Our management, including our Co-ChiefChief Executive OfficersOfficer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the companyCompany have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of DZS Inc.
Opinion on Internal Control Over Financial Reporting
We have audited the internal control over financial reporting of DZS Inc. and subsidiaries (the Company) as of December 31, 2021 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2021, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and our report dated March 9, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
March 9, 2022
ITEM 9B. | OTHER INFORMATION |
None.
ITEM 9B. OTHER INFORMATIONITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. |
ITEM 10. ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
EXECUTIVE OFFICERS
The information required in this item relating to our corporate governance, directors and nominees, and the compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the sections of our definitive proxy statement for our 2021 Annual Meeting of Stockholders to be filed with SEC within 120 days of the end of our fiscal year (the “Proxy Statement”) entitled “Corporate Governance Principles and Board Matters,” “Ownership of Securities” and “Proposal 1: Election of Directors.” Since our last Annual Report on Form 10-K, we have not made any material changes to the procedures by which our stockholders may recommend nominees to the Board of Directors.
Information relating to our executive officers is included under the caption "Executive Officers"“Information About our Executive Officers” in Part I of this Annual Report on Form 10-K, pursuant to General Instruction G(3) of Form 10-K.
DIRECTORS
In accordance with our certificate of incorporation, we divide our Board of Directors into three classes, with Class I consisting of two members, Class II consisting of one member, and Class III consisting of two members. We elect one class of directors to serve a three year term at each annual meeting of stockholders. Each elected director will continue to serve until his or her successor is duly elected or appointed.
The following table sets forth for each director: the age of such director, the positions currently held with the Company, the year in which such director’s current term will expire, and the class of such director.
|
| | | | | | | | |
| Name | | Age | | Position | | Term Expires | | Class |
| Min Woo Nam | | 54 | | Chairman of the Board of Directors | | 2019 | | III |
| Michael Connors | | 75 | | Director | | 2017 | | I |
| Il Yung Kim | | 60 | | President, Chief Executive Officer, Acting Chief Financial Officer and Director
| | 2019 | | III |
| Seong Gyun Kim | | 50 | | Director | | 2017 | | I |
| Sung-Bin Park | | 50 | | Director | | 2018 | | II |
All of our directors bring to the Board of Directors a wealth of executive leadership experience derived from their service as executives or managing directors of small, large and multinational corporations or venture capital firms . They also bring extensive board experience. The process undertaken by the Corporate Governance and Nominating Committee in recommending qualified director candidates is described below under “Corporate Governance Principles and Board Matters-Committee Composition-Corporate Governance and Nominating Committee.” See also “Corporate Governance Principles and Board Matters - Board Structure” above for a discussion of requirements with respect to our Board of Directors prior to September 9, 2018. Certain individual qualifications and skills of our directors that contribute to the Board of Director’s effectiveness as a whole are described in the following paragraphs.
Min Woo Nam has served as the Chairman of the Board of Directors of DZS since the consummation of the Merger on September 9, 2016. Mr. Nam currently serves as the Chief Executive Officer and Chairman of the Board of Directors of DNI, a position he has held since March 1993. Mr. Nam previously served as the Chief Executive Officer of Korea Ready System and Dasan Engineering Co., Ltd. His work has included export of technical services to Silicon Valley, California since 1999. Mr. Nam served as General Chairman of the International Network of Korean Entrepreneurs from 2004 until 2006, and has served as Director of the Korea Entrepreneurship Foundation since November 2011. Previously, he has served as Chairman of the Korean Venture Business Association. Mr. Nam completed his B.E.in Mechanical Engineering from Seoul National University in 1984. We believe Mr. Nam is well suited to serve as the Chairman of our Board of Directors given his extensive experience in chief executive officer and chairman roles and his in-depth knowledge of the telecommunications industry.
Michael Connors has served as a director of DZS since November 2003 following the consummation of Legacy Zhone’s merger with Tellium, Inc. Dr. Connors had been a member of Tellium’s board of directors since June 2000. From 1992 to 1998, Dr. Connors held the office of President of AOL Technologies, an Internet service provider, where he led the creation and growth of AOLnet and the development of AOL software and services. Dr. Connors is currently a director of The Connors Foundation. Dr. Connors earned a B.S. in Engineering, an M.S. in Statistics and a Ph.D. in Operations Research from Stanford University. We believe Dr. Connors is well suited to serve on our Board of Directors given his extensive knowledge of the communications industry based on his experience as President of AOL Technologies and director of Tellium.
Il Yung Kim has served as a director and Co-Chief Executive Officer of DZS since the consummation of the Merger on September 9, 2016, and assumed his current role of director and President, Chief Executive Officer and Acting Chief
Financial Officer as part of the management transition in connection with the first anniversary of the Merger in September 2017. Prior to joining DZS, Mr. Kim served as a consultant to DNI in connection with the Merger. From September 2014 to
August 2016, Mr. Kim served as Chief Executive Officer of TukTak in Korea, an online startup company, which enables people with creative talents to collaborate and produce goods and services online. From December 2014 to August 2016, he also served as a strategic advisor for InMobi, a global mobile advertising platform provider. Previously, Mr. Kim held various positions with Korea Telecom, including as President and executive board member from 2013 to January 2014, and as Chief Strategy Officer from 2010 to 2013. Mr. Kim commenced his career with British Telecom in 1982, where he held various senior positions including Vice President of Technology and Innovation and Programme Director and Head of Technology and Investment. Mr. Kim holds a B.S. (with Honors) in Electronic Engineering and an M.S. Degree in Microwave and Modern Optics from University College, University of London. We believe Mr. Kim is well suited to be our Chief Executive Officer and serve on our Board of Directors given his extensive chief executive officer experience, his expertise in the business arena and his in-depth knowledge of the telecommunications industry.
Seong Gyun Kim has served as a director of DZS since the consummation of the Merger on September 9, 2016. Mr. Kim currently serves as the Chief Financial Officer and a director of Finetex EnE, Inc., a nanofiber technology company listed on KOSDAQ, positions he has held since 2008. Prior to joining Finetex, Mr. Kim served as a Vice President of Mbizkorea, a game development and game products try-and-buy service supplier company, from 2006 to 2008. From 2013 to 2016, Mr. Kim served as a director of Interpark Corp., a KOSDAQ-listed Korean online auction and shopping mall. Mr. Kim holds an M.B.A. from Ajou University in South Korea and a B.S. in International Economics from Seoul National University. We believe Mr. Kim is well suited to serve on our Board of Directors given his considerable experience in the business arena as well as serving on different boards of public companies.
Sung-Bin Park has served as a director of DZS since the consummation of the Merger on September 9, 2016. Mr. Park is a co-founder and Managing Director of TransLink Capital (a U.S.-based venture capital firm), a position he has held since February 2009. Mr. Park is also a founder and Chief Executive Officer of SPK Inc. (which provides Korean business development services to U.S.-based start-ups) and Spark and Associates (a consulting firm providing big data analytics services), positions he has held since May 2002 and November 2010, respectively. Mr. Park earned an M.B.A. from Stanford University and a B.S. in Materials Science and Engineering from Massachusetts Institute of Technology. We believe Mr. Park is well suited to serve on our Board of Directors given his extensive knowledge providing Korean business development services to U.S. based companies as founder and Chief Executive Officer of SPK Inc.
CORPORATE GOVERNANCE PRINCIPLES AND BOARD MATTERS
We are dedicated to maintaining the highest standards of business integrity. It is our belief that adherence to sound principles of corporate governance, through a system of checks, balances and personal accountability is vital to protecting our reputation, assets, investor confidence and customer loyalty. Above all, the foundation of our integrity is our commitment to sound corporate governance. Our corporate governance principles and Code of Conduct and Ethics can be found in the "Corporate Governance" section of our website at http://dasanzhone.com/about/investor-relations/corporate-governance/.
Board Structure
On September 9, 2016, we acquired DNS through the Merger. At the closing of the Merger, we issued 9,493,016 shares (post reverse stock split) of our common stock to DNI, as the sole stockholder of DNS, of which 949,302 shares (post reverse stock split) are being held in escrow as security for claims for indemnifiable losses in accordance with the agreement governing the Merger (the Merger Agreement). As a result, immediately following the effective time of the Merger, DNI held 58% of the outstanding shares of our common stock and the holders of our common stock immediately prior to the Merger retained, in the aggregate, 42% of the outstanding shares of our common stock.
On September 9, 2016, effective as of the effective time of the Merger and in accordance with the terms of the Merger Agreement, (1) Robert Dahl and Mahvash Yazdi resigned from our Board of Directors, (2) the size of our Board of Directors was increased from five to seven directors, (3) the Board of Directors appointed Min Woo Nam, Il Yung Kim, Seong Gyun Kim and Sung-Bin Park to fill the vacancies on the Board resulting from the resignations of Mr. Dahl and Ms. Yazdi and the newly created directorships, and (4) Mr. Nam was elected as Chairman of our Board of Directors. As required by the Merger Agreement, the appointments of Messrs. Nam, Kim, Kim and Park to the Board of Directors were designated by DNI.
In connection with the Merger, effective as of September 9, 2016, we amended our bylaws to provide that, from the closing of the Merger until September 9, 2018: (1) the number of directors constituting our Board of Directors shall be seven and (2) subject to the failure of any director to be re-elected to the Board of Directors by our stockholders, the Board of Directors shall be composed of the four directors designated at the closing by DNI (or a replacement approved by a majority of the remaining DNI-designated directors (or their replacements)) and the three directors designated at the closing by us (or a replacement approved by a majority of the remaining directors designated at the closing by us (or their replacements)). With respect to our 2017 and 2018 annual meetings of stockholders (or any special meeting of stockholders for the election of directors held prior to the second anniversary of the Merger), our bylaws require that the nominees for election to the relevant Class of the Board of
Directors at such meeting be comprised of the director(s) of that Class designated at the closing by DNI and us (or a replacement approved by the applicable remaining directors, as described above).
In connection with the Merger and in accordance with the terms of the Merger Agreement, on September 9, 2016, we also entered into a stockholder agreement with DNI, pursuant to which DNI has agreed, on the terms set forth therein, to vote its shares of our common stock until September 9, 2018 (1) in favor of the election of each person who is nominated by the Board of Directors for election to the Board in accordance with our bylaws and (2) against the removal of any such director unless such removal is recommended by a resolution approved by the affirmative vote of at least two-thirds of the entire Board of Directors.
On September 11, 2017, in connection with the first anniversary of the Merger and the progress successfully attained in the integration of the businesses of Legacy Zhone and DNS, we announced that the Legacy Zhone senior management team of James Norrod and Kirk Misaka were stepping down from their respective roles as Co-Chief Executive Officer and Chief Financial Officer. Messrs. Norrod and Misaka had been serving in those roles under one-year employment agreements to ensure a smooth transition and integration of the businesses of Legacy Zhone and DNS. Mr. Norrod resigned from DZS, including from our Board of Directors, as part of this management transition effective as of September 11, 2017. Mr. Misaka has agreed to remain in our employ as Corporate Treasurer and Secretary for a transitional period to assist with the transition of his responsibilities. Also effective as of September 11, 2017, Richard Kramlich resigned from the Board of Directors to focus on his other business endeavors. Under our bylaws, as Messrs. Norrod and Kramlich were designed by Legacy Zhone at the closing of the Merger, any director appointed to fill the vacancies created by their resignations must be approved by Michael Connors, as the remaining Legacy Zhone director designee. We do not intend to fill the vacancies on our Board of Directors created by the resignations of Messrs. Norrod and Kramlich at this time, but may elect to do so in the future.
The positions of Chairman and Chief Executive Officer are separate. The Board of Directors believes its current leadership structure is appropriate at this time to maximize the effectiveness of its oversight of management and to provide a perspective that is separate and distinct from that of management. The Board of Directors also believes the separation of the Chairman and Chief Executive Officer roles allows our Chief Executive Officer to focus his time and energy on operating and managing our business and leverages the Chairman’s experience and perspectives.
We have elected to be treated as a “controlled company” under Nasdaq Marketplace Rules because more than 50% of the voting power for the election of directors is held by DNI. As a “controlled company,” we may rely on exemptions from certain corporate governance requirements under Nasdaq Marketplace Rules, including the requirement that we have a majority of independent directors on the Board of Directors and requirements with respect to compensation and nominating and corporate governance committees.
Board Independence
The Board of Directors has affirmatively determined that each member of the Board of Directors, other than Min Woo Nam and Il Yung Kim, is independent under the criteria established by Nasdaq for independent board members. At the conclusion of the regularly scheduled Board of Directors meetings, the independent directors have the opportunity to and regularly meet outside of the presence of our management. In addition, each member of the Audit Committee of the Board of Directors is currently an independent director in accordance with Nasdaq standards.
Committee Composition
As of the date of this report, we had the following three standing committees: (1) Audit Committee, (2) Compensation Committee, and (3) Corporate Governance and Nominating Committee. The membership during the last fiscal year and the function of each of the committees are described below. Each of the committees operates under a written charter which can be found on the “Corporate Governance” section of our website at www.dasanzhone.com.
|
| | | | | | |
| Director | | Audit Committee | | Compensation
Committee | | Corporate
Governance and
Nominating
Committee |
| Michael Connors (1) | | Member | | | | |
| Robert Dahl (2) | | Chair | | Member | | Member |
| Morteza Ejabat (3) | | | | | | |
| Il Yung Kim | | | | | | |
| Seong Gyun Kim(2) | | Chair | | | | |
| C. Richard Kramlich (1) (4) | | Member | | Member | | Member |
| Min Woo Nam (2)(4) | | | | Chair | | Chair |
| James Norrod (5) | | | | | | |
| Sung-Bin Park (4)(6) | | Member | | Member | | Member |
| Mahvash Yazdi (7) | | | | | | |
| Number of Meetings in 2016 | | 6 | | 4 | | 4 |
| |
(1) | Effective as of September 11, 2017, Mr. Kramlich resigned from his position as a director of DZS and member of the Compensation Committee and Corporate Governance and Nominating Committee, and Dr. Connors was appointed as a member of both committees to fill the resulting vacancies. |
| |
(2) | Mr. Dahl resigned from his position as a director of DZS, Chairman of the Audit Committee and member of the Compensation Committee and Corporate Governance and Nominating Committee in connection with the Merger effective as of September 9, 2016. Mr. Seong Gyun Kim was appointed as Chairman of the Audit Committee to fill the vacancy effective as of September 9, 2016. Mr. Nam was appointed member of the Corporate Governance and Nominating Committee to fill the vacancy effective as of September 9, 2016. |
| |
(3) | Mr. Ejabat resigned from his position as Executive Chairman of our Board of Directors effective as of January 31, 2016. |
| |
(4) | Mr. Kramlich resigned from his position as Interim Chairman of our Board of Directors and as a member of the Audit Committee in connection with the Merger effective as of September 9, 2016. Mr. Nam was appointed Chairman of our Board of Directors effective as of September 9, 2016. Mr. Park was appointed as a member of the Audit Committee to fill the vacancy effective as of September 9, 2016. |
| |
(5) | Mr. Norrod stepped down from his position as Co-Chief Executive Officer and resigned as a director of DZS effective as of September 11, 2017. |
| |
(6) | Effective as of September 9, 2016, in connection with the Merger, the size of the Corporate Governance and Nominating Committee was expanded from two to three members. Mr. Park was appointed as a member of the Corporate Governance and Nominating Committee to fill the vacancy effective as of September 9, 2016. |
| |
(7) | Ms. Yazdi resigned from her position as a director of DZS in connection with the Merger effective as of September 9, 2016. |
Audit Committee
The Audit Committee reviews the professional services provided by our independent registered public accounting firm, the independence of such independent registered public accounting firm from our management, and our annual and quarterly financial statements. The Audit Committee also reviews such other matters with respect to our accounting, auditing and financial reporting practices and procedures as it may find appropriate or may be brought to its attention. The responsibilities and activities of the Audit Committee are described in greater detail in the section entitled “Audit Committee Report.”
Each member of the Audit Committee is an independent director under the criteria established by Nasdaq. Our Board of Directors has also determined that each member of the Audit Committee qualifies as an “audit committee financial expert,” as that term is defined in the rules and regulations established by the SEC. Stockholders should understand that this designation is a disclosure requirement of the SEC related to the experience and understanding of our Audit Committee members with respect to certain accounting and auditing matters. The designation does not impose upon them any duties, obligations or liabilities that are greater than are generally imposed on them as a member of the Audit Committee and the Board of Directors, and their
designation as audit committee financial experts pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board of Directors.
Compensation Committee
The Compensation Committee is responsible for establishing and monitoring policies governing the compensation of executive officers. In carrying out these responsibilities, the Compensation Committee is responsible for reviewing the performance and compensation levels for executive officers, establishing salary and bonus levels for these individuals, and approving stock option grants for these individuals under our stock option plans. The objectives of the Compensation Committee are to correlate executive officer compensation with our business objectives and financial performance, and to enable us to attract, retain and reward executive officers who contribute to the long-term success of the company. The Compensation Committee seeks to reward executive officers in a manner consistent with our annual and long-term performance goals, and to recognize individual initiative and achievement among executive officers.
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee develops and reviews corporate governance principles applicable to the company, identifies individuals qualified to serve as directors, selects or recommends nominees to the Board of Directors for the election of directors, and advises the Board of Directors with respect to Board of Directors and committee composition. The Corporate Governance and Nominating Committee is also responsible for reviewing with the Board of Directors from time to time the appropriate skills and characteristics required of Board of Directors members in the context of the current size and make-up of the Board of Directors. This assessment includes issues of diversity of professional experience, viewpoint, age, skills (such as understanding of manufacturing, technology, finance and marketing), and international background. These factors, and any other qualifications considered useful by the Corporate Governance and Nominating Committee, are reviewed in the context of an assessment of the perceived needs of the Board of Directors at a particular point in time. As a result, the priorities and emphasis of the Corporate Governance and Nominating Committee and of the Board of Directors may change from time to time to take into account changes in business and other trends, and the portfolio of skills and experience of current and prospective Board of Directors members. Therefore, while focused on the achievement and the ability of potential candidates to make a positive contribution with respect to such factors, the Corporate Governance and Nominating Committee has not established any specific minimum criteria or qualifications that a nominee must possess.
Subject to the requirements under our bylaws with respect to elections to the Board of Directors prior to the second anniversary of the Merger (as described above), in selecting or recommending candidates for election to the Board of Directors, the Corporate Governance and Nominating Committee considers nominees recommended by directors, management and stockholders using the same criteria to evaluate all candidates. The Corporate Governance and Nominating Committee reviews each candidate’s qualifications, including whether a candidate possesses any of the specific qualities and skills desirable in certain members of the Board of Directors. Evaluations of candidates generally involve a review of background materials, internal discussions and interviews with selected candidates as appropriate. Upon the identification of a qualified candidate, the Corporate Governance and Nominating Committee would select, or recommend for consideration by the full Board of Directors, the nominee for the election of directors. The Corporate Governance and Nominating Committee may engage consultants or third party search firms to assist in identifying and evaluating potential nominees. To recommend a prospective nominee for the Corporate Governance and Nominating Committee’s consideration, stockholders should submit the candidate’s name and qualifications to our Corporate Secretary in writing to the following address: DASAN Zhone Solutions, Inc., Attention: Corporate Secretary, 7195 Oakport Street, Oakland, California 94621. When submitting candidates for nomination to be elected at the annual meeting of stockholders, stockholders must also follow the notice procedures and provide the information required by our bylaws. See “Board Structure” above for a discussion of requirements with respect to the composition of the Board of Directors prior to September 9, 2018.
Special Committee
Pursuant to the Merger Agreement, the Board of Directors has also established a Special Committee which is responsible for administering certain post-closing provisions of the Merger Agreement on our behalf. Michael Connors is currently the sole member of the Special Committee. The Special Committee did not hold any meetings during the year ended December 31, 2016.
Board Meetings and Director Attendance at Annual Meetings of Stockholders
During the year ended December 31, 2016, the Board of Directors of Legacy Zhone (prior to the Merger) and DZS
(following the Merger) held nine meetings. During this period, all of the directors attended or participated in at least 75% of the aggregate of the total number of meetings of the Board of Directors and the total number of meetings held by all committees of
the Board of Directors on which each such director served, in each case during the period for which they were directors of Legacy Zhone or DZS (as applicable). We endeavor to schedule our annual meeting of stockholders at a time and date to maximize attendance by directors taking into account the directors’ schedules. One of our directors attended last year’s annual meeting of stockholders.
Board of Directors' Role in Risk Oversight
The Board of Directors has an active role, as a whole and also at the committee level, in overseeing management of the company’s risks. The Compensation Committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements. The Audit Committee oversees management of financial risks and discusses our policies with respect to risk assessment and risk management. The Corporate Governance and Nominating Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest.
The Board of Directors’ role in our risk oversight process includes receiving regular reports from members of senior management on areas of material risk to the company, including operational, financial, legal and regulatory, and strategic and reputational risks. The full Board of Directors (or the appropriate committee in the case of risks that are under the purview of a particular committee) receives these reports from the appropriate “risk owner” within the organization to enable it to understand our risk identification, risk management and risk mitigation strategies. When a committee receives the report, the Chairman of the relevant committee reports on the discussion to the full Board of Directors during the committee reports portion of the next Board of Directors meeting. This enables the Board of Directors and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.
Communications with the Board of Directors
Any stockholder wishing to communicate with any of our directors regarding corporate matters may write to the director, c/o Corporate Secretary, DASAN Zhone Solutions, Inc., 7195 Oakport Street, Oakland, California 94621. The Corporate Secretary will forward these communications directly to the director(s). However, certain correspondence such as spam, junk mail, mass mailings, product complaints or inquiries, job inquiries, surveys, business solicitations or advertisements, or patently offensive or otherwise inappropriate material may be forwarded elsewhere within the company for review and possible response.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. These persons are required to furnish us with copies of all forms that they file. Based solely on our review of copies of these forms in our possession and in reliance upon written representations from our directors and executive officers, with the exception of one late Form 4 filing for Mr. Norrod on April 6, 2016, disclosing a single transaction in which Mr. Norrod was granted an option to purchase 250,000 shares of our common stock, we believe that all of our directors, executive officers and 10% stockholders complied with the Section 16(a) filing requirements during 2016.
Code of Conduct
We have adopted a Code of Conduct and Ethics applicable to all of our employees, directors and officers (including our principal executive officer, principal financial officer, principal accounting officer and controller). The Code of Conduct and Ethics is designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The full text of our Code of Conduct and Ethics can be found in the "Corporate Governance" section ofis published on our website at
http:https://dasanzhone.com/about/investor-relations/corporategovernance/.investor.dzsi.com/governance/governance-documents. We intend to disclose any future amendments to certain provisions of our Code of Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on our website within four business days following the date of such amendment or waiver.
ITEM 11. ITEM 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
This compensation discussion and analysis summarizes our philosophy and objectives regardingThe information required by this item is incorporated herein by reference to the compensation of our executive officers and senior managers, including how we determine the elements and amounts of compensation. The Compensation Committeesections of the Board of Directors is responsible for determining, establishingProxy Statement entitled “Executive Compensation” and approving each element of compensation including salary and all bonus, incentive, equity and other compensation for the company’s executive officers and
senior managers. Our fiscal year 2016 named executive officers were: Il Yung Kim, Co-Chief Executive Officer; James Norrod, Co-Chief Executive Officer; and Kirk Misaka, Chief Financial Officer.
On September 9, 2016, effective as of the effective time of the Merger, Mr. Kim was appointed as Co-Chief Executive Officer of DZS and the title of Mr. Norrod was changed from President and Chief Executive Officer to Co-Chief Executive Officer. The appointments of Messrs. Kim and Norrod as Co-Chief Executive Officers in connection with the consummation of the Merger was required by the terms of the Merger Agreement, and each of our named executive officers entered into a one-year employment agreement with DZS to ensure a smooth transition and integration of the businesses of Legacy Zhone and DNS. On September 11, 2017, we announced management transition changes in connection with the first anniversary of the Merger and the progress successfully attained in the integration of the businesses of Legacy Zhone and DNS. Given the successful integration over the past year, we agreed with Messrs. Norrod and Misaka that they would step down from their management roles effective as of September 11, 2017. On September 11, 2017, Mr. Norrod also agreed to step down as a member of our Board of Directors. Mr. Misaka has agreed to remain in our employ as our Corporate Treasurer and Secretary for a transitional period to assist with the transition of his responsibilities. As part of this management transition, effective September 11, 2017, the Board of Directors appointed Il Yung Kim to serve as our President, Chief Executive Officer and Acting Chief Financial Officer.
Executive Summary
DZS is a global provider of network access solutions and communications equipment for service providers and enterprise networks. We operate in a highly competitive environment. The purpose of our executive compensation program is to attract, motivate and retain the executives who lead our business and align their interests with the long-term interests of our stockholders. The main elements of our compensation program are base salary, annual cash bonus and long-term equity incentive awards. We seek to pay our named executive officers fairly and link pay with performance.
The leadership and discipline of our management team heavily contributed to our performance over the last several years. Among other achievements, our named executive officers demonstrated solid execution of our business plan and the promotion of our strategic objectives, including the successful completion of the Merger. They continued to position us appropriately for growth, including by increasing revenues, expanding operating income as a percentage of revenue, and promoting a diverse customer and product mix in our businesses. Their focus on expense and working capital management increased our efficiency and improved our results. In addition, our managers promoted a philosophy of continuous improvement, leadership development among our senior managers and the ongoing importance of diversity and inclusion among our employee population. Our named executive officers have transitioned the company to expand and grow our business. Our fiscal 2016 accomplishments, guided by our named executive officers, illustrate this focus, which included, among other things, the following:
We completed the Merger and initiated the process of integrating the businesses of Legacy Zhone and DNS.
Our results from continuing operations in fiscal year 2016 reflected ongoing resiliency in our business as demonstrated in our carrier business while investing in the expansion of the enterprise business.
Overall, we demonstrated strong execution on strategic business objectives.
In determining the compensation of our named executive officers for 2016, the Compensation Committee evaluated our company’s overall performance and their individual contributions to that performance, including the factors described above.
Based on the comparable company information reviewed by the Compensation Committee each year in connection with its annual review of our executive compensation program, the Compensation Committee has historically targeted total direct compensation opportunities for the named executive officers at approximately the median of the competitive market data at time of hire and gradually made adjustments to levels above the median as the named executive officer demonstrates performance and assumes additional responsibilities over time. In keeping with our corporate objectives to conserve cash, none of Legacy Zhone's named executive officers received raises in base salary for 2015. Additionally, commencing in October 2015, a voluntary salary reduction was initiated by the executive officers pursuant to which our named executive officers’ base salaries were reduced by 20%. This salary reduction, initiated in 2015, remained in effect in 2016, but was discontinued on April 1, 2017 for our named executive officers. On that date, Mr. Kim’s and Mr. Norrod’s annual salary increased to $400,000 and Mr. Misaka’s annual salary increased to $365,000.
In light of our recent performance and the other factors described above, we believe our executive pay is reasonable, consistent with our performance and financial objectives and position.
Philosophy and Objectives
We strive to find the best talent, resources and infrastructure to serve our customers and strategically expand our product portfolio. Our goal is to attract and retain highly qualified executives to manage and oversee each of our business functions. We seek out individuals who we believe will be able to contribute to our business and our vision of future success, culture, principles and values, and who will promote the long-term interests and growth of our company. Our compensation philosophy is intended
to promote a team-oriented approach to performance as a portion of each named executive officer's incentive compensation is based on achievement against the same performance objectives as our broad-based incentive plan. In 2016, all employees were provided with the same health, welfare and retirement benefits as the executives.
Our compensation programs aim to achieve the following:
foster a goal-oriented, highly talented leadership team with a clear understanding of business objectives and shared corporate principles and values;
allocate our resources effectively in the development and selling of market-leading technology and products;
control costs in our business to maximize our efficiency;
ensure that the elements of compensation provided to our employees and executives are balanced, individually and in combination, and do not encourage excessive risk-taking;
reflect the competitive environment of our industry and our changing business needs;
enable us to attract, retain and drive a world-class leadership team; and
maintain pay parity and fair compensation practices across our organization.
In furtherance of these goals, our compensation programs are designed to:
be market competitive;
emphasize pay for performance;
share risks and rewards with our stockholders;
align the interests of our employees and executives with those of our stockholders; and
reflect our principles and values.
Our executive compensation program in 2016 consisted of the following components:
base salary;
potential cash bonuses;
equity-based incentives; and
health, welfare and retirement benefits.
The Compensation Committee’s goal is to set total compensation for our named executive officers at levels that are generally comparable to executives with similar roles and responsibilities at our peer group of companies, consistent with our goals, and appropriate in light of the company’s financial position and the executive’s experience level and expected contribution. The Compensation Committee typically targets total compensation for our named executive officers at or above the median of the market data from our peer group of companies, although actual compensation for an executive officer may be higher or lower than the targeted position depending on such factors as the individual performance of the named executive officer, our actual financial performance during the year, intensity of competition and general market conditions, the experience level, responsibilities and expected future contribution of the executive, and the importance of each position. The Compensation Committee does not rely solely upon rigid, pre-determined formulas for determining executive compensation and may consider any factor that is deemed pertinent to its executive compensation decisions.
Role of Chief Executive Officer and Chief Financial Officer in Determining Executive Compensation and Benchmarking Data
We generally have followed a consistent process over the years for determining compensation for our named executive officers. At the conclusion of each fiscal year, our Chief Executive Officer (or Co-Chief Executive Officers, as applicable) and Chief Financial Officer with the assistance of the Human Resources Department, consider the compensation of executives in similar positions to theirs at our peer group, which is discussed below, using information gathered from proxy statements and other SEC filings. Our Chief Executive Officer (or Co-Chief Executive Officers, as applicable) and Chief Financial Officer then provide recommendations to the Compensation Committee for adjustments to their base salaries, bonus opportunities and equity levels.
Our Chief Executive Officer (or Co-Chief Executive Officers, as applicable) and our Chief Financial Officer attend some of the Compensation Committee meetings, but the Compensation Committee also regularly holds executive sessions not attended by any members of management or non-independent directors. The Compensation Committee discusses our Chief Executive Officer’s and Chief Financial Officer’s compensation package with them, but makes decisions with respect to their compensation without them present. The Compensation Committee has the ultimate authority to make decisions with respect to the compensation of our named executive officers, but may, if it chooses, delegate any of its responsibilities to subcommittees. The
Compensation Committee has delegated to Mr. Kim the authority to grant long-term incentive awards to employees below the level of executive officer under guidelines set by the Compensation Committee. The Compensation Committee also has authorized Mr. Kim to make salary adjustments and short-term incentive decisions for all employees other than officers under guidelines approved by the Compensation Committee. The Compensation Committee has not delegated any of its authority with respect to the compensation of executive officers. Although neither the Compensation Committee nor the Board of Directors is required to ratify the actions of Mr. Kim with regard to the authority delegated to him, as a matter of good corporate practice, Mr. Kim periodically provides a report to the Board of Directors regarding grants of long-term incentive awards to employees authorized by him. The Compensation Committee reviews this information in light of its own current experience, access to compensation information and experience at other companies and on other boards. The Compensation Committee historically has given considerable weight to management recommendations based on their direct knowledge of their performance and contributions to the company. The Compensation Committee considers these factors, as well as any other factors it may deem relevant to its executive compensation determinations, and sets the compensation for the company’s executive officers.
In determining the compensation of the named executive officers for fiscal year 2016, the Compensation Committee considered external market data and publicly available information from a peer group of comparable companies compiled as described above. This market data focused on, among other things, the cash components of compensation for executives.
The 2016 peer group used for purposes of determining 2016 compensation for the named executive officers represents companies within the telecommunications industry. The peer group was chosen primarily because they are our primary business competitors and because we consider the scope and complexity of their business operations to be closely related to ours. Our 2016 peer group was established by the Compensation Committee based on recommendations made by management.
For fiscal year 2016, our peer group was comprised of the following companies:
Adtran, Inc.
Brocade Communications Systems, Inc.
Calix, Inc.
Ciena Corporation
F5 Networks, Inc.
Harmonic, Inc.
Infinera Corporation
IXIA
Juniper Networks, Inc.
Sonus Networks, Inc.
Westell Technologies, Inc.
Role of Compensation Consultants
In performing its duties, the Compensation Committee may obtain input, as it deems necessary, from outside professional consulting firms retained directly by the Compensation Committee or through the assistance of the Human Resources Department. The Compensation Committee did not retain an outside professional consulting firm to conduct a competitive review and assessment of the company’s executive compensation program for the 2016 fiscal year.
Elements of Compensation Allocation
The Compensation Committee believes that each element of our compensation program is essential to attracting and retaining experienced and motivated executive officers who are able to successfully manage our operations, strategic direction and financial performance, particularly given the intensely competitive and rapidly changing telecommunications industry in which we operate. In evaluating the overall mix of compensation for named executive officers, the Compensation Committee typically does not rely on pre-determined formulas for weighting different elements of compensation for allocating between long-term and short-term compensation, but instead strives to develop comprehensive compensation packages that emphasize attainment of our short-term and long-term objectives and are reflective of our financial position and the executive’s abilities, experience level and contributions.
Base Salaries
In general, base salaries for employees, including named executive officers, are established based on the scope of their responsibilities, individual contribution, prior experience, sustained performance and anticipated level of difficulty of replacing the employee with someone of comparable experience and skill. Decisions regarding salary increases take into account the executive’s current salary and the amounts paid to the named executive officer’s peers outside the company. In addition to considering the competitive pay practices of our peer group of companies, we also consider the amounts paid to a named executive officer’s peers internally by conducting an internal pay equity analysis which compares the pay of each named executive officer to other members of the management team. Base salaries are reviewed periodically, but are not automatically increased if the Compensation Committee believes that other elements of compensation are more appropriate in light of our stated objectives. This strategy is consistent with our intent of offering compensation that is contingent on the achievement of performance objectives. In keeping with our corporate objectives to conserve cash, none of our named executive officers received raises in base salary for 2016. Additionally, commencing in October 2015, a voluntary salary reduction was initiated by the named executive officers. For 2015, Legacy Zhone's named executive officers’ base salaries were reduced by 20%. All other exempt employees company-wide incurred a base salary reduction of 10%. This salary reduction initiated in 2015 was reinstated in July 2016 and remained in effect in 2016 for Messrs. Norrod, Kim and Misaka. The salary reduction was discontinued on April 1, 2017. On that date, Mr. Kim’s and Mr. Norrod’s annual salary increased to $400,000 and Mr. Misaka’s annual salary increased to $365,000.
Annual Incentives
In addition to the named executive officers’ base salaries, they are eligible to participate in a performance-based annual bonus program, to be earned and paid quarterly in equal installments. Mr. Kim’s target quarterly bonus is $100,000. Mr. Norrod’s target quarterly bonus was $100,000. Mr. Misaka’s target quarterly bonus was $50,000. Their actual bonus is intended to be based upon our Board of Directors’ evaluation of our overall results compared to the annual budget approved by our Board of Directors for the following criteria: revenues; pre-tax income from operations (excluding any non-recurring and/or extraordinary charges or credits); free cash flow (excluding any equity and/or debt changes); and other non-financial subjective criteria determined by the Board of Directors. For 2016, no specific quarterly performance objectives were established for the named executive officers’ bonus opportunities. Instead, the quarterly bonus plan achievement and payout was determined by our Board of Directors based on their subjective evaluation of our overall performance relative to the operating plan and of the named executive officers’ individual performance. Our Board of Directors determined none of the named executive officers were entitled to receive a bonus payment in 2016 under this program. Mr. Kim did not receive a bonus for 2016 due to the fact his employment commenced upon consummation of the Merger in September 2016.
Transaction Bonuses
On September 9, 2016, in connection with the consummation of the Merger, we entered into transaction bonus agreements with each of Messrs. Norrod and Misaka pursuant to which these executives were entitled to receive a one-time cash bonus in connection with the successful consummation of the Merger. The amount of the cash bonus payable under the transaction bonus agreements was $1,000,000 for Mr. Norrod and $500,000 for Mr. Misaka. Mr. Norrod was paid $500,000 in October 2016 and $500,000 in January 2017. Mr. Misaka was paid $500,000 in March 2017.
Long-Term Equity Incentives
The goal of our long-term, equity-based incentive awards is to align the interests of employees with stockholders and to provide each employee with an incentive to manage our company from the perspective of an owner with an equity stake in the business. Because vesting is based on continued employment, our equity-based incentives also facilitate the retention of employees through the term of the awards. In determining the size of the long-term equity incentives to be awarded to employees, we take into account a number of internal factors, such as the relative job scope, individual performance history, prior contributions, the size of prior grants and competitive market data for our peer group of companies. Based upon these factors, the Compensation Committee determines the size of the long-term equity incentives at levels it considers appropriate to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value. The Compensation Committee does not apply any set formula or consider any specific weighting of these factors in setting the awards for a year. Rather, the level of awards is determined solely in the discretion of the Compensation Committee, taking into account those factors and the recommendations of management.
To reward and retain employees in a manner that best aligns employees’ interests with stockholders’ interests, we use stock options as the primary incentive vehicle for long-term compensation opportunities. We believe that stock options are an effective tool for meeting our compensation goal of increasing long-term stockholder value by tying the value of the stock options to our future performance. Because employees are able to profit from stock options only if our stock price increases in value over the stock option’s exercise price, we believe the options provide effective incentives to employees to achieve increases in the value of
our stock. To the extent they are awarded in any given year, annual grants of options have historically been approved by the Board of Directors at its regularly scheduled meeting in August and had a grant date effective as of the first day of the September following the Board of Director’s meeting. While historically the vast majority of stock option awards to our employees have been made pursuant to our annual grant program, the Compensation Committee retains discretion to make stock option awards to employees at other times, including in connection with the hiring of an employee, the promotion of an employee, to reward an employee, for retention purposes or for other circumstances recommended by management or the Compensation Committee. The exercise price of any such grant is the fair market value of our common stock on the grant date. In addition, our stock option programs are broad-based.
In 2016, in lieu of their typical annual awards, the named executive officers were granted stock options in connection with the successful completion of the Merger. These grants are described in the table under "2016 Grants of Plan-Based Awards" below. The Compensation Committee has not granted, but they may in the future grant, equity compensation awards to employees in anticipation of the release of material nonpublic information that is likely to result in changes to the price of our common stock, such as a significant positive or negative earnings announcement. Similarly, the Compensation Committee has not timed, nor does it intend in the future to time, the release of material nonpublic information based on equity award grant dates.
Retirement Savings
Our employees are eligible to participate in our 401(k) plan. Each employee may make before-tax contributions of up to 75% of their base salary, up to the limits imposed by the Code. We provide this plan to help our employees save some amount of their cash compensation for retirement in a tax efficient manner. We currently do not provide a matching contribution under our 401(k) plan, nor do we offer other retirement benefits.
Health and Welfare Benefits
The establishment of competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel. Our named executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and disability insurance, in each case on the same basis as other employees. We believe that these health and welfare benefits help ensure that the company has a productive and focused workforce.
Tax Deductibility of Executive Compensation
Limitations on the deductibility of compensation may occur under Section 162(m) of the Code, which generally limits the tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to $1 million, unless such compensation is performance based and certain specific and detailed criteria are satisfied. Tax deductibility is not a primary objective of our compensation programs, particularly in light of our company’s substantial net operating losses. We believe that achieving our compensation objectives set forth above is more important than the benefit of tax deductibility, and we reserve the right to maintain flexibility in how we compensate our executive officers that may result in limiting the deductibility of amounts of compensation from time to time.
Relationship Between Compensation and Risk
In early 2017, management assessed our compensation policies and programs for all employees for purposes of determining the relationship of such policies and programs and the enterprise risks faced by us. After that assessment, management determined that none of our compensation policies or programs create risks that are reasonably likely to have a material adverse effect on us. Management reported the results of its assessment to the Compensation Committee.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussions with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this report.
Respectfully Submitted by the Compensation Committee
Min Woo Nam (Chairman)
Michael Connors
Sung-Bin Park
“Director Compensation.”
* The information contained in this Compensation Committee Report shall not be deemed to be “soliciting material,” to be “filed” with the SEC or be subject to Regulation 14A or Regulation 14C or to the liabilities of Section 18 of the Exchange Act,
and shall not be deemed to be incorporated by reference into any filing of DZS, except to the extent that DZS specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Exchange Act.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee for the 2016 fiscal year were C. Richard Kramlich and Robert Dahl until the consummation of the Merger on September 9, 2016. Effective as of September 9, 2016, (1) the size of the Compensation Committee was increased to three members, (2) Mr. Dahl resigned from his position as a director and member of the Compensation Committee, (3) Min Woo Nam and Sung-Bin Park were appointed to fill the resulting vacancies on the committee and (4) Mr. Nam was appointed Chair of the Compensation Committee. All members of the Compensation Committee during 2016 other than Mr. Nam were independent directors, and none of them were our officers or employees or former officers or employees. During 2016, none of our executive officers served on the compensation committee (or equivalent), or the board of directors, of another entity whose executive officer(s) served on the Compensation Committee or Board of Directors.
Summary Compensation Table
The following table sets forth the compensation earned during the years ended December 31, 2016, 2015 and 2014 by the individuals serving as our Chief Executive Officer (or our Co-Chief Executive Officers, as applicable) and our Chief Financial Officer during such years. We refer to these executive officers throughout this report as our “named executive officers.”
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary ($) | | Bonus ($) (1) | | Stock Awards($) | | Option
Awards ($) (2) | | Non - Equity
Incentive
Plan
Compensation ($) | | Change in Pension Value and Non- qualified Deferred Compensation Earnings($) | | All Other Compensation ($) (3) | | | Total ($) |
| Il Yung Kim | | 2016 | | 113,711 |
| (5) | — |
| | — |
| | 739,907 |
| | | | | | 33,095 |
| (6) | | 886,713 |
|
| President, Chief Executive Officer and Acting Chief Financial Officer (4) | | | | | | | | | | | | | | | | | | | |
| James Norrod | | 2016 | | 320,000 |
| | 1,000,000 |
| | — |
| | 707,535 |
| | — |
| | — |
| | 71,380 |
| (7) | | 2,098,915 |
|
| Former Co-Chief Executive Officer (4) | | 2015 | | 396,923 |
| | 100,000 |
| | — |
| | — |
| | — |
| | — |
| | 86,248 |
| (8) | | 583,171 |
|
| | 2014 | | 172,306 |
| | — |
| | — |
| | 2,826,383 |
| | — |
| | — |
| | 49,738 |
| | | 3,048,427 |
|
| Kirk Misaka | | 2016 | | 292,000 |
| | 500,000 |
| | — |
| | 411,850 |
| | — |
| | — |
| | 20,954 |
| (9) | | 1,224,804 |
|
| Corporate Treasurer and Secretary and Former Chief Financial Officer (4) | | 2015 | | 362,192 |
| | 267,237 |
| | — |
| | — |
| | — |
| | — |
| | 17,631 |
| (10) | | 647,060 |
|
| 2014 | | 365,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15,039 |
| | | 380,039 |
|
| |
(1) | Amounts reflect, for 2015, discretionary bonuses and, for 2016, Merger consummation bonuses paid to our named executive officers. On September 9, 2016, in connection with the consummation of the Merger, we entered into transaction bonus agreements with each of Messrs. Norrod and Misaka pursuant to which these executives were entitled to receive a one-time cash bonus in connection with the successful consummation of the Merger. The amount of the cash bonus payable under the transaction bonus agreements was $1,000,000 for Mr. Norrod and $500,000 for Mr. Misaka. Mr. Norrod was paid $500,000 in October 2016 and $500,000 in January 2017. Mr. Misaka was paid $500,000 in March 2017. |
| |
(2) | This column represents the grant date fair value of the option awards granted during the applicable fiscal year to our named executive officers, calculated in accordance with Accounting Standards Codification Topic 718, Compensation-Stock Compensation, or ASC Topic 718. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions used in the calculation of these amounts, refer to Note 9 to the consolidated financial statements set forth in Part II, Item 8 of this report.
|
| |
(3) | Unless otherwise provided, amounts reflected in this column represent medical benefit premiums, contributions to health savings accounts and life insurance premiums paid by us on behalf of the executive for the applicable fiscal year. |
| |
(4) | As part of the management transition in connection with the first anniversary of the Merger, in September 2017, Messrs. Norrod and Misaka stepped down from their roles as Co-Chief Executive Officer and Chief Financial Officer, respectively, and Mr. Kim was appointed President, Chief Executive Officer and Acting Chief Financial Officer. Mr. |
Misaka has agreed to remain in our employ as Corporate Treasurer and Secretary for a transitional period to assist with the transition of his responsibilities.
| |
(5) | For Mr. Kim, for the period from September 9, 2016 through December 31, 2016, includes (a) $32,000 paid in U.S. Dollars and (b) $83,711 paid in Korean Won (with the KRW 95,640,000 paid to Mr. Kim converted to U.S. Dollars using an average exchange rate of 1,155 KRW:1.00 USD (which represents the average of the actual exchange rates on the date of each payment to Mr. Kim for the period from September 23, 2016 through December 23, 2016)). |
| |
(6) | For Mr. Kim, includes (a) $16,480 in housing allowance, (b) $677 in medical insurance paid by us on Mr. Kim’s behalf, (c) $78 in other insurance premiums (including dental, vision, life insurance, short and long term disability) paid by us on his behalf and (d) $15,860 in fees to obtain immigration visas paid by us on his behalf. DZS entered into a lease agreement on October 10, 2016 for a period on one year for a home in Oakland, California in which Mr. Kim resides while conducting his duties in Oakland, California. The lease expense is $6,200 per month, including utilities and expenses. Mr. Kim pays $200 per month to DZS for the difference between his housing allowance and the lease cost per the terms of his employment agreement. No payments were made to Mr. Kim in 2016 for his relocation from Korea to Oakland, California. |
| |
(7) | For Mr. Norrod, includes (a) $24,877 for reimbursement of housing expenses in Oakland, California, (b) $27,419 for reimbursement of airfare for travel home from the San Francisco Bay Area to visit his family, (c) $17,606 in medical insurance premiums paid by us on his behalf and (d) $1,478 in other insurance premiums (including dental, vision, life insurance, short and long term disability) paid by us on his behalf. |
| |
(8) | For Mr. Norrod, includes (a) $46,021 for reimbursement of housing expenses in Oakland, California, (b) $22,245 for reimbursement of airfare for travel home from the San Francisco Bay Area to visit his family, (c) $15,017 in medical insurance premiums paid by us on his behalf, (d) $1,465 in other insurance premiums including dental, vision, life insurance, short and long term disability paid by us on his behalf. |
| |
(9) | For Mr. Misaka, includes (a) $15,923 in medical insurance premiums paid by us on his behalf, (b) $2,700 in contributions made to his health savings account and (c) $2,331 in other insurance premiums (including dental, vision, life insurance, short and long term disability) paid by us on his behalf. |
| |
(10) | For Mr. Misaka, includes (a) $13,585 in medical insurance premiums paid by us on his behalf, (b) $1,700 in contributions made to his health savings account and (c) $2,346 in other insurance premiums (including dental, vision, life insurance, short and long term disability) paid by us on his behalf. |
2016 Grants of Plan-Based Awards
The following table sets forth summary information regarding grants of plan-based awards made to our named executive officers during the year ended December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | |
| | Name | | Grant Date | | Estimated Possible Payouts under Non-Equity Incentive Plan Awards Target ($)
| | All Other Stock Awards: Number of Shares of Stock or Units (#) | | All Other
Option
Awards:
Number of
Securities Underlying Options
(#) (1) | | Exercise or base Price of Option Awards ($/Sh) | | Grant Date Fair Value of Stock and Option Awards ($) |
| | | |
| |
| | Il Yung Kim | | 9/9/2016 | | 400,000 |
| | — |
| | 200,000 |
| | 5.95 |
| | $ | 739,907 |
|
| | James Norrod | | 9/9/2016 | | 400,000 |
| | — |
| | 200,000 |
| | 5.95 |
| | $ | 707,535 |
|
| | Kirk Misaka | | 9/9/2016 | | 200,000 |
| | — |
| | 100,000 |
| | 5.95 |
| | $ | 411,850 |
|
(1) Amounts presented have been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017. The options granted to Mr. Kim have a term of ten years from the date of grant and vest over four years with the first 25% vesting on September 9, 2017 and the remaining shares vesting in 36 equal monthly installments over the course of the remaining three years thereafter. The options granted to Messrs. Norrod and Misaka have a term of ten years from the date of grant and vest and become exercisable in 48 equal monthly installments over the course of four years from the date of grant. The vesting of the stock options held by our named executive officers may accelerate under certain circumstances as described below under "Potential Payments Upon Termination."
Outstanding Equity Awards at 2016 Fiscal Year End
The following lists all outstanding equity awards held by our named executive officers as of December 31, 2016.
|
| | | | | | | | | | | | | | | | | |
| | | Option Awards (1) |
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | (2) | | Number of Securities Underlying Unexercised Options (#) Unexercisable | (2) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | Option Exercise Price ($)(2) | | Option Expiration Date |
| Il Yung Kim | | — |
| | | 200,000 |
| (3) | | | | $ | 5.95 |
| | 9/9/2027 |
| James Norrod | | 12,499 |
| | | 187,500 |
| | | — |
| | 5.95 |
| | 9/9/2027 |
| Kirk Misaka | | 17,999 |
| | | — |
| | | — |
| | 6.16 |
| | 9/1/2017 |
| | | 17,999 |
| | | — |
| | | — |
| | 7.55 |
| | 9/1/2018 |
| | | 6,249 |
| | | 93,751 |
| | | — |
| | 5.95 |
| | 9/9/2027 |
| |
(1) | Except as otherwise described, all options have a term of ten years from the date of grant and vest and become exercisable in 48 equal monthly installments over the course of four years from the date of grant. The vesting of the stock options held by our named executive officers may accelerate under certain circumstances as described below under “Potential Payments Upon Termination.” |
| |
(2) | Amounts presented have been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017. |
| |
(3) | The options have a term of ten years from the date of grant and vest over four years with the first 25% vesting on September 9, 2017 and the remaining shares vesting in 36 equal monthly installments over the course of the remaining three years thereafter. |
Option Exercises and Stock Vested in 2016
None of our named executive officers exercised options or had stock awards vest in 2016.
Pension Benefits
None of our named executive officers participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us.
Nonqualified Deferred Compensation
None of our named executive officers participates in or has account balances in qualified or non-qualified contribution plans or other deferred compensation plans maintained by us.
Potential Payments Upon Termination
We have employment, severance, change of control or release agreements with certain of the named executive officers, as described below.
Employment Agreement with Il Yung Kim
In September 2016, we entered into an employment agreement with Mr. Kim. This agreement had an initial term expiring on September 9, 2017 and was automatically extended for an additional year on such date and may be automatically extended on each subsequent anniversary of the initial expiration date. Prior to the management transition in September 2017, Mr. Kim served as Co-Chief Executive Officer. As part of this management transition, effective September 11, 2017, the Board of Directors appointed Mr. Kim to serve as our President, Chief Executive Officer and Acting Chief Financial Officer.
During the term, Mr. Kim will perform the responsibilities as President, Chief Executive Officer and Acting Chief Financial Officer, reporting to the Board of Directors of the company, with such duties and responsibilities as are commensurate with such positions. Under the employment agreement, Mr. Kim’s annual salary was initially $320,000, which automatically increased to $400,000 on April 1, 2017, and will be reviewed on at least an annual basis by the Compensation Committee. In addition, Mr. Kim is eligible to participate in a performance-based annual bonus program, to be earned and paid quarterly in equal installments. Mr. Kim’s target bonus is equal to 100% of his annual salary. Mr. Kim is entitled to $30,000 in relocation assistance to relocate his principal place of residence to the San Francisco Bay Area. Mr. Kim will also be reimbursed a maximum of $6,000 per month for housing allowance. Mr. Kim is also eligible to participate in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements generally available to our other officers.
Under Mr. Kim’s employment agreement, Mr. Kim will receive certain compensation in the event that his employment is terminated by us for any reason other than by reason of Mr. Kim’s death, disability, his termination for “cause” (as defined below) or expiration of the term of his employment agreement, or if Mr. Kim resigns for “good reason” (as defined below) (which we refer to as a Qualifying Termination), Mr. Kim will be entitled to receive a lump sum payment equal to his annual salary as in effect immediately prior to the date of termination (or, if greater, $400,000). If termination occurs after the first anniversary of his employment agreement the lump sum payment will be reduced to 50% of his annual salary (or, if greater, $200,000). In addition, in the event of Mr. Kim’s Qualifying Termination following a change in control (as defined in our 2001 Plan), the vesting and exercisability of his stock options will accelerate on the date of termination. In addition, Mr. Kim is eligible for up to $30,000 reimbursement of expenses for relocation to his new principal place of residence.
Assuming a hypothetical Qualifying Termination of Mr. Kim’s employment on December 31, 2016, the last day of our 2016 fiscal year, we would have been obligated to pay Mr. Kim a lump sum payment of $400,000. If a change in control had occurred on December 31, 2016 and, in connection with such change in control, Mr. Kim experienced a Qualifying Termination, we would have been obligated to pay Mr. Kim a lump sum payment of $400,000, up to $30,000 reimbursement of expenses for relocation to his new principal place of residence, and the vesting and exercisability of his stock options would have accelerated on the date of termination, which stock options would have had no value as of December 31, 2016, due to the fact that the closing price per share of our common stock on December 30, 2016 (the last trading day of 2016) was $5.00, which was lower than the exercise price per share of Mr. Kim’s stock options.
Employment Agreement with James Norrod
In September 2016, we entered into an amended and restated employment agreement with Mr. Norrod. The amended and restated agreement replaced the previous employment agreement dated July 14, 2014 with Mr. Norrod.
Mr. Norrod's employment agreement had an initial term expiring on September 9, 2017 and was eligible for automatic extension for an additional year and further extension on each subsequent anniversary of the initial expiration date. Pursuant to the management transition in September 2017, Mr. Norrod stepped down from his position as Co-Chief Executive Officer and a director of the company effective September 11, 2017. Mr. Norrod entered into a release agreement in connection with his resignation from his management roles and employment with the company, which is described below under "Release Agreements with Messrs. Norrod and Misaka."
During the term of his employment agreement, Mr. Norrod performed his responsibilities as Co-Chief Executive Officer, reporting to the Board of Directors of the company, with such duties and responsibilities as were commensurate with the position. Under the employment agreement, Mr. Norrod’s annual salary was initially $320,000, which automatically increased to $400,000 on April 1, 2017, and was reviewed on at least an annual basis by the Compensation Committee. In addition, Mr. Norrod was eligible to participate in a performance-based annual bonus program, to be earned and paid quarterly in equal installments. Mr. Norrod’s target bonus was equal to 100% of his annual salary. Mr. Norrod was also eligible to participate in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements generally available to our other officers.
Under Mr. Norrod’s amended and restated employment agreement, Mr. Norrod was eligible to receive certain compensation in the event that his employment was terminated by us for any reason other than by reason of Mr. Norrod’s death, disability, his termination for “cause” (as defined below) or expiration of the term of his employment agreement, or if Mr. Norrod resigned for “good reason” (as defined below) (which we refer to as a Qualifying Termination), Mr. Norrod was entitled to receive a lump sum payment equal to his annual salary as in effect immediately prior to the date of termination (or, if greater, $400,000). If termination occurred after the first anniversary of his employment agreement, the lump sum payment would be reduced to 50% of his annual salary (or, if greater, $200,000). In addition, in the event of Mr. Norrod’s Qualifying Termination following a change in control (as defined in our Amended and Restated 2001 Stock Incentive Plan), the vesting and exercisability of his stock options would have accelerated on the date of termination.
Assuming a hypothetical Qualifying Termination of Mr. Norrod’s employment on December 31, 2016, the last day of our 2016 fiscal year, we would have been obligated to pay Mr. Norrod a lump sum payment of $400,000. If a change in control had occurred on December 31, 2016 and, in connection with such change in control, Mr. Norrod experienced a Qualifying Termination, we would have been obligated to pay Mr. Norrod a lump sum payment of $400,000 and the vesting and exercisability of his stock options would have accelerated on the date of termination, which stock options would have had no value as of December 31, 2016 due to the fact that the closing price per share of our common stock on December 30, 2016 (the last trading day of 2016) was $5.00, which was lower than the exercise price per share of Mr. Norrod’s stock options.
Employment Agreement with Kirk Misaka
In September 2016, we entered into an employment agreement with Mr. Misaka. This agreement had an initial term expiring on September 9, 2017 and was eligible for automatic extension for an additional year and further extension on each subsequent anniversary of the initial expiration date. Pursuant to the management transition in September 2017, Mr. Misaka stepped down from his position as Chief Financial Officer of the company effective September 11, 2017. Mr. Misaka agreed to remain in the employ of the company as our Corporate Treasurer and Secretary for a transitional period to assist with the transition of his responsibilities, with the same base salary as was in effect prior to the management transition, and continued vesting of his outstanding stock options during the term of his employment, although his continued employment will no longer be governed by the terms of his employment agreement, which was terminated effective September 11, 2017. Mr. Misaka entered into a release agreement in connection with his resignation from his management role, which is described below under "Release Agreements with Messrs. Norrod and Misaka."
During the term of his employment agreement, Mr. Misaka performed the responsibilities as Chief Financial Officer, reporting to our Chief Executive Officer (or the Co-Chief Executive Officers, as applicable), with such duties and responsibilities as were commensurate with the position. Under the employment agreement, Mr. Misaka’s annual salary was initially $292,000, which automatically increased to $365,000 on April 1, 2017, and was reviewed on at least an annual basis by the Compensation Committee. In addition, Mr. Misaka was eligible to participate in a performance-based annual bonus program, to be earned and paid quarterly in equal installments. Mr. Misaka’s target bonus was equal to 100% of his annual salary. Mr. Misaka was also eligible to participate in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements generally available to our other officers.
Under Mr. Misaka’s employment agreement, Mr. Misaka was eligible to receive certain compensation in the event that his employment was terminated by us for any reason other than by reason of Mr. Misaka’s death, disability, his termination for “cause” (as defined below) or expiration of the term of his employment agreement, or if Mr. Misaka resigned for “good reason” (as defined below) (which we refer to as a Qualifying Termination), Mr. Misaka was entitled to receive a lump sum payment equal to his annual salary as in effect immediately prior to the date of termination (or, if greater, $365,000). If termination occurred after the first anniversary of his employment agreement, the lump sum payment would be reduced to 50% of his annual salary (or, if greater, $182,500). In addition, in the event of Mr. Misaka’s Qualifying Termination following a change in control (as defined in our Amended and Restated 2001 Stock Incentive Plan), the vesting and exercisability of his stock options would have accelerated on the date of termination. The employment agreement termination of benefits replaced the severance agreement between the company and Mr. Misaka dated August 2012.
Assuming a hypothetical Qualifying Termination of Mr. Misaka’s employment on December 31, 2016, the last day of our 2016 fiscal year, we would have been obligated to pay Mr. Misaka a lump sum payment of $365,000. If a change in control had occurred on December 31, 2016 and, in connection with such change in control, Mr. Misaka experienced a Qualifying Termination, we would have been obligated to pay Mr. Misaka a lump sum payment of $365,000 and the vesting and exercisability of his stock options would have accelerated on the date of termination, which stock options would have had no value as of December 31, 2016 due to the fact that the closing price per share of our common stock on December 30, 2016 (the last trading day of 2016) was $5.00, which was lower than the exercise price per share of Mr. Misaka’s stock options.
Defined Terms in Employment Agreements
For purposes of the employment agreements, “cause” is generally defined to include: (1) the executive’s willful or continued failure to substantially perform his duties with the company, or any failure to carry out, or comply with, in any material respect any lawful and reasonable directive of the Board of Directors consistent with the terms of his employment agreement, which failure continues for 15 days following the executive’s receipt of written notice from the Board of Directors, (2) the executive’s conviction of, guilty plea to, or entry of a nolo contendere plea to a felony or a crime of moral turpitude or commission of an act of fraud, embezzlement or misappropriation against us, (3) the executive’s willful or reckless misconduct that has caused or is reasonably likely to cause demonstrable and material financial injury to the company, or (4) the executive’s willful and material breach of his employment agreement, which breach remains uncured for 15 days following his receipt of written notice by the Board of Directors.
For purposes of the employment agreements, “good reason” is generally defined to include the occurrence of any of the following events without his consent: (1) a material diminution in the executive’s base compensation, (2) a material diminution in the executive’s authority, duties or responsibilities, (3) a material change in the geographic location at which the executive must perform his duties, or (4) any other action or inaction that constitutes a material breach by the company of its obligations under the employment agreement.
Release Agreements with Messrs. Norrod and Misaka
In connection with their resignations from their management roles, and Mr. Norrod’s termination of employment, Messrs. Norrod and Misaka entered into release agreements with the company. Pursuant to his release agreement, Mr. Norrod is entitled to receive a lump sum cash payment of $300,000, continued health benefits at our expense for a period of six months following his termination of employment and an extension of the period of time to exercise his vested stock options through September 11, 2018. Pursuant to his release agreement, Mr. Misaka is entitled to receive a lump sum cash payment of $232,500 and an extension of the period of time to exercise his vested stock options through September 11, 2018.
Director Compensation
Directors who are employees of the company, such as Il Yung Kim, do not receive any additional compensation for their services as directors.
On September 9, 2016, our Board of Directors adopted a new compensation program for non-employee directors. Under our new non-employee director compensation program, each non-employee director is eligible to receive an annual cash retainer of $20,000, but may elect to receive an equivalent amount of fully vested shares of our common stock, in lieu of the cash retainer, based on the fair market value of the shares on the date the cash retainer would otherwise be paid. To align the interests of directors with the long-term interests of stockholders, each non-employee director is also entitled to receive an annual equity grant in the form of a stock option to purchase 10,000 shares at an exercise price equal to the fair market value of our common stock on the date of grant. In lieu of this stock option, each non-employee director may elect to receive the annual equity grant in the form of 3,000 restricted stock units. The annual equity grant of stock options vests in 48 equal monthly installments over the course of four years. The annual equity grant of restricted stock units vests in four equal annual installments over the course of four years. In addition, the chair of the Audit Committee receives a $4,000 cash payment per committee meeting attended, and each of the other committee members receives a $2,000 cash payment per committee meeting attended. Non-employee directors are entitled to reimbursement of reasonable out-of-pocket expenses incurred attending Board and committee meetings, and in connection with Board related activities. The following table sets forth the compensation earned during the year ended December 31, 2016 by each of our non-employee directors.
|
| | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or
Paid in Cash ($) (1) | | Stock
Awards ($) (2) | | Option
Awards ($) (3) | | Non-Equity
Incentive
Plan
Compensation ($) | | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | | All
Other
Compensation ($) (4) | | Total ($) |
| Michael Connors (5) | | 30,000 |
| | — |
| | 42,501 |
| | — |
| | — |
| | — |
| | 72,501 |
|
| Robert Dahl (6) | | 12,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,000 |
|
| Morteza Ejabat (7) | | — |
| | 640,000 |
| | — |
| | — |
| | — |
| | — |
| | 640,000 |
|
| Seong Gyun Kim (8) | | 24,000 |
| | 17,850 |
| | — |
| | — |
| | — |
| | — |
| | 41,850 |
|
| C. Richard Kramlich (9) | | 8,000 |
| | 17,850 |
| | — |
| | — |
| | — |
| | — |
| | 25,850 |
|
| Min Woo Nam (10) | | 20,000 |
| | — |
| | 37,822 |
| | — |
| | — |
| | — |
| | 57,822 |
|
| Sung-Bin Park (11) | | 22,000 |
| | — |
| | 37,822 |
| | — |
| | — |
| | — |
| | 59,822 |
|
| Mahvash Yazdi (12) | | 20,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 20,000 |
|
| |
(1) | As described above, a director may elect to receive an equivalent amount of fully vested shares of our common stock in lieu of an annual cash retainer. The amounts in this column include the annual retainer and committee fees paid in cash. No fully vested shares of our common stock were issued to any non-employee directors in lieu of their regular cash retainer during 2016. |
| |
(2) | This column represents the grant date fair value of the equity awards granted on September 9, 2016 to each of the non-employee directors who elected to receive their annual equity grant in the form of restricted stock units during 2016 or, for Mr. Ejabat, the shares of our common stock issued to him in January 2016 as consideration for transition services, as calculated in accordance with ASC Topic 718. For these awards, the grant date fair value is calculated using the closing price of our common stock on the grant date as if these awards were vested and issued on the grant date. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions used in the calculation of these amounts, refer to Note 9 to the consolidated financial statements set forth in Part II, Item 8 of this report. Amounts presented have been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017. |
| |
(3) | This column represents the grant date fair value of the option awards granted on September 9, 2016 to each of the non-employee directors who elected to receive their annual equity grant in the form of stock options during 2016, as calculated |
in accordance with ASC Topic 718. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions used in the calculation of these amounts, refer to Note 9 to the consolidated financial statements set forth in Part II, Item 8 of this report. Amounts presented have been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017.
| |
(4) | The aggregate amount of perquisites and other personal benefits, securities or property provided to each non-employee director, valued on the basis of aggregate incremental cost to the company, was less than $10,000. |
| |
(5) | As of December 31, 2016, Dr. Connors had a total of 72,000 options and held no unvested stock awards. |
| |
(6) | In order to facilitate the role of Mr. Dahl as Chair of the Audit Committee prior to the Merger and to provide us with greater access to him as Chair, we provided Mr. Dahl with access to approximately 240 square feet of office space. Mr. Dahl owned and maintained separate phone, fax, server and computer systems. We did not incur any incremental costs in connection with the provision of this office space. Mr. Dahl resigned from his position as a director and Chair of the Audit Committee as of September 9, 2016. As of December 31, 2016, Mr. Dahl held no stock options or unvested stock awards. |
| |
(7) | Mr. Ejabat resigned from his position as Executive Chairman of the Board of Directors effective as of January 31, 2016. As of December 31, 2016, Mr. Ejabat had a total of 589,999 stock options. Mr. Ejabat provided transitional services to DZS for a period of one year following his resignation. In consideration of such transitional services, in February 2016, we issued to him 100,000 vested shares of our common stock. As of December 31, 2016, Mr. Ejabat held no stock options or unvested stock awards. |
| |
(8) | As of December 31, 2016, Mr. Kim held no stock options and a total of 3,000 restricted stock units. |
| |
(9) | Effective September 11, 2017, Richard Kramlich resigned from the Board of Directors to focus on his other business endeavors. As of December 31, 2016, Mr. Kramlich held a total of 30,210 stock options and 3,000 restricted stock units. In connection with Mr. Kramlich’s resignation, the Board of Directors approved the extension of time for him to exercise his vested stock options through September 11, 2018. |
| |
(10) | As of December 31, 2016, Mr. Nam held a total of 10,000 stock options and no unvested stock awards. |
| |
(11) | As of December 31, 2016, Mr. Park held a total of 10,000 stock options and no unvested stock awards. |
| |
(12) | Ms. Yazdi resigned from her position as a director of DZS as of September 9, 2016. As of December 31, 2016, Ms. Yazdi held a total of 10,000 stock options and no unvested stock awards. |
ITEM 12. ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information knownrequired by this item relating to us regardingsecurity ownership of our common stock on September 15, 2017 by (1) each person who beneficially owned more than 5% of our common stock, (2) each current director, (3) each of our named executive officerscertain beneficial owners and (4) all directors, named executive officersmanagement, and their affiliates as a group. We are not aware of any arrangements, including any pledge of our common stock that could result in a change in control.
|
| | | | | | | |
| Name of Beneficial Owner (1) | | Number of Shares Beneficially
Owned (2) | | | Percent Owned (3) |
| DASAN Networks, Inc. | | 9,493,015 |
| | (4) | 57.9 | % |
| New Enterprise Associates | | 956,254 |
| | (5) | 5.8 | % |
| Il Yung Kim | | 58,332 |
| | (6) | * |
|
| James Norrod | | 70,324 |
| | (7) | * |
|
| Kirk Misaka | | 136,472 |
| | (8) | * |
|
| Min Woo Nam | | 2,914 |
| | (9) | * |
|
| Michael Connors | | 78,802 |
| | (10) | * |
|
| Seong Gyun Kim | | 750 |
| | (11) | * |
|
| Sung-Bin Park | | 2,914 |
| | (12) | * |
|
| All directors, named executive officers and their affiliates as a group (8 persons) | | 10,802,025 |
| | | 65.1 | % |
| |
(1) | Under the rules of the SEC, a person is the beneficial owner of securities if that person has sole or shared voting or investment power. Except as indicated in the footnotes to this table and subject to applicable community property laws, to our knowledge, the persons named in the table have sole voting and investment power with respect to all |
shares of common stock beneficially owned. Unless otherwise indicated, the addresssecurities authorized for each person or entity named below is c/o DASAN Zhone Solutions, Inc., 7195 Oakport Street, Oakland, California 94621.
| |
(2) | In computing the number of shares beneficially owned by a person named in the table and the percentage ownership of that person, shares of common stock that such person had the right to acquire within 60 days after September 15, 2017 are deemed outstanding, including without limitation, upon the exercise of options or vesting of restricted stock units. These shares are not, however, deemed outstanding for the purpose of computing the percentage ownership of any other person. |
| |
(3) | For each person included in the table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person by the sum of (a)16,385,455 shares of common stock outstanding on September 15, 2017 plus (b) the number of shares of common stock that such person had the right to acquire within 60 days after September 15, 2017. |
| |
(4) | The address of DASAN Networks, Inc. is DASAN Tower, 49, Daewangpangyo-ro 644 Beon-gil Budang-gu, Sungnam-si, Gyeonggi-do, 463-400, Korea. |
| |
(5) | Based solely on information contained in a Schedule 13D/A filed with the SEC on April 21, 2016 (as adjusted for the one-for-five reverse stock split of our common stock effected in February 2017), consists of (a) 72,685 shares held by New Enterprise Associates VIII, Limited Partnership, (b) 51,767 shares held by New Enterprise Associates 8A, Limited Partnership, (c) 357,613 shares held by New Enterprise Associates 9, Limited Partnership and (d) 474,189 shares held by New Enterprise Associates 10, Limited Partnership. Each separate New Enterprise Associates entity disclaims beneficial ownership over shares with respect to which it is not the direct holder, except to the extent of its pecuniary interest therein. The address of the entities affiliated with New Enterprise Associates is 1954 Greenspring Drive, Suite 600, Timonium, MD 21093. |
| |
(6) | Consists of 58,332 shares subject to stock options exercisable by Mr. Kim within 60 days after September 15, 2017. |
| |
(7) | Consists of (a) 12,000 shares held by Mr. Norrod, and (b) 58,324 shares subject to options exercisable by Mr. Norrod within 60 days after September 15, 2017. |
| |
(8) | Consists of (a) 89,309 shares held by Mr. Misaka, and (b) 47,163 shares subject to options exercisable by Mr. Misaka within 60 days after September 15, 2017. |
| |
(9) | Consists of 2,914 shares subject to options exercisable by Mr. Nam within 60 days after September 15, 2017. |
| |
(10) | Consists of (a) 25,565 shares held by Dr. Connors, (b) 3,333 shares held by Suaimhneas LLC, of which Dr. Connors is the sole manager and his adult children are the owners, and (c) 49,904 shares subject to options exercisable by Dr. Connors within 60 days after September 15, 2017. |
| |
(11) | Consists of 750 shares subject to options exercisable by Mr. Kim within 60 days after September 15, 2017. |
| |
(12) | Consists of 2,914 shares subject to options exercisable by Mr. Park within 60 days after September 15, 2017. |
| |
(13) | Includes 219,551 shares subject to options exercisable within 60 days after September 15, 2017. |
Equity Compensation Plan Information
The following table provides information as of December 31, 2016 with respect to shares of our common stock that may be issued under existing equity compensation plans. The table does not include information with respect to shares subject to outstanding options grantedissuance under equity compensation arrangements assumedplans is incorporated herein by us in connection with mergers and acquisitionsreference to the sections of the companies that originally granted those options.
Proxy Statement entitled “Ownership of Securities” and “Executive Compensation.” |
| | | | | | | | | | | | | |
| | | (a) | (b) | | (c) | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (1)(2) | Weighted average exercise price of outstanding options, warrants and rights(2) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(2) | |
| Equity compensation plans approved by security holders | | 910,245 |
| | $ | 6.84 |
| | 120,104 |
| | (3)(4) |
| Equity compensation plans not approved by security holders | | — |
| | | — |
| | — |
| | |
| |
(1) | This column includes 9,302 shares of unvested restricted stock and/or restricted stock units outstanding as of December 31, 2016 under the 2001 Plan, and does not reflect options assumed in mergers and acquisitions where the plans governing the options will not be used for future awards. As of December 31, 2016, a total of 234,554 shares of our common stock were issuable upon exercise of outstanding options under those assumed arrangements. The weighted average exercise price of those outstanding options is $8.34 per share. |
| |
(2) | Amounts presented have been adjusted to reflect the one-for-five reverse stock split effected on February 28, 2017. |
| |
(3) | Includes shares available for future issuance under the Zhone Technologies, Inc. 2002 Employee Stock Purchase Plan. As of December 31, 2016, 113,845 shares of common stock were available for future issuance under the plan. |
| |
(4) | Under the 2001 Plan, the number of shares available for issuance under the plan will be increased automatically on January 1 of any year in which the number of shares available for issuance is less than 5% of the total number of outstanding shares on such date. In any such case, the increase is equal to an amount such that the aggregate number of shares available for issuance under the plan equals the least of (a) 5% of the total number of outstanding shares on such date, (b) 1,000,000 shares, or (c) such other number of shares as determined by the Board. The 2001 Plan expired in March 2017. |
ITEM 13. ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Review and Approval of Related Party Transactions
All relationships and transactions in whichThe information required by this item is incorporated herein by reference to the company and our directors and executive officers or their immediate family members are participants are reviewed by our Audit Committee or another independent bodysection of the Board of Directors, such as the independentProxy Statement entitled “Certain Relationships and disinterested members of the Board of Directors. As set forth in the Audit Committee charter, the members of the Audit Committee, all of whom are independent directors, review and approve related party transactions for which such approval is required under applicable law, including SEC and Nasdaq rules. In the course of its review and approval or ratification of a disclosable related party transaction, the Audit Committee or the independent and disinterested members of the Board of Directors may consider:
the nature of the related person’s interest in the transaction;
the material terms of the transaction, including, without limitation, the amount and type of transaction;
the importance of the transaction to the related person;
the importance of the transaction to the company;
whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the company; and
any other matters the Audit Committee deems appropriate.
Related Party Transactions
Transactions.”
As discussed above under “Corporate Governance Principles and Board Matters - Board Structure” in Part III, Item 10 of this report, and in accordance with the terms of the Merger Agreement, on September 9, 2016, we entered into a stockholder agreement with DNI (the holder of 58% of the outstanding shares of our common stock), pursuant to which DNI has agreed, on the terms set forth therein, to vote its shares of our common stock until September 9, 2018 (1) in favor of the election of each person who is nominated by the Board of Directors for election to the Board in accordance with our bylaws and (2) against the removal of any such director unless such removal is recommended by a resolution approved by the affirmative vote of at least two-thirds of the entire Board of Directors.
In connection with the Merger, on September 9, 2016, we also entered into a lock-up agreement with each of our directors and executive officers and certain of our significant stockholders (including DNI), pursuant to which such persons and stockholders agreed not to offer, sell or otherwise dispose of any shares of our common stock, or any options or warrants to purchase our common stock, for a period of 180 days from the effective time of the Merger (or for a period of 90 days from the effective time of the Merger, in respect of certain stockholders), subject to customary exceptions.
Also in connection with the Merger, on September 9, 2016, we entered into a registration rights agreement with DNI, which provides DNI with the right to demand that we register its shares of our common stock and also provides DNI with piggyback registration rights for its shares of our common stock. Pursuant to the registration rights agreement, upon DNI’s request, we are required to prepare and file one or more registration statements with the SEC for the offer and sale from time to time on a continuous or delayed basis of the shares of our common stock issued to DNI in connection with the Merger. Such registrations are required to be accomplished pursuant to a shelf registration statement on Form S-3 (or, if we do not satisfy the requirements for such form, on such other form as may be appropriate). Additionally, DNI has the right to demand that we effect the registration of a specified number of shares for sale within a specified period, provided that such demand may only be made twice in any 12-month period. In addition, under the registration rights agreement, if we propose to file a registration statement with respect to an offering of equity securities for sale to the public (other than registrations on Form S-4 or S-8), we are
required to provide notice to DNI of such anticipated filing and, subject to certain limitations and priorities, DNI may require us to include in such registration any of the shares of our common stock issued to it in connection with the Merger.
See Note 13 to the consolidated financial statements set forth in Part II, Item 8 of this report for information regarding other related party transactions involving DNI and its affiliates. In addition, Mr. Min Woo Nam, the Chairman of our Board of Directors, personally guarantees certain of our credit facilities. As of December 31, 2016, the aggregate principal amount of outstanding indebtedness guaranteed by Mr. Nam under such facilities was $8.7 million.
Director Independence
See “Item 10. Directors, Executive Officers and Corporate Governance” for information regarding our Board of Directors and independence requirements.
ITEM 14. PRINCIPAL ACCOUNTINGITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Principal Accounting Fees and Services
The followinginformation required by this item is a summaryincorporated herein by reference to the section of the fees billed by PricewaterhouseCoopers LLP (PwC) and Samil PricewaterhouseCoopers (Samil PwC) for professional services rendered to DZS and DNS, respectively, for the year ended December 31, 2016, and billed by Samil PwC to DNS for the year ended December 31, 2015:
|
| | | | | | | | | |
| | | 2016 | | | 2015 |
| Audit Fees | | $ | 1,893,194 |
| (1) | | $ | 661,144 |
|
| Audit-Related Fees | | 60,274 |
| (2) | | 116,878 |
|
| Tax Fees | | 77,043 |
| | | — |
|
| All Other Fees | | — |
| | | 2,244 |
|
| Total | | $ | 2,030,511 |
| | | $ | 780,266 |
|
(1) Audit Fees for the year ended December 31, 2016 comprise $1,837,000 billed by PwC and $56,194 billed by Samil PwC.
(2) All Audit-Related Fees for the year ended December 31, 2016 were billed by Samil PwC.
Audit Fees. This category includes the auditProxy Statement entitled “Proposal 2: Ratification of our annual financial statements, reviewAppointment of financial statements, audit of our internal control over financial reporting (when applicable), review of our Form 10-Q quarterly reports, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. With respect to pre-Merger periods, this category includes the audit of the annual financial statements and review of financial statements of DNS only, as DNS was a wholly owned subsidiary of DNI prior to the Merger.
Audit-Related Fees. This category consists of assurance and related services provided by PwC and Samil PwC that are reasonably related to the performance of the audit or review of our financial statements, and are not reported above as “Audit Fees.Independent Registered Public Accounting Firm.” These services include accounting consultations in connection with acquisitions, and consultations concerning financial accounting and reporting standards.
Tax Fees. This category consists of professional services rendered by PwC and Samil PwC primarily in connection with tax compliance, tax planning and tax advice activities. These services include assistance with the preparation of tax returns, claims for refunds, value added tax compliance, and consultations on state, local and international tax matters.
All Other Fees. This category consists of fees for products and services other than the services reported above.
Pre-Approval Policy of the Audit Committee
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year, is detailed as to the particular service or category of services, and is generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee
may also pre-approve particular services on a case-by-case basis. All audit-related fees, tax fees and other fees billed to DZS or Legacy Zhone in each of the last two fiscal years were pre-approved by the Audit Committee.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
