offered to executive officers in similar positions at comparable companies.
Mr. Famalette.
We entered into an employment agreement with Mr. Famalette dated December 20, 2005.
This agreement provides for the payment of certain severance benefits if Mr. Famalette is terminated other than for cause or due to disability. In
the event that Mr. Famalette is terminated other than for cause, we shall pay Mr. Famalette a severance benefit equal to Mr. Famalette's base
salary and all benefits for the period commencing on the date employment is terminated and ending on the date the employment agreement
terminates (but not less than 12 months severance payments regardless of the termination date of the employment agreement). The employment
agreement automatically renews for a one-year term each January 1
st
, which will result in severance benefits being paid equal to
12 months base salary and all benefits, determined at Mr. Famalette's annual base rate of pay in effect at the time such notice of termination is
given. Upon such termination, all of Mr. Famalette's stock options will be considered fully vested regardless of vesting schedule in accordance
with the accelerated vesting provision contained within the employment agreement. In the event that Mr. Famalette is terminated due to disability,
we shall pay Mr. Famalette a severance benefit equal to Mr. Famalette's base salary for the period commencing on the date employment is
terminated and ending on the date which is six months thereafter (not to exceed the number of months left on the employment agreement or any
extension thereof).
The severance benefit shall be paid to Mr. Famalette after the date of termination in the same form and at the same time
as Mr. Famalette's salary and benefits otherwise would have been paid had Mr. Famalette continued to be employed by us. All severance
payments are made in accordance with the requirements of Section 409A of the Internal Revenue Code as addressed later on in this discussion.
Mr. Famalette must continue to report to work, and adequately perform each and every duty of his employment, until the date set forth in the notice
of termination as the date of termination. We shall not pay a severance benefit if Mr. Famalette is terminated for cause. Termination for cause
means termination by the Company of Mr. Famalette's employment (1) by reason of willful dishonesty towards, fraud upon, or deliberate injury or
attempted injury to, the Company, (2) by reason of material breach of aforementioned employment agreement, (3) by reason of gross negligence
or intentional misconduct with respect to the performance of duties under the employment agreement, (4) by reason of breached or violation of any
fiduciary duty owed to the Company, or (5) if Mr. Famalette has been personally dishonest, or has willfully or negligently violated any law, rule or
regulation or has been convicted of a felony or misdemeanor (other than minor traffic violations and similar offenses), provided however that no
such termination will be deemed to be a termination for cause unless we have provided Mr. Famalette with written notice of what we reasonably
believe are the grounds for any termination for cause. Mr. Famalette shall not be entitled to a severance benefit if his employment with us is
voluntarily terminated as a result of retirement or resignation, or if his employment with us is terminated by death.
Termination due to disability, as referred to above, will occur in the event that, during the term of the employment
agreement, Mr. Famalette should, in the reasonable judgment of the Board, fail to perform his duties under this agreement because of illness or
physical or mental incapacity, and such disability continues for a period of more than three consecutive months. In such instance, we must provide
Mr. Famalette with written notification of termination. Any determination by the Board with respect to such disability must be based on a
determination by competent medical authority or authorities, a copy of which determination must be delivered to Mr. Famalette at the time it is
delivered to the Board. If Mr. Famalette disagrees with this determination, Mr. Famalette shall have the right to submit to the Board a
determination by competent medical authority or authorities of Mr. Famalette's own
choosing. If an agreement is not reached with the Board after
such submission, the parties will submit the issue of disability to arbitration within the provisions of the employment agreement.
The employment agreement discussed above contains certain confidentiality provisions. In accordance with the
confidentiality provisions contained in the employment agreement, Mr. Famalette may not directly or indirectly disclose or use any confidential
information about the Company unless such disclosure is required in the course of Mr. Famalette's employment with us, was permitted in writing
by the Board, or is within the public domain.
Any severance benefit payable under this agreement during the first six months following the date of termination, shall be
delayed and paid to Mr. Famalette in a lump sum as soon as practicable following the end of such six-month period in accordance with the
requirements of Section 409A of the Internal Revenue Code ("Section 409A"). No such six-month delay shall apply to the extent that
guidance issued under Section 409A allows payments to be made when otherwise due without subjecting Mr. Famalette to additional taxes under
Section 409A.
Mr. Warzenski.
We entered into a severance agreement with Mr. Warzenski dated March 23, 2007. The terms of
this agreement are the same as the terms of the agreements entered into with Messrs. Ambro, Manson and Schmidt on March 12, 2007 as
described below. The only difference is that Mr. Warzenski is eligible for a severance benefit of eight months base salary instead of 12 months
base salary, and is eligible to continue coverage in our group medical plan for a period of eight months instead of for a period of 12 months.
On March 25, 2008, the Compensation Committee approved the Company's entry into a new severance agreement with
Mr. Warzenski. The terms of this agreement are the same as the terms of Mr. Warzenski's agreement dated March 23, 2007 with two exceptions.
Under the new severance agreement, Mr. Warzenski is eligible for a severance benefit of 12 months base salary and is eligible to continue
coverage in our group medical plan for a period of 12 months, as compared with his original agreement that provided a severance benefit of eight
months base salary and the right to continue coverage in our group medical plan for a period of eight months.
As of February 2, 2008, Mr. Warzenski was entitled to receive a severance benefit in accordance with his severance
agreement dated March 23, 2007. The "Estimated Current Value of Severance Payments and Benefits" table and corresponding
footnote disclosures assume a termination date of February 2, 2008, and as such, amounts in this table and corresponding footnote disclosures
represent amounts receivable under his severance agreement dated March 23, 2007.
Messrs. Ambro, Manson, Schmidt.
We entered into severance agreements with Messrs. Ambro, Manson and
Schmidt as of March 12, 2007. Each of these agreements provide that, in the event the executive officer's employment with us is terminated by
written notice for other than for cause, we shall pay the executive officer a severance benefit equal to 12 months base salary, determined at the
executive officer's annual base rate of pay in effect at the time such notice of termination is given. The executive officer shall also have the right to
continue their coverage in our group medical plan. As a result, we shall make full payment on COBRA benefits for a period of 12 months from the
termination date or until the officer's right to COBRA health care continuation ceases, whichever is earlier.
The severance benefit shall be paid to the executive officer after the date of termination in the same form and at the same
time as the executive officer's salary otherwise would have been paid had the executive officer continued to be employed by us. All severance
payments are made in accordance with the requirements of Section 409A and Section 4999 of the Internal Revenue Code as addressed later on in
this discussion. The executive officer must continue to report to work, and adequately perform each and every duty of their employment, until the
date set forth in the notice of termination as their date of termination. The executive officer shall not be entitled to a severance benefit if their
employment with us is terminated other than by written notice of termination from the Company, including without limitation, the retirement,
resignation, disability or death of said executive officer. We shall also not pay a severance benefit if the executive officer is terminated for cause,
which includes, without limitation, a good faith determination by us that the executive officer (1) has committed a material breach of his duties and
responsibilities, (2) refused to perform required duties and responsibilities or performed them incompetently, (3) breached or violated any fiduciary
duty owed to the Company or (4) is or has been personally dishonest, or has willfully or negligently violated any law, rule or regulation or has been
convicted of a felony or misdemeanor (other than minor traffic violations and similar offenses).
Any severance benefit payable under these agreements during the first six months following the date of termination, shall
be delayed and paid to Messrs. Ambro, Manson and Schmidt in a lump sum as soon as practicable following the end of such six-month period in
accordance with the requirements of Section 409A. No such six-month delay
shall apply to the extent that guidance issued under Section 409A
allows payments to be made when otherwise due without subjecting Messrs. Ambro, Manson and Schmidt to additional taxes under Section 409A.
If total payments subject to such agreement will be subject to the excise tax imposed under Section 4999 of the Internal Revenue Code
("Section 4999"), then the total payments shall be reduced to the extent necessary so that the total payments will not be subject to the
excise tax imposed by Section 4999, and the deductibility of our total payments will not be disallowed by Section 280G of the Internal Revenue
Code.