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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrantý | ||
Filed by a Party other than the Registranto | ||
Check the appropriate box: | ||
Preliminary Proxy Statement | ||
o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
Definitive Proxy Statement | ||
o | Definitive Additional Materials | |
o | Soliciting Material under §240.14a-12 |
K12 INC. | ||||
(Name of Registrant as Specified In Its Charter) | ||||
(Name of Person(s) Filing Proxy Statement, if other than the Registrant) | ||||
Payment of Filing Fee (Check the appropriate box): | ||||
ý | No fee required. | |||
o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. | |||
(1) | Title of each class of securities to which transaction applies: | |||
(2) | Aggregate number of securities to which transaction applies: | |||
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): | |||
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o | Fee paid previously with preliminary materials. | |||
o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. | |||
(1) | Amount Previously Paid: | |||
(2) | Form, Schedule or Registration Statement No.: | |||
(3) | Filing Party: | |||
(4) | Date Filed: |
October 28, 20132016
Dear Fellow Stockholders:
On behalf of our Board of Directors, I cordially invite you to attend the 20132016 Annual Meeting of Stockholders of K12 Inc. to be held at the law firm of Latham & Watkins LLP, 555 Eleventh Street, N.W., Suite 1000, Washington, D.C. 20004-1304, on December 5, 2013,15, 2016, at 9:10:00 A.M., Eastern Time. The matters to be considered by the stockholders at the Annual Meeting are described in detail in the accompanying proxy materials.
IT IS IMPORTANT THAT YOU BE REPRESENTED AT THE ANNUAL MEETING REGARDLESS OF THE NUMBER OF SHARES YOU OWN OR WHETHER OR NOT YOU ARE ABLE TO ATTEND THE ANNUAL MEETING IN PERSON. Let meWe urge you to mark, sign and date your proxy card today andvote promptly, even if you plan to return it inattend the envelope provided.Annual Meeting. Please vote electronically via the Internet or by telephone, if permitted by the broker or other nominee that holds your shares. Ifshares, or if you receive a paper copy of the proxy materials, please complete, sign, date and return the accompanying proxy card. Voting electronically, by telephone or by returning your proxy card in advance of the Annual Meeting does not deprive you of your right to attend the Annual Meeting. Thank you for your continued support of K12.
Sincerely, | ||
Nathaniel A. Davis | ||
Executive Chairman of the Board of Directors |
NOTICE OF 20132016 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 5, 201315, 2016
The annual meeting of stockholders of K12 Inc., a Delaware corporation (the "Company"), will be held at the law firm of Latham & Watkins LLP, 555 Eleventh Street, N.W., Suite 1000, Washington, D.C. 20004-1304, on Thursday, December 5, 2013,15, 2016, at 9:10:00 A.M., Eastern Time (the "Annual Meeting").
At the Annual Meeting, stockholders will be asked to:
The foregoing matters are described in more detail in the accompanying Proxy Statement. In addition, financial and other information about the Company is contained in the accompanying Annual Report to Stockholders for the fiscal year ended June 30, 2013. The Annual Report to Stockholders consists of2016 (the "Annual Report"), which includes our Annual Report on Form 10-K for the fiscal year ended June 30, 2013,2016 ("fiscal 2016"), as filed with the U.S. Securities and Exchange Commission (the "SEC") on August 29, 2013, as well as certain information contained in the accompanying Proxy Statement.
The Board of Directors of the Company recommends that stockholders voteFOR the election of the Board of Directors nominees named in the Proxy Statement;FOR the approval, on a non-binding advisory basis, of the compensation of the named executive officers of the Company; andFOR the ratification of the appointment of BDO USA, LLP as the Company's independent registered public accounting firm for the fiscal year ending June 30, 2014.9, 2016.
The Board of Directors has fixed the close of business on October 10, 2013,19, 2016, as the record date for determining the stockholders entitled to notice of and to vote at the Annual Meeting.Meeting (the "Record Date"). Consequently, only stockholders of record at the close of business on October 10, 2013,19, 2016, will be entitled to notice of and to vote at the Annual Meeting. It is important that your shares be represented at the Annual Meeting regardless of the size of your holdings. A Proxy Statement, proxy card and self-addressed envelope are enclosed with these materials. Whether or not you plan to attend the Annual Meeting in person, please complete, date and sign the proxy card. Returncard and return it promptly in the envelope provided, which requires no postage if mailed in the United States. Alternatively, you may vote by telephone or via the Internet as instructed in these materials. If you are the record holder of your shares and you attend the Annual Meeting, you may withdraw your proxy and vote in person, if you so choose.
For admission to the Annual Meeting, all stockholders should come to the stockholder check-in table. Those who own shares in their own names should provide identification and have their ownership verified against the list of registered stockholders as of the record date.Record Date. Those who have beneficial ownership of stock through a bank or broker must bring account statements or letters from their banks or brokers indicating that they owned the Company's common stock as of the close of business on October 10, 2013.19, 2016. In order to vote at the meeting, those who have beneficial ownersownership of the Company's common stock through a bank or broker must bring a legal proxies,proxy, which can be obtained only from their brokersthe broker or banks.bank.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDERS MEETING TO BE HELD ON DECEMBER 5, 2013
By Order of the Board of Directors, | ||
|
Herndon, VA
October 28, 20132016
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to be Held on December 15, 2016:
The 2016 Proxy Statement and the 2016 Annual Report are available at: http://proxy.ir.k12.com.
PROXY STATEMENT | 5 | |
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THESE PROXY MATERIALS | 8 | |
CORPORATE GOVERNANCE AND BOARD MATTERS | 10 | |
Corporate Governance Guidelines and Code of Business Conduct and Ethics | 10 | |
Board of Directors | 10 | |
Director Independence | 11 | |
Board of Directors Leadership Structure | 11 | |
Committees of the Board of Directors | 12 | |
Risk Management | 14 | |
Director Compensation for Fiscal 2016 | 15 | |
PROPOSAL 1: ELECTION OF DIRECTORS | 18 | |
NOMINEES FOR ELECTION AT THE ANNUAL MEETING | 18 | |
EXECUTIVE OFFICERS | 21 | |
COMPENSATION DISCUSSION AND ANALYSIS | 23 | |
Executive Summary | 23 | |
Advisory Vote on Executive Compensation and Stockholder Engagement | 23 | |
Relationship Between Company Performance and Executive Compensation | 26 | |
New Executive Leadership Structure | 27 | |
Executive Compensation Principles and Practices | 30 | |
Executive Compensation Program Objectives and Process | 31 | |
Elements of Compensation | 33 | |
Fiscal 2016 Compensation Decisions | 34 | |
Other Compensation | 44 | |
Compensation Governance, Process And Incentive Decisions | 45 | |
Other Compensation Policies and Practices | 46 | |
COMPENSATION TABLES | 49 | |
Summary Compensation Table for Fiscal 2016 | 49 | |
Grants of Plan-Based Awards During Fiscal 2016 | 50 | |
Outstanding Equity Awards at End of Fiscal 2016 | 51 | |
Option Exercises and Stock Vested During Fiscal 2016 | 53 | |
Fiscal 2016 Non-Qualified Deferred Compensation | 54 | |
Potential Payments upon Termination or Change in Control | 54 | |
COMPENSATION COMMITTEE REPORT | 58 | |
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS | 59 | |
Policies and Procedures for Related-Party Transactions | 59 | |
Compensation Committee Interlocks and Insider Participation | 59 | |
PROPOSAL 2: ADVISORY VOTE ON EXECUTIVE COMPENSATION | 60 | |
PROPOSAL 3: APPROVAL OF THE COMPANY'S 2016 EQUITY INCENTIVE AWARD PLAN | 61 | |
Why Stockholders Should Vote to Approve the 2016 Plan | 61 | |
Description of the 2016 Plan | 63 | |
United States Federal Income Tax Consequences | 68 | |
Plan Benefits | 70 | |
Stock-Based Incentive Plan Information | 71 | |
PROPOSAL 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR | 72 | |
Fees Paid to Independent Registered Public Accounting Firm | 72 |
PROPOSAL 5: APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION | 73 | |
PROPOSAL 6: STOCKHOLDER PROPOSAL REGARDING A REPORT ON LOBBYING ACTIVITIES AND EXPENDITURES | 74 | |
AUDIT COMMITTEE REPORT | 78 | |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 79 | |
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE | 81 | |
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED ON | 81 | |
DELIVERY OF DOCUMENTS TO SECURITY HOLDERS SHARING AN ADDRESS | 81 | |
PROPOSALS BY OUR STOCKHOLDERS | 82 | |
WHERE YOU CAN FIND MORE INFORMATION | 82 |
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
DECEMBER 5, 201315, 2016
This Proxy Statement and the accompanying proxy card and notice of Annual Meeting are provided in connection with the solicitation of proxies by and on behalf of the Board of Directors of K12 Inc., a Delaware corporation, for use at the annual meeting of stockholders to be held at the law firm of Latham & Watkins LLP, 555 Eleventh Street, N.W., Suite 1000, Washington, D.C. 20004-1304, on Thursday, December 5, 2013,15, 2016, at 9:10:00 A.M., Eastern Time, and any adjournments or postponements thereof, which we refer to as the Annual Meeting. "We,"K12," "we," "our," "us" and the "Company" each refer to K12 Inc. Unless the context provides otherwise, all references to "Mr. Davis" are to our Executive Chairman, Nathaniel A. Davis. The mailing address of our principal executive offices is 2300 Corporate Park Drive, Herndon, VA 20171. This Proxy Statement, the accompanying proxy card and the notice of Annual Meeting will be made available on or about October 28, 2013,2016, to holders of record as of the close of business on October 10, 201319, 2016 of our common stock, par value $0.0001 per share, which we refer to as our Common Stock.
Record Date; Outstanding Shares; Shares Entitled to Vote
Our Board of Directors has fixed the close of business on October 10, 2013,19, 2016, as the Record Date for determining the stockholders entitled to notice of, and to vote at, the Annual Meeting. On the Record Date, we had 41,145,092[40,659,472] shares of Common Stock issued and outstanding.
Holders of record of Common Stock on the Record Date will be entitled to one vote per share on any matter that may properly come before the Annual Meeting and any adjournments or postponements of the Annual Meeting.
Quorum and Vote Required
The presence, in person or by duly executed proxy, of stockholders representing a majority of all the votes entitled to be cast at the Annual Meeting will constitute a quorum. If a quorum is not present at the Annual Meeting, we expect that the Annual Meeting will be adjourned or postponed to solicit additional proxies.
If a quorum is present, (i) the members of the Board of Directors must be elected by a plurality of votes present in person or by proxy at the Annual Meeting and entitled to vote; and (ii) the proposals of a non-binding advisory vote on executive compensation, and for the ratification of the appointment of BDO USA, LLP as the Company's independent registered public accounting firm for the fiscal year ending June 30, 2014, or fiscal 2014, and such other matters as may properly come before the Annual Meeting or any adjournments or postponements of the Annual Meeting, must be approved by the affirmative vote of a majority of the votes present in person or represented by proxy at the Annual Meeting.
Voting; Proxies; RevocationLeadership Structure
Shares of our Common Stock represented at the Annual Meeting by properly executed proxies received prior to or at the Annual Meeting, and not revoked prior to or at the Annual Meeting, will be voted at the Annual Meeting, and at any adjournments, continuations or postponements of the Annual Meeting, in accordance with the instructions on the proxies.
If a proxy is duly executed and submitted without instructions, the shares of Common Stock represented by that proxy will be voted:
The person who executes a proxy may revoke it at, or before, the Annual Meeting by: (i) delivering to our corporate secretary a written notice of revocation of a previously delivered proxy bearing a later date than the proxy; (ii) duly executing, dating and delivering to our corporate secretary a subsequent proxy; or (iii) attending the Annual Meeting and voting in person. Attendance at the Annual Meeting will not, in and of itself, constitute revocation of a proxy. Any written notice revoking a proxy should be delivered to K12 Inc., Attn: General Counsel and Secretary, 2300 Corporate Park Drive, Herndon, VA 20171. If your shares of Common Stock are held in a brokerage account, you must follow your broker's instructions to revoke a proxy.
Abstentions and Broker Non-Votes
Broker non-votes occur when a nominee holding shares of voting securities for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power on that item and has not received instructions from the beneficial owner. Abstentions, withheld votes, and broker non-votes are included in determining whether a quorum is present but are not deemed a vote cast "For" or "Against" a given proposal, and therefore, are not included in the tabulation of the voting results. As such, abstentions, withheld votes and broker non-votes do not affect the voting results with respect to the election of directors. Abstentions and broker non-votes will have the effect of a vote against the approval of any items requiring the affirmative vote of the holders of a majority or greater of the outstanding Common Stock who are entitled to vote and are present in person or represented by proxy at the Annual Meeting.
Proxy Solicitation
We are soliciting proxies for the Annual Meeting from our stockholders and we will bear the entire cost of soliciting proxies from our stockholders. Copies of solicitation materials will be furnished to brokerage houses, fiduciaries and custodians holding Common Stock for the benefit of others so that such brokerage houses, fiduciaries and custodians may forward the solicitation materials to such beneficial owners. We may reimburse persons representing beneficial owners of Common Stock for their expenses in forwarding solicitation materials to those beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone or personal solicitation by our directors, officers or other regular employees of the Company. No additional compensation will be paid to our directors, officers or other regular employees for these services.
Business; Adjournments
We do not expect that any matter other than the proposals presented in this Proxy Statement will be brought before the Annual Meeting. However, if other matters are properly presented at the Annual Meeting or any adjournments or postponements of the Annual Meeting, the proxy holders will vote in their discretion with respect to those matters.
If a quorum is not present at the Annual Meeting, the Annual Meeting may be adjourned from time to time upon the approval of the holders of shares representing a majority of the votes present in person, or by proxy at the Annual Meeting, until a quorum is present. Any business may be transacted at the adjourned meeting which might have been transacted at the meeting originally noticed. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. We do not currently intend to seek an adjournment of the Annual Meeting.
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THESE PROXY MATERIALS
The following addresses some questions you may have regarding the matters to be voted upon at the Annual Meeting. These questions and answers may not address all questions that may be important to you as a stockholder of the Company. Please refer to the more detailed information contained elsewhere in this Proxy Statement and the documents referred to or incorporated by reference in this Proxy Statement for additional information.
Why am I receiving this Proxy Statement?
The Company is soliciting proxies for the Annual Meeting. You are receiving a Proxy Statement because you owned shares of Common Stock at the close of business on October 10, 2013, the record date for the Annual Meeting, which entitles you to vote at the Annual Meeting. By use of a proxy, you can vote whether or not you attend the Annual Meeting. This Proxy Statement describes the matters on which we would like you to vote and provides information on those matters so that you can make an informed decision.
Why is K12 calling the Annual Meeting?
We are calling the Annual Meeting and submitting proposals to stockholders of the Company to consider and vote upon Annual Meeting matters, including electing directors, a non-binding advisory vote on executive compensation, and ratifying the appointment of our independent registered public accounting firm. You are being asked to vote in favor of the election of ten directors nominated by our Board of Directors, for the Company's executive compensation and for the ratification of the selection of BDO USA, LLP as the Company's independent registered public accounting firm for fiscal 2014.
How does the Board of Directors recommend that I vote?
Our Board of Directors recommends that you vote FOR each of the proposals.
What do I need to do now?
After carefully reading and considering the information in this Proxy Statement, please complete, date, sign and promptly mail the proxy card in the envelope provided, which requires no postage if mailed in the United States, or vote electronically via the Internet or by telephone by following the instructions provided by your broker.
May I vote in person?
Yes. If you were a stockholder of record as of the close of business on October 10, 2013, you may attend the Annual Meeting and vote your shares in person instead of returning your signed proxy card. However, we urge you to vote in advance even if you are planning to attend the Annual Meeting.
How do I vote if my shares are held in "street name" by my broker?
If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received voting instructions with these proxy materials from that organization rather than from us. Simply complete and mail your voting instructions as directed by your broker or bank to ensure that your vote is counted. To vote in person at the Annual Meeting, you must obtain a valid proxy from your broker, bank, or other agent. Follow the instructions from your broker or bank included with these proxy materials, or contact your broker or bank to request a proxy form.
If my shares are held in "street name" by my broker, will my broker vote my shares for me even if I do not give my broker voting instructions?
Under the rules that govern brokers who have record ownership of shares that are held in "street name" for their clients, brokers may vote such shares on behalf of their clients with respect to "routine" matters (such as the
ratification of auditors), but not with respect to non-routine matters (such as the election of directors or a proposal submitted by a stockholder). If the proposals to be acted upon at the Annual Meeting include both routine and non-routine matters, the broker may turn in a proxy card for uninstructed shares that votes FOR the routine matters, but expressly states that the broker is not voting on non-routine matters. This is called a "broker non-vote." Broker non-votes will be counted for the purpose of determining the presence or absence of a quorum, but will not be counted for the purpose of determining the number of votes cast. We encourage you to provide specific instructions to your broker by returning your proxy card. This ensures that your shares will be properly voted at the Annual Meeting.
Can I revoke my proxy and change my vote?
Yes. You have the right to revoke your proxy at any time prior to the time your shares are voted at the Annual Meeting. If you are a stockholder of record, your proxy can be revoked in several ways: by timely delivery of a written revocation to our corporate secretary, by submitting another valid proxy bearing a later date or by attending the Annual Meeting and voting your shares in person, even if you have previously returned your proxy card.
When and where is the Annual Meeting?
The Annual Meeting will be held on December 5, 2013 at 9:00 A.M., Eastern Time, at the law firm of Latham & Watkins LLP, 555 Eleventh Street, NW, Suite 1000, Washington, DC 20004-1304.
Who can help answer my questions regarding the Annual Meeting or the proposals?
You may contact K12 to assist you with your questions. You may reach K12 at:
K12 Inc.Attention: Investor Relations2300 Corporate Park DriveHerndon, VA 20171(703) 483-7000
PROPOSAL 1:ELECTION OF DIRECTORS
Our Board of Directors currently has ten members: Messrs. Guillermo Bron, Adam L. Cohn, Nathaniel A. Davis, John M. Engler, Steven B. Fink, Ronald J. Packard, Jon Q. Reynolds, Jr., Andrew H. Tisch, and Drs. Craig R. Barrett and Mary H. Futrell. The term of office of each member of our Board of Directors expires at the Annual Meeting, or in any event at such time as their respective successors are duly elected and qualified or their earlier resignation, death, or removal from office. Each year, the stockholders will elect the members of our Board of Directors to a one-year term of office.
Upon the recommendation of our Nominating and Corporate Governance Committee, the Board of Directors has approved the nomination of ten directors, Messrs. Bron, Cohn, Davis, Engler, Fink, Packard, Reynolds, Tisch, and Drs. Barrett and Futrell, for election at the Annual Meeting to serve until the next annual meeting of the stockholders (or until such time as their respective successors are elected and qualified or their earlier resignation, death, or removal from office).
Our Board of Directors has no reason to believe that the persons listed below as nominees for directors will be unable or decline to serve if elected. In the event of death or disqualification of any nominee or the refusal or inability of any nominee to serve as a director, proxies cast for that nominee may be voted with discretionary authority for a substitute or substitutes as shall be designated by the Board of Directors.
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS SHALL BE ELECTED BY A PLURALITY OF VOTES PRESENT IN PERSON OR BY PROXY AT THE ANNUAL MEETING AND ENTITLED TO VOTE. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" ALL OF THE NOMINEES LISTED BELOW.
Nominees for Election at the Annual Meeting
Set forth below are the names and other information pertaining to each person nominated to the Board of Directors:
Name | Age | First Year Elected Director | Positions | |||
---|---|---|---|---|---|---|
Craig R. Barrett | 74 | 2010 | Director | |||
Guillermo Bron | 61 | 2007 | Director | |||
Adam L. Cohn | 42 | — | Director | |||
Nathaniel A. Davis | 59 | 2009 | Director and Executive Chairman | |||
John M. Engler | 65 | 2012 | Director | |||
Steven B. Fink | 62 | 2003 | Director | |||
Mary H. Futrell | 73 | 2007 | Director | |||
Ronald J. Packard | 50 | 2000 | Director and Chief Executive Officer | |||
Jon Q. Reynolds, Jr. | 45 | 2011 | Director | |||
Andrew H. Tisch | 64 | 2001 | Director | |||
Craig R. Barrett
Dr. Barrett joined us as a director in September 2010. He served as Chairman and Chief Executive Officer of Intel Corporation, which he joined in 1974, until his retirement in 2009. Prior to Intel Corporation, Dr. Barrett was a member of the Department of Materials Science and Engineering faculty of Stanford University. Dr. Barrett currently serves as Co-Chairman of Achieve, Inc., an independent, bipartisan, non-profit education reform organization,
Chairman of Change the Equation, an organization promoting widespread literacy in science, technology, engineering and math (STEM), President and Chairman of BASIS Schools, Inc., Vice Chair of the Science Foundation Arizona and Co-Chairman of the Business Coalition for Student Achievement. Dr. Barrett holds B.S., M.S. and Ph.D. degrees in Materials Science from Stanford University. Dr. Barrett was selected as a director because of his deep knowledge and experience in information technology innovation, as well as his global, operational, and leadership experience as Chairman and Chief Executive Officer of Intel Corporation. He also brings a unique perspective to the Board of Directors from his tenure as a professor and his volunteer work and support of numerous educational organizations.
Guillermo Bron
Mr. Bron joined us as a director in July 2007, and currently serves as Chairman of the Nominating and Corporate Governance Committee. Mr. Bron is a Managing Director at Pine Brook Road Partners, LLC, an investment firm, and is the Managing Member of PAFGP, LLC, the sole general partner of Pan American Financial, L.P. Mr. Bron served as a Managing Director of Acon Funds Management LLC, a private equity firm, from 2006 to 2012. Mr. Bron also served as Chairman and a director of United Pan Am Financial Corp. (UPFC) from 1994 to 2011, and he served as a director of Pan American Bank, FSB (Pan American), a former wholly-owned subsidiary of UPFC, from 1994 to 2005. Mr. Bron has also served as Chairman of idX Corporation since 2008 and, from 2000 to 2002, Mr. Bron was a director of Telemundo Group, Inc. From 1994 to 2003, Mr. Bron was an officer, director and principal stockholder of a general partner of Bastion Capital Fund, L.P., a private equity investment fund primarily focused on the Hispanic market. Previously, Mr. Bron was a Managing Director of Corporate Finance and Mergers and Acquisitions at Drexel Burnham Lambert. Mr. Bron holds a B.S. in Electrical Engineering and Management from Massachusetts Institute of Technology and an M.B.A. from Harvard University. Mr. Bron was selected as a director because his extensive executive leadership and international experience, as well as his expertise in investment banking and capital markets, which enables him to bring valuable insights to the Board of Directors in the areas of finance and strategy. The Board of Directors also benefits from his prior experience as a public company director and audit committee member.
Adam L. Cohn
Mr. Cohn joined us as a director in February 2013. He is a partner at Knowledge Universe, or KU, where he is head of mergers and acquisitions and business development for KU and its portfolio companies. Mr. Cohn has been employed by KU since March of 2000. Prior to joining KU, he was a senior associate with Whitney & Co., a leading private equity firm. At Whitney & Co., he was responsible for sourcing and executing transactions for the Whitney Mezzanine Fund. Prior to Whitney & Co., Mr. Cohn was an investment banker in the Financial Sponsors Group at Bankers Trust Company and Deutsche Bank. He has a B.S. in business from Skidmore College and an M.B.A. from Columbia University. Mr. Cohn serves on the board of directors of Knowledge Schools LLC, Knowledge Universe Global Inc., Busy Bees Holdings Limited and Milagro Oil and Gas, Inc. From 2007 to 2012 he served as a director of Embanet Corp. Mr. Cohn was selected as a director based on his significant financial and transactional experience in private equity and investment banking, as well as his experience with education companies. The Board of Directors also benefits from his extensive board experience.
Nathaniel A. Davis
Mr. Davis joined us as a director in July 2009, served as our Chairman beginning June 2012 and became our Executive Chairman in January 2013. Prior to joining the Company, he served as the managing director of RANND Advisory Group from 2003 until December 2012. Previously, Mr. Davis worked for XM Satellite Radio from June 2006 to November 2008, serving as President and then Chief Executive Officer until the company's merger with Sirius Radio. He also served on the XM Satellite Radio board from 1999 through 2008. From 2000 to 2003, Mr. Davis was President and Chief Operating Officer, and board member of XO Communications Inc. Mr. Davis has also held senior executive positions at Nextel Communications (EVP, Network and Technical Service), MCI Telecommunications (Chief Financial Officer) and MCI Metro (President and Chief Operating Officer). Since 2011, Mr. Davis has served as a director of Unisys Corporation and RLJ Lodging Trust. Mr. Davis has also previously served on the board of several public and private firms including Mutual of America Capital Management Corporation, Charter Communications and Telica Switching. Mr. Davis also currently serves as a director of the non-profit Progressive Life Center. Mr. Davis received an M.B.A. from the Wharton School of the University of
Pennsylvania, an M.S. in Engineering Computer Science at the Moore School of the University of Pennsylvania, and a B.S. in Engineering from Stevens Institute of Technology. Mr. Davis was selected as a director based on his strong record of executive management, finance and systems engineering skills, as well as his insight into the considerations necessary to run a successful, diverse global business. The Board of Directors also benefits from his previous service on other public company boards and his experience in accounting and financial reporting.
John M. Engler
Mr. Engler joined us as a director in October 2012. He has been President of the Business Roundtable since January 2011. From 2004 to 2011, Mr. Engler served as President and Chief Executive Officer of the National Association of Manufacturers. He was President of State and Local Government and Vice President of Government Solutions for North America for Electronic Data Systems Corporation from 2003 to 2004. Mr. Engler served as Michigan's 46th governor for three terms from 1991 to 2003. He has served on the board of directors of Universal Forest Products Inc. since 2003 and is currently a director of Munder Capital Management. Previously, Mr. Engler served as a director of Northwest Airlines from 2003 to 2008, as a director of Dow Jones & Company, Inc. from 2005 to 2007, and as a director of Delta Airlines from 2008 to 2012. Mr. Engler holds a B.S. in Agricultural Economics from Michigan State University and a J.D. from the Thomas M. Cooley Law School. Mr. Engler was selected as a director because of his executive and legislative expertise as a state governor, including state education budgets, and for his business experience. The Board of Directors also benefits from Mr. Engler's perspective as a director of numerous public companies and as a member of their audit committees.
Steven B. Fink
Mr. Fink joined us as a director in October 2003, and currently serves as Chairman of the Audit Committee. Mr. Fink is the Chairman of Life Storage, LLC, the Deputy Chairman of Heron International and a Director of the Foundation of the University of California, Los Angeles. Mr. Fink served as a director of Nobel Learning Communities, Inc. from 2003 to 2011. From 1999 to 2009, Mr. Fink served as a director of Leapfrog, Inc. and its Chairman from 2004 to 2009. From 2000 to 2008, Mr. Fink was the Chief Executive Officer of Lawrence Investments, LLC. Mr. Fink has also previously served as Chairman and Chief Executive Officer of Anthony Manufacturing, Chairman and Managing Director of Knowledge Universe and Chairman and Chief Executive Officer of Nextera. Mr. Fink holds a B.S. in Psychology from the University of California, Los Angeles and a J.D. and an L.L.M. from New York University. Mr. Fink was selected as a director based on his significant experience in operations and financial oversight gained as serving as director or chairman for various public and private companies in addition to his membership on various company audit committees which enables him to contribute significantly to the financial oversight, risk oversight and governance of the Company.
Mary H. Futrell
Dr. Futrell joined us as a director in August 2007. Until September 2010, Dr. Futrell was the Dean of the Graduate School of Education and Human Development at the George Washington University. She has served as a director of Horace Mann Educators Corporation since 2001. She is the Co-director of the GWU Institute for Curriculum, Standards and Technology, the founding President of Education International and a past president of the World Confederation of the Teaching Profession, a member of the U.S. National Commission for UNESCO and she serves as President of Americans for UNESCO. Previously, she served as President of the Virginia Education Association, and ERAmerica. Dr. Futrell served as President of the National Education Association (NEA) from 1983 to 1989. Dr. Futrell has also served on the boards of the Kettering Foundation, the Carnegie Foundation for the Advancement of Teaching Leadership, the National Holmes Partnership, the National Commission on Teaching and America's Future and the National Society for the Study of Education. Dr. Futrell holds a B.A. in Business Education from Virginia State University, a M.A. in Secondary Education and an Ed.D. in Education Policy Studies from George Washington University. She is also the recipient of numerous honors and awards, including more than 20 honorary degrees. Dr. Futrell was selected as a director because her tenure in the academic world and her leadership experience with education organizations provides strategic insight, experience and in-depth knowledge of the education industry to the Board of Directors. Her years of experience serving on boards of both public and private companies also gives her a wide range of knowledge on topics important to our business and that contribute to the Board of Directors' function.
Ronald J. Packard
Mr. Packard founded K12 in 2000, and since then has served as Chief Executive Officer or Executive Chairman. Commencing in May 2007, Mr. Packard has held the title of Chief Executive Officer and Founder. He also currently serves as the Chairman of Middlebury Interactive Languages LLC. Previously, Mr. Packard served as Vice President of Knowledge Universe and as Chief Executive Officer of Knowledge Schools, a provider of early childhood education and after school programs. In addition, Mr. Packard has held positions at McKinsey & Company and Goldman Sachs in mergers and acquisitions. Mr. Packard serves on the Digital Learning Council and he formerly served on the Advisory Board of the Department of Defense Schools from 2002 to 2008, and is a member of the board of the Fairfax Education Foundation. From 2004 to 2006, Mr. Packard served as a director of Academy 123. Mr. Packard holds B.A. degrees in Economics and Mechanical Engineering from the University of California at Berkeley, an M.B.A. from the University of Chicago, and he was a Chartered Financial Analyst. Mr. Packard was selected as a director because of his significant knowledge and understanding of the education industry, extensive knowledge of all aspects of K12's business and his unique historical understanding of our operations as the founder of the Company.
Jon Q. Reynolds, Jr.
Mr. Reynolds has served as a director of our Company since April 2011, and became the lead independent director in January 2013. In 1999, Mr. Reynolds became a General Partner at Technology Crossover Ventures, or TCV, a private equity and venture capital firm that he joined in 1997. Prior to joining TCV, Mr. Reynolds was an Associate with General Atlantic Partners, a private equity firm focused on late stage software and service businesses. Before joining General Atlantic Partners, Mr. Reynolds was a member of the mergers and acquisitions group at Lazard Freres & Co., where he focused on the technology and telecommunications industries. Mr. Reynolds holds an A.B. degree from Dartmouth College and an M.B.A. from Columbia Business School. Mr. Reynolds serves as a director of OSIsoft, LLC, Genesys Telecommunications Laboratories, Inc. and Webroot Software, Inc., and he served as a director of Capella Education Company from 2005 to 2008. Mr. Reynolds was nominated as a director because of his experience in mergers and acquisitions and as a director of other public companies. Additionally, his experience as an active investor in numerous software and online education companies and extensive relationships throughout our industry will benefit the Board of Directors and the Company.
Andrew H. Tisch
Mr. Tisch joined us as a director in August 2001 and served as Chairman of the Board of Directors from May 2007 to June 2012. He currently serves as Chairman of the Compensation Committee. Since 1985, Mr. Tisch has been a director of Loews Corporation, and is Co-Chairman of its board, Chairman of its executive committee and, since 1999, has been a member of its Office of the President. Mr. Tisch has also served as a director of three subsidiaries of Loews Corporation; Diamond Offshore Drilling, Inc. since 2011, CNA Financial Corporation since 2006, and Boardwalk Pipeline Partners, LP since 2005. Mr. Tisch previously served as a director of Bulova Corporation from 1979 to 2008 and as a director of Lord & Taylor from 2006 to 2008. Mr. Tisch engages in numerous public service activities including, serving as Vice Chairman of Cornell University, trustee of the Brookings Institution, and as a member of the Dean's Advisory Board at the Harvard Business School. Mr. Tisch holds a B.S. in Hotel Administration from Cornell University and an M.B.A. from Harvard University. Mr. Tisch was selected as a director because of his extensive experience having served as president or chairman of various multinational companies over his career in addition to his membership on various boards of public companies which allows him to provide the Board of Directors with leadership and a variety of perspectives on important strategic and governance issues. The Board of Directors also benefits from his involvement in higher education and non-profit organizations.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors and Director Independence
Our Board of Directors met nine times during the fiscal 2013, and each director attended at least 75% of the meetings of the Board of Directors and committees of the Board of Directors on which he or she served during the director's tenure. Our policy with respect to director attendance at the annual meeting of the stockholders is to encourage, but not require, director attendance. Three members of our Board of Directors attended our 2012 Annual Meeting of Stockholders: Messrs. Packard and Davis and Dr. Futrell.
Our Board of Directors has affirmatively determined that each of our non-employee directors is "independent" as defined in the currently applicable listing standards of the New York Stock Exchange, or NYSE. Under the regulations of the U.S. Securities and Exchange Commission, or SEC, and except for Dr. Futrell who receives meeting fees as a member of the Company's Educational Advisory Committee, each of our non-employee directors is independent and eligible to be a member of the Audit Committee. Messrs. Davis and Packard are not independent under either NYSE or SEC rules because they are executive officers of the Company. If the nominees for the Board of Directors are duly elected at the Annual Meeting, then each of our directors, other than Messrs. Davis and Packard, will serve as an independent director on our Board of Directors as the term is defined in applicable rules of the NYSE. Our Board of Directors has a lead independent director, Mr. Reynolds, who presides over the executive sessions of the non-employee directors. Furthermore, our Board of Directors has adopted Corporate Governance Guidelines which are available on our website at www.K12.com.
The Committees of the Board of Directors
Risk Management
Director Compensation for Fiscal 2016
PROPOSAL 1: ELECTION OF DIRECTORS
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
EXECUTIVE OFFICERS
COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
Advisory Vote on Executive Compensation and Stockholder Engagement
Relationship Between Company Performance and Executive Compensation
New Executive Leadership Structure
Executive Compensation Principles and Practices
Executive Compensation Program Objectives and Process
Elements of Compensation
Fiscal 2016 Compensation Decisions
Other Compensation
Compensation Governance, Process And Incentive Decisions
Other Compensation Policies and Practices
COMPENSATION TABLES
Summary Compensation Table for Fiscal 2016
Grants of Plan-Based Awards During Fiscal 2016
Outstanding Equity Awards at End of Fiscal 2016
Option Exercises and Stock Vested During Fiscal 2016
Fiscal 2016 Non-Qualified Deferred Compensation
Potential Payments upon Termination or Change in Control
COMPENSATION COMMITTEE REPORT
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
Policies and Procedures for Related-Party Transactions
Compensation Committee Interlocks and Insider Participation
PROPOSAL 2: ADVISORY VOTE ON EXECUTIVE COMPENSATION
PROPOSAL 3: APPROVAL OF THE COMPANY'S 2016 EQUITY INCENTIVE AWARD PLAN
Why Stockholders Should Vote to Approve the 2016 Plan
Description of the 2016 Plan
United States Federal Income Tax Consequences
Plan Benefits
Stock-Based Incentive Plan Information
PROPOSAL 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
Fees Paid to Independent Registered Public Accounting Firm
PROPOSAL 5: APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION | 73 | |
PROPOSAL 6: STOCKHOLDER PROPOSAL REGARDING A REPORT ON LOBBYING ACTIVITIES AND EXPENDITURES | 74 | |
AUDIT COMMITTEE REPORT | 78 | |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 79 | |
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE | 81 | |
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED ON | 81 | |
DELIVERY OF DOCUMENTS TO SECURITY HOLDERS SHARING AN ADDRESS | 81 | |
PROPOSALS BY OUR STOCKHOLDERS | 82 | |
WHERE YOU CAN FIND MORE INFORMATION | 82 |
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
DECEMBER 15, 2016
This Proxy Statement and the accompanying proxy card and notice of Annual Meeting are provided in connection with the solicitation of proxies by and on behalf of the Board of Directors of K12 Inc., a Delaware corporation, for use at the annual meeting of stockholders to be held at the law firm of Latham & Watkins LLP, 555 Eleventh Street, N.W., Suite 1000, Washington, D.C. 20004-1304, on Thursday, December 15, 2016, at 10:00 A.M., Eastern Time, and any adjournments or postponements thereof, which we refer to as the Annual Meeting. "K12," "we," "our," "us" and the "Company" each refer to K12 Inc. The mailing address of our principal executive offices is 2300 Corporate Park Drive, Herndon, VA 20171. This Proxy Statement, the accompanying proxy card and the notice of Annual Meeting will be made available on or about October 28, 2016, to holders of record as of the close of business on October 19, 2016 of our common stock, par value $0.0001 per share, which we refer to as our Common Stock.
Record Date; Outstanding Shares; Shares Entitled to Vote
Our Board of Directors has fixed the close of business on October 19, 2016, as the Record Date for determining the stockholders entitled to notice of, and to vote at, the Annual Meeting. On the Record Date, we had [40,659,472] shares of Common Stock issued and outstanding.
Holders of record of Common Stock on the Record Date will be entitled to one vote per share on any matter that may properly come before the Annual Meeting and any adjournments or postponements of the Annual Meeting.
Chairperson Member Financial Expert
The standing committees of our Board of Directors are the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee.
Audit Committee. The Audit Committee, which was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, consists of Mr. Fink, who serves as the Chairman, and Messrs. Bron and Engler. Our Board of Directors has determined that each of Messrs. Fink, Bron and Engler qualify as independent directors under the applicable NYSE listing requirements and regulations of the SEC.
The Audit Committee met nine times during fiscal 2013. The meetings to review the Company's quarterly and annual periodic filings with the SEC each include at least two separate sessions (which together count as only one meeting).
Mr. Fink engaged in routine separate communications with the Company's external auditors and Chief Financial Officer, and held the required executive sessions at each meeting. The Audit Committee has a charter, available on our website at www.K12.com, setting forth the structure, powers and responsibilities of the Audit Committee. Pursuant to the charter, the Audit Committee is comprised of at least three members appointed by our Board of Directors, each of whom satisfies the requirements of independence and financial literacy. Our Audit Committee has determined that Messrs. Fink and Bron are each an audit committee financial expert as that term is defined under the Exchange Act. Under its charter, the responsibilities of the Audit Committee include:
In addition, our Corporate Governance Guidelines provide that members of the Audit Committee may not serve on the audit committees of more than two other companies at the same time as they serve on our Audit Committee.
Compensation Committee. The Compensation Committee consists of Mr. Tisch, who serves as the Chairman, Mr. Reynolds and Dr. Futrell. Our Board of Directors has determined that each of Messrs. Tisch and Reynolds and Dr. Futrell qualify as independent directors within the meaning of the applicable NYSE listing requirements and regulations of the SEC.
The Compensation Committee met seven times during fiscal 2013. The Compensation Committee has a charter, available on our website at www.K12.com, setting forth the structure, powers and responsibilities of the Compensation Committee. Under its charter, the responsibilities of the Compensation Committee include:
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee consists of Mr. Bron, who serves as the Chairman, and Messrs. Barrett, Fink and Tisch. Our Board of Directors has determined that each of Messrs. Bron, Barrett, Fink and Tisch qualify as independent directors within the meaning of the applicable NYSE listing requirements and regulations of the SEC. Our Board of Directors has adopted Corporate Governance Guidelines which are available on our website at www.K12.com.
The Nominating and Corporate Governance Committee met twice during fiscal 2013. The Nominating and Corporate Governance Committee has a charter, available on our website at www.K12.com, setting forth the structure, powers and responsibilities of the Nominating and Corporate Governance Committee. Under its charter, the Nominating and Corporate Governance Committee has the authority to nominate persons to stand for election and to fill vacancies on our Board of Directors. The Nominating and Corporate Governance Committee may consider the following criteria, as well as any other factors the Nominating and Corporate Governance Committee deems appropriate, in recommending candidates for election to our Board of Directors:
Although the Nominating and Corporate Governance Committee does not have a formal policy with regard to the consideration of diversity in identifying director nominees, it strives to nominate directors with a variety of complementary skills so that, as a group, the Board of Directors will possess the appropriate backgrounds, talent, perspectives, skills and expertise to oversee the Company's business. The Nominating and Corporate Governance Committee will consider director candidates recommended by stockholders, provided such recommendations are submitted in writing not later than the close of business on the 90th day, or earlier than the close of business on the 120th day, prior to the anniversary of the preceding year's annual meeting of the stockholders. Such recommendations should include the name and address and other pertinent information about the candidate as is required to be included in the Company's proxy statement. Recommendations should be submitted to the corporate secretary of the Company at K12 Inc., 2300 Corporate Park Drive, Herndon, VA 20171, Attention: General Counsel and Secretary. The Nominating and Corporate Governance Committee will consider the same criteria set forth above when evaluating director candidates recommended by stockholders.
Board of Directors Leadership Structure
As announced in January 2013, Mr. Davis now serves as our Executive Chairman, while Mr. Packard continues to serve as our Chief Executive Officer. The Board of Directors is led by Mr. Davis as its Executive Chairman and the independent membersCommittees of the Board of Directors have designated Mr. Reynolds to serve as lead independent director.
The Executive Chairman oversees all corporate functions of the Company, shapes the formulation and implementation of the Company's strategic and operational plans and acts as the Board of Directors' liaison to management. Reporting directly to the Executive Chairman are the Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, and General Counsel and Secretary. In consultation with other directors and the Chief Executive Officer, the Executive Chairman sets the agenda for the regular and special meetings of the Board of Directors, presides at the annual meeting of stockholders and performs such other functions and responsibilities as set forth in the Corporate Governance Guidelines, or as requested by the Board of Directors. The Chief Executive Officer oversees the business development and academic functions of the Company, which are essential to fulfilling its mission of providing an individualized education to any child, anywhere. The business development responsibilities include obtaining required legislative or regulatory authorizations to allow the Company
to serve online public schools in new states, removing restrictions in existing states that limit the availability of online learning to families and students seeking this option, and pursuing the development of online private schools and international expansion. With regard to academics, the Chief Executive Officer oversees initiatives to improve the effectiveness of the curriculum and academic outcomes consistent with state standards, including the use of new technologies and methods to encourage student engagement and learning.
The role of the lead independent director is to communicate to the Executive Chairman the views of the independent directors and the committees of the Board of Directors. In doing so, the lead independent director provides the liaison between the Board of Directors and the Executive Chairman, thereby giving guidance to management in meeting the objectives set by the Board of Directors and monitoring compliance with corporate governance policies. Additionally, the lead independent director serves as a liaison between the Board of Directors and stockholders. The lead independent director has the authority to call meetings of the independent directors and chairs executive sessions of the Board of Directors during which no members of management are present. These meetings are intended to provide the lead independent director with information that he can use to assist the Executive Chairman function in the most effective manner.
Risk Management
Our Board of Directors believes full and open communication with management is essential for effective enterprise risk management and oversight. Members discuss strategy and risks facing the Company with our Executive Chairman and our senior management at meetings of our Board of Directors or when members of our Board of Directors seek to focus on a particular area of risk, such as meeting state academic accountability standards, ensuring the privacy of student information, expanding internationally or ensuring compliance with state regulatory and reporting requirements. Because the Executive Chairman also sets the agenda for the Board of Director meetings, each functional division of the Company can identify risk-related topics that may require the Board of Directors' attention, such as audit, compensation, legal, political and information security. Each quarter, our Executive Chairman also presents an assessment of the strategic, financial and operational issues facing the Company, which includes a review of associated risks and opportunities.
Management is responsible for identifying, prioritizing, remediating and monitoring the day-to-day management of risks that the Company faces, while our Board of Directors, as a whole and through its committees, is responsible for the oversight of enterprise risk management. Beginning in fiscal 2010, with the participation of external advisors, our Board of Directors instituted a formal process to assess enterprise-wide risk and initially assigned the above-noted responsibilities to a management operating committee, along with an obligation to make progress reports to the Board of Directors at least semi-annually. In fiscal 2011, those responsibilities were transferred to the Company's internal audit department, which was managed by a major independent accounting firm. This structure allowed us to elevate the focus, expertise and attention devoted to risk management so as to make it more effective and continuous and to enhance oversight transparency by the Audit Committee and the Board of Directors. In October 2013, the Company took the additional step of creating the position of Vice President of Internal Audit, who reports to the Audit Committee and directs the risk management tasks of the internal audit department as determined by the Audit Committee.
While our Board of Directors is ultimately responsible for risk oversight, its three committees concentrate on specific risk areas.
Risk Assessment in Compensation Programs
Consistent with SEC disclosure requirements, we periodically evaluate the Company's executive and general compensation programs. In fiscal 2013, the Compensation Committee engaged Towers Watson & Co., or Towers Watson, to review the existing programs and analyze whether they create risks that are reasonably likely to have a material adverse effect on the Company. Among other factors, the Towers Watson analysis considered the program structure, design features and performance-based measurements associated with variable compensation, and concluded that our compensation programs contain a number of safeguards that would be expected to minimize excessive risk taking, including capped incentive plan payouts, the use of multiple metrics in our annual incentive plan, balanced bonus and equity variable pay structures, multi-year vesting of long-term incentive grants and minimal perquisites.
Based on the foregoing, we believe that our compensation policies and practices do not create inappropriate or unintended significant risk to the Company as a whole. We also believe that our incentive compensation arrangements provide incentives that do not encourage risk-taking beyond the Company's ability to effectively identify and manage significant risks, are compatible with effective internal controls and the risk management practices of our Company, and are supported by the oversight and administration of the Compensation Committee with regard to executive compensation programs.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all employees. The Code of Business Conduct and Ethics is available on our website at www.K12.com. We intend to satisfy the disclosure requirements under the Exchange Act regarding an amendment to, or waiver concerning a material departure of a provision of our Code of Business Conduct and Ethics involving our principal executive, financial or accounting officer or controller by posting such information on our website.
Stockholder Communications with the Board of Directors
Stockholders and other interested parties may communicate directly with our Board of Directors, individually or as a group, by sending an email to our General Counsel at OGC@K12.com, or by mailing a letter to K12 Inc., 2300 Corporate Park Drive, Herndon, VA 20171, Attention: General Counsel and Secretary. Our General Counsel will monitor these communications and provide summaries of all received communications to our Board of Directors at its regularly scheduled meetings. Where the nature of a communication warrants, our General Counsel may decide to seek the more immediate attention of the appropriate committee of the Board of Directors or a director, or our management or independent advisors and will determine whether any response is necessary.
Director Compensation for Fiscal 20132016
We have adopted a Directors Compensation Plan under which our non-employee directors receive an annual cash retainer, fees for attending Board of Directors and committee meetings and annual restricted stock awards. Mr. Packard, our Chief Executive Officer, receives no additional compensation for his service on our Board of Directors and, effective upon his commencement of service as our Executive Chairman, Mr. Davis no longer receives additional compensation for his service on our Board of Directors. In accordance with SEC disclosure rules, all of Mr. Davis' compensation for service on our Board of Directors prior to his becoming Executive Chairman is reported in the Summary Compensation Table for fiscal 2013 under the heading "Base Salary." As a result, Mr. Davis is not included in the Director Compensation for Fiscal 2013 table below.
Pursuant to the terms of the Directors Compensation Plan, the Chairman of the Audit Committee receives an annual cash retainer of $60,000, and all other non-employee directors receive annual cash retainers of $40,000. Non-employee directors receive an annual restricted stock award valued at $60,000, as of the grant date (prorated based on their start date), with the shares underlying such awards vesting in equal annual installments over a period of three years. In addition, each committee chairman receives $2,500 per Board of Directors meeting attended and $1,500 per committee meeting attended, with the exception of the Chairman of the Audit Committee who receives $2,500 per Board of Directors meeting attended and $2,500 per committee meeting attended. The remaining non-employee members of the Board of Directors receive $1,500 per Board of Directors or committee meeting attended.
The following table sets forth the compensation paid to our non-employee directors for their services during fiscal 2013:
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1) | Total ($) | |||
---|---|---|---|---|---|---|
Craig R. Barrett (2) | $55,000 | $60,000 | $115,000 | |||
| ||||||
Guillermo Bron (3) | 79,000 | 60,000 | 139,000 | |||
| ||||||
Adam L. Cohn (4) | 21,500 | 50,046 | 71,546 | |||
| ||||||
John M. Engler (5) | 64,500 | 71,660 | 136,160 | |||
| ||||||
Steven B. Fink (6) | 107,500 | 60,000 | 167,500 | |||
| ||||||
Mary H. Futrell (7) | 62,500 | 60,000 | 122,500 | |||
| ||||||
Jon Q. Reynolds, Jr. (8) | 64,000 | 60,000 | 124,000 | |||
| ||||||
Andrew H. Tisch (9) | 76,000 | 60,000 | 136,000 | |||
|
PROPOSAL 1: ELECTION OF DIRECTORS
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
The following table sets forth, as of October 10, 2013, certain information with respect to the beneficial ownership of Common Stock by each beneficial owner of more than 5% of the Company's voting securities (based solely on review of filings with the SEC), each director and each named executive officer and all directors and executive officers of the Company as a group, except as qualified by the information set forth in the notes to this table. As of October 10, 2013, 41,145,092 shares of our Common Stock were issued and outstanding.
Unless otherwise noted, the address for each director and executive officer is c/o K12 Inc., 2300 Corporate Park Drive, Herndon, VA 20171.
Name | Shares Beneficially Owned (1) | |||
---|---|---|---|---|
| Number | Percent | ||
Nathaniel A. Davis (2) | 351,135 | * | ||
Ronald J. Packard (3) | 927,073 | 2.2% | ||
James J. Rhyu (4) | 109,250 | * | ||
Timothy L. Murray (5) | 242,129 | * | ||
Howard D. Polsky (6) | 64,046 | * | ||
Directors | ||||
Craig R. Barrett (7) | 8,803 | * | ||
Guillermo Bron (8) | 112,611 | * | ||
Adam L. Cohn (9) | 7,170 | * | ||
John M. Engler (10) | 3,492 | * | ||
Steven B. Fink (11) | 114,599 | * | ||
Mary H. Futrell (12) | 22,079 | * | ||
Jon Q. Reynolds, Jr. (13) | 4,006,230 | 9.7% | ||
Andrew H. Tisch (14) | 413,629 | 1.0% | ||
All Directors and Executive Officers as a Group (13 persons) (15) | 6,382,246 | 15.1% | ||
Beneficial Owners of 5% or More of Our Outstanding Common Stock | ||||
FMR LLC (16) | 2,070,312 | 5.0% | ||
Frontier Capital Management Co., LLC (17) | 2,730,396 | 6.6% | ||
Macquarie Group Limited (18) | 5,368,580 | 13.1% | ||
Technology Crossover Ventures (19) | 4,006,230 | 9.7% | ||
William Blair & Co. (20) | 4,676,172 | 11.4% | ||
of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of October 10, 2013 and not subject to repurchase as of that date. Shares issuable pursuant to options are deemed outstanding for calculating the percentage ownership of the person holding the options but are not deemed outstanding for the purposes of calculating the percentage ownership of any other person.
Set forth below is biographical information for each of our current executive officers who is not also a director.
Timothy L. Murray, President and Chief Operating Officer, Age 56
Mr. Murray joined us in April 2012. From September 2011 to April 2012, Mr. Murray served as Chief Executive Officer of Pulsepoint, Inc., a digital media technology company, having served beginning in 2010 as Chief Executive Officer of ContextWeb, which later merged with another company to form Pulsepoint. From 2007 to 2010, Mr. Murray was Chief Operating Officer of Dialogic Inc., which had acquired Cantata Technologies, where Mr. Murray served as Chief Executive Officer. Mr. Murray began his career at AT&T in 1980 and over the next 20 years worked in positions of increasing responsibilities in sales, marketing, operations, engineering, and product management. He left AT&T in 2001 after serving as Executive Vice President Business Service Operations. Mr. Murray holds a B.S. and M.S. in Management and Industrial Engineering from Rensselaer Polytechnic Institute.
Howard D. Polsky, Executive Vice President, General Counsel and Secretary, Age 62
Mr. Polsky joined us in June 2004, and serves as Executive Vice President, General Counsel and Secretary. Mr. Polsky previously held the position of Vice President and General Counsel of Lockheed Martin Global Telecommunications from 2000 to 2002. Prior to its acquisition by Lockheed Martin, Mr. Polsky was employed by COMSAT Corporation from 1992 to 2000, initially serving as Vice President and General Counsel of COMSAT's largest operating division, and subsequently serving on the executive management team as Vice President of Federal Policy and Regulation. From 1983 to 1992, Mr. Polsky was a partner at Wiley, Rein & Fielding, and was an associate at Kirkland & Ellis from 1979 to 1983. Mr. Polsky began his legal career at the Federal Communications Commission. He received a B.A. in Government from Lehigh University and a J.D. from Indiana University. Mr. Polsky currently serves as a member of the Advisory Board to the Lehigh University College of Arts and Science.
James J. Rhyu, Executive Vice President and Chief Financial Officer, Age 43
Mr. Rhyu joined us in June 2013 and serves as Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Rhyu served as Chief Financial Officer and Chief Administrative Officer of Match.com, a subsidiary of publicly traded IAC/InterActiveCorp since June 2011. In those roles, he was responsible for overseeing a broad range of functions, including human resources, legal, information technology and operations, certain international operations and product development. Prior to his roles at Match.com, Mr. Rhyu was a Senior Vice President of Finance at Dow Jones & Company from January 2009 until May 2011, where he ran the global financial function. Previously, Mr. Rhyu served for three years as the Corporate Controller of Sirius XM Radio Inc. and its predecessor company, XM Satellite Radio, as well as serving in the same role for Graftech International. Mr. Rhyu also served six years as an auditor with Ernst & Young LLP in the United States and South America. Mr. Rhyu holds a B.S. from the Wharton School of Business at the University of Pennsylvania and an M.B.A. from the London Business School.
COMPENSATION DISCUSSION AND ANALYSIS
The Compensation Committee, or the Committee, has reviewed and discussed with management the Compensation Discussion and Analysis set forth below. Based on its review and discussion with management, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2013. This report is provided by the following independent directors, who comprise the Committee:
Compensation Discussion and Analysis
Executive Summary
Since it was founded in 1999, K12 has provided students in kindergarten through 12th grade with access to engaging curriculum and learning systems which enable them to maximize their success in life, regardless of geographic, financial or demographic circumstances. Today, we continue to lead the industry in technology-enabled individualized learning, adapting instruction to meet each student's unique capabilities, interests and needs.
Our fiscal 2013 achievements included positive results in the following financial metrics:
In addition, one of the most notable improvements in fiscal 2013 was our overall Total Shareholder Return, or TSR, which rose to +12.7% for the fiscal 2013 period. We attribute these results to:
Relationship Between Company Performance and Executive Compensation
Our New Executive Leadership Structure
Executive Compensation Principles and Practices
Executive Compensation Program Objectives and Process
Elements of Compensation
Fiscal 2016 Compensation Decisions
Other Compensation
Compensation Governance, Process And Incentive Decisions
Other Compensation Policies and Practices
COMPENSATION TABLES
Summary Compensation Table for Fiscal 2016
Grants of Plan-Based Awards During Fiscal 2016
Outstanding Equity Awards at End of Fiscal 2016
Option Exercises and Stock Vested During Fiscal 2016
Fiscal 2016 Non-Qualified Deferred Compensation
Potential Payments upon Termination or Change in Control
COMPENSATION COMMITTEE REPORT
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
Policies and Procedures for Related-Party Transactions
Compensation Committee Interlocks and Insider Participation
PROPOSAL 2: ADVISORY VOTE ON EXECUTIVE COMPENSATION
PROPOSAL 3: APPROVAL OF THE COMPANY'S 2016 EQUITY INCENTIVE AWARD PLAN
Why Stockholders Should Vote to Approve the 2016 Plan
Description of the 2016 Plan
United States Federal Income Tax Consequences
Plan Benefits
Stock-Based Incentive Plan Information
PROPOSAL 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
Fees Paid to Independent Registered Public Accounting Firm
PROPOSAL 5: APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION | 73 | |
PROPOSAL 6: STOCKHOLDER PROPOSAL REGARDING A REPORT ON LOBBYING ACTIVITIES AND EXPENDITURES | 74 | |
AUDIT COMMITTEE REPORT | 78 | |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 79 | |
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE | 81 | |
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED ON | 81 | |
DELIVERY OF DOCUMENTS TO SECURITY HOLDERS SHARING AN ADDRESS | 81 | |
PROPOSALS BY OUR STOCKHOLDERS | 82 | |
WHERE YOU CAN FIND MORE INFORMATION | 82 |
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
DECEMBER 15, 2016
This Proxy Statement and the accompanying proxy card and notice of Annual Meeting are provided in connection with the solicitation of proxies by and on behalf of the Board of Directors of K12 Inc., a Delaware corporation, for use at the annual meeting of stockholders to be held at the law firm of Latham & Watkins LLP, 555 Eleventh Street, N.W., Suite 1000, Washington, D.C. 20004-1304, on Thursday, December 15, 2016, at 10:00 A.M., Eastern Time, and any adjournments or postponements thereof, which we refer to as the Annual Meeting. "K12," "we," "our," "us" and the "Company" each refer to K12 Inc. The mailing address of our principal executive offices is 2300 Corporate Park Drive, Herndon, VA 20171. This Proxy Statement, the accompanying proxy card and the notice of Annual Meeting will be made available on or about October 28, 2016, to holders of record as of the close of business on October 19, 2016 of our common stock, par value $0.0001 per share, which we refer to as our Common Stock.
Record Date; Outstanding Shares; Shares Entitled to Vote
Our Board of Directors has fixed the close of business on October 19, 2016, as the Record Date for determining the stockholders entitled to notice of, and to vote at, the Annual Meeting. On the Record Date, we had [40,659,472] shares of Common Stock issued and outstanding.
Holders of record of Common Stock on the Record Date will be entitled to one vote per share on any matter that may properly come before the Annual Meeting and any adjournments or postponements of the Annual Meeting.
Quorum and Vote Required
The presence, in person or by duly executed proxy, of stockholders representing a majority of all the votes entitled to be cast at the Annual Meeting will constitute a quorum. If a quorum is not present at the Annual Meeting, we expect that the Annual Meeting will be adjourned or postponed to solicit additional proxies.
If a quorum is present: (i) a plurality of votes present in person or represented by proxy at the Annual Meeting is required to elect the members of the Board of Directors; and an affirmative vote of a majority of the votes present in person or represented by proxy at the Annual Meeting must approve (ii) the non-binding advisory resolution on executive compensation, (iii) the 2016 Equity Incentive Plan, (iv) the ratification of the appointment of BDO USA, LLP as the Company's independent registered public accounting firm for the fiscal year ending June 30, 2017, or fiscal 2017,(v) the stockholder proposal regarding a report on lobbying activities and expenditures, and (vi) such other matters as may properly come before the Annual Meeting or any adjournments or postponements of the Annual Meeting.
To amend Article V of the Company's Third Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), as discussed in Proposal 5, the Certificate of Incorporation requires the affirmative vote of the holders of at least 66.67% of the outstanding voting power of the Company.
Voting; Proxies; Revocation
Shares of our Common Stock represented at the Annual Meeting by properly executed proxies received prior to or at the Annual Meeting, and not revoked prior to or at the Annual Meeting, will be voted at the Annual Meeting, and at any adjournments, continuations or postponements of the Annual Meeting, in accordance with the instructions on the proxies.
If a proxy is duly executed and submitted without instructions, the shares of Common Stock represented by that proxy will be voted:
A record holder who executes a proxy may revoke it before or at the Annual Meeting by: (i) delivering to our corporate secretary a written notice of revocation of a previously delivered proxy, with such notice dated after the previously delivered proxy; (ii) duly executing, dating and delivering to our corporate secretary a subsequent proxy; or (iii) attending the Annual Meeting and voting in person. Attendance at the Annual Meeting will not, in and of itself, constitute revocation of a proxy. Any written notice revoking a proxy should be delivered to K12 Inc., Attn: General Counsel and Secretary, 2300 Corporate Park Drive, Herndon, VA 20171. If your shares of Common Stock are held in a brokerage account, you must follow your broker's instructions to revoke a proxy.
Abstentions and Broker Non-Votes
Broker non-votes occur when a nominee holding shares of voting securities for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power on that item and has not received instructions from the beneficial owner. Abstentions, withheld votes, and broker non-votes are included in determining whether a quorum is present but are not deemed a vote cast "For" or "Against" a given proposal, and therefore, are not included in the tabulation of the voting results. As such, abstentions, withheld votes and broker non-votes do not affect the voting results with respect to the election of directors. Abstentions and broker non-votes will have the effect of a vote against the approval of any items requiring the affirmative vote of the holders of a majority or greater of the outstanding Common Stock who are entitled to vote and are present in person or represented by proxy at the Annual Meeting. Abstentions and broker non-votes will also have the effect of a vote against the approval of the amendment to the Company's Certificate of Incorporation, as discussed in Proposal 5, which requires the affirmative vote of the holders of at least 66.67% of the outstanding voting power of the Company.
Proxy Solicitation
We are soliciting proxies for the Annual Meeting from our stockholders and we will bear the entire cost of soliciting proxies from our stockholders. Copies of solicitation materials will be furnished to brokerage houses, fiduciaries and custodians holding Common Stock for the benefit of others so that such brokerage houses, fiduciaries and custodians may forward the solicitation materials to such beneficial owners. We may reimburse persons representing beneficial owners of Common Stock for their expenses in forwarding solicitation materials to those beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone or personal solicitation by our directors, officers or other regular employees of the Company. No additional compensation will be paid to our directors, officers or other regular employees for these services.
The Company has retained MacKenzie Partners, Inc. to assist in obtaining proxies from shareholders for the Annual Meeting. The estimated cost of such services is $17,500, plus out-of-pocket expenses. MacKenzie Partners may be contacted at (800) 322-2885 or via email at proxy@mackenziepartners.com.
Business; Adjournments
We do not expect that any matter other than the proposals presented in this Proxy Statement will be brought before the Annual Meeting. However, if other matters are properly presented at the Annual Meeting or any adjournments or postponements of the Annual Meeting, then the proxy holders will vote in their discretion with respect to those matters.
If a quorum is not present at the Annual Meeting, the Annual Meeting may be adjourned from time to time upon the approval of the holders of shares representing a majority of the votes present in person, or by proxy at the Annual Meeting, until a quorum is present. Any business may be transacted at the adjourned meeting which might have been transacted at the meeting originally noticed. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. We do not currently intend to seek an adjournment of the Annual Meeting.
QUESTIONS AND ANSWERS ABOUT THE ANNUAL
MEETING AND THESE PROXY MATERIALS
The following addresses some questions you may have regarding the matters to be voted upon at the Annual Meeting. These questions and answers may not address all questions that may be important to you as a stockholder of the Company. Please refer to the more detailed information contained elsewhere in this Proxy Statement and the documents referred to or incorporated by reference in this Proxy Statement for additional information.
Why am I receiving this Proxy Statement?
The Company is soliciting proxies for the Annual Meeting. You are receiving a Proxy Statement because you owned shares of Common Stock at the close of business on October 19, 2016, the Record Date for the Annual Meeting, which entitles you to vote at the Annual Meeting. By use of a proxy, you can vote whether or not you attend the Annual Meeting. This Proxy Statement describes the matters on which we would like you to vote and provides information on those matters so that you can make an informed decision.
Why is K12 calling the Annual Meeting?
We are calling the Annual Meeting and submitting proposals to stockholders of the Company to consider and vote upon Annual Meeting matters, including electing directors, a non-binding advisory vote on executive compensation, approval of our 2016 Equity Incentive Award Plan, ratifying the appointment of our independent registered public accounting firm, approval of an amendment to the Company's Certificate of Incorporation and a stockholder proposal regarding a report on lobbying activities and expenditures.
How does the Board of Directors recommend that I vote?
Our Board of Directors recommends that you voteFOR the election of ten directors nominated by our Board of Directors,FOR the Company's executive compensation,FOR approval of our 2016 Equity Incentive Award Plan,FOR the ratification of the appointment of BDO USA, LLP as the Company's independent registered public accounting firm for fiscal 2017,FOR approval of an amendment to the Company's Certificate of Incorporation andAGAINST the stockholder proposal regarding a report on lobbying activities and expenditures.
What do I need to do now?
After carefully reading and considering the information in this Proxy Statement, please complete, date, sign and promptly mail the proxy card in the envelope provided, which requires no postage if mailed in the United States, or vote electronically via the Internet or by telephone by following the instructions provided by your bank or broker.
May I vote in person?
Yes. If you were a stockholder of record as of the close of business on October 19, 2016, you may attend the Annual Meeting and vote your shares in person instead of returning your signed proxy card. However, we urge you to vote in advance even if you are planning to attend the Annual Meeting.
How do I vote if my shares are held in "street name" by my bank, broker or agent?
If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received voting instructions with these proxy materials from that organization rather than from us. Simply complete and mail your voting instructions as directed by your broker or bank to ensure that your vote is counted. To vote in person at the Annual Meeting, you must obtain a valid proxy from your broker, bank, or other agent. Follow the instructions from your broker or bank included with these proxy materials, or contact your broker or bank to request a proxy form.
If my shares are held in "street name" by a broker, will my broker vote my shares for me even if I do not give my broker voting instructions?
Under the rules that govern brokers who have record ownership of shares that are held in "street name" for their clients, brokers may vote such shares on behalf of their clients with respect to "routine" matters (such as the ratification of auditors), but not with respect to non-routine matters (such as the election of directors, the approval of an equity incentive award plan, the approval of an amendment to the Company's Certificate of Incorporation or a proposal submitted by a stockholder). If the proposals to be acted upon at the Annual Meeting include both routine and non-routine matters, the broker may turn in a proxy card for uninstructed shares that votes on the routine matters, but expressly states that the broker is not voting on non-routine matters. This is called a "broker non-vote" as to non-routine matters. Broker non-votes on non-routine matters will be counted for the purpose of determining the presence or absence of a quorum, but will not be counted for the purpose of determining the number of votes cast. We encourage you to provide specific instructions to your broker by returning your proxy card or by voting electronically via the Internet or by telephone, if permitted by the broker or other nominee that holds your shares. This ensures that your shares will be properly voted at the Annual Meeting.
Can I revoke my proxy and change my vote?
Yes. You have the right to revoke your proxy at any time prior to the time your shares are voted at the Annual Meeting. If you are a stockholder of record, your proxy can be revoked in several ways: by timely delivery of a written revocation to our corporate secretary, by submitting another valid proxy bearing a later date or by attending the Annual Meeting and voting your shares in person, even if you have previously returned your proxy card.
When and where is the Annual Meeting?
The Annual Meeting will be held on December 15, 2016 at 10:00 A.M., Eastern Time, at the law firm of Latham & Watkins LLP, 555 Eleventh Street, NW, Suite 1000, Washington, DC 20004-1304.
Who can help answer my questions regarding the Annual Meeting or the proposals?
You may contact K12 to assist you with your questions. You may reach K12 at:
K12 Inc.
Attention: Investor Relations
2300 Corporate Park Drive
Herndon, VA 20171
(703) 483-7000
MacKenzie Partners, Inc.
105 Madison Avenue
New York, NY 10016
(800) 322-2885
CORPORATE GOVERNANCE AND BOARD MATTERS
Corporate Governance Guidelines and Code of Business Conduct and Ethics
Our Board of Directors oversees the management of the Company and its business for the benefit of our stockholders in order to enhance stockholder value over the long-term and to achieve its educational mission. The Board of Directors has adopted Corporate Governance Guidelines (the "Guidelines") to assist it in the exercise of its responsibilities. The Guidelines are reviewed annually and periodically amended as the Board of Directors enhances the Company's corporate governance practices. The Board of Directors has also adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees. The purpose of this code is to promote honest and ethical conduct for conducting the business of the Company consistent with the highest standards of business ethics. The Guidelines and Code of Business Conduct and Ethics are available on our website at www.K12.com under theInvestor Relations-Governance section.
Our corporate governance and business conduct best practices include:
We intend to satisfy the disclosure requirements under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") regarding any amendment to, or waiver from a material provision of our Code of Business Conduct and Ethics involving our principal executive, financial or accounting officer or controller by posting such information on our website.
Term of Office. All directors of the Company serve terms of one year and until the election and qualification of their respective successors.
Attendance at Board and Committee Meetings and the 2015 Annual Meeting. Our Board of Directors met nine times in person or telephonically during fiscal 2016. Each director attended at least 75% of the total Board and committee meetings to which they were assigned. Our policy with respect to director attendance at the annual meeting of stockholders is to encourage, but not require, director attendance. Two members of our Board of Directors attended our 2015 Annual Meeting of Stockholders: Mr. Davis and Mr. Engler. Our director attendance policy is included in our Corporate Governance Guidelines, which is available on our website at www.K12.com.
Communication with Directors. Stockholders and other interested parties may communicate directly with our Board of Directors, individually or as a group, by sending an email to our General Counsel at OGC@K12.com, or by mailing a letter to K12 Inc., 2300 Corporate Park Drive, Herndon, VA 20171, Attention: General Counsel and Secretary. Our General Counsel will monitor these communications and provide summaries of all received communications to our Board of Directors at its regularly scheduled meetings. Where the nature of a communication warrants, our General Counsel may decide to seek the more immediate attention of the appropriate committee of the Board of Directors, the Lead Independent Director or an individual director, or our management or independent advisors and will determine whether any response is necessary.
Our Board of Directors has affirmatively determined that each of our non-employee directors is "independent" as defined in the currently applicable listing standards of the New York Stock Exchange ("NYSE") and the rules and regulations of the Securities and Exchange Commission ("SEC"). Messrs. Davis and Udell are not independent under either NYSE or SEC rules because they are each an executive officer of the Company. If the nominees for the Board of Directors are duly elected at the Annual Meeting, then each of our directors, other than Messrs. Davis and Udell, will serve as an independent director on our Board of Directors as the term is defined in applicable rules of the NYSE and the SEC.
Board of Directors Leadership Structure
Our Board of Directors is comprised of independent, accomplished and experienced directors who provide advice and oversight of management to further the interests of the Company and its stockholders. Our governance framework provides the Board of Directors with the flexibility to determine an optimal organizational structure for leadership and engagement while ensuring appropriate insight into the operations and strategic issues of the Company. The Board of Directors has evaluated its leadership structure and determined that Mr. Davis should serve as Executive Chairman of the Board and that Mr. Reynolds should serve as Lead Independent Director.
Chairman. Our Board of Directors elects a chairman from among the directors and determines whether to separate or combine the roles of chairman and chief executive officer based on what it believes best serves the needs of the Company and its stockholders at any particular time. Both approaches have been taken depending on the circumstances. The determination to appoint Mr. Davis as Executive Chairman was based on a number of factors that made him particularly well-suited for the role. These factors included his prior position as Executive Chairman and Chief Executive Officer, his prior service on the Board of Directors and its Compensation Committee, and his understanding of the Company's business and day-to-day operations, growth opportunities, challenges and risk management practices. This combination of Company experience and expertise enables Mr. Davis to provide strong and effective leadership to the Board of Directors and to ensure that the Board of Directors is informed of important issues. In consultation with our Lead Independent Director and the Chief Executive Officer, the Executive Chairman sets the agenda for the regular and special meetings of the Board of Directors, presides at the annual meeting of stockholders and performs such other functions and responsibilities as set forth in the Corporate Governance Guidelines, or as requested by the Board of Directors.
Lead Independent Director. The role of the Lead Independent Director is to facilitate communications between the Executive Chairman and the independent directors and the committees of the Board of Directors. In doing so, the Lead Independent Director, Mr. Reynolds, serves as the liaison between the Board of Directors and the Executive Chairman, thereby giving guidance to management in meeting the objectives set by the Board of Directors and monitoring compliance with corporate governance policies. Additionally, the Lead Independent Director serves as a liaison between the Board of Directors and stockholders. The Lead Independent Director has the authority to call meetings of the independent directors and chairs executive sessions of the Board of Directors during which no members of management are present. These meetings are intended to provide the Lead Independent Director with information that he can use to assist the Executive Chairman to function in the most effective manner. The Board of Directors believes the Lead Independent Director provides additional independent oversight of executive management and Board matters.
Executive Sessions of the Board. Our Board of Directors holds executive sessions without management directors or management present at each regularly scheduled meeting of the Board of Directors. The independent directors may also meet without management present at other times as requested by any independent director. As Lead Independent Director, Mr. Reynolds chairs the executive sessions of the Board of Directors.
Committees of the Board of Directors
As of the date of this Proxy Statement, membership on the Committees of the Board of Directors is as follows:
Chairperson Member Financial Expert
| |||||||||||||
Chief Financial Officer Compensation
In early fiscal 2013, our Board of Directors determined that several of our former executive officers, including Ms. Stokes and Mr. Bruce Davis, no longer met the technical definition of executive officers under SEC rules due to the change in management reporting structure we implemented following the hiring of our President and Chief Operating Officer. However, because Ms. Stokes and Mr. Bruce Davis served as executive officers for part of fiscal 2013 and met the definition of a "named executive officer" under SEC rules, we have included Ms. Stokes and Mr. Bruce Davis as among our NEOs for fiscal 2013.
| | | | | | | | | | | | | | | | | | | | |
| | Audit Committee | | Compensation Committee | | Nominating and Corporate Governance Committee | | Academic Committee | | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Craig R. Barrett | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Guillermo Bron | | | | | | | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Fredda J. Cassell | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Adam L. Cohn | | | | | | | | | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Nathaniel A. Davis | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| John M. Engler | | | | | | | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Steven B. Fink | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Jon Q. Reynolds, Jr. | | | | | | | | | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Andrew H. Tisch | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
The standing committees of our Board of Directors are the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Academic Committee.
Audit Committee
The Audit Committee, which was established in accordance with Section 3(a)(58)(A) of the Exchange Act, consists of Mr. Fink, who serves as the Chairman, Mr. Bron and Ms. Cassell. Our Board of Directors has determined that each of Messrs. Fink and Bron and Ms. Cassell qualify as independent directors under the applicable NYSE listing requirements and SEC regulations.
The Audit Committee met seven times during fiscal 2016. The meetings to review the Company's quarterly and annual periodic filings with the SEC each include at least two separate sessions (which together count as only one meeting). Mr. Fink engaged in routine separate communications with the Company's external auditors and Chief Financial Officer, held the required executive sessions at each meeting, and requested participation by outside counsel, as needed. The Audit Committee has a charter, available on our website at www.K12.com, setting forth its structure, powers and responsibilities. Pursuant to the charter, the Audit Committee is comprised of at least three members appointed by our Board of Directors, each of whom satisfies the requirements of independence and financial literacy. In addition, our Board has determined that Messrs. Fink and Bron and Ms. Cassell are each an audit committee financial expert as that term is defined under the Exchange Act. Under its charter, the responsibilities of the Audit Committee include:
In addition, our Corporate Governance Guidelines provide that members of the Audit Committee may not serve on the audit committees of more than two other companies at the same time as they serve on our Audit Committee.
Compensation Committee
The Compensation Committee consists of Mr. Cohn, who serves as the Chairman, and Messrs. Fink and Reynolds. Our Board of Directors has determined that each of Messrs. Cohn, Fink and Reynolds qualify as independent directors within the meaning of the applicable NYSE listing requirements and SEC regulations.
The Compensation Committee met nine times during fiscal 2016. The Compensation Committee has a charter, available on our website at www.K12.com, setting forth its structure, powers and responsibilities. These include:
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee consists of Mr. Tisch, who serves as the Chairman, and Messrs. Bron and Engler. Our Board of Directors has determined that each of Messrs. Tisch, Bron and Engler qualify as independent directors within the meaning of the applicable NYSE listing requirements and SEC regulations. Our Board of Directors has adopted Corporate Governance Guidelines which are available on our website at www.K12.com.
The Nominating and Corporate Governance Committee met two times during fiscal 2016. The Nominating and Corporate Governance Committee has a charter, available on our website at www.K12.com, setting forth its structure, powers and responsibilities. Under its charter, the Nominating and Corporate Governance Committee has the authority to nominate persons to stand for election and to fill vacancies on our Board of Directors. The Nominating and Corporate Governance Committee may consider the following criteria, as well as any other factors it deems appropriate, in recommending candidates for election to our Board of Directors:
For fiscal year 2017, the Board amended its Corporate Governance Guidelines to include consideration of diversity in identifying director nominees. The Board strives to nominate directors with a variety of complementary skills so that, as a group, the Board of Directors will possess a mix of the appropriate backgrounds, talent, gender, race, perspectives, skills and expertise to oversee the Company's business. The Nominating and Corporate Governance Committee will consider director candidates recommended by stockholders, provided such recommendations are submitted in writing not later than the close of business on the 90th day, or earlier than the close of business on the 120th day, prior to the anniversary of the preceding year's annual meeting of the stockholders. Such recommendations should include the name and address and other pertinent information about the candidate as is required to be included in the Company's proxy statement. Recommendations should be submitted to the corporate secretary of the Company at K12 Inc., 2300 Corporate Park Drive, Herndon, VA 20171, Attention: General Counsel and Secretary. The Nominating and Corporate Governance Committee will consider the criteria set forth above and other relevant information when evaluating director candidates recommended by stockholders.
Academic Committee
The Academic Committee consists of Dr. Barrett, who serves as the Chairman, and Messrs. Davis and Engler. The primary role of the Academic Committee is to make recommendations and assist management in discharging its responsibility to ensure continuous improvement in academic outcomes for the students and schools we serve.
The Academic Committee has a charter, available on our website at www.K12.com, setting forth the structure, powers and responsibilities of the Academic Committee. Members of the Academic Committee participated in three meetings of the Company's Educational Advisory Committee. Under its charter, the responsibilities of the Academic Committee include:
Our Board of Directors believes full and open communication with management is essential for effective enterprise risk management and oversight. Members discuss strategy and risks facing the Company with our Executive Chairman, our CEO and our senior management at meetings of our Board of Directors or when members of our Board of Directors seek to focus on a particular area of risk, such as meeting state academic accountability standards at the schools we manage, ensuring the privacy of student information, compliance with state regulatory and reporting requirements or information technology cyber-security protections and preparedness. Because our Executive Chairman and our CEO also set the agenda for the Board of Directors meetings, each functional division of the Company can identify risk-related topics that may require added attention, such as evolving state curriculum standards, student engagement and retention, education technology, legal and policy matters, and information security. Each quarter, our Executive Chairman and our CEO also present an assessment of the strategic, financial and operational issues facing the Company, which includes a review of associated risks and opportunities.
Management is responsible for identifying, prioritizing, remediating and monitoring the day-to-day management of risks that the Company faces, while our Board of Directors, as a whole and through its committees, is responsible for the oversight of enterprise risk management. In fiscal 2016, the Audit Committee continued to work directly with a major independent accounting firm to support the Company's internal audit function in risk management. This
combination provides us with the focus, scope, expertise and continuous attention necessary for effective risk management.
While our Board of Directors is ultimately responsible for risk oversight, three of its committees concentrate on specific risk areas.
Director Compensation for Fiscal 2016
In fiscal 2016, pursuant to our Amended Non-Employee Directors Compensation Plan ("Directors Compensation Plan"), our non-employee directors received annual cash retainers for service on the Board of Directors and assigned committees and annual restricted stock awards. Messrs. Davis and Udell, our Executive Chairman and Chief Executive Officer, respectively, received no additional compensation for their service on our Board of Directors.
Pursuant to the terms of the Directors Compensation Plan, each non-employee director receives an annual cash retainer of $50,000 and an additional $5,000 for each committee on which the non-employee director serves. For service as the Chairman of a Board committee, an additional annual cash retainer is provided in the following amounts:
| | | | | | | | |
| Committee | | Additional Cash Retainer | | ||||
| | | | | | | | |
Audit | $20,000 | |||||||
| | | | | | | | |
| Compensation | | $15,000 | | ||||
| | | | | | | | |
Nominating and Corporate Governance | $10,000 | |||||||
| | | | | | | | |
| Academic | | $5,000 | | ||||
| | | | | | | | |
The retainer for service on the Audit Committee includes attendance at up to five Audit Committee meetings. Should the Audit Committee meet more than five times per year, members receive an additional fee of $1,500 per meeting attended.
The Directors Compensation Plan also provides for annual restricted stock awards for each non-employee director, valued at $100,000 as of the grant date (prorated for a partial year of service), with the shares underlying such awards vesting in equal annual installments over a period of three years. The restricted stock awards were granted on January 4, 2016.
The following table sets forth the compensation paid to our non-employee directors for their services during fiscal 2016:
| | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash ($) | | Stock Awards ($) (1) | | Total ($) | | ||||||||
| | | | | | | | | | | | | | | | |
Craig R. Barrett (2) | 55,000 | 100,000 | 155,000 | |||||||||||||
| | | | | | | | | | | | | | | | |
| Guillermo Bron (3) | | 65,500 | | 100,000 | | 165,500 | | ||||||||
| | | | | | | | | | | | | | | | |
Fredda J. Cassell (4) | 58,000 | 100,000 | 158,000 | |||||||||||||
| | | | | | | | | | | | | | | | |
| Adam L. Cohn (5) | | 60,000 | | 100,000 | | 160,000 | | ||||||||
| | | | | | | | | | | | | | | | |
John M. Engler (6) | 57,500 | 100,000 | 157,500 | |||||||||||||
| | | | | | | | | | | | | | | | |
| Steven B. Fink (7) | | 78,000 | | 100,000 | | 178,000 | | ||||||||
| | | | | | | | | | | | | | | | |
Mary H. Futrell (8) | 30,000 | — | 30,000 | |||||||||||||
| | | | | | | | | | | | | | | | |
| Jon Q. Reynolds, Jr. (9) | | 57,500 | | 100,000 | | 157,500 | | ||||||||
| | | | | | | | | | | | | | | | |
Andrew H. Tisch (10) | 65,000 | 100,000 | 165,000 | |||||||||||||
| | | | | | | | | | | | | | | | |
Please see the Security Ownership of Certain Beneficial Owners and Management table starting on page 79 for additional information on the beneficial ownership of the Company's common stock by each of our directors.
Director Stock Ownership Guidelines
The Company encourages directors to purchase shares of the Company's common stock and to maintain a minimum ownership level during his or her tenure to foster alignment with our investing stockholders. To reinforce this objective, in early fiscal 2017 we adopted minimum director stock ownership guidelines for all of our non-management directors. Pursuant to those guidelines, these directors must hold shares of the Company's stock equal to the lesser of: (i) shares having a value equal to three times the annual cash retainer paid to non-management directors for board service or (ii) 15,000 shares. Non-management directors must be in compliance with this policy by September 28, 2021 or five years after they begin Board service, whichever date is later.
PROPOSAL 1:
ELECTION OF DIRECTORS
Our Board of Directors currently has ten members: Messrs. Guillermo Bron, Adam L. Cohn, Nathaniel A. Davis, John M. Engler, Steven B. Fink, Jon Q. Reynolds, Jr., Andrew H. Tisch, Stuart J. Udell, Ms. Fredda J. Cassell, and Dr. Craig R. Barrett.
The term of office of each member of our Board of Directors expires at the Annual Meeting, or in any event at such time as their respective successors are duly elected and qualified or their earlier resignation, death, or removal from office. Each year, the stockholders will elect the members of our Board of Directors to a one-year term of office.
Upon the recommendation of our Nominating and Corporate Governance Committee, the Board of Directors has approved the nomination of ten directors, Messrs. Bron, Cohn, Davis, Engler, Fink, Reynolds, Tisch, Udell Ms. Cassell, and Dr. Barrett, for election at the Annual Meeting to serve until the next annual meeting of the stockholders (or until such time as their respective successors are elected and qualified or their earlier resignation, death, or removal from office).
Our Board of Directors has no reason to believe that the persons listed below as nominees for directors will be unable or decline to serve if elected. In the event of death or disqualification of any nominee or the refusal or inability of any nominee to serve as a director, proxies cast for that nominee may be voted with discretionary authority for a substitute or substitutes as shall be designated by the Board of Directors. Nominees for election to the Board of Directors shall be elected by a plurality of votes present in person or by proxy at the annual meeting and entitled to vote.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" ALL OF THE NOMINEES LISTED BELOW.
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
Set forth below are the names and other information pertaining to each person nominated to the Board of Directors.
Craig R. Barrett, Age 77
Dr. Barrett joined us as a director in September 2010 and currently serves as Chairman of our Academic Committee. He served as Chairman and Chief Executive Officer of Intel Corporation, which he joined in 1974, until his retirement in 2009. Prior to Intel Corporation, Dr. Barrett was a member of the Department of Materials Science and Engineering faculty of Stanford University. Dr. Barrett currently serves as Co-Chairman of Achieve, Inc., an independent, bipartisan, non-profit education reform organization; Chairman of Change the Equation, an organization promoting widespread literacy in science, technology, engineering and math (STEM); President and Chairman of BASIS Schools, Inc.; Vice Chair of the Science Foundation Arizona; and Co-Chairman of the Business Coalition for Student Achievement. Dr. Barrett holds B.S., M.S. and Ph.D. degrees in Materials Science from Stanford University. Dr. Barrett was selected as a director because of his deep knowledge and experience in information technology innovation, as well as his global, operational, and leadership experience as Chairman and Chief Executive Officer of Intel Corporation. He also brings a unique perspective to the Board of Directors from his tenure as a professor and his volunteer work and support of numerous educational organizations.
Guillermo Bron, Age 64
Mr. Bron joined us as a director in July 2007, and currently serves as a member of our Nominating and Corporate Governance Committee and our Audit Committee. Mr. Bron is a Managing Director at Pine Brook Road Partners, LLC, an investment firm, and served as a Managing Director of Acon Funds Management LLC, a private equity firm, from 2006 to 2012. Mr. Bron has also served as Chairman and a director of United Pan Am Financial Corp. (UPFC) since 1994, and he served as a director of Pan American Bank, FSB (Pan American), a former wholly- owned subsidiary of UPFC, from 1994 to 2005. Mr. Bron has served as Chairman of idX Corporation since 2008, and
from 2000 to 2002, Mr. Bron was a director of Telemundo Group, Inc. From 1994 to 2003, Mr. Bron was an officer, director and principal stockholder of a general partner of Bastion Capital Fund, L.P., a private equity investment fund primarily focused on the Hispanic market. Previously, Mr. Bron was a Managing Director of Corporate Finance and Mergers and Acquisitions at Drexel Burnham Lambert. Mr. Bron holds a B.S. in Electrical Engineering and Management from Massachusetts Institute of Technology and an M.B.A. from Harvard University. Mr. Bron was selected as a director because of his extensive executive leadership and international experience, as well as his expertise in investment banking and capital markets, which enables him to bring valuable insights to the Board of Directors in the areas of finance and strategy. The Board of Directors also benefits from his prior experience as a public company director and audit committee member.
Fredda J. Cassell, Age 61
Ms. Cassell joined us as a director in May 2014, and is a member of our Audit Committee. Ms. Cassell was with PricewaterhouseCoopers LLP for 32 years, having been a partner with the firm from 1992 until her retirement in June 2012. Ms. Cassell is a CPA, received her B.A. from Washington University in St. Louis and holds an M.B.A. from Washington University's John M. Olin School of Business. She previously served on the Board of Directors of the United Hospital Fund and was a member of its Audit Committee. Ms. Cassell was selected as a director because she is a highly accomplished senior executive. Ms. Cassell also possesses experience and expertise working with senior management of both public and private multinational companies in many industries, dealing extensively with complex technical accounting matters, acquisitions and divestitures, financial reporting, and internal control over financial reporting.
Adam L. Cohn, Age 45
Mr. Cohn joined us as a director in February 2013 and currently serves as the Chairman of our Compensation Committee. He is Co-CEO of Stone Canyon Industries LLC ("SCI"), a company he co-founded in September of 2014. SCI is a holding company that owns and invests in operating companies around the world. Mr. Cohn serves on the board of directors of SCI, Fleischmann's Vinegar Company and FLY Wheel Sports, each a privately-held company in which SCI invests. In addition, he is a partner at Knowledge Universe, or KU, where he is head of mergers and acquisitions and business development for KU and its portfolio companies. Mr. Cohn has been employed by KU since March of 2000. Prior to joining KU, he was a senior associate with Whitney & Co., a leading private equity firm. At Whitney & Co., he was responsible for sourcing and executing transactions for the Whitney Mezzanine Fund. Prior to Whitney & Co., Mr. Cohn was an investment banker in the Financial Sponsors Group at Bankers Trust Company and Deutsche Bank. He has a B.S. in business from Skidmore College and an M.B.A. from Columbia University. Mr. Cohn was selected as a director based on his significant financial and transactional experience in private equity and investment banking, as well as his experience with education companies. The Board of Directors also benefits from his extensive board experience.
Nathaniel A. Davis, Age 62
Mr. Davis joined us as a director in July 2009 and has served as our Chairman since June 2012. In January 2013, he became our Executive Chairman, and in January 2014, Mr. Davis was appointed to be our Chief Executive Officer, serving in that role through February 2016. He also is a member of our Academic Committee. Prior to joining the Company, he served as the managing director of RANND Advisory Group from 2003 until December 2012. Previously, Mr. Davis worked for XM Satellite Radio from June 2006 to November 2008, serving as President and then Chief Executive Officer until the company's merger with Sirius Radio. He also served on the XM Satellite Radio board from 1999 through 2008. From 2000 to 2003, Mr. Davis was President and Chief Operating Officer, and board member of XO Communications Inc. Mr. Davis has also held senior executive positions at Nextel Communications (EVP, Network and Technical Service), MCI Telecommunications (Chief Financial Officer) and MCI Metro (President and Chief Operating Officer). Since 2011, Mr. Davis has served as a director of Unisys Corporation and RLJ Lodging Trust. Mr. Davis has also previously served on the board of several public and private firms including Mutual of America Capital Management Corporation, Charter Communications and Telica Switching. Mr. Davis received an M.B.A. from the Wharton School of the University of Pennsylvania, an M.S. in Engineering Computer Science at the Moore School of the University of Pennsylvania, and a B.S. in Engineering from Stevens Institute of Technology. Mr. Davis was selected as a director based on his strong record of executive management, finance and systems engineering skills, as well as his insight into the considerations necessary to run a successful, diverse global
business. The Board of Directors also benefits from his previous service on other public company boards and his experience in accounting and financial reporting.
John M. Engler, Age 68
Mr. Engler joined us as a director in October 2012 and is a member of our Nominating and Corporate Governance Committee and our Academic Committee. He has served as President of the Business Roundtable since January 2011. From 2004 to 2011, Mr. Engler was the President and Chief Executive Officer of the National Association of Manufacturers. He was President of State and Local Government and Vice President of Government Solutions for North America for Electronic Data Systems Corporation from 2003 to 2004. Mr. Engler served as Michigan's 46th governor for three terms from 1991 to 2003. He has served on the board of directors of Universal Forest Products Inc. since 2003 and is a member of its Compensation Committee. He is also a director of Munder Capital Management. Previously, Mr. Engler was a director of Northwest Airlines from 2003 to 2008, a director of Dow Jones & Company, Inc. from 2005 to 2007, and a director of Delta Airlines from 2008 to 2012. Mr. Engler holds a B.S. in Agricultural Economics from Michigan State University and a J.D. from the Thomas M. Cooley Law School. Mr. Engler was selected as a director because of his executive and legislative expertise as a state governor, including working with state education budgets, and for his business experience. The Board of Directors also benefits from Mr. Engler's perspective as a director of numerous public companies and as a member of their audit committees.
Steven B. Fink, Age 65
Mr. Fink joined us as a director in October 2003 and currently serves as Chairman of our Audit Committee and is a member of our Compensation Committee. Mr. Fink the Deputy Chairman of Heron International and a Director of the Foundation of the University of California, Los Angeles. Mr. Fink served as a director of Nobel Learning Communities, Inc. from 2003 to 2011 and as Chairman of the Board of Life Storage, LLC from 2013 to 2016. In addition, Mr. Fink is a member of the Board of the Smithsonian National Museum of American History, the Board of the Herb Ritts Foundation, and is a member of The J. Paul Getty Photographs Council. From 1999 to 2009, Mr. Fink served as a director of Leapfrog, Inc. and its Chairman from 2004 to 2009. From 2000 to 2008, Mr. Fink was the Chief Executive Officer of Lawrence Investments, LLC. Mr. Fink has also previously served as Chairman and Chief Executive Officer of Anthony Manufacturing, Chairman and Managing Director of Knowledge Universe and Chairman and Chief Executive Officer of Nextera. Mr. Fink holds a B.S. in Psychology from the University of California, Los Angeles and a J.D. and an L.L.M. from New York University. Mr. Fink was selected as a director based on his significant experience in operations and financial oversight gained as serving as director or chairman for various public and private companies in addition to his membership on various company audit committees which enables him to contribute significantly to the financial oversight, risk oversight and governance of the Company.
Jon Q. Reynolds, Jr., Age 48
Mr. Reynolds joined us as a director in April 2011 and became the Lead Independent Director in January 2013. He also currently serves as Chairman of our Compensation Committee. In 1999, Mr. Reynolds became a General Partner at Technology Crossover Ventures, or TCV, a private equity and venture capital firm that he joined in 1997. Prior to joining TCV, Mr. Reynolds was an Associate with General Atlantic Partners, a private equity firm focused on late stage software and service businesses. Before joining General Atlantic Partners, Mr. Reynolds was a member of the mergers and acquisitions group at Lazard Freres & Co., where he focused on the technology and telecommunication industries. Mr. Reynolds holds an A.B. degree from Dartmouth College and an M.B.A. from Columbia Business School. Mr. Reynolds serves as a director of OSIsoft, LLC, Genesys Telecommunications Laboratories, Inc., IQMS, OneSource Virtual, Inc., and Webroot Software, Inc., none of which are publicly-traded companies. Mr. Reynolds was nominated as a director because of his experience in mergers and acquisitions and as a director of other public companies. Additionally, his experience as an active investor in numerous software and online education companies and extensive relationships throughout our industry will benefit the Board of Directors and the Company.
Andrew H. Tisch, Age 67
Mr. Tisch joined us as a director in August 2001 and served as Chairman of the Board of Directors from May 2007 to June 2012. He currently is a member of our Nominating and Corporate Governance Committee. Since 1985, Mr. Tisch has been a director of Loews Corporation, and is Co-Chairman of its board, Chairman of its executive committee and, since 1999, has been a member of its Office of the President. Mr. Tisch has also served as a director of three subsidiaries of Loews Corporation: Diamond Offshore Drilling, Inc. since 2011, CNA Financial Corporation since 2006, and Boardwalk Pipeline Partners, LP since 2005. Mr. Tisch previously served as a director of Bulova Corporation from 1979 to 2008 and as a director of Lord & Taylor from 2006 to 2008. Mr. Tisch engages in numerous public service activities including serving as a member of the Board of Overseers and executive committee member of Weill Cornell Medicine, trustee of the Brookings Institution, and as a member of the Dean's Advisory Board at the Harvard Business School. Mr. Tisch holds a B.S. in Hotel Administration from Cornell University and an M.B.A. from Harvard University. Mr. Tisch was selected as a director because of his extensive experience having served as president or chairman of various multinational companies over his career in addition to his membership on various boards of public companies which allows him to provide the Board of Directors with leadership and a variety of perspectives on important strategic and governance issues. The Board of Directors also benefits from his involvement in higher education and non-profit organizations.
Stuart J. Udell, Age 49
Mr. Udell joined us as a director and as Chief Executive Officer in February 2016. Mr. Udell brings significant strategic and operational experience to K12 in the education industry. Most recently, Mr. Udell served as Executive Chairman (from 2015-2016) and Chief Executive Officer (from 2010-2015), of Catapult Learning, LLC, a privately-held provider of instructional services, professional development, and operator of schools. Prior to joining Catapult Learning, from 2009-2010, Mr. Udell was the President of Postsecondary Education at The Princeton Review. He was concurrently, from 2007-2010, the Chief Executive Officer of Penn Foster Inc., a global leader in high school and career-focused online learning, which was acquired by The Princeton Review. Mr. Udell spent 11 years at Kaplan, most recently as President of Kaplan K12 Learning Services (from 2002-2007), where he built the K-12 school division. From 1997-2001, Mr. Udell was President of the School Renaissance Institute, the training, publishing, and research subsidiary of Renaissance Learning Inc. Mr. Udell has served the last 13 years on the board of directors of the National Dropout Prevention Center/Network at Clemson University. Mr. Udell holds a MBA from Columbia University and a BS from Bucknell University.
Set forth below is biographical information for each of our current executive officers who is not also a director.
Allison B. Cleveland, Executive Vice President of School Management and Services, Age 43
Ms. Cleveland joined us in October 2002 and serves as Executive Vice President of School Management and Services. During her time at K12, Ms. Cleveland has been instrumental in building the managed public school line of business. Most recently, she served as the Senior Vice President of School Services, overseeing academic and operational services in the managed public schools. Prior to that, Ms. Cleveland was the Regional Vice President of the Southern Region, responsible for schools in the Southeast portion of the United States. In her early years at K12, Ms. Cleveland worked in support of new school start-up and school operations, where she was responsible for the successful launch of K12 Virtual Academies throughout the country. Ms. Cleveland began her career at Andersen Consulting, where she focused on clients in the telecommunications industry and government. She holds a BSE in Biomedical and Electrical Engineering from Duke University and an MBA and MA in Education from Stanford University. Ms. Cleveland currently serves as a Director for the Foundation for Blended and Online Learning.
Lynda B. Cloud, Executive Vice President, Products, Age 49
Ms. Cloud joined us in September 2014 and serves as Executive Vice President, Products. As the head of K12's Curriculum and Products organization, she oversees the development and delivery of all program content and customer-facing technologies, and drives the product strategy and results across all areas of the business. Prior to joining K12, she was with Pearson Publishing for more than 20 years, where she held senior leadership positions in
Product Development, Marketing, and Product Management. In her role as General Manager, she drove strategy for the company's print and digital properties in the North American educational market. She holds a BA in English/Elementary Education from Susquehanna University.
Howard D. Polsky, Executive Vice President, General Counsel and Secretary, Age 65
Mr. Polsky joined us in June 2004, and serves as Executive Vice President, General Counsel and Secretary. Mr. Polsky previously held the position of Vice President and General Counsel of Lockheed Martin Global Telecommunications from 2000 to 2002. Prior to its acquisition by Lockheed Martin, Mr. Polsky was employed by COMSAT Corporation from 1992 to 2000, initially serving as Vice President and General Counsel of COMSAT's largest operating division, and subsequently serving on the executive management team as Vice President of Federal Policy and Regulation. From 1983 to 1992, Mr. Polsky was a partner at Wiley, Rein & Fielding, and was an associate at Kirkland & Ellis from 1979 to 1983. Mr. Polsky began his legal career at the Federal Communications Commission. He received a B.A. in Government from Lehigh University and a J.D. from Indiana University. Mr. Polsky currently serves as a member of the Advisory Board to the Lehigh University College of Arts and Science.
James J. Rhyu, Executive Vice President and Chief Financial Officer, Age 46
Mr. Rhyu joined us in June 2013 and serves as Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Rhyu served as Chief Financial Officer and Chief Administrative Officer of Match.com, a subsidiary of publicly traded IAC/InterActiveCorp, since June 2011. In those roles, he was responsible for overseeing a broad range of functions, including finance, human resources, legal, information technology and operations, certain international operations and product development. Prior to his roles at Match.com, Mr. Rhyu was a Senior Vice President of Finance at Dow Jones & Company from January 2009 until May 2011, where he ran the global financial function. Previously, Mr. Rhyu served for three years as the Corporate Controller of Sirius XM Radio Inc. and its predecessor company, XM Satellite Radio, as well as serving in the same role for Graftech International. Mr. Rhyu also served six years as an auditor with Ernst & Young LLP in the United States and South America. Mr. Rhyu holds a B.S. from the Wharton School of Business at the University of Pennsylvania and an M.B.A. from the London Business School.
Joseph P. Zarella, Executive Vice President, Business Operations, Age 57
Mr. Zarella joined us in October 2014, and serves as Executive Vice President, Business Operations, leading the Company's marketing organization, information technology organization, enrollment and customer care operations, as well as contract provisioning, billing and collections functions. Mr. Zarella has more than 20 years of successful customer service, sales and marketing operations, and information technology management experience. Prior to joining the Company, Mr. Zarella served as Chief Service Officer for SiriusXM Satellite Radio and its predecessor company, XM Satellite Radio, since 2006. In this role, he led the Company's sales, marketing, customer service and retention operations. Before joining XM Satellite Radio, he served at Constellation NewEnergy as Managing Director of Operations, where he was responsible for setting the corporate operations consolidation strategy. Prior to that, he was Vice President of Revenue Operations for XO Communications for six years, which followed after more than ten years' experience at MCI Communications serving as Vice President of Financial Operations and holding several executive operations leadership positions. Mr. Zarella holds a B.S. in Information Systems from the University of Massachusetts, and an M.B.A. in International Finance from the University of Dallas.
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis provides information about our fiscal 2016 compensation for the following named executive officers (our "NEOs"):
Since our inception, we have offered online educational services and software designed to facilitate individualized learning for students in kindergarten through 12th grade. As we continue to invest in our curriculum, academic support programs, and learning platforms to respond to the unique needs of the schools, students and families we serve, our mission and vision is to transform learning for every student and to become the trusted leader in education innovation. Following operational performance challenges in fiscal 2015, we initiated a shift in our strategic focus from a growth-motivated organization to a business model built upon sustained corporate development and student academic success. This transformation continued into fiscal 2016 as we position ourselves to drive and effectively execute this fundamental evolution in strategy.
Our executive leadership structure and compensation plans and programs are not immune to the consequences of a redefined business strategy and have necessarily been re-evaluated and modified based on experience and results. Specifically, fiscal 2016 saw a restructuring of our executive leadership team to bring it into closer alignment with individual expertise, accountability and division of authority to more effectively address our financial, operational and student academic needs. In addition, following disappointing results on our annual advisory vote on executive compensation for fiscal 2015, we engaged in meaningful dialogue with our stockholders to identify and address their primary concerns regarding our executive compensation programs and practices. Informed by these conversations, we pursued additional adjustments to build upon the redesign of our executive compensation program that began in fiscal 2015 and implemented a series of reforms to ensure that our pay practices mirror our pay for performance philosophy. We are optimistic that the strategic shift in our business strategy, coupled with a rejuvenated executive leadership structure and executive compensation programs and practices, will lead to enhanced academic performance of the students we serve, increased student retention at our managed schools, and improved operational performance, all of which should drive stockholder value over the long-term.
Advisory Vote on Executive Compensation and Stockholder Engagement
Although we gained majority-level support on our annual advisory vote on executive compensation in 2013 (54%) and 2014 (69%), these levels were nonetheless concerning. In fiscal 2015, we therefore began a fundamental restructuring of our executive compensation program in conjunction with our shift to a sustained business development strategy. Essentially, we sought to create incentives for our executives to increase shareholder value by implementing the initiatives in their respective business and functional units that would be required to move the strategy forward in a measurable way. Some changes were implemented immediately, such as a redesign of our annual cash bonus plan, or the Executive Bonus Plan, and engagement of a new compensation consultant, while others, including a performance-based equity incentive plan, required additional time to transition and were introduced this past fiscal year. However, this convergence of a new business strategy and compensation incentives to execute that strategy was not originally communicated effectively to our investors and at our 2015 annual meeting, our executive compensation programs received support from only 47% of our voting stockholders. We considered those results seriously and, while we have undertaken stockholder outreach in the past, our management intensified its outreach efforts in fiscal 2016 to seek to better explain the compensation incentives tied to our revised strategy plan and likewise to learn more about the stockholder concerns that led to the disappointing say-on-pay results.
In the fall of 2015 and continuing through the fall of 2016, our Vice President, Finance and Head of Investor Relations; our General Counsel; and our Senior Vice President, Human Resources, contacted each of our top twenty-five stockholders and spoke with many of them in order to identify and address concerns regarding our compensation practices and policies. These outreach efforts were conducted with the assistance of our Lead Independent Director, who is also a member of our Compensation Committee and a General Partner at TCV, our largest investor and holder of approximately 10% of our shares of common stock. These discussions addressed the fundamental shift in our business strategy, which impacted near term profitability. We explained to our stockholders that, in order to drive executive performance and retention during this period of transition, the performance objectives and compensation program design for our executives must reflect this near-term impact in a realistic way in order to provide fair rewards for executive contributions toward achieving important milestones for our business. Additionally, we sought to convey to stockholders the Company's and the Committee's strong confidence that our executive team is performing well as they navigate challenges arising from external events and factors over which they have no control, including, in fiscal 2016, an industry-wide investigation of for-profit virtual schools in California which cast a cloud over our stock and diverted management attention in responding to demanding and massive document productions and interviews. The decision in fiscal 2015 of the independent Agora Cyber Charter School Board to convert to a self-managed business model also had to be taken into account given its financial impact on our business.
We also believe that the low level of support for our executive compensation programs for fiscal 2015 was due, in part, to negative recommendations from Institutional Shareholder Services ("ISS") and Glass, Lewis & Co. ("Glass Lewis") with respect to our most recent annual advisory vote. Therefore, our discussions with stockholders also involved the specific areas of concern raised by ISS and Glass Lewis with respect to our compensation programs. The following table sets forth the primary critiques raised by ISS and Glass Lewis regarding our executive compensation programs, the stockholder feedback we received during our outreach efforts and the responsive actions we took and will continue to take to modify our executive compensation programs.
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ISS/Glass Lewis Critique | Stockholder Feedback | Responsive Actions and Discussion | ||||||||||
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Payouts under our Executive Bonus Plan do not correlate to Company performance resulting in a pay for performance misalignment | Similar concern expressed by stockholders | In fiscal 2016 the Committee tied annual bonuses more closely to pre-set and objective financial and operational performance metrics so that payouts under our Executive Bonus Plan would be tightly linked to corporate performance. Unlike in prior years, for our Executive Chairman and our new Chief Executive Officer, bonus payouts for achieving qualitative individual goals were not awarded for fiscal 2016. | ||||||||||
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One year performance period on performance-based equity awards does not incentivize long-term Company growth | Similar concern expressed by stockholders | The Committee adopted a long-term incentive plan (the "LTIP") in 2016, pursuant to which performance share units ("PSUs") are awarded to our NEOs based on the achievement of rigorous performance objectives at the end of longer two and three year performance periods. The PSU performance metrics are weighted based on academic performance (70%) and student retention (30%), which we believe are key factors in driving stockholder value over the long-term and improving student outcomes. The awards to our NEOs reflect the fact that there will not be overlapping measurement periods during the three year duration of the performance period. | ||||||||||
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ISS/Glass Lewis Critique | Stockholder Feedback | Responsive Actions and Discussion | ||||||||||
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Performance-based awards do not drive stockholder value because they do not include a total shareholder return metric relative to peer group members | Similar concern expressed by stockholders | We utilize a peer group to ensure that our NEOs are paid at competitive market levels. However, as the only publicly-traded company in the K-12 education space, our stock price returns may not closely correlate with those of our peer group because our peer group companies have different businesses. This is particularly the case as external interests mount challenges to charter school choice and for-profit management companies, which can impact our stock price. Accordingly, unlike many public companies who have effectively implemented a total shareholder return metric in their executive compensation programs, comparing company stock price performance to the performance of its peers, our Committee believes that such a metric would be tenuous in this unique environment. | ||||||||||
Despite this reality, we recognize that market performance of our stock remains an important criteria for rewarding executives and we have worked to address stockholder concerns in this area. In fiscal 2016, we began to grant our most senior executives the opportunity to earn restricted stock awards ("RSAs") based upon our achieving stock price appreciation thresholds over a two or three year performance period, and for fiscal 2017 we have extended this award type to our other executives as well. | ||||||||||||
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Lack of performance-based long-term incentive awards beyond the top executives fails to incentivize improving Company performance | Not raised as a significant concern by stockholders | In connection with the restructuring of our long-term incentive program in 2016, as a component of their long-term incentives, PSUs were granted to each of our NEOs that vest based on the Company's performance against rigorous academic and student retention metrics over a two and three year performance period. | ||||||||||
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Compensation paid to Mr. Davis during 2015, including an increase in total pay and a special one-time, time-vesting equity award, is misaligned with our pay for performance philosophy | Similar concern expressed by stockholders | During fiscal 2016, Mr. Davis's base salary was reduced by 43% over his 2015 salary level in connection with his transition to the non-CEO Executive Chairman position. This caused a corresponding reduction to his annual bonus opportunity, long-term incentive award target and the amount of any potential severance payments. Compensation levels for Mr. Udell as our new Chief Executive Officer were set below those previously provided to Mr. Davis and in line with market levels based on guidance from our independent compensation consultant. | ||||||||||
In fiscal 2015, the Committee had granted Mr. Davis a fairly small special time-based restricted stock award on account of the Committee having exercised its discretion to reduce his bonus payout for the prior year below the actual level earned. Some of our stockholders disagreed with the Committee's decision to grant that award and no such awards were granted in fiscal 2016. Rather, the only extraordinary time-based equity award granted to our NEOs during fiscal 2016 was a one-time "new hire" award for our new Chief Executive Officer as an inducement to join our Company. | ||||||||||||
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In addition to implementing the responsive actions set forth above, in fiscal 2016 we took a number of additional steps to restructure and refine our executive compensation programs and practices. We also continued to use and expand upon the policies and practices that have historically served to promote the long-term interests of our stockholders and public school customers, while attracting and retaining the talent necessary to achieve those interests. These new and continuing practices are discussed in more detail throughout this Compensation Discussion and Analysis.
Performance Assessment For Fiscal 2016 | ||||||||||||||||||
A portion of our executives' variable pay opportunity is based on annual performance under our Executive Bonus Plan. The Committee uses a well-defined objective process to assess performance, which includes a combination of specific corporate and individual Performance Management Objectives ("PMOs"). These PMOs ensure that a significant portion of our executives' annual incentive awards are directly associated with measurable achievements. In response to concerns raised by ISS, Glass Lewis and our stockholders regarding pay for performance alignment in our fiscal 2015 annual bonus awards, in fiscal 2016 the Committee strived to ensure that payouts under our Executive Bonus Plan were tied to meaningful objective performance criteria, including financial, operational and strategic goals for the year. Unlike prior years, our most senior NEOs, consisting of our Executive Chairman and our new Chief Executive Officer were not given opportunities to earn additional bonus awards based upon individual qualitative objectives. |
Key Corporate PMOs for Fiscal 2016 | ||||||||||||||||||
In fiscal 2016, the corporate PMOs were most heavily weighted based on our financial performance, specifically revenue, operating income and cash flow (measured by EBITDA minus CapEx). Performance levels are set by the Committee at the beginning of the year as part of our annual budgeting process. The fiscal 2016 target award levels are less than the fiscal 2015 target levels and less than actual performance for fiscal 2015. In setting these performance thresholds below the 2015 measures, the Committee took into account our planned investments, which are needed to effectively drive and execute our shift to a sustained business development strategy, the impact these investments will have on near term profitability and the approximate $111 million then-anticipated reduction in fiscal 2016 revenues due to the loss of the management component of the Agora Cyber Charter School Contract. Performance under these corporate PMOs was based upon our achievement against the following threshold, target and outperform performance levels, such that no bonus opportunity would be earned for performance below the threshold level and, for the revenue and operating income metrics, performance between two levels would be extrapolated on a straight-line basis: | ||||||||||||||||||
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Metric | Threshold | Target | Outperform | |||||||||||||||
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Revenue | $840M | $853M | $867M | |||||||||||||||
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Operating Income | $14M | $18M | $21M | |||||||||||||||
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EBITDA minus CapEx (1) | $12M-15M | $16M-$18M | >$18M | |||||||||||||||
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1. | Performance levels shown reflect the goals established at the beginning of the fiscal year for Mr. Davis's EBITDA minus CapEx PMO under the Executive Bonus Plan for 2016. The goals for Mr. Udell were intended to measure performance for the second half of fiscal 2016 following Mr. Udell's commencement of employment and, accordingly, are lower than the levels that applied to Mr. Davis due to our revised expectations following actual performance during the first two quarters of the year. |
New Executive Leadership Structure
In connection with our transition to a strategic model focused on sustained business development, the Board began to consider whether a new leadership structure was necessary to facilitate our business strategy and heightened focus on long-term growth. Following the resignation of Mr. Murray, our former Chief Operating Officer, in early fiscal 2016, we determined that a successful transition must be led by a leadership team comprised of two individuals serving in the separate and distinct roles of Executive Chairman and Chief Executive Officer. In February 2016 Mr. Udell began serving in the position of Chief Executive Officer with authority over the day to day operations of the business and continued execution of our strategic transformation. Mr. Davis continued in his role of Executive Chairman with primary responsibility for building relations with industry policymakers and school boards, as well as developing corporate strategy and other objectives approved by the Board.
CEO and Executive Chairman Pay Mix
As part of our executive leadership transition, the Committee engaged Compensia, our independent compensation consultant, to design competitive pay packages that focus heavily on variable pay components, with the intent that compensation for our Chief Executive Officer and our Executive Chairman should be overwhelmingly performance-
based. The basic annual pay mix for each of these executives, which is reflected in their respective employment agreements, is set forth in the following charts:
New Executive Employment Agreements
In connection with this transition of our executive leadership, we entered into an amended and restated employment agreement with Mr. Davis and an employment agreement with Mr. Udell, which were intended to implement the respective pay mix shown above and the variable pay components and compensation reforms introduced for fiscal 2016. A summary of the key terms of these agreements, including one-time equity grants implemented for fiscal 2016 or related to the transition, is set forth below. For additional information regarding these agreements, please read the section below titled "Potential Payments Upon Termination or Change in Control—Employment Agreements".
Mr. Davis
employment agreement. Earlier in fiscal 2016, Mr. Davis also received an award of PSUs under our new LTIP, which is described in more detail under "—Determination of Long Term Incentive Compensation—Performance Share Units."
Mr. Udell
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Time-based Restricted Stock | Mr. Udell was granted time-based restricted shares having a fair market value equal to $1.5 million. The award will vest as to 25% of the shares on February 8, 2017 and in eight substantially equal quarterly installments thereafter. | |||||||
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PSUs under our new LTIP | Mr. Udell's PSU award has a value at target level of $1.5 million. Shares are earned based on the achievement of academic performance and student retention metrics over a two and three year period. For additional information, see below under "—Determination of Long Term Incentive Compensation—Performance Share Units." | |||||||
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Stock Price RSAs | Stock price RSAs granted to Mr. Udell are earned based upon our achieving stock price appreciation thresholds over a three year performance period. In order for Mr. Udell to realize the maximum value attributable to this award, our stock price must experience a 141% increase in value over the stock price on the execution date of his employment agreement. For additional information, see below under "—Determination of Long Term Incentive Compensation—Stock Price RSAs." | |||||||
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Executive Compensation Principles and Practices
Principles
Our executive compensation programs are guided by four basic principles:
Link Compensation to Performance. Compensation levels should reflect actual performance, including both Company-wide performance and the performance of the individual executive.
Maintain Competitive Compensation Levels. Levels of compensation should be competitive with those offered by comparable companies in our industry to attract, retain and reward our NEOs.
Align Executives' and Stockholders' Interests. Our programs encourage high performing NEOs to remain with us and increase long-term stockholder value by requiring that they maintain significant share ownership and by granting long-term equity incentive awards each year.
Engagement of Independent Compensation Consultant. We are committed to engaging an independent compensation consultant to inform the Committee and evaluate the alignment of pay and performance relative to our peer group.
Practices
We employ certain executive compensation practices to align our executives' compensation with stockholder interests. Listed below are those compensation practices we employ and certain practices we do not employ because we believe they would not serve the long-term interests of our stockholders.
What We Do
Pay for Performance. A significant portion of our NEOs' potential compensation is not guaranteed but is linked to our financial and operational performance, which directly correlates to stockholder returns. We seek to place appropriate emphasis on variable pay components relative to our peer group and our compensation consultant evaluates the alignment of pay and performance relative to our peer group on an annual basis.
Alignment to Share Price. A portion of potential compensation for our most senior executives is tied to growth in our share price which directly aligns to shareholder interests.
Establish Performance Goals Aligned to Strategy. Our Executive Bonus Plan and LTIP utilize objective performance-based goals that we believe are rigorous and challenging, aligned to our strategic priorities and designed to increase stockholder value and motivate executive performance.
Target Pay Competitively. We seek to target compensation within a competitive range of the median of the peer group and only deliver greater compensation when warranted by performance or unique skill set.
Use Meaningful Vesting Conditions on Equity Awards. In connection with the restructuring of our long-term incentive award program to emphasize the use of performance-based awards, in fiscal 2016 we granted PSUs that only vest to the extent rigorous student retention and academic performance metrics are attained. In addition, stock price RSAs granted to our Executive Chairman and Chief Executive Officer will only be awarded if we achieve certain stock price appreciation thresholds over a two or three year performance period.
Maintain a Clawback Policy. We can recover incentive compensation wrongly awarded to an executive officer where fraud or intentional misconduct led to a restatement of our financial statements.
Require Mandatory Share Ownership. We expanded our stock ownership policy in fiscal 2016, such that all of our executive officers, including our NEOs, are required to maintain a minimum ownership level of our common stock to ensure they hold a significant equity stake in our Company thereby aligning their interests with those of the stockholders.
Perform Competitive Market Analysis. The Committee reviews competitive market data provided by its independent compensation consultant for our executive officers prior to making annual executive compensation decisions.
Analyze Executive Compensation Risk. We review the executive compensation program to ensure that it does not encourage excessive or unnecessary risk.
Provide an Incentive Oriented Pay Mix. Pay for our NEOs is heavily performance based, which includes annual and long-term incentive awards. Our targeted total direct compensation for our Executive Chairman and our CEO is approximately 87% and 82% performance based, respectively. Actual awards vary based on performance and may be forfeited in the event threshold performance is not achieved.
What We Do Not Do
Grant Multi-Year or Guaranteed Bonuses or Equity Awards. We do not pay guaranteed bonuses and currently have no guaranteed commitments to grant any equity-based awards. This ensures that we are able to base all compensation awards on measurable performance factors and operational results.
Provide Generous Executive Perquisites. We do not provide significant perquisites to our NEOs, such as club memberships, vehicles and similar items.
Offer Income Tax Gross-ups. We do not provide income tax gross-ups for personal benefits and other broad-based benefits.
Permit Excise Tax Gross-ups. We do not provide excise tax gross-ups for change in control payments or benefits.
Offer Pension or Supplemental Retirement Plans. We do not provide costly retirement benefits to our NEOs that reward longevity rather than contributions to Company performance.
Reprice Options. Since our initial public offering in 2007, we have not repriced or otherwise reduced the per-share exercise price of any outstanding stock options and we have no present intention of implementing any such repricings or reductions. Our proposed 2016 Incentive Award Plan specifically prohibits repricing of options without stockholder approval.
Provide Single Trigger Change in Control Payments. We maintain a "double trigger" vesting policy with respect to our equity awards whereby accelerated vesting in connection with a change in control of the Company also requires a qualifying termination of employment. Only legacy stock option awards granted prior to November 20, 2013 contain single trigger accelerated vesting provisions.
Allow Hedging or Pledging. Our insider trading policy specifically prohibits short sales, hedging and margin transactions. Our 2007 Equity Incentive Plan, or the 2007 Plan, prohibits pledging of any award granted under the plan.
Executive Compensation Program Objectives and Process
Focus on Variable Pay
Our executive compensation programs are designed to attract, retain and reward the management talent that we need to maintain and strengthen our position in the education business. By linking a significant portion of our executives' compensation to variable pay practices tied to performance on both short-term and long-term bases, we are able to focus our executives on the achievement of targeted financial and operational metrics, including attaining
specific financial performance metrics and improving the academic performance and student retention levels of the students at our managed schools in order to promote our long-term growth.
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KEY ELEMENTS OF VARIABLE PAY FOR FISCAL 2016 | ||||||||
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Annual Cash Bonus | Focuses executives on attaining targeted and strategic performance objectives from year to year | |||||||
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Performance-Based RSAs | One-year performance targets based on cash flow metrics drives profitability and financial stability | |||||||
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Time-Based RSAs | Encourages retention of our NEOs and results in less dilution to our stockholders as compared to stock option grants | |||||||
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LTIP PSUs | Incentivizes improved academic and student retention performance and promotes stockholder value over the long-term | |||||||
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Stock Options and Stock Price RSAs | Equity awards valued by stock price appreciation directly links realizable pay to the creation of long-term stockholder value | |||||||
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Determining Executive Compensation
The Committee uses a performance-based framework in making compensation decisions for our executives, including our NEOs. To maintain a disciplined approach to incentive compensation, the Committee applies a pre-defined process to calculate annual incentive payouts under our Executive Bonus Plan in relation to our level of achievement against corporate PMOs, which include objective financial performance criteria and measurable academic, student retention and operational metrics, and, for certain NEOs, achievement of their individual PMOs.
In fiscal 2016, the Committee engaged Compensia, an independent compensation consultant, to evaluate the market competitiveness of compensation for our NEOs. In addition, Compensia's work for the Committee included but was not limited to an assessment of possible peer group companies and a subsequent executive compensation market analysis.
Assessing Comparative Market Data and Practices
Prior to fiscal 2016, Towers Watson, the Committee's former compensation consultant, assisted the Committee by reviewing competitive market data on the compensation practices and programs of publicly-traded peer group companies and published survey data. In evaluating our peer group, the Committee considered a number of factors, including revenue, market capitalization, number of employees, industry and status as an existing peer. Towers Watson also considered companies that list us as a peer as well as our peers as identified by the major proxy advisory firms. The Committee feels it is important to maintain as much consistency as possible in the peer group year over year and carefully considers changes. The companies in the fiscal 2016 peer group were:
• Apollo Education Group, Inc. • Blackbaud, Inc. • Bridgepoint Education, Inc. • Capella Education Co. • Career Education Corp. | • Corporate Executive Board Co. • DeVry, Inc. • Fair Isaac • Gartner • Grand Canyon Education, Inc. • Houghton Mifflin Harcourt Company | • iGate • ITT Educational Services, Inc. • Strayer Education, Inc. • The Advisory Board Company • Tyler Technologies, Inc. • Zynga, Inc. |
The Committee and Compensia used this peer group to compare the compensation levels of our NEOs to comparable executive positions for fiscal 2016. This peer group reflects an adjustment made in late fiscal 2015 to remove Education Management Corp. and Universal Technical Institute, Inc., which companies no longer met the screening criteria, and LinkedIn Corporation in response to proxy advisory firm feedback related to the company's increase in market capitalization. In seeking replacements for those companies removed from the peer group, the Committee considered the previously mentioned factors and added Apollo Education Group, Inc., Career Education Corp., The Advisory Board Company, and Tyler Technologies, Inc. but the Committee did not otherwise adjust the peer group to ensure consistency in compensation benchmarking from year to year.
The following table outlines the key components of our executive compensation program for our NEOs for fiscal 2016:
| Component | | Role | | Determination and Link to Performance | | ||||||||||
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FIXED | Base Salary | • Provide a stable, reliable monthly income • Set at levels that comprise a low percentage of total compensation | • Reviewed periodically in light of individual performance results, market pay practices and advice of the Committee's independent compensation consultant. • Represents a small component of fixed pay for our most senior NEOs | |||||||||||||
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VARIABLE | Annual Bonuses | • Reward the achievement of strategic PMOs • Promote pay for performance since award amounts are determined following the fiscal year end based on actual results | • Target annual incentive levels are determined based on competitive market analysis. • Primarily based on corporate performance, including objective financial goals and measurable academic, student retention and operational metrics. • For certain NEOs, individual performance aligned with achievement of personalized strategic priorities. | |||||||||||||
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Long-Term Incentives | • Increase alignment with stockholder interests by providing significant stock ownership • Typically constitutes the largest portion of target total direct compensation opportunity • Reward achievement of specific financial, academic, student retention and strategic operational goals, as well as market performance • Retain executives through three or four year vesting periods | • Stock options and stock price RSAs align executive interests with those of stockholders as potential value of awards increases or decreases with stock price. • Performance-based RSAs and PSUs are earned based on financial, academic and student retention measures linked to increasing stockholder value. • Time-based RSAs are not regularly granted to our most senior NEOs but are granted to other NEOs to encourage retention. | ||||||||||||||
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Other Compensation | • Allow executive officers to participate in standard employee benefit plans • Offer opportunity for deferring income taxes on a portion of annual income • Provide supplemental long-term disability and life insurance coverage | • NEOs may participate in compensation and benefit programs on the same terms as other employees, such as health and welfare benefit plans, 401(k) plan, life insurance and executive life and disability plans. • NEOs may elect to participate in a non-qualified deferred compensation plan providing tax-efficient savings, but receive no additional Company contributions. • Premiums for supplemental disability and life insurance benefits for NEOs are paid by the Company but no costly supplemental retirement programs are offered. | ||||||||||||||
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Fiscal 2016 Compensation Decisions
Determination of Base Salaries
Base salaries for our NEOs are initially determined by negotiation at the time of hire and take into consideration the scope of their responsibilities, as well as a competitive market analysis of the compensation paid by our peer group to similarly situated executives. In considering base salary adjustments for fiscal 2016, the Committee recognized that the base salaries of Mr. Polsky, Ms. Cleveland and Mr. Zarella were below the market median and determined to increase the base salaries of these NEOs to ensure that they are offered reasonable and competitive salary levels commensurate with market data provided by Compensia. The Committee also considered additional responsibilities that were recently assigned to Mr. Zarella.
The fiscal 2016 base salaries for our NEOs are set forth in the table below:
| Name | | Base Salary for Fiscal 2015 | | Base Salary for Fiscal 2016 | | Percentage Increase/Decrease | | ||||||||
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| Nathaniel A. Davis | $700,000 | $400,000 (1) | –43% | ||||||||||||
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| Stuart J. Udell | | — | | $650,000 (2) | | — | | ||||||||
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| James J. Rhyu | $478,500 | $486,500 | +2% | ||||||||||||
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| Howard D. Polsky | | $345,000 | | $380,000 | | +10% | | ||||||||
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| Allison Cleveland | $360,000 | $396,000 | +10% | ||||||||||||
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| Joseph P. Zarella | | $345,000 | | $390,000 | | +13% | | ||||||||
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Determination of Annual Incentive Compensation
Our Executive Bonus Plan is intended to reward our executive officers based on performance relative to corporate PMOs and, for certain NEOs, individual objective PMOs that are aligned with our strategic priorities. We believe that the Executive Bonus Plan provides incentives that are necessary to retain high performing executives and reward them for achieving our short-term goals in the pursuit of our larger business objectives. It is also designed to ensure that a meaningful portion of our NEOs' cash compensation is "at risk" based upon Company and individual performance. Target award amounts for our NEOs are reviewed by the Committee and set at levels that, when combined with base salary levels, are intended to provide total target-level cash compensation that approximates the market median. Target bonus levels for our NEOs are as follows:
Name | | Target Bonus Level (% of Base Salary) | | |||||
Nathaniel A. Davis | 150% | |||||||
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| Stuart J. Udell | | 150% | | ||||
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James J. Rhyu | 80% | |||||||
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| Howard D. Polsky | | 50% | | ||||
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Allison Cleveland | 50% | |||||||
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| Joseph P. Zarella | | 50% | | ||||
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We maintain a performance-based "umbrella" bonus plan for certain of our key executives based upon objective performance measures and a pre-determined bonus pool, which is intended to qualify as "performance-based compensation" for purposes of Section 162(m) of the Internal Revenue Code. While all Executive Bonus Plan
awards continue to be determined based on objective corporate PMOs and, for certain NEOs, a rigorous assessment of individual PMOs, the umbrella bonus plan also provides that for our most senior executives (which for fiscal 2016 included Mr. Davis), awards under the Executive Bonus Plan will not exceed a pre-determined allocated percentage of our operating income for the year. For fiscal 2016, the bonus pool was set at 15% of operating income, resulting in a maximum possible bonus award to Mr. Davis of $2,025,000. The umbrella bonus plan also enables the Committee to exercise discretion below a maximum bonus level in tying compensation to actual performance as events unfold during the performance period.
The Executive Bonus Plan for our NEOs in fiscal 2016 consisted of corporate PMOs based upon the achievement of objective financial goals and measurable academic, student retention and operational metrics, and, for each NEO other than Mr. Davis and Mr. Udell, individual PMOs intended to motivate our executives to produce measurable strategic achievements. For Mr. Davis and Mr. Udell, the Committee determined that their awards under the Executive Bonus Plan for 2016 should not include qualitative individual PMOs in order to focus their efforts on improving Company performance and increasing stockholder value.
Corporate PMOs
Bonus payouts under the corporate PMOs for fiscal 2016 were based upon achievement against the performance metrics set forth in the table below. Certain PMO categories provide our NEOs the opportunity to earn above target awards in the event they exceed the pre-established performance levels, but also provide for no awards below minimum thresholds of performance. For the revenue and operating income metrics, performance between two levels would be extrapolated on a straight-line basis. In August 2016, the Committee reviewed our financial results and achievement against the corporate PMOs and such results are included in the following table.
Metric | | Performance Level | | Achievement (5) | | Actual Results (6) | | |||||||||
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Threshold | $840M |
Long-term performance drives
target enrollments resulting
The Compensation Committee of our Board of Directors, which we refer to throughout the Executive Compensation section of this Proxy Statement as the Committee, uses
The Committee also engages our independent compensation consultant to assess our pay-for-performance alignment, which includes an analysis of our NEOs' realizable pay relative to our peer group and an analysis of operational and stockholder returns relative to our peer group.
EXECUTIVE COMPENSATION PRACTICES
Below we highlight certain executive compensation practices we employ to align executive compensation with stockholder interests. Also listed below are certain compensation practices we do not employ because we believe they would not serve our stockholders' long-term interests.
What We Do
Pay for Performance. We generally tie annual pay to objective performance metrics, including our fiscal 2013 revenue and EBITDA. A significant portion of our NEO's potential compensation is not guaranteed but is linked to financial metrics and stockholder return. We ask our independent compensation consultant to evaluate the alignment of pay and performance relative to our peer group.
Use Rigorous Performance Goals. We use objective performance-based goals in our annual incentive plan that we believe are rigorous and designed to motivate executive performance. We establish customized individual PMOsexceed quarterly guidance for each of our NEOs to set clear performance tasks so a meaningful portion of their annual incentives are tied directly to their individual achievements for the year.
Target Pay Competitively. We seek to target compensation within a competitive range of the median peer group and only deliver greater compensation when warranted by actual performance.
Link Compensation to Total Shareholder Return. We believe linking executive compensation to stockholder performance is important, so restricted shares and/or stock options are awarded annually, and the value of those awards to the executives is ultimately based on share price performance.
Utilize Meaningful Vesting Conditions on Equity Awards. To the extent that time-vested equity awards are granted to our NEOs, we use relatively long three-year or four-year vesting periods under the long-term incentive plan. Equity awards granted in fiscal 2013 in the form of restricted stock to our most senior NEOs, Messrs. Packard and Davis, are subject to the attainment of financial performance conditions.
Impose a Clawback Policy. We can recover incentive compensation wrongly awarded to an executive officer where fraud or intentional misconduct led to a restatement of the Company's financial statements.
Perform Competitive Market Analysis. We review competitive market data for our executive officers prior to making annual executive compensation decisions.
Analyse Executive Compensation Risk. Our independent consultant reviews the executive compensation program to ensure that it does not encourage imprudent risk.
What We Don't Do
Grant Multi-Year or Guaranteed Bonuses or Equity Grants. We do not pay guaranteed bonuses to anyone and currently have no guaranteed commitments to grant any equity-based awards. This ensures that we are able to base all compensation awards to measurable performance factors and business results.
Provide Generous Executive Perquisites. We do not provide significant perquisites to our NEOs, such as Company aircraft, club memberships and similar items.
Offer Income Tax Gross-ups. We do not provide income tax gross-ups for personal benefits and other broad-based benefits.
Provide Excise Tax Gross-ups. We do not provide excise tax gross-ups for change-in-control benefits.
Offer Pension or Supplemental Retirement Plans. We do not provide costly retirement benefits to our NEOs that reward longevity rather than contributions to Company performance.
Reprice Options. Since our initial public offering in 2007, we have not repriced or otherwise reduced the per-share exercise price of any outstanding stock options and we have no present intention of implementing any such repricings or reductions.
EXECUTIVE COMPENSATION PROGRAM OBJECTIVES
FOCUS ON RETENTION, MOTIVATION AND VARIABLE PAY
Our executive compensation programs are designed to attract, retain and reward the management talent that we need to maintain and strengthen our position in the education business, improve academic performance at the public and private online schools we manage and to achieve our other varied business objectives.
PAY FOR PERFORMANCE
Tightly linking compensation to performance is a fundamental value underlying our NEO compensation practices. The annual incentives paid to each of our NEOs vary with performance, including our annual financial results and customized individual PMOs that are reviewed by the Committee at the beginning of each fiscal year. A significant portion of the total direct compensation delivered to our most senior NEOs (consisting of Mr. Davis and Mr. Packard) is variable, which directly ties their pay to corporate performance and their individual PMOs.
Additionally, the executives received annual long-term incentive plan awards in fiscal 2013 that will result in realizable value based on stock price appreciation and continued employment at K12. For our new NEOs hired in fiscal 2013, a one-time initial equity incentive award was granted at the time of hire to motivate and align the NEO's interests with those of our stockholders. For Mr. Davis, this initial award will, with respect to the stock option component, generate value to him only to the extent of our future stock price appreciation, and, with respect to the performance-based restricted stock award component, was more than 90% dependent upon our achieving a rigorous operating income metric for Mr. Davis' initial period of service as our Executive Chairman to ensure his immediate attention to our financial performance. For Mr. Rhyu, the initial restricted stock award will generate value to him based on our future stock price as the award vests over three years.
The Compensation Committee engages its independent compensation consultant, Towers Watson, to evaluate the relationship and alignment between executive compensation for our NEOs and our corporate performance. For fiscal 2013, Towers Watson considered the alignment between the realizable compensation of our NEOs over the last three fiscal years (which took into account the value of incentives awarded for completed performance periods and the intrinsic value of stock option and restricted share awards) relative to that of our public company peer group, and our performance over that period relative to those peer companies. Towers Watson's analysis showed that K12's total shareholder return over the period ranked in the 61st percentile of the peer group while the three-year realizable pay for our NEOs ranked in the 66th percentile. Based on these findings, Towers Watson advised our Compensation Committee of its belief that our pay and performance were generally aligned.
Peer Group Pay vs. TSR Performance Analysis3-Yr Top 5 Realizable Pay
DETERMINING EXECUTIVE COMPENSATION
The Committee uses a performance assessment framework as the basis for compensation decisions for our executives. In calculating annual incentive awards, in order to maintain a disciplined approach to incentive compensation, the Committee initially applies a pre-defined process to calculate payouts in relation to both our level of achievement against objective financial performance criteria and each NEO's measurable PMOs. However, the Committee may adjust final payout amounts to ensure that compensation decisions are fair and equitable, reflect all available information and serve our overall corporate objectives, including the retention of our NEOs, which we believe is critical to our ability to implement our strategic goals and continue to grow our business.
Towers Watson's work for the Committee in fiscal 2013 included advising on the compensation levels and elements in connection with the hiring of our new Executive Chairman and Chief Financial Officer, in additional to the annual compensation benchmarking and pay for performance assessments, as described above. For fiscal 2013, the benchmarking and pay for performance assessments included a compensation analysis completed at the startquarter of fiscal 2013 to ensure that base salaries and annual equity incentive grants for fiscal 2013 were appropriately sized realizable pay levels of similarly situated executives at our peer group companies. We also performed an assessment late in fiscal 2013 to ensure that actual pay for our NEOs was appropriately aligned with our overall performance and corporate, strategic and executive retention goals. In determining overall compensation levels, the Committee generally seeks to target total direct opportunity compensation at approximately the 50th percentile of our peer group companies for most NEOs (or above the 50th percentile when warranted due to internal pay equity or historical performance considerations), with the possibility to earn compensation above these levels when dictated by actual superior performance.2016
the U.S. GAAP financial measure of operating income is provided in Item 6 of our fiscal 2016 Annual Report on Form 10-K. EBITDA, as adjusted, further excludes the impact of the California Attorney General settlement amount (as described below), which had a net positive impact of $7.1 million for fiscal 2016.
Fiscal 2016 Executive Bonus Plan Payments
The following tables illustrate, for each NEO, the Committee's approved annual incentive award under our Executive Bonus Plan for fiscal 2016 based upon performance against the relevant corporate PMOs and, for each NEO other than Mr. Davis and Mr. Udell, performance against the executive's individual PMOs.
Mr. Davis—Target Bonus Level = 150% of Base Salary
ASSESSING COMPARATIVE MARKET DATA AND PRACTICES
Towers Watson assists the Committee by reviewing comparative market data on compensation practices and programs of publicly-traded peer group companies and published survey data. The peer group was selected based on a number of factors, including revenue, market capitalization, corporate strategy and industry. The publicly-traded companies in the fiscal 2013 peer group were:
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| PMO | | Performance Level Achieved | | Maximum Bonus Opportunity (% of Base Salary) | | % of Base Salary Earned | | Amount of Bonus (1) | | ||||||||||
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| Revenue | Outperform | 45% | 45% | $274,580 | |||||||||||||||
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| Operating Income | | Outperform | | 65% | | 65% | | $396,616 | | ||||||||||
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| EBITDA–CapEx | Outperform | 60% | 60% | $366,107 | |||||||||||||||
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| Academic | | Outperform | | 30% | | 30% | | $183,053 | | ||||||||||
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| Retention | Threshold | 50% | 25% | $152,545 | |||||||||||||||
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| Enrollment | | Below Threshold | | 10% | | 0% | | — | | ||||||||||
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| Quarterly Guidance | Met | 40% | 40% | $244,071 | |||||||||||||||
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| TOTAL: | | | | 300% | | 265% | | $1,616,972 | | ||||||||||
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Mr. Rhyu—Target Bonus Level = 80% of Base Salary
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| PMO | | Performance Level Achieved | | Maximum Bonus Opportunity (% of Base Salary) | | % of Base Salary Earned | | Amount of Bonus | | ||||||||||
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| Revenue | Outperform | 10% | 10% | $48,650 | |||||||||||||||
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| Operating Income | | Outperform | | 20% | | 20% | | $97,300 | | ||||||||||
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| Academic | Outperform | 30% | 30% | $145,950 | |||||||||||||||
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| Retention | | Threshold | | 25% | | 5% | | $24,325 | | ||||||||||
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| Enrollment | Below Threshold | 10% | 0% | — | |||||||||||||||
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| Individual | | Between Target and Outperform | | 45% | | 40% | | $194,600 | | ||||||||||
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| Individual goals and performance results: | |||||||||||||||||||
| • Improve usability of key financial reports to direct operating income: Met by achieving active walk forward reviews • Implement Phase II of Hyperion: Phase II of Hyperion implemented • Implement Phase II of new school accounting system: Phase II rolled out to 15 schools • Hire key role in finance division: Key role not hired • Achieve effective tax rate below 40%: Achieved effective tax rate of 35.7% • Deliver bottom line procurement savings of >$1.5 M: Identified and achieved savings above $1.5 M • Implement revenue capture initiative assessment and deliver >$500,000 in incremental revenue capture: $900,000 in incremental revenue capture achieved • Implement LTV calculation for MPS enrollments and drive measurable actions to improve LTV: LTV calculations in place • Conduct three non-deal related roadshows: Conducted four non-deal roadshows | |||||||||||||||||||
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| TOTAL: | | | | 140% | | 105% | | $510,825 | | ||||||||||
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Mr. Polsky—Target Bonus Level = 50% of Base Salary
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| PMO | | Performance Level Achieved | | Maximum Bonus Opportunity (% of Base Salary) | | % of Base Salary Earned | | Amount of Bonus | | ||||||||||
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| Revenue | Outperform | 6.75% | 6.75% | $25,650 | |||||||||||||||
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| Operating Income | | Outperform | | 6.75% | | 6.75% | | $25,650 | | ||||||||||
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| Academic | Outperform | 7.5% | 7.5% | $28,500 | |||||||||||||||
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| Retention | | Threshold | | 7.5% | | 2.5% | | $9,500 | | ||||||||||
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| Enrollment | Below Threshold | 5% | 0% | — | |||||||||||||||
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| Individual | | Between Target and Outperform | | 50% | | 25.18% | | $95,700 | | ||||||||||
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| Individual goals and performance results: | |||||||||||||||||||
| • Achieve favorable outcomes in multiple pending legal matters: Favorable outcomes and settlements in five major pending matters • Ensure all public company filing requirements are satisfied: All timely filed • Support corporate development activities: Created model post-M&A transaction integration process and negotiated post-transaction dispute resolutions • Improve corporate governance and school compliance programs: Updated student data privacy policies and related employee training; implemented early testing of automated teacher certification compliance system at pilot schools • Establish high performing corporate contracts function: Implemented partial improvements in the FuelEd contract review process, but otherwise not achieved • Support School Services and FuelEd businesses: Provided contract support for new managed school and for contract renewals; favorably resolved several commercial contract disputes | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| TOTAL: | | | | 83.5% | | $48.68 | | $185,000 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Ms. Cleveland—Target Bonus Level = 50% of Base Salary
| | | | | | | | | | | | | | | | | | | | |
| PMO | | Performance Level Achieved | | Maximum Bonus Opportunity (% of Base Salary) | | % of Base Salary Earned | | Amount of Bonus | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Revenue | Outperform | 6.75% | 6.75% | $26,730 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Operating Income | | Outperform | | 6.75% | | 6.75% | | $26,730 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Academic | Outperform | 7.5% | 7.5% | $29,700 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Retention | | Threshold | | 7.5% | | 2.5% | | $9,900 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Enrollment | Below Threshold | 5% | 0% | — | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Individual | | Between Target and Outperform | | 50.00% | | 26.16% | | $103,590 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Individual goals and performance results: | |||||||||||||||||||
| • Improve board of director relationships: Relationships with key contacts launched and monitored • Expand managed public school offerings: Opened career academies in Wisconsin, Utah, Colorado and South Carolina • Improve customer satisfaction: Improved net promoter score 14% for K-8, 8% for HS Parent and 11% for HS Student • Develop and implement new marketing strategies: Managed marketing issues with boards as needed • Renew expiring service agreements and support schools in charter renewals: All expiring service agreements that the Company chose to renew were renewed and all charter renewals completed | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| TOTAL: | | | | 83.5% | | 49.66% | | $196,650 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Mr. Zarella—Target Bonus Level = 50% of Base Salary
| | | | | | | | | | | | | | | | | | | | |
| PMO | | Performance Level Achieved | | Maximum Bonus Opportunity (% of Base Salary) | | % of Base Salary Earned | | Amount of Bonus | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Revenue | Outperform | 6.75% | 6.75% | $26,325 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Operating Income | | Outperform | | 6.75% | | 6.75% | | $26,325 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Academic | Outperform | 7.5% | 7.5% | $29,250 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Retention | | Threshold | | 7.5% | | 2.5% | | $9,750 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Enrollment | Below Threshold | 5% | 0% | — | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Individual | | Between Target and Outperform | | 50.00% | | 26.92% | | $105,000 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Individual goals and performance results: | |||||||||||||||||||
| • Promote and lead efficiency of the marketing organization: Successfully provided executive leadership for the marketing organization • Improve operational efficiency and business performance at a Company level: Drove improvements in receivables performance by improving billing quality, invoice timeliness and accuracy • Support key Fuel-Ed initiatives to improve the overall cost and customer experience: Drove key FuelEd initiatives to improve the expense economics, quality of support and customer experience • Drive improvements in the customer experience: Improved the customer experience by eliminating issues in the enrollment process for parents • Improve the performance and contributions of the IT leadership team: Built a new IT leadership team with new and proven talent at multiple levels within the organization | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| TOTAL: | | | | 83.5% | | 50.42% | | $196,650 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Fiscal 2016 Executive Bonus Plan for Mr. Udell
Mr. Udell commenced employment with the Company in February 2016, approximately half-way through the 2016 Executive Bonus Plan performance period. In recognition of the fact that Mr. Udell would only be able to influence performance results for the period following his commencement of employment, the Committee determined to assess Mr. Udell's 2016 bonus opportunity under the Executive Bonus Plan against a modified set of performance goals based upon performance from February 1, 2016 through the end of fiscal 2016. Certain of these goals are measured in reference to performance levels that are lower than the levels that applied to our other NEOs, including Mr. Davis, due to revised expectations with respect to our year-end performance based on actual results for the first half of the fiscal year, but which remained uncertain when adopted. Mr. Udell's relevant PMOs, performance levels, actual results of performance and payouts with respect to each metric are set forth in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Metric | | Performance Level | | Achievement | | Actual Results (1) | | Maximum Bonus Opportunity (% of Base Salary) | | % of Base Salary Earned | | Amount of Bonus (2) | | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Threshold | $334M | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | Target | $347M | $367M resulting in payout at the | 50% | 50% | $128,219 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outperform | $360M | "Outperform" level | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Threshold | | $17M | | $21.3M resulting in payout between | | | | | | | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating | | Target | | $20M | | the "Target" and "Outperform" | | 50% | | 41.5% | | $106,421 | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income | | Outperform | | $23M | | levels | | | | | | | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Threshold | $12M-$14M | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EBITDA–CapEx | Target | $14M-$17M | $12.3M resulting in payout at the | 35% | 10% | $25,644 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outperform | >$17M | "Threshold" level | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retention | | Outperform | | 300 bps | | 140 bps resulting in no payout | | 30% | | 0% | | — | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarterly Guidance | Target | Meet or exceed quarterly guidance for Q3 and Q4 of fiscal 2016 | Quarterly guidance met each quarter | 20% | 20% | $51,288 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition | | Target | | Close one acquisition to drive FuelEd growth | | Met | | 30% | | 30% | | $76,931 | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Threshold | $37M | $43.2M resulting in payout between | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FuelEd | Target | $40.6M | the "Target" and "Outperform" | 60% | 59.07% | $151,478 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | Outperform | $43.3M | levels | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL: | | | | | | | | 275% | | 210.57% | | $539,981 | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Determination of Long-Term Incentive Compensation
We believe that providing long-term incentive compensation opportunities in the form of equity awards promotes our philosophy of aligning executive pay with the long-term interests of our stockholders while building the value of our Company.
During fiscal 2016, we granted stock options to Mr. Davis, restricted stock awards and PSUs to all of our NEOs and stock price RSAs to Mr. Davis and Mr. Udell. The Committee believes that the use of various forms of long-term incentive compensation awards, each designed to promote a specific purpose, including encouraging retention, incentivizing performance and increasing stockholder value, best serves the unique needs of our Company.
LTIP—Performance Share Units
In response to concerns raised by our stockholders regarding the lack of long-term performance-based equity awards for the majority of our NEOs and to reinforce our pay for performance philosophy, in fiscal 2016 the Committee adopted and the Board approved the LTIP, pursuant to which PSUs tied to the achievement of specific performance goals will be awarded to our NEOs. The Committee believes the LTIP will incentivize and closely connect our NEOs to our long-term performance objectives.
In September 2015 the Committee approved the grant of PSUs to our NEOs in the following amounts at the target level, which award amounts took into account the fact that additional annual PSUs with overlapping performance periods were not anticipated to be granted:
| | | | | | | | |
Name | | PSUs (#) | | |||||
| | | | | | | | |
Nathaniel A. Davis | 200,000 | |||||||
| | | | | | | | |
| Stuart J. Udell | | 155,602 * | | ||||
| | | | | | | | |
James J. Rhyu | 87,000 | |||||||
| | | | | | | | |
| Howard D. Polsky | | 63,000 | | ||||
| | | | | | | | |
Allison Cleveland | 73,000 | |||||||
| | | | | | | | |
| Joseph P. Zarella | | 73,000 | | ||||
| | | | | | | | |
|
|
|
For the fiscal 2016 grants, awards will be earned based on academic performance, weighted at 70%, and student retention, weighted at 30%. Academic performance goals are measured over both a two and three year period and
the student retention goal is measured based on performance for the third year following the grant (fiscal 2018) as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Achievement | | % of Metric Earned (3) | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Metric | | Performance Level | | Year 2 | | Year 3 | | Year 2 | | Year 3 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Threshold | N/A | 16% Growth | N/A | 70% | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Retention (1) | Target | N/A | 33% Growth | N/A | 100% | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Outperform | N/A | 52% Growth | N/A | 150% | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Threshold | | 87% of schools | | 90% of schools | | 70% | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Academic (2) | | Target | | 90% of schools | | 95% of schools | | 100% | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Outperform | | 95% of schools | | 100% of schools | | 150% | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
Performance-Based Restricted Stock Awards
In early fiscal 2016, the Committee approved a long term incentive award to Mr. Davis based on his role as our Chief Executive Officer with a total target value of $3 million, 50% of which was granted in the form of performance-based restricted stock with a one year cash flow goal measured by EBITDA minus CapEx. The Committee continues to grant performance-based RSAs to our most senior NEO because it believes this component of our executive compensation program provides strong incentive opportunities in order to maintain realistically attainable levels of short-term profitability.
The number of shares in Mr. Davis's award was determined based upon the fair market value of our common stock on the date of grant, which resulted in a target award of 111,690 shares. The restricted shares are earned based upon the attainment of certain EBITDA minus CapEx performance levels for fiscal 2016 as set forth in the table below, with the earned shares subject to time-based vesting in equal annual installments over a period of three years.
| | | | | | | | | | | | |
Performance Level | | Metric: EBITDA–CAPEX | | % of Award Earned | | |||||||
| | | | | | | | | | | | |
Threshold | $7M | 80% of award earned | ||||||||||
| | | | | | | | | | | | |
| Target | | $11-15M | | 100% of award earned | | ||||||
| | | | | | | | | | | | |
Outperform | $18M | 133% of award earned | ||||||||||
| | | | | | | | | | | | |
|
|
|
Financial achievement falling between the specified levels would result in a proportionate adjustment to the shares earned. In evaluating actual results for 2016, the Committee considered the effect of costs attributable to the settlement with the California Attorney General's office and determined that actual performance with respect to this award should reflect adjustments with respect to the California Attorney General settlement amount.
In early fiscal 2017, the Committee determined that our fiscal 2016 EBITDA minus CapEx, as adjusted for the California Attorney General settlement amount, was $18 million, which resulted in Mr. Davis earning an award of 148,548 shares at the "Outperform" level, one-third of which vested in August 2016, on the date of determination of achievement, and the remainder of which will vest in annual installments in 2017 and 2018.
Stock Price Restricted Stock Awards
As part of the restructuring of our long-term incentive compensation program in response to stockholder concerns regarding our executive pay practices, specifically the absence of a relative total shareholder return metric, in fiscal 2016 the Committee recommended and the Board approved the grant to Mr. Davis and Mr. Udell of restricted stock awards that vest based upon the Company achieving stock price appreciation thresholds for 30 consecutive days over a two or three year period. Since the value of the award is determined solely based upon an increase in value of our stock price, the stock price RSAs directly link executive compensation and stockholder value. Mr. Davis's and Mr. Udell's stock price RSAs represent the opportunity to earn restricted stock having an aggregate fair market value of up to $4.5 million for Mr. Davis and $5.5 million for Mr. Udell based upon the Company achieving certain stock price appreciation thresholds over 30 consecutive calendar days over a two and three year performance period for Mr. Davis and Mr. Udell, respectively, as set forth in the table below.
| | | | | | | | | | | | | | | | | | | | |
|
| | Value of Award Earned | | Number of Shares Awarded | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Stock Price | | Davis | | Udell | | Davis | | Udell | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| ³ $13 per share | $500,000 | $1,000,000 | 38,462 | 76,923 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| ³ $16 per share | | $1,500,000 | | $1,500,000 | | 93,750 | | 93,750 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| ³ $19 per share | $2,500,000 | $3,000,000 | 131,579 | 157,895 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
The table below illustrates the stock price growth that would be required in order for Mr. Davis and Mr. Udell to realize value from the stock price RSA awards.
| | | | | | | | | | | | | | | | | | | | |
|
| | Closing Stock Price at Time Award | | Appreciation to Achieve Threshold | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Executive | | Contracted | | $13 | | $16 | | $19 | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Mr. Davis | $7.79 | 67% | 105% | 144% | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Mr. Udell | | $7.87 | | 65% | | 103% | | 141% | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Restricted shares granted upon the achievement of a stock price appreciation threshold shall vest as to 50% of the shares immediately upon the date the applicable threshold is achieved and as to 50% of the shares in semi-annual installments until February 8, 2018 for Mr. Davis and February 8, 2019 for Mr. Udell.
Option Awards
Pursuant to the terms of Mr. Davis's prior employment agreement, he was entitled to receive an annual award of stock options in an amount competitive with the market for similarly situated executives. Accordingly, 50% of Mr. Davis's fiscal 2016 long-term incentive award was granted in the form of stock options. The number of shares in Mr. Davis's stock option grant was determined using the "Black-Scholes" value of the option. The option vests over a period of four years such that 25% of the shares subject to the option vest on the first anniversary of the date of grant and the remaining shares vest in equal quarterly installments thereafter, subject to his continued employment.
Time-Based Restricted Stock Awards
In August 2015, we granted time-based restricted stock awards to each of our NEOs, other than Mr. Davis and Mr. Udell, in the following amounts:
| | | | | | | | |
Name | | PSUs (#) | | |||||
| | | | | | | | |
James J. Rhyu | 38,000 | |||||||
| | | | | | | | |
| Howard D. Polsky | | 32,000 | | ||||
| | | | | | | | |
Allison Cleveland | 35,000 | |||||||
| | | | | | | | |
| Joseph P. Zarella | | 31,000 | | ||||
| | | | | | | | |
|
|
|
These awards vest pursuant to our standard vesting schedule which is semi-annually over a three-year period, with 20% of the shares subject to the awards vesting in the first year and 40% vesting in each of the next two years following the grant date. The Committee determined that the size of each restricted stock award was appropriate to encourage retention among our NEOs and to ensure the stability of our management team.
Deferred Compensation Plan
We maintain a non-qualified deferred compensation plan, or the Deferred Compensation Plan, for members of our management team, including our NEOs. Under the Deferred Compensation Plan, our NEOs are eligible to elect to defer the receipt of up to 50% of their annual salary and up to 100% of any annual incentive bonus until retirement. Earnings are credited on deferred amounts based upon a variety of investment options that may be elected by each participant. We do not make any contributions to the Deferred Compensation Plan. Certain information with respect to amounts deferred by our NEOs under this plan is set forth below in the "Fiscal 2016 Non-Qualified Deferred Compensation Table."
Defined Contribution Plan
We maintain a Section 401(k) Savings/Retirement Plan, or the 401(k) Plan, in which certain of our employees, including our NEOs, are eligible to participate. All employees, including our NEOs, are automatically enrolled in the 401(k) Plan at a 3% deferral rate with the ability to opt-out. The 401(k) Plan allows participants to defer a portion of their annual compensation, subject to certain limitations imposed by the Internal Revenue Code. We currently provide matching contributions equal to $0.25 for each dollar of a participant's contributions on the first 4% of eligible salary that they contribute each pay period, subject to certain statutory limits.
Employee Benefits and Perquisites
We provide our NEOs with certain personal benefits and perquisites, which we do not consider to be a significant component of executive compensation but recognize to be an important factor in attracting and retaining talented executives. Our NEOs participate in the same medical, dental, vision, disability and life insurance plans as our employees generally. We also pay for supplemental long-term disability and life insurance premiums for our executive officers and provide our executive officers with the opportunity to receive annual Company-paid executive physical examinations. We provide these supplemental benefits to our executive officers due to the relatively low cost of such benefits and the value they provide in assisting us in attracting and retaining talented executives. We reimburse certain executives for their relocation expenses from time to time and for temporary housing expenses they may incur in connection with their provision of services. We provide such reimbursements to our executives because such expenses are typically directly associated with and would not have been incurred but for their commencement or continued provision of services.
None of our executive officers receive tax gross-ups or other tax payments in connection with our provision of any perquisites or personal benefits. The value of personal benefits and perquisites we provided to each of our NEOs in fiscal 2016 is set forth below in our "Summary Compensation Table for Fiscal 2016."
Compensation Governance, Process And Incentive Decisions
Role of Compensation Committee
The Committee is responsible for overseeing and implementing our executive compensation programs, as specified in its charter. The Committee's role includes:
In performing its responsibilities with respect to the compensation of our executive officers, the Committee uses information from a number of sources. The information utilized by the Committee includes advice from its independent compensation consultant, market data regarding the compensation practices of competitors, outside counsel specializing in executive compensation, tally sheets showing prior compensation awards, the recommendations of our CEO, with input from our Executive Chairman, and an assessment of the outstanding equity holdings of the NEOs.
Role of Management
Our management, under the leadership of our Executive Chairman and our CEO, plays an important role in establishing and maintaining our executive compensation programs. Management's role includes recommending plans and programs to the Committee, implementing the Committee's decisions regarding the plans and programs and assisting and administering plans in support of the Committee. With feedback from our Executive Chairman, our CEO provides information on the individual performance of the other NEOs and makes annual recommendations to the Committee on compensation levels for our executive officers, including the other NEOs. Our Executive Chairman and our CEO are not present when the Committee discusses and determines matters regarding their own compensation.
Role of Committee's Independent Compensation Consultant
The Committee's charter gives it the authority to retain and approve fees and other terms of engagement for compensation consultants and other advisors to assist it in performing its duties. In fiscal 2016, the Committee continued to retain Compensia as its independent compensation consultant. Compensia reports directly to the Committee, which will annually review its performance, independence and fees.
The Committee receives a report from Compensia on an annual basis reviewing its independence in light of SEC regulations and NYSE listing standards. In fiscal 2016 the Committee concluded that the engagement of Compensia did not raise any conflicts of interest.
Other Compensation Policies and Practices
Stock Ownership Policy
We maintain a stock ownership policy that is designed to ensure that our executive officers hold a significant equity stake in our Company to align their interests with those of our stockholders. The policy initially applied to only certain members of our executive leadership team and was subsequently expanded in fiscal 2015 and again in fiscal 2016 such that it now applies to all of our executive officers. The policy requires each of our Executive Chairman and Chief Executive Officer to maintain ownership of our common stock having a value equal to three times their respective base salaries, our Chief Financial Officer to maintain ownership of our common stock equal to two times his base salary and each of our other executive officers to maintain common stock ownership equal to one times their respective base salaries. The NEOs have five years from the date the policy became applicable to them to accumulate the specified level of ownership. As of October 11, 2016, all of our NEOs are in compliance with this policy.
Compensation Clawback Policy
Our Board of Directors has adopted a clawback policy pursuant to which the Company may recover from current or former executive officers the amount of previously paid incentive compensation (including both cash bonuses and equity awards) that it determines to be appropriate if a material error or inaccuracy resulted in whole or in part from the fraud or intentional misconduct of an executive that leads to a financial restatement. This policy is intended to provide enhanced safeguards against certain types of employee misconduct, and allows for recovery of significant compensation paid to an executive.
Insider Trading Policy
We maintain a Policy Statement for the Prevention of Insider Trading that applies to all securities issued by the Company, including common stock, options to purchase shares of common stock, preferred stock, and any other type of security that the Company may issue or that relates to the Company's securities. Company employees, directors and consultants are prohibited from engaging in hedging transactions, including purchasing Company stock on margin or engaging in transactions in puts, calls or other derivative securities designed to hedge or offset any decrease in the market value of the Company's equity securities. Additionally, our 2007 Plan prohibits the pledging of awards granted under the plan.
Tax Deductibility of Annual Compensation
Section 162(m) of the Internal Revenue Code limits tax deductions for certain annual compensation in excess of $1 million paid to certain individuals named in the summary compensation tables of public company proxy statements. The Committee considers tax deductibility when structuring compensation programs and presently expects to pursue compensation programs that are intended to be tax deductible where practicable to the extent consistent with our compensation goals and philosophies. However, if circumstances warrant, the Committee retains the discretion to grant incentive awards to NEOs that are not fully deductible as a result of Section 162(m), as the Committee must balance the effectiveness and overall goals of our executive compensation programs with the materiality of reduced tax deductions. For example, in determining to adjust actual results for the EBITDA minus CapEx performance metric to exclude the impact of the California Attorney General settlement for purposes of determining the number of shares Mr. Davis would earn under his performance-based restricted stock award for fiscal 2016, the Committee recognized that the additional shares Mr. Davis earned as a result of such adjustment would not be fully deductible for purposes of Section 162(m). In addition, even where compensation programs are intended to qualify as performance-based compensation for purposes of Section 162(m), there can be no guarantee that the requirements of Section 162(m) will be satisfied and that all such compensation will be deductible.
Accounting for Stock-Based Compensation
ASC Topic 718, Compensation—Stock Compensation, requires us to recognize an expense for the fair value of equity-based compensation awards. Grants of equity-based awards under our equity incentive award plans are accounted for under ASC Topic 718. The Committee considers the accounting implications of significant
compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs. As accounting standards change, the Committee may revise certain programs to appropriately align accounting expenses of our equity awards with our overall executive compensation philosophy and objectives.
Equity Award Grant Practices
We do not have any program, plan or practice to time equity awards to our employees in coordination with the release of material non-public information. We generally grant awards at the time employment commences and annually in connection with our annual compensation review process. We do not time the grant of equity awards based on our stock price. If we are in possession of material non-public information, either favorable or unfavorable, when equity awards are made, the Committee will not take the information into consideration in determining award amounts. Our practice is to determine the stock price for annual NEO equity awards on the day that incentive awards are granted.
Severance and Change in Control Arrangements
We consider severance to be an integral part of the overall compensation package for our executives. We provide severance to attract and retain individuals with superior ability and managerial talent, provide our executives with appropriate protections due to their vulnerability to terminations of employment due to a change in control, merger or acquisition and encourage our executives to focus their attention on their work duties and responsibilities in all situations.
Change in Control. The NEOs are generally not entitled to receive cash payments or accelerated vesting of equity awards solely as a result of a change in control of the Company. The only outstanding equity awards that contain a single trigger vesting acceleration provision are stock option awards granted prior to November 20, 2013 to our Executive Chairman, all of which were out of the money as of June 30, 2016 such that no value would be realized with respect to such awards upon a change in control. We have adopted a go-forward policy pursuant to which all restricted stock awards and stock option grants will be subject to "double trigger" acceleration upon a change in control, such that these awards will vest in full only if the NEO is terminated without cause in connection with the change in control. For this purpose, a termination without cause includes a "constructive termination," which generally involves any material diminution in the NEO's base salary, bonus potential, job title or responsibilities, as well as a relocation of the NEO's principal place of business outside of a 40-mile radius.
In fiscal 2016, the Committee approved limited change in control benefits for our NEOs, other than Mr. Davis and Mr. Udell, whose change in control rights are set forth in their respective employment contracts, in order to ensure that their interests are aligned with those of our stockholders in connection with any potential change in control transactions in the future. We entered into change in control agreements with these NEOs pursuant to which, in the event the NEO is terminated without "cause" or resigns for "good reason" within 24 months following a change in control, the executive would be entitled to receive 1.5 times the severance amount available under the executive's employment agreement with the Company, or under the Company's standard severance practices if the NEO does not have an employment agreement.
For purposes of the change in control agreements, "good reason" is generally defined in the same manner as "constructive termination", except that (i) it also includes the Company's failure to obtain an agreement from a successor to assume the change in control agreement and (ii) the relocation provision applies to a 50 mile radius.
Severance. With regard to severance payments not made in connection with a change in control of the Company, and if not otherwise provided for in the applicable employment agreement, the Company's severance guidelines provide that for terminations without cause and, beginning in fiscal 2016, resignations for good reason, the NEOs will be eligible to receive, contingent upon signing a release of claims, (i) accelerated vesting of outstanding and unvested stock options that otherwise would have vested in the one year period following the date of termination (all other options to be forfeited) and (ii) accelerated vesting of outstanding and unvested restricted stock awards, subject entirely to the Committee's discretion, such that executives are not entitled to receive this benefit unless the Committee determines to provide it at the time of termination. For restricted stock awards granted prior to August 2015, accelerated vesting upon a termination without cause or a constructive termination was provided under the terms of the applicable stock award agreements and these provisions were removed for all subsequent grants as
part of our executive compensation reforms. For Mr. Davis and Mr. Udell, the terms governing the accelerated vesting of equity awards are contained in their employment agreements. These agreements provide that in the event of termination without cause or resignation for good reason, unvested equity awards would be accelerated by two years for Mr. Davis and one year for Mr. Udell, except that the vesting of all performance-based awards remains subject to the Company's attainment of the applicable performance goals.
We believe that providing the NEOs with the above-described severance payments and benefits upon certain terminations of employment are key retention tools that assist us with remaining competitive with the companies in our peer group, provide our executive officers with incentives to focus on the best interests of our stockholders in the context of a potential change in control, and appropriately protect our executive officers in the event of an involuntary termination of employment without creating a windfall due solely to a change in control.
Risk Assessment in Compensation Programs
Consistent with SEC disclosure requirements, we periodically evaluate the risk profile associated with the Company's executive and other compensation programs. In fiscal 2016, the Committee engaged Compensia to review the existing programs and analyze whether they create risks that are reasonably likely to have a material adverse effect on the Company. Among other factors, this analysis considered the program structure, design characteristics and performance-based measures associated with our executive compensation programs and concluded that our compensation programs contain a number of safeguards that are expected to minimize excessive risk taking, including a reasonable mix of cash and equity compensation opportunities, a compensation claw back policy, the use of multiple measures in our annual incentive plan, balanced bonus and equity variable pay structures, multi-year vesting of long-term incentive grants, succession plan for key executives and a stock ownership policy for our NEOs.
Based on the foregoing, we believe that our compensation policies and practices do not create inappropriate or unintended significant risk to the Company as a whole. We also believe that our incentive compensation arrangements provide incentives that do not encourage risk-taking beyond the Company's ability to effectively identify and manage significant risks, are compatible with effective internal controls and the risk management practices of our Company, and are supported by the oversight and administration of the Committee with regard to our executive compensation programs.
Summary Compensation Table for Fiscal 2016
The following table shows the compensation we paid to our NEOs for services rendered during fiscal 2016, 2015 and 2014.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fiscal Year | | Base Salary | | Bonus (1) | | Stock Awards (2) | | Option Awards (2) | | Non-equity Incentive Plan Compensation (3) | | All Other Compensation (4) | | Total | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nathaniel A. Davis, | 2016 | $610,178 | — | $3,160,796 | $1,500,001 | $1,616,972 | $17,885 | $6,905,832 | ||||||||||||||||||||||||||||
Executive Chairman | 2015 | 700,000 | — | 1,702,755 | 1,500,899 | 1,407,280 | 14,512 | 5,325,446 | ||||||||||||||||||||||||||||
2014 | 577,504 | — | 1,500,000 | 1,500,000 | 663,125 | 14,113 | 4,254,742 | |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stuart J. Udell, | | 2016 | | 256,438 | | 200,000 | | 3,475,390 | | — | | 539,981 | | 68,889 | | 4,540,698 | | ||||||||||||||||||
| Chief Executive Officer (5) | | | | | | | | | | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
James J. Rhyu, | 2016 | 486,500 | — | 533,140 | — | 510,825 | 9,719 | 1,540,184 | ||||||||||||||||||||||||||||
Executive Vice | 2015 | 478,500 | — | 2,542,050 | — | 584,727 | 8,877 | 3,614,154 | ||||||||||||||||||||||||||||
President and Chief Financial Officer | 2014 | 460,000 | — | — | — | 322,000 | 42,322 | 824,322 | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Howard D. Polsky | | 2016 | | 380,000 | | — | | 448,960 | | — | | 185,000 | | 20,480 | | 1,034,440 | | ||||||||||||||||||
| Executive Vice | | 2015 | | 345,000 | | — | | 414,260 | | — | | 155,699 | | 14,961 | | 929,920 | | ||||||||||||||||||
| President, General Counsel and Secretary | | 2014 | | 315,000 | | — | | 629,000 | | — | | 153,125 | | 13,109 | | 1,110,234 | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allison Cleveland | 2016 | 396,000 | — | 491,050 | — | 196,650 | 7,380 | 1,091,080 | ||||||||||||||||||||||||||||
Executive Vice | 2015 | 360,000 | — | 376,600 | — | 160,668 | 6,754 | 904,022 | ||||||||||||||||||||||||||||
President, School Management and Services | 2014 | 311,667 | — | 377,000 | — | 160,625 | 5,659 | 854,951 | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Joseph P. Zarella | | 2016 | | 390,000 | | — | | 434,930 | | — | | 196,650 | | 19,642 | | 1,041,222 | | ||||||||||||||||||
| Executive Vice President, Business Operations | | 2015 | | 245,702 | | 75,000 | | 306,250 | | 325,200 | | 110,055 | | 4,166 | | 1,066,373 | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Grants of Plan-Based Awards During Fiscal 2016
The following table provides information regarding grants of plan-based awards to our NEOs during fiscal 2016. The awards described in the following table were granted under our Executive Bonus Plan, 2007 Plan and LTIP.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Grant Date | | Estimated Possible Payouts under Non-equity Incentive Plan Awards (1) | | Estimated Possible Payouts under Equity Incentive | | Estimated Possible Payouts under Equity Incentive | | Estimated Possible Payouts under Equity Incentive | | All Other Stock Awards: Number of Shares of Stock | | All Other Option Awards: Number of Securities Underlying | | Exercise Price of Option Awards ($/Sh) | | Grant Date Fair Value of Option and Stock Awards ($) | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Target ($) | | Maximum ($) | | Plan Awards: Threshold (#) | | Plan Awards: Target (#) | | Plan Awards: Maximum (#) | | (#) | | Options (#) | | | | | | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nathaniel A. Davis | — | 915,267 | 1,830,534 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Executive Chairman | 2/8/2016 (2) | — | — | — | 38,462 | — | — | — | — | 257,695 | ||||||||||||||||||||||||||||||||||
2/8/2016 (3) | — | — | — | 93,750 | — | — | — | — | 474,375 | |||||||||||||||||||||||||||||||||||
2/8/2016 (4) | — | — | — | 131,579 | — | — | — | — | 502,632 | |||||||||||||||||||||||||||||||||||
9/21/2015 (5) | — | — | 140,000 | 200,000 | 300,000 | — | — | — | — | |||||||||||||||||||||||||||||||||||
9/10/2015 (6) | — | — | 89,352 | 111,690 | 148,548 | — | — | — | 1,926,094 | |||||||||||||||||||||||||||||||||||
9/10/2015 | — | — | — | — | — | — | 243,112 | 13.43 | 1,500,001 | |||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stuart J. Udell | | — | | 384,657 | | 705,205 | | — | | — | | — | | — | | — | | — | | — | | ||||||||||||||||||||||
| Chief Executive Officer | | 2/8/2016 (2) | | — | | — | | — | | 76,923 | | — | | — | | — | | — | | 578,461 | | ||||||||||||||||||||||
| | | 2/8/2016 (3) | | — | | — | | — | | 93,750 | | — | | — | | — | | — | | 582,188 | | ||||||||||||||||||||||
| | | 2/8/2016 (4) | | — | | — | | — | | 157,895 | | — | | — | | — | | — | | 814,738 | | ||||||||||||||||||||||
| | | 2/8/2016 (5) | | — | | — | | 108,921 | | 155,602 | | 233,403 | | — | | — | | — | | — | | ||||||||||||||||||||||
| | | 2/8/2016 (7) | | — | | — | | — | | — | | — | | 155,602 | | — | | — | | 1,500,003 | | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
James J. Rhyu | — | 389,200 | 681,100 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Executive Vice President | 9/21/2015 (5) | — | — | 60,900 | 87,000 | 130,500 | — | — | — | |||||||||||||||||||||||||||||||||||
and Chief Financial Officer | 8/6/2015 (8) | — | — | — | — | — | 38,000 | — | — | 533,140 | ||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Howard D. Polsky | | — | | 190,000 | | 317,680 | | — | | — | | — | | — | | — | | — | | — | | ||||||||||||||||||||||
| Executive Vice President, | | 9/21/2015 (5) | | — | | — | | 44,100 | | 63,000 | | 94,500 | | — | | — | | — | | — | | ||||||||||||||||||||||
| General Counsel and Secretary | | 8/6/2015 (8) | | — | | — | | — | | — | | — | | 32,000 | | — | | — | | 448,960 | | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allison Cleveland | — | 198,000 | 331,056 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Executive Vice President, | 9/21/2015 (5) | — | — | 51,100 | 73,000 | 109,500 | — | — | — | — | ||||||||||||||||||||||||||||||||||
School Management and Services | 8/6/2015 (8) | — | — | — | — | — | 35,000 | — | — | 491,050 | ||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Joseph P. Zarella | | — | | 195,000 | | 326,040 | | — | | — | | — | | — | | — | | — | | — | | ||||||||||||||||||||||
| Executive Vice President, | | 9/21/2015 (5) | | — | | — | | 51,100 | | 73,000 | | 109,500 | | — | | — | | — | | — | | ||||||||||||||||||||||
| Business Operations | | 8/6/2015 (8) | | — | | — | | — | | — | | — | | 31,000 | | — | | — | | 434,930 | | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding Equity Awards at End of Fiscal 2016
The following table provides information regarding outstanding equity awards held by our NEOs as of June 30, 2016. The section titled "Determination of Long-Term Incentive Compensation" in the Compensation Discussion and Analysis above provides additional information regarding the outstanding equity awards set forth in this table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards | | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Number of Securities Underlying Unexercised Options Exercisable (#) | | Number of Securities Underlying Unexercised Options Unexercisable (#) | | Option Exercise Price ($) | | Option Expiration Date | | Equity Incentive Plan Awards: Amount of Unearned Shares, Units or Other Rights That Have Not Vested (#) | | Equity Incentive Plan Awards: Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | | Number of Shares or Units of Stock That Have Not Vested (#) | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nathaniel A. Davis | 420,000 | — | 21.26 | 01/07/21 | — | — | — | — | ||||||||||||||||||||||||||||
81,368 | 104,617 (1) | 18.17 | 09/04/22 | — | — | — | — | |||||||||||||||||||||||||||||
67,179 | 30,541 (1) | 33.92 | 09/19/21 | — | — | — | — | |||||||||||||||||||||||||||||
2,500 | — | 17.46 | 07/13/17 | — | — | — | — | |||||||||||||||||||||||||||||
— | 243,112 (1) | 13.43 | 09/10/23 | — | — | — | — | |||||||||||||||||||||||||||||
— | — | — | — | 140,000 (2) | 1,748,600 | — | — | |||||||||||||||||||||||||||||
— | — | — | — | 263,791 (3) | 3,294,750 | — | — | |||||||||||||||||||||||||||||
— | — | — | — | — | — | 228,221 (4) | 2,850,484 | |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stuart J. Udell | | — | | — | | — | | — | | 108,921 (2) | | 1,360,428 | | — | | — | | ||||||||||||||||||
| | | — | | — | | — | | — | | 328,568 (5) | | 4,103,814 | | — | | — | | ||||||||||||||||||
| | | — | | — | | — | | — | | — | | — | | 155,602 (6) | | 1,943,469 | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
James J. Rhyu | — | — | — | — | 60,900 (2) | 760,641 | — | — | ||||||||||||||||||||||||||||
— | — | — | — | — | — | 131,200 (7) | 1,638,688 | |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Howard D. Polsky | | 14,000 | | — | | 23.45 | | 08/21/16 | | — | | — | | — | | — | | ||||||||||||||||||
| | | — | | — | | — | | — | | 44,100 (2) | | 550,809 | | — | | — | | ||||||||||||||||||
| | | — | | — | | — | | — | | | | | | 46,000 (8) | | 574,540 | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allison Cleveland | 5,600 | — | 17.46 | 07/13/17 | — | — | — | — | ||||||||||||||||||||||||||||
3,000 | — | 23.45 | 08/21/16 | — | — | — | — | |||||||||||||||||||||||||||||
— | — | — | — | 51,100 (2) | 638,239 | — | — | |||||||||||||||||||||||||||||
— | — | — | — | — | — | 45,900 (9) | 573,291 | |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Joseph P. Zarella | | 22,500 | | 37,500 (10) | | 12.25 | | 11/03/22 | | | | | | — | | — | | ||||||||||||||||||
| | | — | | — | | — | | — | | 51,100 (2) | | 638,239 | | | | | | ||||||||||||||||||
| | | | | | | | | | | | | | | 42,900 (11) | | 535,821 | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Option Exercises and Stock Vested During Fiscal 2016
The following Option Exercises and Stock Vested table provides additional information about the value realized by the NEOs as a result of the vesting of restricted stock awards during the year ended June 30, 2016. The NEOs did not exercise any stock option awards during fiscal 2016.
| | | | | | | | | | | | |
|
| | Stock Awards | | ||||||||
| | | | | | | | | | | | |
| Name | | Number of Shares Acquired on Vesting (#) | | Value Realized on Vesting (1) ($) | | ||||||
| | | | | | | | | | | | |
| Nathaniel A. Davis | 120,716 | 1,482,664 | |||||||||
| | | | | | | | | | | | |
| Stuart J. Udell | | — | | — | | ||||||
| | | | | | | | | | | | |
| James J. Rhyu | 76,000 | 797,972 | |||||||||
| | | | | | | | | | | | |
| Howard D. Polsky | | 20,600 | | 238,168 | | ||||||
| | | | | | | | | | | | |
| Allison Cleveland | 17,960 | 200,022 | |||||||||
| | | | | | | | | | | | |
| Joseph P. Zarella | | 10,600 | | 117,760 | | ||||||
| | | | | | | | | | | | |
Fiscal 2016 Non-Qualified Deferred Compensation
The following table sets forth certain information with respect to amounts deferred by the NEOs during the year ended June 30, 2016, under our Deferred Compensation Plan, which is discussed in more detail above.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Executive Contributions in Last Fiscal Year ($) | | Company Contributions in Last Fiscal Year ($) | | Aggregate Earnings/(Losses) in Last Fiscal Year ($) | | Aggregate Withdrawals/ Distributions ($) | | Aggregate Balance at Last FYE ($) | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Nathaniel A. Davis | — | — | — | — | — | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Stuart J. Udell | | — | | — | | — | | — | | — | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| James J. Rhyu | 48,650 | — | (1,429) | — | 142,911 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Howard D. Polsky | | — | | — | | — | | — | | — | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Allison Cleveland | — | — | — | — | — | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Joseph P. Zarella | | 117,000 | | — | | (2,665) | | — | | 230,485 | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Potential Payments upon Termination or Change in Control
We have entered into employment agreements with each of Mr. Davis, Mr. Udell, Mr. Rhyu and Mr. Polsky that provide for severance payments and benefits upon certain terminations of employment. Our NEOs are also entitled to certain payments and benefits upon a change in control of the Company. The terms and conditions of such payments and benefits, and the circumstances in which they will be paid or provided to our NEOs, are described in more detail below.
Employment Agreements
Summary of Employment Agreement with Mr. Davis
In connection with the restructuring of our executive leadership team, on January 27, 2016, we entered into a second amended and restated employment agreement with Mr. Davis, pursuant to which Mr. Davis will continue employment as our Executive Chairman. The employment agreement has an initial term of two years and automatically renews for successive one year periods unless notice of non-renewal is delivered by either party at least 60 days prior to the expiration of the applicable term.
Under the terms of the employment agreement, Mr. Davis is entitled to receive an annual base salary of $400,000 and is eligible for annual performance-based bonuses with a target award amount equal to 150% of his base salary and maximum award opportunity of 300% of his base salary. Mr. Davis is also entitled to annual awards under the Company's equity incentive awards plans and programs as in effect from time to time with a target award level of $2,000,000 beginning in fiscal 2017, subject to Committee and board approval.
If we terminate Mr. Davis's employment without cause or he resigns for good reason, Mr. Davis will be entitled to receive (i) a lump sum cash payment equal to three times his base salary, (ii) a pro-rated portion of the annual bonus he would have received for the year of termination, based upon actual performance for such year and generally paid at the same time annual bonuses are paid to the Company's executives, and (iii) one year of continued health, medical, dental and vision benefits (or a payment in lieu thereof). Mr. Davis would also be entitled to accelerated vesting of his outstanding equity awards (including stock price RSAs to the extent the applicable price threshold is attained within 30 days after termination) to the extent such awards would have vested during the 24 month period following his termination of employment; provided that performance-based equity awards will only be payable subject to the attainment of the applicable performance measures. If Mr. Davis's termination without cause or resignation for good reason occurs within 24 months following a change in control, Mr. Davis will be entitled to receive the severance payments and benefits described above, except that, all of Mr. Davis's outstanding equity awards would become 100% vested and any performance-based equity awards will remain subject to the attainment of applicable performance measures as such measures apply in connection with the change in control.
If we elect not to renew the employment agreement, no severance payments will be made; however, if, in such event, Mr. Davis is asked to leave the Board of Directors, Mr. Davis will be entitled to accelerated vesting of his outstanding option awards, and an extended option exercise period of one year. Any restricted stock that has been awarded will not accelerate beyond the quarter in which the resignation occurs.
In the event Mr. Davis's employment is terminated due to death or disability, Mr. Davis (or his estate) will receive (i) three months of continued base salary payments, (ii) a pro-rated performance bonus for the year of termination, and (iii) one year of continued health, medical, dental and vision benefits (or a payment in lieu thereof). Mr. Davis would also be entitled to accelerated vesting of his outstanding equity awards to the extent such awards would have vested during the 12 month period following his termination of employment; provided that performance-based equity awards will only be payable subject to the attainment of the applicable performance measures.
Mr. Davis's receipt of any severance payments or benefits is generally contingent upon his entering into a customary separation agreement with the Company. The employment agreement also contains a three year confidentiality covenant and additional restrictive covenants pursuant to which Mr. Davis has agreed not to compete with us or solicit our customers or employees for 12 months following termination. If Mr. Davis is terminated without cause or resigns for good reason, in either case, within 24 months following a change in control and the Company or the successor entity elects to continue Mr. Davis's compliance with the non-compete provision, then Mr. Davis will be entitled to an additional payment equal to one times his then-current base salary.
Summary of Employment Agreement with Mr. Udell
We entered into an employment agreement with Mr. Udell, effective February 8, 2016, pursuant to which Mr. Udell serves as Chief Executive Officer. Mr. Udell's employment agreement has an initial term of three years and automatically renews for successive one year periods unless notice of non-renewal is delivered by either party at least 60 days prior to the expiration of the applicable term.
Under the terms of the employment agreement, Mr. Udell is entitled to receive an annual base salary of $650,000 and is eligible for annual performance-based bonuses with a target award amount equal to 150% of his base salary and maximum award opportunity of 300% of his base salary. Mr. Udell is also entitled to annual awards under the Company's equity incentive awards plans and programs as in effect from time to time with a target award level of $2,000,000, subject to Committee and board approval.
If we terminate Mr. Udell's employment without cause (which includes the Company's non-renewal of the term of the agreement) or he resigns for good reason, Mr. Udell will be entitled to receive (i) a lump sum cash payment equal to three times his base salary, (ii) a pro-rated portion of the annual bonus he would have received for the year of termination, based upon actual performance for such year and paid at the same time annual bonuses are generally paid to the Company's senior executives, (iii) his prior year's earned but unpaid bonus, and (iv) if he elects to continue participating in the Company's healthcare plans pursuant to COBRA, payment of his COBRA premiums for a period of up to 18 months. Mr. Udell would also be entitled to accelerated vesting of his outstanding equity awards (including stock price RSAs to the extent the applicable price threshold is attained within 30 days after termination) to the extent such awards would have vested during the 12 month period following his termination of employment; provided that, performance-based equity awards will only be payable subject to the attainment of the applicable performance measures. If Mr. Udell's termination without cause or resignation for good reason occurs within 24 months following a change in control, Mr. Udell will be entitled to receive those severance payments and benefits described above, except that all of Mr. Udell's outstanding equity awards would become 100% vested and any performance-based equity awards will remain subject to the attainment of applicable performance measures as such measures apply in connection with the change in control.
Mr. Udell's receipt of any severance payments or benefits is generally contingent upon his entering into a customary separation agreement with the Company. The employment agreement also contains a non-disparagement covenant pursuant to which Mr. Udell and the Company have agreed to refrain from disparaging the other and additional restrictive covenants pursuant to which Mr. Udell has agreed not to compete with us or solicit our customers or employees for 12 months following his termination.
Summary of Letter Agreement with Mr. Rhyu
We have entered into a letter agreement with Mr. Rhyu pursuant to which, in the event he is terminated without cause or resigns for good reason, Mr. Rhyu is entitled to 12 months of base salary continuation and any earned but unpaid bonus for the fiscal year immediately preceding the year of termination.
The agreement also provides that Mr. Rhyu is subject to the terms of our Confidentiality, Proprietary Rights and Non-Solicitation Agreement which prohibits the solicitation of employees during the one year period following termination of employment.
Summary of Employment Agreement with Mr. Polsky
We have entered into an employment agreement with Mr. Polsky pursuant to which, in the event he is terminated without cause or resigns for good reason, Mr. Polsky is entitled to 12 months of base salary continuation.
The agreement also provides that Mr. Polsky is subject to the terms of our Confidentiality, Proprietary Rights and Non-Solicitation Agreement which prohibits the solicitation of employees during the one year period following termination of employment.
Change in Control Arrangements
None of our NEOs is entitled to any payments or benefits upon a change in control of the Company absent a qualifying termination in connection with the change in control. The only outstanding equity awards that contain a single trigger vesting acceleration provision are stock option awards granted prior to November 20, 2013 to our Executive Chairman, all of which were out of the money as of June 30, 2016 such that no value would be realized with respect to such awards upon a change in control. Going forward, no new grants of equity awards provide for "single trigger" change in control vesting.
In fiscal 2016, the Committee approved limited change in control benefits for our NEOs, other than Mr. Davis and Mr. Udell, and we subsequently entered into change in control agreements with these NEOs, pursuant to which the NEOs are entitled to certain additional benefits in the event they incur a qualifying termination within the 24 month period following a change in control of the Company. These agreements are described in more detail above under the heading "Severance and Change in Control Arrangements—Change in Control".
Potential Value of Termination and Change-in-Control Benefits
The following table provides the dollar value of the potential payments and benefits that each NEO would be eligible to receive upon certain terminations of employment (including in connection with a change in control of the Company) and upon a change in control of the Company absent a termination of employment, assuming that the termination or change in control, as applicable, occurred on June 30, 2016, and the price per share of our common stock equaled $12.49, the value of one share of our common stock on the last day of fiscal 2016.
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| Name | | Payment | | Death | | Disability | | Termination Without Cause | | Constructive Termination/ Good Reason | | Change in Control (no Termination) | | Change in Control (and Qualifying Termination) | | ||||||||||||||||
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| Nathaniel A. Davis | Salary Continuation | $100,000 (1) | $100,000 (1) | $1,200,000 | $1,200,000 | — | $1,200,000 (2) | ||||||||||||||||||||||||
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| Bonus | 1,616,972 | 1,616,972 | 1,616,972 | 1,616,972 | — | 1,616,972 | |||||||||||||||||||||||||
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| Benefit Continuation (3) | 5,040 | 5,040 | 5,040 | 5,040 | — | 5,040 | |||||||||||||||||||||||||
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| Option Vesting | — | — | — | — | — | — | |||||||||||||||||||||||||
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| Restricted Stock Vesting (4) | 2,850,484 | 2,850,484 | 2,232,030 | 2,232,030 | — | 2,850,484 | |||||||||||||||||||||||||
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| Stuart J. Udell | | Salary Continuation | | — | | — | | 1,950,000 | | 1,950,000 | | — | | 1,950,000 | | ||||||||||||||||
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| | | Bonus | | — | | — | | 539,981 | | 539,981 | | — | | 539,981 | | ||||||||||||||||
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| | | Benefit Continuation (3) | | — | | — | | 10,524 | | 10,524 | | — | | 10,524 | | ||||||||||||||||
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| | | Restricted Stock Vesting (4) | | 1,943,469 | | 1,943,469 | | 668,065 | | 668,065 | | — | | 1,943,469 | | ||||||||||||||||
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| James J. Rhyu | Salary Continuation | — | — | 486,500 | 486,500 | — | 729,750 | ||||||||||||||||||||||||
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| Benefit Continuation (3) | — | — | — | — | — | 5,390 | |||||||||||||||||||||||||
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| Restricted Stock Vesting (5) | 1,638,688 | 1,638,688 | 1,211,530 | 1,211,530 | — | 1,638,688 | |||||||||||||||||||||||||
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| Howard D. Polsky | | Salary Continuation | | — | | — | | 380,000 | | 380,000 | | — | | 570,000 | | ||||||||||||||||
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| | | Benefit Continuation (3) | | — | | — | | — | | — | | — | | 4,877 | | ||||||||||||||||
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| | | Restricted Stock Vesting (5) | | 574,540 | | 574,540 | | 214,828 | | 214,828 | | — | | 574,540 | | ||||||||||||||||
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| Allison Cleveland | Salary Continuation | — | — | — | — | — | 594,000 | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Benefit Continuation (3) | — | — | — | — | — | 7,015 | |||||||||||||||||||||||||
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| Restricted Stock Vesting (5) | 573,291 | 573,291 | 179,856 | 179,856 | — | 573,291 | |||||||||||||||||||||||||
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| Joseph P. Zarella | | Salary Continuation | | — | | — | | — | | — | | — | | 585,000 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Benefit Continuation (3) | | — | | — | | — | | — | | — | | 5,173 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Restricted Stock Vesting (5) | | 535,821 | | 535,821 | | 187,350 | | 187,350 | | — | | 535,821 | | ||||||||||||||||
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The Compensation Committee (the "Committee") has reviewed and discussed with management the Compensation Discussion and Analysis set forth above. Based on its review and discussion with management, the Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2016.
As already disclosed, the Company recently identified an error in its previously reported results of Scantron tests taken by students at K12 managed schools during the 2013-14 school year. The Company will be including the corrected Scantron test results for that year in its 2016 Academic Report. The Company has further determined that this error resulted in an inaccurate calculation and reporting of the Company's FY 2014 PMO Academic Metric and the overpayment of bonus compensation to multiple current and former senior executives to which this specific PMO applied. The total excess bonus compensation paid to the Company's Named Executive Officers for FY 2014 as a result of this error and inaccurate calculation was $212,554. Applying the Company's previously disclosed marginal income tax rate for FY 2014 of 37.9%, the cash impact of the error to the Company with respect to NEO bonus compensation for that year was $131,996. The Committee has reviewed this matter, the source of the error and the resulting inaccurate calculation, considered relevant factors including the immateriality of the cash impact to the Company and the impracticality of collecting the excess bonus paid to two former NEOs and determined, in their business judgment, that no further action was necessary.
This report is provided by the following independent directors, who comprise the Committee:
Members of the Compensation Committee | ||
Adam L. Cohn (Chairman) Steven B. Fink Jon Q. Reynolds, Jr. | ||
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The foregoing report shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, each as amended (together, the "Acts"), except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Acts.
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
Policies and Procedures for Related-Party Transactions
We recognize that related-party transactions present a heightened risk of conflicts of interest and have adopted a written policy to which all related-party transactions shall be subject. Pursuant to the policy, the Audit Committee of our Board of Directors, or in the case of a transaction in which the aggregate amount is, or is expected to be, in excess of $250,000, the Board of Directors will review the relevant facts and circumstances of all related-party transactions, including, but not limited to: (i) whether the transaction is on terms comparable to those that could be obtained in arm's length dealings with an unrelated third party; and (ii) the extent of the related party's interest in the transaction. Pursuant to the policy, no director, including the Chairman of the Audit Committee, may participate in any approval of a related- party transaction to which he or she is a related party. The Board of Directors or Audit Committee, as applicable, will then, in its sole discretion, either approve or disapprove the transaction.
Certain types of transactions, which would otherwise require individual review, have been pre-approved by the Audit Committee. These types of transactions include, for example: (i) compensation to an officer or director where such compensation is required to be disclosed in our proxy statement; (ii) transactions where the interest of the related party arises only by way of a directorship or minority stake in another organization that is a party to the transaction; and (iii) transactions involving competitive bids or fixed rates. Additionally, pursuant to the terms of our related-party transaction policy, all related-party transactions are required to be disclosed in our applicable filings as required by the Securities Act of 1933 and the Exchange Act and related rules. Furthermore, any material related-party transactions are required to be disclosed to the full Board of Directors. We have established internal policies relating to disclosure controls and procedures, which include policies relating to the reporting of related-party transactions that must be pre-approved under our related-party transactions policy.
Compensation Committee Interlocks and Insider Participation
In fiscal 2016, there were no interlocking relationships existing between members of our Board of Directors and our Compensation Committee and members of the Board of Directors or the compensation committee of any other company. No members of the Compensation Committee are current or former officers of the Company or were employees of the Company during the past fiscal year and no members of the Compensation Committee have any relationship requiring disclosure by the Company under Item 404 of Regulation S-K.
PROPOSAL 2:
ADVISORY VOTE ON EXECUTIVE COMPENSATION
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, we are providing our stockholders with a non-binding advisory vote to approve the compensation paid to our NEOs as disclosed in this Proxy Statement in accordance with rules promulgated by the SEC.
Our Board of Directors is committed to corporate governance best practices and recognizes the substantial interests that stockholders have in executive compensation matters. The Compensation Committee of our Board of Directors has designed our executive compensation programs with the following key objectives:
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| Objective | | How our executive compensation programs reflect this objective | | ||||
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To achieve strong Company performance | • Aligns executive compensation with the Company's and the individual's performance |
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Makes a substantial portion of total compensation variable with performance
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Provides executives with the opportunity to participate in the ownership of relevant companies to compare the compensation levelsCompany
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Rewards executives for long-term growth in the value of our NEOs to comparable executive positions of companies in the peer group. This peer group reflected adjustments made at the beginning of FY2013 to remove certain companies that were taken private or that were no longer of comparable size to us and to add certain companies that included us within their peer group. The companies we removed from our peer group in early FY2013 were American Public Education, Inc., Blackboard Inc., Blue Nile, Inc., Lincoln Educational Services Corporation, Deltek, Inc., Rosetta Stone Inc. and Skillsoft Ltd. and the companies that we added to our peer group in early FY2013 were Cree, Inc., Education Management Corp., EZCORP, Inc., IGate Corp. and ITT Education Services, Inc. Because our June 30 fiscal year-end date is later than that of these firms, we are able to review up-to-date information about market practices and compensation awardsstock
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Requires minimum stock ownership levels for the previously completed calendar year.executive officers
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In May 2013,Links executive pay to specific, measurable results intended to create value for stockholders
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Compensates executives with performance-based awards that depend upon the Committee adoptedachievement of pre-established corporate targets
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Rewards executives for individual contributions to the Company's achievement of Company-wide performance objectives
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Targets total compensation decisions in consultation with Towers Watson. The changes were made to reflect an appropriate balanceapproximate between the educational services50th to 75th percentile range among companies with which we compete for talent and software/subscription businessesfor stockholder investment
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Utilizes independent compensation consultants and competitive market data to better reflect the Company's market capitalization and corporate strategy. The publicly-tradedmonitor pay relative to peer companies in the fiscal 2014 peer group are:
We encourage our stockholders to review the Compensation Discussion and Analysis in this Proxy Statement, which describes our executive compensation philosophy and the design of our executive compensation programs in detail. Our Board of Directors believes our executive compensation programs are effective in creating value for our stockholders and moving the Company towards realization of its long-term goals.
We are asking our stockholders to signal their support for the compensation of our NEOs by casting a vote "FOR" the following resolution:
"RESOLVED, that the Company's stockholders approve, on a non-binding advisory basis, the compensation of the Company's named executive officers, as disclosed in the Proxy Statement for the 2016 Annual Meeting pursuant to the compensation disclosure rules of the U.S. Securities and Exchange Commission, including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and narrative disclosure."
The vote sought by this proposal is advisory and not binding on the Company, our Board of Directors or the Compensation Committee. Although the vote is non-binding and advisory, the Company, our Board of Directors and the Compensation Committee value the input of our stockholders, and the Compensation Committee will consider the outcome of the vote when making future executive compensation determinations. The next advisory vote on executive compensation is expected to occur at the 2017 Annual Meeting of Stockholders.
OUR BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE SEC.
PROPOSAL 3:
APPROVAL OF THE COMPANY'S 2016 EQUITY INCENTIVE AWARD PLAN
Our Board of Directors (the "Board") is seeking stockholder approval of the Company's 2016 Incentive Award Plan (the "2016 Plan"). The 2016 Plan will become effective on the day of our Annual Meeting, assuming approval of this proposal by our stockholders.
We believe that providing long term incentive compensation opportunities in the form of equity awards aligns the interests of the Company's employees, directors and consultants with the long-term interests of our stockholders, linking compensation to Company performance while building the value of our Company. The use of equity awards as compensation also allows the Company to conserve cash resources for other important purposes.
The Board has adopted, subject to stockholder approval, the 2016 Plan for our employees, consultants and directors. The 2016 Plan is a new equity compensation plan that is intended to replace our existing 2007 Plan, which was adopted prior to our initial public offering. However,we are not seeking to increase the number of shares that are available for equity compensation awards. Rather, the number of shares that will be available for awards under the 2016 Plan will be equal to the number of shares available under our existing 2007 Plan, which will no longer be used for new grants if the 2016 Plan is approved. In fact, if the 2016 Plan is approved, there will be an overall reduction in the number of shares that could be granted because the annual increase that would apply under the 2007 Plan's "evergreen" feature in July 2017 will not apply if the 2016 Plan is approved by our stockholders and becomes effective.
If the 2016 Plan is approved by the stockholders, the Board will not grant any future awards under the 2007 Plan and the annual increase to the number of shares available under the 2007 Plan that would take effect in July 2017 will not apply; however, the terms and conditions of the 2007 Plan will continue to govern any outstanding awards thereunder. If the stockholders do not approve the 2016 Plan, the 2016 Plan will not become effective and the 2007 Plan will continue in accordance with its terms (including the July 2017 annual share increase) until its expiration date in October 2017.
Why Stockholders Should Vote to Approve the 2016 Plan
Long-Term Incentive Awards are an Important Part of our Compensation Philosophy
We believe that the adoption of the 2016 Plan, which will allow us to continue to make equity compensation grants beyond the scheduled October 2017 expiration of the 2007 Plan, is essential to our success. Equity awards are intended to motivate high levels of performance, align the interests of our employees, directors and consultants with those of our stockholders by giving these individuals the perspective of an owner with an equity stake in our Company and provide a means of recognizing their contributions to the success of our Company. Our Board and leadership team believe that long-term equity incentive awards are necessary to remain competitive in the market and are essential to recruiting and retaining the highly qualified employees who help our Company meet its goals.
Our long-term incentive program is broad-based. We believe we must continue to offer a competitive long-term equity incentive plan in order to attract, retain and motivate the talent imperative to our continued growth and success. As of October 1, 2016, 470 of our employees had received grants of equity awards and all eight of our non-employee directors had received grants of equity awards.
Our Existing Equity Plan Will Expire in 2017
The 2007 Plan will expire in accordance with its terms in October 2017 and we will not be able to continue to issue equity awards to our employees, directors and consultants following such date unless our stockholders approve the 2016 Plan. While we could increase cash compensation if we are unable to grant long-term equity incentive awards, we anticipate that we will have difficulty attracting, retaining and motivating our employees if we are unable to grant
them equity awards. We believe that equity-based awards are a more effective compensation vehicle than cash because they align employee and stockholder interests with a smaller impact on current income and cash flow.
2016 Plan Contains Equity Compensation Best Practices—What is in the Plan?
The 2016 Plan contains a number of provisions that we believe are consistent with best practices in equity compensation and which protect our stockholders' interests. These provisions include:
2016 Plan Contains Equity Compensation Best Practices—What is not in the Plan?
Determination of Share Reserve Under 2016 Plan
The table below presents information regarding the shares that were subject to various outstanding equity awards under the 2007 Plan and the other prior equity incentive plans of the Company (collectively, the "Prior Plans") at October 13, 2016.
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ELEMENTS OF COMPENSATION
Options outstanding Weighted-average exercise price of outstanding options Weighted-average remaining term of outstanding options Restricted shares outstanding Performance share units outstandingThe following table outlines the key components of our executive compensation program for our NEOs for fiscal 2013: Number of Shares Market Value
($) (1) 2,112,119 310,596
$20.03
2.27 years
2,820,000
40,043,993
1,089,602
15,472,348
In addition, as of October 13, 2016, there were 3,746,829 shares remaining available for future issuance under our 2007 Plan. Taking into account this amount and the foregoing information, the board of directors determined that the 2016 Plan should not result in an increase to the number of shares that will be available for equity compensation grants. Rather, the 2016 Plan will reserve for issuance the same number of shares that currently remain available under the 2007 Plan, and without factoring in the annual increase that would apply under the 2007 Plan (were it to remain effective) in July 2017.
Taking into account our recent annual equity burn rates (calculated by dividing the number of shares subject to equity awards granted during the year, excluding unearned stock price RSAs, by the number of common shares outstanding at the end of the applicable year) under the 2007 Plan of 6.3%, 3.8% and 2.6%, respectively, in each of the past three years (resulting in a three year average burn rate of 4.2%), we expect the share reserve under the 2016 Plan to provide us with enough shares for awards for approximately two to three years. This assumes that we continue to grant awards consistent with our current practices and historical usage, as reflected in our historical burn rate, and is further dependent on the price of our shares and hiring activity during the next few years, forfeitures of outstanding awards under the Prior Plans, and noting that future circumstances may require us to change our current equity grant practices. We cannot predict our future equity grant practices, the future price of our shares or future hiring activity with any degree of certainty at this time, and the share reserve under the 2016 Plan could last for a shorter or longer time.
In light of the factors described above, and the fact that the ability to continue to grant equity compensation is vital to the Company's ability to continue to attract and retain talented employees in the industry in which it competes, the Board has determined that the size of the share reserve under the 2016 Plan is reasonable and appropriate at this time. The Board will not create a subcommittee to evaluate the risk and benefits for issuing shares under the 2016 Plan.
Stockholder Approval Requirement
In general, stockholder approval of the 2016 Plan is necessary in order for us to meet the stockholder approval requirements of the principal securities market on which shares of our common stock are traded, and grant stock options that qualify as incentive stock options as defined under Section 422 of the Code.
In addition, although the Company has not adopted a policy that all compensation paid to executive officers must be deductible, the 2016 Plan is also intended to allow us to provide performance-based compensation that will be tax deductible without regard to the limits of Section 162(m) of the Code. Therefore, for purposes of Section 162(m) of the Code, the Company is asking stockholders to approve the list of performance criteria that may be used for purposes of granting awards that are intended to qualify as performance-based compensation under the Code, as described below under the heading "—Performance-Based Awards," in the event the Company chooses to seek to
structure compensation in a manner that will satisfy the performance-based compensation exception to Section 162(m). Should the Company choose to do so, stockholder approval of such criteria would preserve the Company's ability to satisfy this exception and deduct compensation associated with future performance-based awards to certain executives. The Code limits the deductions a publicly-held company can claim for compensation in excess of $1 million paid in a given year to its chief executive officer and certain of its other most highly-compensated executive officers (other than its chief financial officer) (these officers are generally referred to as the "covered employees"). "Performance-based" compensation that meets certain requirements is not counted against the $1 million deductibility cap. Stock options and stock appreciation rights that may be granted under the 2016 Plan generally should qualify as performance-based compensation. Other awards that the Company may grant under the 2016 Plan may qualify as performance-based compensation if the payment, retention or vesting of the award is subject to the achievement during a performance period of performance goals selected by the administrator of the plan. The administrator of the plan retains the discretion to set the level of performance for a given performance measure under a performance-based award. For such awards to qualify as performance-based compensation, they must be in amounts that are within the individual award limits set forth in the 2016 Plan and stockholders must approve the material terms of the performance goals every five years. Such approval does not guarantee that incentive compensation that the Company pays to its covered employees will qualify as performance-based compensation for purposes of Section 162(m), but will permit the administrator to seek to structure incentive compensation to meet the performance-based compensation requirements if it chooses to do so. In addition, even where compensation programs are intended to qualify as performance-based compensation for purposes of Section 162(m), there can be no guarantee that the requirements of Section 162(m) will be satisfied and that all such compensation will be deductible.
The following sets forth a description of the material features and terms of the 2016 Plan. The following summary is qualified in its entirety by reference to the full text of the 2016 Plan, which is attached hereto asAppendix A.
Authorized Shares
The 2016 Plan authorizes the issuance of the sum of:
In no event will more than 9,768,550 shares of common stock be issuable pursuant to awards under the 2016 Plan during its ten year term. No awards will be granted under the Prior Plans following the effective date of the 2016 Plan. Shares issued under the 2016 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares.
Share Counting Provisions
If an award under the 2016 Plan or a Prior Plan expires, lapses or is terminated, exchanged for cash, surrendered, repurchased, canceled without having been fully exercised or forfeited, in any case, in a manner that results in the Company acquiring shares covered by the award at a price not greater than the price (as adjusted to reflect any equity restructuring) paid by the participant for the shares or not issuing any shares covered by the award, the unused shares covered by the award will, as applicable, become or again be available for award grants under the 2016 Plan. In addition, shares delivered to the Company to satisfy the applicable exercise or purchase price of an award under the 2016 Plan or a Prior Plan or to satisfy any tax withholding obligation (including shares retained by the Company from the award being exercised or purchased and/or creating the tax obligation) will, as applicable, become or again be available for award grants under the 2016 Plan.
Dividend equivalents paid in cash will not be counted against the number of shares reserved under the 2016 Plan.
Administration
The 2016 Plan will be administered by the Committee or a subcommittee thereof (or by the Board or another Board committee as may be determined by the Board from time to time). The administrator of the 2016 Plan (the "Administrator") has the authority to determine which service providers receive awards and sets the terms and conditions applicable to the award within the confines of the 2016 Plan's terms. The Administrator will have the authority to make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, the 2016 Plan.
Award Limits
The 2016 Plan includes annual limits on awards that may be granted to any individual participant. For participants other than non-employee directors, the maximum aggregate number of shares of common stock with respect to all options and stock appreciation rights that may be granted to any one person is 2,000,000 shares per year and the maximum aggregate number of shares of common stock with respect to all restricted stock, restricted stock units and other stock or cash based awards that are intended to qualify as "performance-based compensation" under Section 162(m) of the Code that may be granted to any one person is 2,000,000 shares per year. The maximum aggregate amount that may be paid in cash with respect to one or more awards payable in cash and not denominated in shares to any one person is $3,000,000 per year. These numbers may be adjusted to take into account equity restructurings and certain other corporate transactions as described below. The maximum aggregate grant date fair value, as determined in accordance with FASB ASC Topic 718 (or any successor thereto), of all equity and cash-based awards granted to a non-employee director for services as a director under the 2016 Plan during any fiscal year may not exceed $750,000 per year. Notwithstanding the foregoing, in no event will more than the authorized number of shares available for issuance under the 2016 Plan be granted to any one person during any fiscal year of the Company.
Eligibility
Employees, consultants and non-employee directors of the Company or any of its subsidiaries are eligible to receive awards under the 2016 Plan. As of October 13, 2016, the Company and its subsidiaries had approximately 5,000 employees and eight non-employee directors who would have been eligible to receive awards under the 2016 Plan had it been in effect on such date. Based on our historical practices, consultants and other service providers are generally not considered for awards under our long-term equity incentive program.
Types of Awards
The 2016 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock or cash based awards. Awards to eligible individuals shall be subject to the terms of an individual award agreement between the Company and the individual. A brief description of each award type follows.
Plan. A stock appreciation right entitles the holder to exercise the stock appreciation right to acquire shares of the Company's common stock upon exercise within a specified time period from the date of the grant. Subject to the provisions of the stock appreciation right award agreement, the recipient may receive from the Company an amount determined by multiplying the difference between the price per share of the stock appreciation right and the value of the share on the date of exercise by the number of shares of common stock subject to the award. The maximum term for which stock appreciation rights may be exercisable under the 2016 Plan is ten years.
Performance-Based Awards
The Administrator will determine whether specific awards are intended to constitute "qualified performance-based compensation" ("QPBC") within the meaning of Section 162(m) and even if stockholders approve the performance criteria set forth in the 2016 Plan for purposes of the QPBC exception, the Administrator may determine to pay compensation that is not QPBC under Section 162(m) and that is not deductible by reason thereof.
In order to constitute QPBC under Section 162(m), in addition to certain other requirements, the relevant amounts must be payable only upon the attainment of pre-established, objective performance goals set by the Administrator and linked to stockholder-approved performance criteria. For purposes of the 2016 Plan, one or more of the following performance criteria will be used in setting performance goals applicable to QPBC and may be used in setting performance goals applicable to other stock or cash based awards: net earnings (either before or after interest, taxes, depreciation and amortization), sales or revenue, net income (either before or after taxes), operating
earnings, cash flow (including, but not limited to, operating cash flow and free cash flow), return on net assets, return on stockholders' equity, return on assets, return on capital, return on sales, gross or net profit margin, total shareholder return, internal rate of return (IRR), financial ratios (including those measuring liquidity, activity, profitability or leverage), working capital, earnings per share, price per share, market capitalization, any GAAP financial performance measures, inventory management, measures related to A/R balance and write-offs, timeliness and/or accuracy of business reporting, approval or implementation of strategic plans, financing and other capital raising transactions, debt levels or reductions, cash levels, acquisition activity, investment sourcing activity, marketing initiatives, projects or processes, achievement of customer satisfaction objectives, number of new states entered, number of new countries entered, number of new schools, number of students/new students, student retention percentage, student lifetime value, number of new courses, number of classrooms using our curriculum, curriculum enhancement and compliance with state standards, learning and content management system improvements, development and/or implementation of school initiatives and services, academic performance, training and professional development goals, state testing measures for schools and students, infrastructure scaling, new product development, business development, human capital development, human resources goals, employee satisfaction, regulatory compliance objectives, supervision of litigation and other legal matters, managing relationships with charter authorizers, charter school boards, or other organizations that influence charter schools, cost management, expense reduction goals, budget comparisons, and contract renewals, any of which may be measured in absolute terms or as compared to any incremental increase or decrease. Such performance goals also may be based solely by reference to the Company's performance or the performance of a subsidiary, division, business segment or business unit of the Company or a subsidiary, or based upon performance relative to performance of other companies or upon comparisons of any of the indicators of performance relative to performance of other companies. The 2016 Plan also permits the Administrator to provide for objectively determinable adjustments to the applicable performance criteria in setting performance goals for QPBC awards.
Prohibition on Repricing
Under the 2016 Plan, the Administrator may not, without the approval of the Company's stockholders, authorize the repricing of any outstanding option or stock appreciation right to reduce its price per share, cancel any option or stock appreciation right in exchange for cash or another award when the price per share exceeds the fair market value of the underlying shares, or take any other action with respect to an option or stock appreciation right that the Company determines would be treated as a repricing under the rules and regulations of the principal U.S. stock exchange on which the shares of common stock are listed.
Certain Transactions
The Administrator has broad discretion to take action under the 2016 Plan, as well as make adjustments to the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting the Company's common stock, such as dividends or other distributions (whether in the form of cash, common stock, other securities, or other property), reorganizations, mergers, consolidations, change in control events and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with the Company's stockholders known as "equity restructurings," the Administrator will make equitable adjustments to outstanding awards. No adjustment or other action will be authorized for awards that are intended to qualify as QPBC, which would cause such awards to fail to continue to qualify as QPBC, unless the Administrator determines that the award should not so qualify.
Acceleration upon a Change in Control
In the event of a change in control in which outstanding awards are not continued, converted, assumed or replaced by the Company or the successor to the Company in the change in control, such awards shall become fully exercisable and all forfeiture, repurchase and other restrictions on such awards shall lapse immediately prior to the change in control.
Amendment and Termination
The Administrator may amend, suspend or terminate the 2016 Plan at any time. However, no amendment, other than an amendment that increases the number of shares available under the 2016 Plan, may materially and
adversely affect an award outstanding under the 2016 Plan without the consent of the affected participant. The Board is required to obtain stockholder approval for any amendment to the 2016 Plan to the extent necessary to comply with applicable laws. The 2016 Plan provides that in no event may an award be granted pursuant to the 2016 Plan after ten years from the earlier of (i) the date the Board adopted the 2016 Plan or (ii) the date Company's stockholders approve the 2016 Plan.
Forfeiture and Claw-backs
All awards (including any proceeds, gains or other economic benefit obtained in connection with any award) made under the 2016 Plan are subject to any claw-back policy implemented by the Company, including any claw-back policy adopted to comply with the requirements of applicable law (including the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder) as set forth in such claw-back policy or award agreement.
United States Federal Income Tax Consequences
The following summary is based on an analysis of the Code as currently in effect, existing laws, judicial decisions, administrative rulings, regulations and proposed regulations, all of which are subject to change. Moreover, the following is only a summary of United States federal income tax consequences. Actual tax consequences to participants may be either more or less favorable than those described below depending on the participants' particular circumstances.
Incentive Stock Options
No income will be recognized by a participant for United States federal income tax purposes upon the grant or exercise of an incentive stock option. The basis of shares transferred to a participant upon exercise of an incentive stock option is the price paid for the shares. If the participant holds the shares for at least one year after the transfer of the shares to the participant and two years after the grant of the option, the participant will recognize capital gain or loss upon sale of the shares received upon exercise equal to the difference between the amount realized on the sale and the basis of the stock. Generally, if the shares are not held for that period, the participant will recognize ordinary income upon disposition in an amount equal to the excess of the fair market value of the shares on the date of exercise over the amount paid for the shares, or if less (and if the disposition is a transaction in which loss, if any, will be recognized), the gain on disposition. Any additional gain realized by the participant upon the disposition will be a capital gain. The excess of the fair market value of shares received upon the exercise of an incentive stock option over the option price for the shares is an item of adjustment for the participant for purposes of the alternative minimum tax. Therefore, although no income is recognized upon exercise of an incentive stock option, a participant may be subject to alternative minimum tax as a result of the exercise.
Non-qualified Stock Options
No income is expected to be recognized by a participant for United States federal income tax purposes upon the grant of a non-qualified stock option. Upon exercise of a non-qualified stock option, the participant will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the amount paid for the shares. Income recognized upon the exercise of a non-qualified stock option will be considered compensation subject to withholding at the time the income is recognized, and, therefore, the participant's employer must make the necessary arrangements with the participant to ensure that the amount of the tax required to be withheld is available for payment. Non-qualified stock options are designed to provide the employer with a deduction equal to the amount of ordinary income recognized by the participant at the time of the recognition by the participant, subject to the deduction limitations described below.
Stock Appreciation Rights
There is expected to be no United States federal income tax consequences to either the participant or the employer upon the grant of SARs. Generally, the participant will recognize ordinary income subject to withholding upon the receipt of payment pursuant to SARs in an amount equal to the aggregate amount of cash and the fair market value
of any common stock received. Subject to the deduction limitations described below, the employer generally will be entitled to a corresponding tax deduction equal to the amount includible in the participant's income.
Restricted Stock
If the restrictions on an award of shares of restricted stock are of a nature that the shares are both subject to a substantial risk of forfeiture and are not freely transferable (within the meaning of Section 83 of the Code), the participant will not recognize income for United States federal income tax purposes at the time of the award unless the participant affirmatively elects to include the fair market value of the shares of restricted stock on the date of the award, less any amount paid for the shares, in gross income for the year of the award pursuant to Section 83(b) of the Code. In the absence of this election, the participant will be required to include in income for United States federal income tax purposes on the date the shares either become freely transferable or are no longer subject to a substantial risk of forfeiture (within the meaning of Section 83 of the Code), the fair market value of the shares of restricted stock on such date, less any amount paid for the shares. The employer will be entitled to a deduction at the time of income recognition to the participant in an amount equal to the amount the participant is required to include in income with respect to the shares, subject to the deduction limitations described below. If a Section 83(b) election is made within 30 days after the date the restricted stock is received, the participant will recognize ordinary income at the time of the receipt of the restricted stock, and the employer will be entitled to a corresponding deduction, equal to the fair market value of the shares at the time, less the amount paid, if any, by the participant for the restricted stock. If a Section 83(b) election is made, no additional income will be recognized by the participant upon the lapse of restrictions on the restricted stock, but, if the restricted stock is subsequently forfeited, the participant may not deduct the income that was recognized pursuant to the Section 83(b) election at the time of the receipt of the restricted stock.
Dividends paid to a participant holding restricted stock before the expiration of the restriction period will be additional compensation taxable as ordinary income to the participant subject to withholding, unless the participant made an election under Section 83(b). Subject to the deduction limitations described below, the employer generally will be entitled to a corresponding tax deduction equal to the dividends includible in the participant's income as compensation. If the participant has made a Section 83(b) election, the dividends will be dividend income, rather than additional compensation, to the participant.
If the restrictions on an award of restricted stock are not of a nature that the shares are both subject to a substantial risk of forfeiture and not freely transferable, within the meaning of Section 83 of the Code, the participant will recognize ordinary income for United States federal income tax purposes at the time of the transfer of the shares in an amount equal to the fair market value of the shares of restricted stock on the date of the transfer, less any amount paid therefore. The employer will be entitled to a deduction at that time in an amount equal to the amount the participant is required to include in income with respect to the shares, subject to the deduction limitations described below.
Restricted Stock Units
There will be no United States federal income tax consequences to either the participant or the employer upon the grant of restricted stock units. Generally, the participant will recognize ordinary income subject to withholding upon the receipt of cash and/or transfer of shares of common stock in payment of the restricted stock units in an amount equal to the aggregate of the cash received and the fair market value of the common stock so transferred. Subject to the deduction limitations described below, the employer generally will be entitled to a corresponding tax deduction equal to the amount includible in the participant's income.
Generally, a participant will recognize ordinary income subject to withholding upon the payment of any dividend equivalents paid with respect to an award in an amount equal to the cash the participant receives. Subject to the deduction limitations described below, the employer generally will be entitled to a corresponding tax deduction equal to the amount includible in the participant's income.
Limitations on the Employer's Compensation Deduction
Section 162(m) of the Code limits the deduction certain employers may take for otherwise deductible compensation payable to certain executive officers of the employer to the extent the compensation paid to such an officer for the year exceeds $1 million, unless the compensation is performance-based, is approved by the employer's stockholders, and meets certain other criteria, as described above under the heading "—Performance-Based Awards."
Excess Parachute Payments
Section 280G of the Code limits the deduction that the employer may take for otherwise deductible compensation payable to certain individuals if the compensation constitutes an "excess parachute payment." Excess parachute payments arise from payments made to disqualified individuals that are in the nature of compensation and are contingent on changes in ownership or control of the employer or certain affiliates. Accelerated vesting or payment of awards under the 2016 Plan upon a change in ownership or control of the employer or its affiliates could result in excess parachute payments. In addition to the deduction limitation applicable to the employer, a disqualified individual receiving an excess parachute payment is subject to a 20% excise tax on the amount thereof.
Application of Section 409A of the Code
Section 409A of the Code imposes an additional 20% tax and interest on an individual receiving non-qualified deferred compensation under a plan that fails to satisfy certain requirements. For purposes of Section 409A, "non-qualified deferred compensation" includes equity-based incentive programs, including some stock options, stock appreciation rights and restricted stock unit programs. Generally speaking, Section 409A does not apply to incentive stock options, non-discounted non-qualified stock options and stock appreciation rights if no deferral is provided beyond exercise, or restricted stock.
The awards made pursuant to the 2016 Plan are expected to be designed in a manner intended to comply with the requirements of Section 409A of the Code to the extent the awards granted under the 2016 Plan are not exempt from coverage. However, if the 2016 Plan fails to comply with Section 409A in operation, a participant could be subject to the additional taxes and interest.
State and local tax consequences may in some cases differ from the federal tax consequences. The foregoing summary of the United States federal income tax consequences in respect of the 2016 Plan is for general information only. Interested parties should consult their own advisors as to specific tax consequences of their awards.
The 2016 Plan is not subject to the Employee Retirement Income Security Act of 1974, as amended, and is not intended to be qualified under Section 401(a) of the Code.
Except with respect to grants to certain non-employee directors pursuant to our Director Compensation Plan, the number of awards that our named executive officers, other executive officers, other employees and non-employee directors may receive under the 2016 Plan will be determined in the discretion of the Committee in the future, and the Committee has not made any determination to make future grants to any persons under the 2016 Plan as of the date of this proxy statement. Therefore, other than as set forth below, it is not possible to determine the benefits that will be received in the future by participants in the 2016 Plan or the benefits that would have been received by such
participants if the 2016 Plan had been in effect in the fiscal year ended June 30, 2016. No awards have been issued under the 2016 Plan as it is not yet effective.
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The following table provides certain information as of June 30, 2016, with respect to our equity compensation plans under which common stock is authorized for issuance:
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FISCAL 2013 COMPENSATION DECISIONS
Determination of Base Salaries
Base salaries for our NEOs are generally determined by negotiation at the time of hire and take into consideration the scope of their responsibilities, as well as competitive market compensation paid by our peer group to similarly situated executives. In determining base salary adjustments for fiscal 2013, the Committee reviewed Towers Watson's 2012 executive compensation report and compared each NEO's salary to peer group data, and adjusted base salaries effective in August 2012 to ensure that our NEOs received competitive pay.
Mr. Davis' base salary was established when he began serving as our Executive Chairman in January 2013. Unlike our other NEOs, a comparable position analysis found that a non-founder, non-CEO at a public company who assumes the position of Executive Chairman is rare. Accordingly, Towers Watson market compensation analysis was used by the Committee to establish Mr. Davis' initial base salary (along with the other elements of his compensation) using an equitable comparison to pay levels for our other NEOs and taking into account Mr. Davis' significant executive experience in technology companies in highly-regulated industries as well as his service on our Board of Directors for the prior three years. In fact, the Committee deliberately set Mr. Davis' initial base salary substantially below what it believed to be a competitive level for a position of this type, and more heavily weighted his compensation with variable and long-term equity grants to incentivize Mr. Davis to increase long-term shareholder value.
Mr. Rhyu's base salary, which was established when he joined the Company as Chief Financial Officer in June 2013, reflects a competitive base salary level for similar positions at our peer companies and took into account his higher total cash compensation received in his position at his prior employer. The base salaries for each of our NEOs in fiscal 2013, both prior to and after the August 2012 increases, where applicable, are set forth in the table below: Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
(a) (1) Weighted
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
(b) Number of
Securities
Remaining
Available for Future
Issuance under
Equity
Compensation Plans
(Excluding
Securities Reflected
in Column
(a)) (c) Equity compensation plans approved by securityholders 2,350,175 $20.20 2,957,517 Equity compensation plans not approved by securityholders — — — Total 2,350,175 $20.20 2,957,517
Approval of the 2016 Plan will require the affirmative vote of the holders of a majority of the outstanding shares of the Company's common stock represented in person or by proxy at the meeting and entitled to vote thereon.
OUR BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE APPROVAL OF THE 2016 PLAN.
PROPOSAL 4:
RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITOR
Subject to stockholder ratification, the Audit Committee has appointed the firm of BDO USA, LLP, or BDO USA, as the Company's independent registered public accounting firm for fiscal 2017. Although ratification is not required by law, our Board of Directors believes that stockholders should be given the opportunity to express their view on the subject. While not binding on the Audit Committee, if the stockholders do not ratify this appointment, the appointment will be reconsidered by the Audit Committee. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our stockholders. A representative of BDO USA will attend the Annual Meeting and this representative will be provided with an opportunity to make a statement, if he or she desires, and will be available to respond to appropriate questions of stockholders, if any.
The affirmative vote of the holders of a majority of the shares of Common Stock present in person or represented by proxy and entitled to vote at the Annual Meeting is required to ratify the appointment of BDO USA as the Company's independent registered public accounting firm.
OUR BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" RATIFICATION OF BDO USA AS THE
COMPANY'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL 2017.
Fees Paid to Independent Registered Public Accounting Firm
The following table sets forth the aggregate fees and expenses billed to us by BDO USA for fiscal years 2015 and 2016:
| 2015 | 2016 | |||||
---|---|---|---|---|---|---|---|
Audit Fees | $ | 1,107,533 | $ | 1,075,290 | |||
Audit-Related Fees | 49,545 | 46,167 | |||||
Tax Fees | — | — | |||||
All Other Fees | — | — | |||||
| | | | | | | |
Total | $ | 1,157,078 | $ | 1,121,457 | |||
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Audit Fees are for professional services for the Company's annual audit, including the audit of internal control over financial reporting for fiscal 2015 and 2016, reviews of the interim financial statements included in the Company's quarterly reports on Form 10-Q, and other professional services provided in connection with statutory and regulatory filings or engagements. Audit-related fees in fiscal 2015 and 2016 were for professional services associated with audits of certain managed schools and other minor matters.
The Audit Committee maintains policies and procedures for the pre-approval of work performed by the independent auditors in that, under the Audit Committee charter, all auditor engagements must be approved in advance by the Audit Committee. All of the services provided to the Company by BDO USA during fiscal 2015 and 2016 were pre-approved by the Audit Committee.
PROPOSAL 5:
APPROVAL OF AN AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION
On February 4, 2016, the Board approved and recommended for stockholder approval, at the next annual meeting of stockholders, an amendment to the Company's Third Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") to provide that any director may be removed by the holders of a majority of the voting power of the Company entitled to vote at an election of directors. Currently, the Certificate of Incorporation provides that stockholders may remove a director from office only for cause. The full text of the proposed amendment to the Certificate of Incorporation is set forth below and stockholders are being asking to approve this amendment, which requires the affirmative vote of the holders of at least 66.67% of the outstanding voting power of the Company.
In December 2015, the Delaware Court of Chancery held that if a Delaware corporation has neither a classified board of directors nor cumulative voting in the election of directors (such as the Company at this time), provisions of such a corporation's certificate of incorporation and bylaws providing that directors may be removed "only for cause" are contrary to the General Corporation Law of the State of Delaware and are therefore invalid and unenforceable. The proposed amendment to the Certificate of Incorporation is intended to conform the Certificate of Incorporation to the requirement of Delaware law, as interpreted by this ruling.
If the proposed amendment is approved, it will become effective upon the filing of a certificate of amendment with the Secretary of State of the State of Delaware. The Company intends to file with the Secretary of State of the State of Delaware a Fourth Amended and Restated Certificate of Incorporation, which restates and integrates the proposed amendment, but does not further amend the provisions of the Certificate of Incorporation.
Section A.3. of Article FIVE of the Certificate of Incorporation reads as follows before giving effect to the proposed amendment:
"3. REMOVAL OF DIRECTORS. Subject to any limitation imposed by law, any director may be removed with cause by the holders of a majority of the voting power of the Corporation entitled to vote at an election of directors."
Pursuant to the proposed amendment, Section A.3. of Article FIVE of the Certificate of Incorporation would be deleted and replaced by the following:
"3. REMOVAL OF DIRECTORS. Subject to any limitation imposed by law, any director may be removed by the holders of a majority of the voting power of the Corporation entitled to vote at an election of directors."
OUR BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION.
PROPOSAL 6:
STOCKHOLDER PROPOSAL REGARDING A REPORT ON
LOBBYING ACTIVITIES AND EXPENDITURES
Arjuna Capital (the "Proponent"), on behalf of Bertis E. Downs IV, c/o Arjuna Capital, LLC, 353 West Main Street, Durham, North Carolina 27701, has advised that Bertis E. Downs IV holds more than $2,000 of the Company's common stock, and that the Proponent intends to send a representative to introduce a proposal regarding a report on lobbying by the Company (the "Proposal") for the consideration of stockholders at the Annual Meeting, the text of which is included below. The Company is not responsible for the accuracy or content of the Proposal provided below, which in accordance with SEC rules, is reproduced verbatim as received from the Proponent.
OUR BOARD OF DIRECTORS RECOMMENDS YOU VOTE "AGAINST" THE PROPOSAL FOR THE REASONS STATED AFTER THE PROPOSAL BELOW.
Stockholder Proposal:
WHEREAS: businesses have a recognized legal right to express opinions to legislators and regulators on public policy matters.
We believe in full disclosure of our company's lobbying activities and expenditures to assess whether our lobbying is in the best interests of shareholders and our stated mission "to put students first and maximize their potential to learn and achieve."
Since 2004, K12 has spent nearly 2 million dollars on state lobbying, according to the National Institute on Money in State Politics, yet over that same period, K12 stock has fallen approximately 45 percent, nearly 65 percent over the last 5 years, and 15 percent over the last year. K12 is also involved in the highly controversial American Exchange Legislative Council (ALEC), but does not disclose or explain to investors its contributions to ALEC or other lobbying groups. In 2013, ALEC put forth at least 139 bills for the benefit of K12, 31 of which were written into law to promote private, for-profit education models.
But prior to and subsequent to ALEC's model legislation campaign, K12's performance has not fallen in line with our stated mission. Bloomberg reports a 2013 National Education Policy Center study found only 27 percent of K12's online schools met Adequate Yearly Progress standards from 2010 to 2011, compared to 52 percent of public schools. And a 2016Mercury News investigation into California Virtual Academies found fewer than half of the students graduate, less than half were proficient in reading, only a third were proficient in math, and almost none were qualified to attend the state's public universities.Mercury News also reported inflated attendance and enrollment records used to determine taxpayer funding, and charges in excess of what the schools can afford, leading lawmakers to launch a state probe.
RESOLVED: the shareholders of K12 Inc. request the Board prepare a report, updated annually, disclosing:
For purposes of this proposal, a "grassroots lobbying communication" is a communication directed to the general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. "Indirect lobbying" is lobbying engaged in by a trade association or other organization of which K12 is a member. "Direct and indirect lobbying" and "grassroots lobbying communications" include efforts at the local, state and federal levels.
The report shall be presented to the Audit Committee or another relevant Board committee and posted on the company's website.
The Board of Directors' Statement in Opposition
Our Board of Directors has considered this Proposal and concluded that its adoption is unnecessary in light of the Company's existing practices regarding lobbying activities and expenditures and is not in the best interests of our stockholders. Accordingly, the Board of Directorsunanimously recommends you vote"AGAINST" Proposal 6 for the following reasons.
We are committed to complying with our values, our internal policies and all applicable laws when engaging in any type of lobbying or political activity. While the Company supports and practices transparency and accountability in political spending, the Board of Directors believes that the disclosures recommended by the Proposal are unnecessary in light of the Company's existing internal policies regarding oversight of lobbying activities and expenditures, the current public availability of much of the information requested by the Proposal and the potential concerns related to enhanced disclosures.
The Company has policies in place to effectively oversee decisions regarding lobbying activities and expenditures.
The Company's Senior Vice President of Public Affairs oversees our participation in the U.S. political process, the Company's compliance with federal, state and local laws governing lobbying activities and campaign contributions and the Company's expenditures made to trade associations and other nonprofits engaged in public policy advocacy. Any request for the Company to make a political contribution must be submitted in writing to the Senior Vice President of Public Affairs. The written request must specify the amount, purpose and diligence efforts that have been made to ensure that the contribution will satisfy applicable legal requirements and is consistent with the Company's strategic priorities and goals. If the Senior Vice President of Public Affairs approves the requested contribution, the request shall then be reviewed for compliance with applicable federal and/or state law by the Legal Department. Upon obtaining both approvals, the employee shall notify the Finance Department of the approved contribution in writing prior to the release of any Company funds or provision of anything of value to the political organization. Further, any political contribution by the Company of over $100,000 requires approval by the Company's Board of Directors. In addition, the Board of Directors receives quarterly updates concerning the Company's political spending activities.
The Company participates in the U.S. political process to the benefit of its stakeholders.
The Board of Directors believes it is in the best interests of our stockholders for the Company to participate in the political process. We are highly regulated by both the states in which we operate and by federal laws. The authority to operate a virtual or blended public school is dependent on the laws and regulations of each state, which vary significantly from one state to the next and are constantly evolving. Additionally, our curriculum and management services are often governed and overseen by non-profits or local or state education agencies, such as independent public charter school boards, local school districts or state education authorities. Certain federal laws also govern the day-to-day educational services we provide. As a result, the Company has a responsibility to our customers, stockholders and other stakeholders to be an active participant in the political process, to inform policy and decision makers of our views on issues and to develop and maintain strong working relationships with governmental decision makers.
The Company actively reviews and discusses existing and upcoming policy changes and regulatory initiatives and takes part in industry dialogue and lobbying efforts related to those issues that are of high importance to the Company's success and the concerns of the stakeholders. While the Proponent claims that lobbying exposes our
Company to risks, we believe that the failure to engage in critical public policy developments that impact our business would present a far greater risk to stockholders' interests.
The Company already provides substantial disclosure regarding its lobbying expenditures.
Political activities of all types are subject to extensive governmental regulation and public disclosure requirements, and the Company is fully committed to complying with all applicable U.S. state and federal laws governing its lobbying activities. The Board of Directors believes these disclosure requirements provide transparency of our lobbying activities to the general public, including our stockholders. Specifically, the Company, through its agents:
Providing additional disclosure of the Company's lobbying expenditures would not be in the best interests of the Company or its stockholders.
The expanded disclosure requested by this Proposal could place the Company at a competitive disadvantage by revealing strategies and priorities designed to protect the economic future of the Company, its stockholders and employees. Because parties with interests adverse to the Company also participate in the political process to their business advantage, any unilateral expanded disclosure could benefit these parties with interests adverse to the Company, while harming the interests of the Company and its stockholders.
Additionally, requiring the Company to specifically disclose payments made to industry associations may be misleading to stockholders. Membership in these associations comes with the understanding that we may not always agree with all of the positions of the associations or other members of such groups. As a result, such disclosure is not necessarily indicative of our position on any particular issue.
For the reasons set forth above, the Board of Directors believes that the adoption of the Proposal is unnecessary, would not provide any meaningful benefit to stockholders and is not in the best interests of our stockholders.
The academic progress and success of the schools and students we serve are reviewed annually in our Academic Reports.
Each year we publish an Academic Report available through our website that discloses the academic progress of the schools we serve and the results of student testing in reading and mathematics, based on nationally recognized tests. Our Academic Reports show test results, broken down state by state and school by school, that we use to improve our academic offerings and school management services on a continuous basis. We believe that the performance of our schools compares favorably to most of the public school options available to our students, particularly as the student population we serve has shifted toward those who have struggled at underperforming public schools.
None of the allegations raised by the Proponent support its Proposal to require additional disclosure regarding the Company's lobbying activities.
The Adequate Yearly Progress tests referenced by the Proponent, widely adopted under the now repealed and amended No Child Left Behind Act, are now recognized as having substantially less value in assessing the quality of an education provided to disadvantaged students, and have been replaced by a majority of state authorities in recent years.
The Proponent's references to theMercury News articles similarly miss the mark, as the Company has successfully resolved all issues raised by the California Attorney General's office and the California Virtual Academy schools are enrolling more students for the 2016 - 2017 school year than before.
The Proponent's Proposal could put the Company at a competitive disadvantage and its adoption is unnecessary in light of the Company's existing disclosure regarding lobbying activities and expenditures and is not in the best interests of our stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "AGAINST" THE SHAREHOLDER PROPOSAL 6 REGARDING A REPORT ON LOBBYING ACTIVITIES AND EXPENDITURES.
In accordance with a written charter adopted by the Board of Directors, the Audit Committee, or the "Committee", assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the Company's financial reporting processes and its internal audit function. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls and for assessing the effectiveness of the Company's internal control over financial reporting. The independent auditors are responsible for performing an independent audit of the Company's consolidated financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board and for issuing reports thereon.
In this context, the Committee has met and held discussions with management and the independent auditors, as well as legal counsel. Management represented to the Committee that the Company's consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Committee has reviewed and discussed the consolidated financial statements with management and the independent auditors. The Committee discussed with the independent auditors matters required to be discussed by Auditing Standard No. 16, Communications with Audit Committees, as currently in effect and as adopted by the Public Company Accounting Oversight Board.
In addition, the Committee has received the written disclosures and the letter from the independent auditors required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant's communications with the Committee concerning independence and has discussed with the independent auditors the auditors' independence from the Company and its management.
The Committee discussed with the Company's internal and independent auditors the overall scope and plans for their respective audits. The Committee meets with the internal and independent auditors, with and without management present, to discuss the results of their examinations, the evaluations of the Company's internal controls and the overall quality of the Company's accounting principles.
In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board of Directors approved, the inclusion of the audited financial statements of the Company for the fiscal year ended June 30, 2016, in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2016, filed with the SEC on August 9, 2016. The Committee also recommended to the Board of Directors, subject to stockholder ratification, the selection of BDO USA as the Company's independent registered public accounting firm for the fiscal year ending June 30, 2017, and the Board of Directors accepted its recommendation.
Name | Base Salary for Fiscal 2012 ($) | Base Salary for Fiscal 2013 ($) | Percentage Increase (%) | |||
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Nathaniel A. Davis | New hire in fiscal 2013 | $480,000 | N/A | |||
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Ronald J. Packard | $625,000 | 675,000 | 8.0% | |||
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James J. Rhyu | New hire in fiscal 2013 | 460,000 | N/A | |||
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Timothy L. Murray | $500,000 | 500,000 | 0 | |||
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Howard D. Polsky | $280,000 | 300,000 | 7.1 | |||
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Celia M. Stokes | $331,000 | 350,000 | 5.7 | |||
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Bruce J. Davis | $324,000 | 340,000 | 4.9 | |||
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Harry T. Hawks | $432,000 | 440,000 | 1.9 | |||
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Executive Bonus Plan
We maintain an annual cash bonus program, or the Executive Bonus Plan, which is intended to reward executive officers based on Company performance relative to objective financial metrics and individual measurable PMOs. We believe that the Executive Bonus Plan provides incentives that are necessary to retain high performing executives and reward them for achieving short-term goals in the pursuit of our larger business objectives. It is also designed to make a meaningful portion of NEO cash compensation variable based upon Company and individual performance. Mr. Rhyu was not eligible to receive an annual bonus for fiscal 2013 as he joined us in June 2013. In addition, Mr. Davis' annual bonus for fiscal 2013 was pro-rated to reflect his partial year of service as our Executive Chairman.
The Executive Bonus Plan for our NEOs in fiscal 2013 consisted of two primary PMO categories: (i) corporate-level financial performance metrics; and (ii) individual PMOs intended to motivate our executives to produce measurable corporate, academic and strategic achievements. The Committee identified these PMOs and assigned their relative weightings to align the total cash compensation opportunity of our NEOs with the achievement of specific performance objectives that are intended to promote the creation of long-term stockholder value. For all of our NEOs, the corporate-level financial PMOs are weighted 60% (with the opportunity to earn above-target awards in the event of outperformance and with minimum thresholds for underperformance) and the individual PMOs are weighted 40%, although individual adjustments are sometimes made to these weightings when the Committee deems it appropriate.
Corporate Financial PMOs
In fiscal 2013, the Committee adopted a financial performance matrix that provides for certain percentages of the annual cash bonus that each NEO could receive depending upon the Company's achievement of certain minimum, target or "stretch" EBITDA and revenue goals, ranging from 0% to 135% of the corporate-level component of each NEO's target bonus. In the event that performance falls in-between payout levels in the matrix, we apply the lower payout amount associated with those EBITDA and revenue goals.
Under this matrix, no bonus would be awarded to our NEOs unless the Company achieved revenue and EBITDA of at least $847 million and $94 million, respectively. Each NEO (other than Mr. Davis due to pro-ration) would be entitled to receive 100% of the corporate-level component of his or her target bonus (representing 60% of his or her target bonus) if our revenue and EBITDA goals of $862 million and $111 million, respectively, were achieved. A maximum bonus of 135% of the corporate-level component of each NEO's target bonus could be awarded under the matrix if we achieved our stretch revenue and EBITDA targets of $902 million and $138 million, respectively. As reflected in the "Determination of Fiscal 2013 Annual Performance Bonuses Paid" table below, under the matrix all NEOs (other than Mr. Nathaniel Davis) achieved 80% of the corporate financial goal, which resulted in 48% bonus funding (60% of target bonus multiplied by 80% attainment on PMO matrix).
Because Mr. Davis assumed his position as Executive Chairman mid-fiscal year, his fiscal 2013 bonus was based on modified financial performance metrics reflecting performance in the third and fourth quarters only (the period during with Mr. Davis served as our Executive Chairman). Mr. Davis was eligible to receive 90% of his base salary (60% of target bonus) if the Company's revenue and EBITDA for the third and fourth quarter of 2013 reached $419 million and $53 million, respectively. The remainder of Mr. Davis' bonus eligibility in fiscal 2013 was based on individual PMOs. Pursuant to his employment agreement, Mr. Davis' bonus opportunity was pro-rated to 50% for fiscal 2013. As reflected in the "Determination of Fiscal 2013 Annual Performance Bonuses Paid" table below, under the matrix Mr. Davis achieved 100% of the corporate financial goal, which resulted in 60% bonus funding (60% of target bonus multiplied by 100% attainment on the PMO matrix).
Individual PMOs
The Committee also established individual PMOs for the fiscal 2013 Executive Bonus Plan that were intended to align the NEOs' incentives with the Company's development and performance strategies. We retained discretion to pay additional cash bonuses to our NEOs for exceptional individual performance during fiscal 2013 consistent with the limitations of Section 162(m) of the Internal Revenue Code.
A general description of each NEO's primary individual PMOs for fiscal 2013 and his or her achievements are described below:
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Determination of Fiscal 2013 Annual Performance Bonuses Paid
In September 2013, the Committee reviewed the Company's financial results for fiscal 2013 of $848.2 million in revenue for fiscal 2013 ($421.1 million in aggregate for the third and fourth quarters of fiscal 2013) and $111.4 million in EBITDA ($54.6 million in aggregate for the third and fourth quarters of fiscal 2013). The Committee then evaluated each NEO's achievement against the previously-established individual PMOs. Based on those criteria, the Committee approved incentive awards for each NEO as summarized in the table below:
Name | (a) Weighted EBITDA / Revenue Combined (1) | (b) Weighted Individual PMOs (2) | (c) = (a)+(b) Total Achievement (% of Target Bonus Paid) = | (d) Target Bonus (% of Base Salary) | (e) Base Salary ($) | (f) = (c)*(d)*(e) Amount of Bonus ($) | ||||||
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Nathaniel A. Davis | 60% | 87% | 147% | 150% | $480,000 | $528,000 | ||||||
(prorated by 50%) = 75% | ||||||||||||
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Ronald J. Packard | 48% | 56% | 104% | 100% | 675,000 | 702,000 | ||||||
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James J. Rhyu | — | — | — | 50% | — | — | ||||||
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Harry T. Hawks (3) | 48% | 40% | 88% | 50% | 440,000 | 193,600 | ||||||
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Timothy L. Murray | 48% | 55% | 103% | 60% | 500,000 | 309,000 | ||||||
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Howard D. Polsky | 48% | 44% | 92% | 40% | 300,000 | 110,400 | ||||||
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Celia M. Stokes | 48% | 28% | 76% | 40% | 350,000 | 106,400 | ||||||
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Bruce J. Davis | 48% | 28% | 76% | 40% | 340,000 | 103,360 | ||||||
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Determination of Long-Term Incentive Plan Awards
We believe that providing long-term equity awards promotes our compensation philosophy of aligning executive pay with the long-term interests of our stockholders in building the value of our Company. In deciding on long-term incentive award amounts for each of the NEOs, the Committee considered:
During fiscal 2013, we granted restricted stock awards under our 2007 Equity Incentive Award Plan, as amended, or the 2007 Plan, to certain of our employees, including our NEOs, and, with respect to Messrs. Davis and Packard only, stock options, as described in more detail below. The Committee believes that the use of restricted stock (as opposed to stock options) as the primary form of equity compensation for most of our NEOs more closely aligns the interests of these executives with those of our stockholders, provides better retention incentives and results in less dilution to our stockholders. However, the Committee utilizes stock options as a form of equity incentive compensation for our most senior NEOs to tie their realizable pay to the creation of long-term stockholder value. The dollar amount of these stock option grants, as shown in the "Summary Compensation Table for Fiscal 2013" below, reflect an assumed accounting or "Black-Scholes" value of the option grants and do not represent the actual amount of compensation Mr. Davis or Mr. Packard may receive in connection with these awards. All stock option grants have an exercise price equal to the fair market value of our Common Stock on the date of grant. As a result, the NEOs will realize the value of the option grants only to the extent our share price appreciates and benefits our stockholders.
For the new NEOs who joined our company as executive officers in fiscal 2013, namely, Messrs. Davis and Rhyu, the initial equity incentive grants received by them represent one-time grants that are not expected to be reflective of ongoing compensation levels for these executives. For Mr. Davis, the awards were granted to be complimentary to his below-market base salary level and to focus Mr. Davis' immediate attention on bottom-line financial performance by making nearly the entire restricted stock award contingent upon the attainment of a challenging operating income metric for his initial period of service as our Executive Chairman. For Mr. Rhyu, the award was granted in partial recognition of the equity awards in his prior employer that were forfeited as a result of his becoming our Chief Financial Officer.
Executive Chairman
In connection with Mr. Davis's commencement of employment with us in January 2013, pursuant to his employment agreement, Mr. Davis received a grant of an option to purchase 420,000 shares of stock, subject to vesting in 12 equal installments on each of April 6, July 6, October 6 and January 6 during the term of his employment agreement, beginning April 6, 2013 and subject to his continued employment.
In addition, Mr. Davis received an initial hire grant of 210,000 shares of restricted stock, vesting over 12 equal quarterly installments, subject to performance-based vesting with the exception of the first quarterly installment which vested on April 6, 2013. All remaining quarterly installments would vest only upon satisfaction of a specific performance objective, namely the Company's attainment of operating income of $20 million or more for the third and fourth quarter of fiscal 2013. In September 2013, the Board of Directors determined that the Company achieved the operating income goal and therefore the performance-based vesting requirement was satisfied and the remainder of the initial grant will vest pursuant to the three year vesting schedule.
Chief Executive Officer
Under the terms of his amended and restated employment agreement entered into in 2010, Mr. Packard was entitled to receive for fiscal 2013 a restricted stock award having a value of $1.25 million, subject to the achievement of one or more pre-determined performance objectives established by the Compensation Committee. The Committee previously determined that the performance objective for Mr. Packard's potential restricted stock awards would be the achievement of 8% compounded annual revenue growth over a three-year period and fiscal 2013 revenue equal to or greater than our fiscal 2012 revenue. In January 2013, the Committee determined that the performance objectives had been met and that the restricted stock award would be granted to Mr. Packard no later than December 2013. In September 2013, the Committee awarded Mr. Packard 36,851 shares of restricted stock, valued at $1.25 million based upon the fair market value of our Common Stock on the date of issuance of the shares. These shares vest over three years in equal quarterly installments. Mr. Packard also received an award of 141,509 stock options for fiscal 2013, which vest quarterly over a period of four years, to further tie Mr. Packard's total realizable pay to the creation of long-term stockholder value.
Other NEOs
In August 2012, we granted time-based restricted stock awards to our NEOs in the following amounts: Messrs. Hawks and Bruce Davis each received 13,000 shares of restricted stock, Mr. Polsky received 14,000 shares
of restricted stock and Ms. Stokes received 22,000 shares of restricted stock. Mr. Rhyu, who did not join us until June 2013, received 109,250 shares of restricted stock in connection with his commencement of employment. In addition, pursuant to the terms of his employment agreement, we granted 10,000 shares of restricted stock to Mr. Murray. The shares of restricted stock granted to our NEOs vest semi-annually over a three-year period, with 20% vesting in the first year and 40% vesting in each of the next two years following the grant date. The Committee determined that the size of each restricted stock award was appropriate to encourage retention among our NEOs and to ensure the stability and consistency of our management team.
One-Time Bonuses in Fiscal 2013
In February 2013, Mr. Polsky received a one-time mid-year cash bonus of $50,000, in consideration of his essential role in supporting and coordinating with the Board of Directors during our executive reorganization in fiscal 2013, while simultaneously managing the Company's critical legal and litigation matters.
Pursuant to his employment agreement, Mr. Rhyu received a $200,000 cash signing bonus in connection with his commencement of employment with us in June 2013. The bonus was awarded to induce Mr. Rhyu to accept the position as our Chief Financial Officer and in consideration of forfeited incentive compensation opportunities at his prior employer. The bonus was also awarded in recognition of the fact that Mr. Rhyu was not eligible to participate in our Executive Bonus Plan for fiscal 2013 due to his joining the company late in the year. The bonus is subject to forfeiture if Mr. Rhyu's employment terminates within six months after his date of hire.
Deferred Compensation Plan
We maintain a non-qualified deferred compensation plan, or the Deferred Compensation Plan, for members of our management team, including our NEOs. Under the Deferred Compensation Plan, our NEOs are eligible to elect to defer the receipt of up to 50% of their annual salary and up to 100% of any annual incentive bonus until retirement. Earnings are credited on deferred amounts based upon a variety of investment options that may be elected by each participant. The Company does not make any contributions to the Plan. Certain information with respect to amounts deferred by our NEOs under this plan is set forth below in the Non-qualified Deferred Compensation Table.
Defined Contribution Plan
We maintain a Section 401(k) Savings/Retirement Plan, or the 401(k) Plan, in which certain of our employees, including our NEOs, are eligible to participate. All employees, including our NEOs, are automatically enrolled in the 401(k) plan at a 3% deferral rate with the ability to opt-out. The 401(k) Plan allows participants to defer a portion of their annual compensation, subject to certain limitations imposed by the Internal Revenue Code. We currently provide matching contributions equal to $0.25 for each dollar of a participant's contributions, up to a maximum of 4% of the participant's annual salary, subject to certain statutory limits.
Employee Benefits and Perquisites
We provide our NEOs with certain personal benefits and perquisites, which we do not consider to be a significant component of executive compensation but recognize to be an important factor in attracting and retaining talented executives. NEOs participate in the same medical, dental, vision, disability and life insurance plans as our employees generally. We also pay for supplemental long-term disability and life insurance premiums for our executive officers and provide our executive officers with the opportunity to receive annual Company-paid executive physical examinations. We provide these supplemental benefits to our executive officers due to the relatively low cost of such benefits and the value they provide in assisting us in attracting and retaining talented executives. We reimburse certain executives for their relocation expenses from time to time and for temporary housing expenses they may incur in connection with their provision of services. We provide such reimbursements to our executives because such expenses are typically directly associated with and would not have been incurred but for their commencement or continued provision of services.
Mr. Rhyu received reimbursement for expenses related to his relocation in fiscal 2013. Mr. Murray and Mr. Hawks received lodging and commuting allowances in fiscal 2013. None of our executive officers receive tax gross-ups in connection with our provision of any perquisites or personal benefits. The value of personal benefits and perquisites we provided to each of our NEOs is set forth below in our "Summary Compensation Table for Fiscal 2013."
COMPENSATION GOVERNANCE, PROCESSAND INCENTIVE DECISIONS
Role of Compensation Committee and Non-Employee Directors
The Committee is responsible for overseeing and implementing our NEO compensation programs, as specified in the Committee's charter. The Committee's role includes:
In implementing its role in the compensation program, the Committee uses information from a number of sources. The information utilized by the Committee includes advice from its independent compensation consultant, data regarding the compensation practices of competitors, tally sheets showing prior compensation awards, and outstanding equity holdings of the NEOs.
Role of Management
Our management, under the leadership of our Executive Chairman, plays an important role in establishing and maintaining our NEO compensation programs. Management's role includes recommending plans and programs to the Committee, implementing the Committee's decisions regarding the plans and programs and assisting and administering plans in support of the Committee. Our Executive Chairman also provides information on the individual performance of the other NEOs and makes annual recommendations to the Committee on compensation levels for all other NEOs.
Role of Committee's Independent Compensation Consultant
The Committee's charter gives it the authority to retain and approve fees and other terms of engagement for compensation consultants and other advisors to assist it in performing its duties. In fiscal 2013, the Committee continued to retain Towers Watson as its independent compensation consultant. Towers Watson reports directly to the Committee, which annually reviews its performance and fees.
In fiscal 2013, the Committee received a report from Towers Watson reviewing its independence in light of new SEC regulations and proposed NYSE listing standards. The Committee discussed all relevant factors, including those cited in the new rules and proposed NYSE listing standards, and concluded that the work of the consultant did not raise any conflict of interest.
The Committee instructed Towers Watson to provide it with advice and guidance on compensation proposals, including proposed compensation amounts, the design of incentive plans, the setting of performance goals, and the structure of other forms of compensation and benefits programs, as well as relevant information about market practices and trends. Typically, Towers Watson attends Committee meetings, reviews existing compensation programs to ensure consistency with our compensation philosophy and current market practices and reviews the comparative information derived from the peer group and published survey data that the Committee uses when making compensation decisions.
OTHER COMPENSATION POLICIES AND PRACTICES
Tax Deductibility of Annual Compensation
Section 162(m) of the Internal Revenue Code limits tax deductions for certain annual compensation in excess of $1,000,000 paid to certain individuals named in the summary compensation tables of public company proxy statements. The Committee has generally sought to structure certain incentive compensation awards to satisfy the requirements for such awards to be treated as qualified performance-based compensation for purposes of Section 162(m) where necessary to preserve the tax deductibility of such payments. The Committee considers tax deductibility when structuring compensation programs and presently expects to continue to pursue compensation programs that are intended to be tax deductible. However, if circumstances warrant, the Committee retains the discretion to grant incentive awards to NEOs that are not fully deductible as a result of Section 162(m), as the Committee must balance the effectiveness and overall goals of our executive compensation programs with the materiality of reduced tax deductions.
Accounting for Stock-Based Compensation
ASC Topic 718, Compensation—Stock Compensation, requires us to recognize an expense for the fair value of equity-based compensation awards. Grants of equity-based awards under our equity incentive award plans are accounted for under ASC Topic 718. We consider the accounting implications of significant compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs. As accounting standards change, we may revise certain programs to appropriately align accounting expenses of our equity awards with our overall executive compensation philosophy and objectives.
Equity Grant Practices
We do not have any program, plan or practice to time equity awards to our employees in coordination with the release of material non-public information. We do not grant equity awards based on our stock price. If we are in possession of material non-public information, either favorable or unfavorable, when equity awards are made, the Committee will not take the information into consideration in determining award amounts. Our practice is to determine the stock price for annual NEO equity awards on the day that incentive awards are granted.
Compensation Clawback Policy
The Board of Directors adopted a clawback policy in September 2013. If the Board of Directors determines that it is necessary, K12 may recover from an NEO the amount of previously paid incentive compensation (including both cash bonuses and equity awards) that the Board of Directors determines to be appropriate if a material error or inaccuracy resulted in whole or in part from the fraud or intentional misconduct of an executive that leads to a financial restatment. This clawback provision is intended to provide enhanced safeguards against certain types of employee misconduct, and allows for recovery of significant compensation paid to an employee.
Stock Ownership Guidelines
In fiscal 2013, the Committee considered adopting mandatory stock ownership guidelines for our executive officers. After evaluating the Company's current compensation structure and corporate objectives and the holdings of the current management team, the Committee concluded that adopting a mandatory stock ownership policy at this time would not be in the long term best interests of our stockholders. We also note that Mr. Packard, our CEO, is one of our largest individual stockholders, and our Board of Directors has historically viewed Mr. Packard's stock ownership level in our company as very closely aligning his interests with those of our stockholders generally.
Severance and Change-in-Control Arrangements
We consider severance to be an integral part of the overall compensation package. We provide severance to attract and retain individuals with superior ability and managerial talent, provide our executives with appropriate protections due to their vulnerability to terminations of employment, acquisitions and to encourage our executives to focus their attention on their work duties and responsibilities in all situations.
The NEOs are generally not entitled to receive cash payments solely as a result of a change in control. Unvested stock options and restricted stock awards are treated differently following a change in control to take into account their respective purposes of value creation and retention, and in light of our executives' heightened vulnerability to terminations of employment in the change in control context. All of our named executive officers' unvested stock options will become fully vested and exercisable under the terms of the applicable stock option agreements upon a change in control. We have also adopted a policy pursuant to which all restricted stock awards held by our NEOs other than Mr. Packard would be subject to "double trigger" acceleration upon a change in control. Under this policy, restricted stock awards will vest in full only if the NEO is terminated without cause in connection with the change in control. For this purpose, a termination without cause includes a "constructive termination," which generally involves any material diminution in the NEO's base salary, bonus potential, job title or responsibilities, as well as a relocation of the NEO's principal place of business outside of a 40-mile radius. As provided in Mr. Packard's employment agreement, all of the outstanding restricted stock and stock options held by Mr. Packard will become fully vested immediately prior to a change in control. In addition, certain awards granted to Mr. Davis and Mr. Murray are subject to additional acceleration provisions under the terms of his employment agreement, as described in more detail under the heading "Potential Payments upon Termination or Change in Control."
With regard to severance payments not made in connection with a termination following a change in control, and if not otherwise provided for in the employment agreements of the NEOs, the Company's severance policy provides that solely for terminations without cause, and contingent upon signing a release of claims, the NEOs will be entitled to the (i) accelerated vesting of stock options that otherwise would have vested in the one year following the date of termination (all other options to be forfeited) and (ii) accelerated vesting of all unvested restricted stock awards.
We believe that providing the NEOs with severance payments upon certain terminations of employment, accelerated vesting of stock options upon a change in control, and accelerated vesting of restricted stock awards upon a termination without cause in connection with a change in control are key retention tools that assist us with remaining competitive with the companies in our peer group, provide our executive officers with incentives to focus on the best interests of our stockholders in the context of a potential change in control, and appropriately protect our executive officers in the event of an involuntary termination of employment without creating a windfall due solely to the change in control.
Summary Compensation Table for Fiscal 2013
The following table shows the compensation we paid to our NEOs for services rendered during fiscal 2013, 2012 and 2011, with the exception of Mr. Murray, who was not employed by us in fiscal 2011, Messrs. Davis and Rhyu who were not employed by us in fiscal 2011 or 2012 and Mr. Polsky who was not an NEO during fiscal 2011 or 2012.
Name | Fiscal Year | Base Salary | Bonus (1) | Stock Awards (2)(3) | Option Awards (2) | Non-equity Incentive Plan Compensation (4) | All Other Compensation (5) | Total | ||||||||
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Nathaniel A. Davis, Executive Chairman (6) | 2013 | $342,893 | $ — | $4,524,600 | $4,128,114 | $528,000 | $20,000 | $9,543,607 | ||||||||
Ronald J. Packard, | 2013 | 670,836 | — | 1,250,000 | 1,500,000 | 702,000 | 4,031 | 4,126,867 | ||||||||
Chief Executive | 2012 | 618,942 | — | 1,250,000 | 1,500,000 | 584,375 | 7,182 | 3,960,499 | ||||||||
Officer | 2011 | 551,539 | — | 5,410,496 | — | 281,250 | 9,648 | 6,252,933 | ||||||||
James J. Rhyu, Executive Vice President and Chief Financial Officer | 2013 | 36,564 | 200,000 | 2,960,675 | — | — | 73,983 | 3,271,222 | ||||||||
Harry T. Hawks, | 2013 | 402,667 | — | 278,200 | — | 193,600 | 74,183 | 948,650 | ||||||||
Former Executive | 2012 | 428,123 | — | 428,480 | — | 151,200 | 48,813 | 1,056,616 | ||||||||
Vice President and Chief Financial Officer | 2011 | 400,000 | — | — | — | 97,200 | 46,522 | 543,722 | ||||||||
Timothy L. Murray, | 2013 | 500,000 | — | 214,000 | — | 309,000 | 53,053 | 1,076,053 | ||||||||
President and Chief Operating Officer | 2012 | 94,871 | 75,000 | 1,275,000 | 1,827,000 | — | 10,000 | 3,281,871 | ||||||||
Howard D. Polsky, Executive Vice President, Secretary and General Counsel | 2013 | 298,333 | 50,000 | 299,600 | — | 110,400 | — | 758,333 | ||||||||
Celia M. Stokes | 2013 | 341,687 | — | 470,800 | — | 106,400 | 4,066 | 922,953 | ||||||||
Executive Vice | 2012 | 320,915 | 13,240 | 428,480 | — | 132,400 | 8,487 | 903,552 | ||||||||
President and Chief Marketing Officer | 2011 | 300,300 | — | 314,760 | — | 66,200 | 8,260 | 689,520 | ||||||||
Bruce J. Davis | 2013 | 338,667 | — | 278,200 | — | 103,360 | 3,586 | 723,813 | ||||||||
Executive Vice | 2012 | 322,183 | — | 348,140 | — | 90,720 | 8,433 | 769,476 | ||||||||
President of Worldwide Business Development | 2011 | 309,000 | — | 314,760 | — | 51,840 | 10,322 | 685,922 | ||||||||
additional information, including information regarding the assumptions used when valuing the stock options, refer to note 9 of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2013. See the table below entitled "Grants of Plan-Based Awards During 2013" for additional information on stock awards and stock options granted during fiscal 2013.
Grants of Plan-Based Awards During Fiscal 2013
The following table provides information regarding grants of plan-based awards to our NEOs during fiscal 2013. The awards described in the following table were granted under our Executive Bonus Plan and 2007 Plan.
Name | Grant Date | Estimated Possible Payouts under Non-equity Incentive Plan Awards (1) | Estimated Possible Payouts under Equity Incentive Plan Awards: Target (#)($) | All Other Stock Awards: Number of Shares of Stock (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise Price of Option Awards ($/Sh) | Grant Date Fair Value of Option and Stock Awards ($) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Target ($) | Maximum ($) | ||||||||||||||||
Nathaniel A. Davis | — | $360,000 | $720,000 | — | — | — | — | — | |||||||||
Executive Chairman | 1/2/2013 | — | — | — | 2,901 (3) | — | — | $60,000 | |||||||||
1/7/2013 | — | — | 192,500 (4) | 17,500 (4) | — | — | 4,464,600 | ||||||||||
1/7/2013 | — | — | — | — | 420,000 (4 | ) | $21.26 | 4,128,114 | |||||||||
Ronald J. Packard, | — | 675,000 | 1,350,000 | — | — | — | — | — | |||||||||
Chief Executive Officer | 8/24/2012 | — | — | — | — | 141,509 (6 | ) | 21.44 | 1,500,000 | ||||||||
8/24/2012 | — | — | $1,250,000 (5) | — | — | 1,250,000 | |||||||||||
James J. Rhyu Executive Vice President and Chief Financial Officer | 6/19/2013 | — | — | — | 109,250 (7) | — | — | 2,960,675 | |||||||||
Harry T. Hawks | — | 216,000 | 261,360 | — | — | — | — | — | |||||||||
Former Executive Vice President and Chief Financial Officer | 8/14/2012 | — | — | — | 13,000 (2) | — | — | 278,200 | |||||||||
Timothy L. Murray | — | 300,000 | 438,000 | — | — | — | — | — | |||||||||
President and Chief Operating Officer | 8/14/2012 | — | — | — | 10,000 (2) | — | — | 214,000 | |||||||||
Howard D. Polsky | — | 120,000 | 145,200 | — | — | — | — | — | |||||||||
Executive Vice President, General Counsel and Secretary | 8/14/2012 | — | — | — | 14,000 (2) | — | — | 299,600 | |||||||||
Celia M. Stokes | — | 140,000 | 169,400 | — | — | — | — | — | |||||||||
Executive Vice President and Chief Marketing Officer | 8/14/2012 | — | — | — | 22,000 (2) | — | — | 470,800 | |||||||||
Bruce J. Davis | — | 136,000 | 164,560 | — | — | — | — | — | |||||||||
Executive Vice President of Worldwide Business Development | 8/14/2012 | — | — | — | 13,000 (2) | — | — | 278,200 | |||||||||
years following the grant date with the initial 17,500 shares subject to time vesting. The remaining shares were subject to performance vesting based on the Company meeting financial targets in fiscal 2013 following Mr. Davis initial employment. In September 2013, the Board of Directors determined that the performance criteria had been met. The stock options vests in equal quarterly installments of 35,000 shares over three years following the grant date.
Outstanding Equity Awards at End of Fiscal 2013
The following table provides information regarding outstanding equity awards held by our NEOs as of June 30, 2013. The section titled "Determination of Long-Term Incentive Awards" in the Compensation Discussion and Analysis above provides additional information regarding the outstanding equity awards set forth in this table.
| Option Awards | Stock Awards | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | Option Exercise Price | Option Expiration Date | Equity Incentive Plan Awards: Amount of Unearned Shares, Units or Other Rights That Have Not Vested ($) | Equity Incentive Plan Awards: Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | |||||||||
Nathaniel A. | 35,000 | 385,000 | — | $21.26 | 1/7/2021 | — | — | — | ||||||||||
Davis (1) | 2,343 | 157 | — | 17.46 | 7/13/2017 | — | — | — | ||||||||||
5,802 | $152,419 | |||||||||||||||||
192,500 | 5,056,975 | |||||||||||||||||
Ronald J. | — | 141,509 | — | 21.44 | 8/24/2020 | — | — | — | — | |||||||||
Packard (2) | 16,160 | 48,495 | — | 26.78 | 8/12/2019 | — | — | — | — | |||||||||
28,581 | 36,750 | — | 26.78 | 8/12/2019 | — | — | — | — | ||||||||||
165,000 | 11,000 | — | 17.46 | 7/13/2017 | — | — | — | — | ||||||||||
150,000 | — | — | 23.45 | 8/21/2016 | — | — | — | — | ||||||||||
446,078 | — | 14,704 | 13.66 | 7/12/2015 | — | — | — | — | ||||||||||
— | — | — | — | — | — | — | 97,288 | 2,555,756 | ||||||||||
— | — | — | — | — | $1,250,000 (9) | $1,250,000 (9) | — | — | ||||||||||
James J. Rhyu (3) | — | — | — | — | — | 109,250 | 2,869,998 | |||||||||||
Harry T. Hawks (4) | 95,000 | — | — | 23.59 | 11/30/2013 | — | — | |||||||||||
Timothy L. | 37,500 | 112,500 | — | 25.50 | 4/30/2020 | — | — | |||||||||||
Murray (5) | — | — | — | — | — | 49,000 | 1,287,230 | |||||||||||
Howard D. Polsky (6) | 35,767 | 1,238 | — | 17.46 | 7/13/2017 | 21,500 | 564,805 | |||||||||||
Celia M. | — | 2,269 | — | 17.46 | 7/13/2017 | — | — | |||||||||||
Stokes (7) | — | — | — | — | — | 25,400 | 667,258 | |||||||||||
Bruce J. | 27,843 | 1,857 | — | 17.46 | 7/13/2017 | — | — | |||||||||||
Davis (8) | 27,000 | — | — | 23.45 | 8/21/2016 | — | — | |||||||||||
— | — | — | — | — | 21,900 | 575,313 | ||||||||||||
Mr. Davis' outstanding shares of restricted stock vest as follows, subject to his continued employment through the applicable vesting date:
Mr. Packard's outstanding shares of restricted stock vest as follows, subject to his continued employment through the applicable vesting date:
Mr. Murray's outstanding shares of restricted stock vest as follows, subject to his continued employment through the applicable vesting date:
Mr. Polsky's outstanding shares of restricted stock vest as follows, subject to his continued employment through the applicable vesting date:
Ms. Stokes' outstanding shares of restricted stock vest as follows, subject to her continued employment through the applicable vesting date:
Mr. Davis' outstanding shares of restricted stock vest as follows, subject to his continued employment through the applicable vesting date:
Option Exercises and Stock Vested During Fiscal 2013
The following Option Exercises and Stock Vested table provides additional information about the value realized by the NEOs on option award exercises and the vesting of restricted stock awards during the year ended June 30, 2013.
| Option Awards | Stock Awards | ||||||
---|---|---|---|---|---|---|---|---|
Name | Number of Shares Acquired on Exercise (1) (#) | Value Realized on Exercise (2) ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting (3) ($) | ||||
Nathaniel A. Davis | — | — | 20,303 | $483,296 | ||||
| ||||||||
Ronald J. Packard | 40,000 | $482,320 | 68,596 | 1,533,836 | ||||
| ||||||||
James J. Rhyu | — | — | — | — | ||||
| ||||||||
Harry T. Hawks | — | — | 37,400 | 990,703 | ||||
| ||||||||
Timothy L. Murray | — | — | 11,000 | 256,280 | ||||
| ||||||||
Howard D. Polsky | 3,206 | 48,090 | 8,956 | 192,589 | ||||
| ||||||||
Celia M. Stokes | 82,271 | 508,227 | 12,412 | 267,086 | ||||
| ||||||||
Bruce J. Davis | — | — | 10,612 | 229,010 | ||||
|
Nonqualified Deferred Compensation
The following table sets forth certain information with respect to amounts deferred by the NEOs during the year ended June 30, 2013, under our non-qualified deferred compensation plan, which is discussed in more detail above.
Name | Executive Contributions in Last Fiscal Year ($) | Company Contributions in Last Fiscal Year ($) | Aggregate Earnings/(Losses) in Last Fiscal Year ($) | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance at Last FYE ($) | |||||
---|---|---|---|---|---|---|---|---|---|---|
Nathaniel A. Davis | — | — | — | — | — | |||||
| ||||||||||
Ronald J. Packard | — | — | $26,402 | — | $209,717 | |||||
| ||||||||||
James J. Rhyu | — | — | — | — | — | |||||
| ||||||||||
Harry T. Hawks | — | — | — | — | — | |||||
| ||||||||||
Timothy L. Murray | — | — | — | — | — | |||||
| ||||||||||
Howard D. Polsky | — | — | — | — | — | |||||
| ||||||||||
Celia M. Stokes | — | — | — | — | — | |||||
| ||||||||||
Bruce J. Davis | — | — | — | — | — | |||||
|
Potential Payments Upon Termination or Change in Control
The Company has entered into employment agreements with each of our NEOs that provide for severance payments and benefits upon certain terminations of employment. Our NEOs are also entitled to certain benefits upon a change in control. The terms and conditions of such payments and benefits, and the circumstances in which they will be paid or provided to our NEOs, are described in more detail below.
Employment Agreements
Summary of Employment Agreement with Nathaniel A. Davis
Mr. Davis entered into an employment agreement with the Company to serve as Executive Chairman, effective January 7, 2013, as amended on June 10, 2013, for a term of three years from the effective date. If Mr. Davis' employment is terminated without cause, or if he resigns for good reason (generally defined as a material diminution of responsibilities, a material change in geographic location of the Company or the Company's breach of the agreement) on or prior to January 7, 2014 or in the event of his death or disability, then all non-vested equity awards that would have vested anytime in the one year following his separation from employment will automatically vest. If Mr. Davis's employment is terminated without cause, or if he resigns for good reason after January 7, 2014, then all equity awards that would have vested anytime in the two year period following the separation from employment will automatically vest. If Mr. Davis' employment is terminated without cause, or if he resigns for good reason within one year of a change in control, all outstanding non-vested awards will accelerate and automatically vest.
If Mr. Davis is terminated without cause or resigns for good reason, he will receive an amount of severance equal to three times his then-current base salary as of the date of termination and he will also remain eligible to receive his performance bonus for the fiscal year in which such termination occurs, subject to the attainment of the performance criteria previously established, as well as one-year of continued health, medical, dental and vision benefits (or a payment in lieu thereof). However, if he is terminated without cause or resigns for good reason and the Board of Directors elects to continue Mr. Davis' compliance with the non-compete provision of his employment agreement, then he will be entitled to an additional two times his then-current base salary as of the date of termination. In the event of a termination of Mr. Davis' employment due to death or disability, he (or his estate will receive) three months of continued base salary payments, a pro-rated performance bonus for the year of termination, as well as one-year of continued health, medical, dental and vision benefits (or a payment in lieu thereof), Upon the expiration of Mr. Davis'
employment contract, any restricted shares scheduled to vest at the end of the final calendar quarter coincident or immediately preceding the third anniversary of the effective date of the employment agreement will vest, subject to satisfaction of previously-established performance criteria. If the Company offers Mr. Davis a new employment contract at the end of the term, but the parties do not enter into a new employment contract, then he may exercise any vested options within three months of the termination. If the Company does not offer Mr. Davis a new employment contract at the end of the term, he may exercise vesting options for 365 days following the termination.
The agreement also provides that Mr. Davis is subject to restrictive covenants during the term of the agreement and for certain periods following termination of employment, including confidentiality restrictive covenants during the term and for three years following termination, non-competition restrictive covenants during the term and for two years following termination, and non-solicitation restrictive covenants while he is employed by us and during the 18-month period following termination.
Summary of Employment Agreement with Ronald J. Packard
Effective as of September 27, 2010, we entered into an amended and restated employment agreement with Mr. Packard. This amended and restated agreement was further amended and restated on January 7, 2013, and was amended again effective April 29, 2013. Mr. Packard's amended employment agreement was entered into in connection with the creation of our Executive Chairman position to define the span of responsibilities for Mr. Packard in his role as CEO. Mr. Packard's compensation or cash severance amounts generally were not increased. However, the agreement, as amended, provides Mr. Packard with an additional period of time (up to 328 days) to provide the Company notice of any intent to resign for a "constructive termination."
Under his employment agreement, as amended, the term of Mr. Packard's employment continues until September 30, 2014 (subject to the possibility of annual extensions thereafter). Mr. Packard is entitled to severance upon a termination of his employment without cause or due to a constructive termination in an amount equal to three times Mr. Packard's base salary, 50% of which would be payable in a lump sum and 50% of which would be payable in installments over an 18-month period. Upon a termination without cause, Mr. Packard is entitled to an extension of the exercise date for his outstanding vested stock options until the earlier of 365 days following such termination, the date he is no longer on the Board of Directors or the expiration of the option term. Upon a constructive termination prior to the end of fiscal 2013, he would have also been entitled to a pro-rata portion of his annual bonus up to the maximum, subject to the Board of Directors' determination that he had achieved the previously-established corporate and individual performance goals and performed his responsibilities as CEO as determined by the Board of Directors in its discretion. Upon termination of Mr. Packard's employment due to his death, his estate will receive salary continuation payments for 180 days plus a pro rata portion of his target bonus for the year in which the termination occurs based upon the termination date occurs. In addition, upon a termination of Mr. Packard's employment without Cause, a "constructive termination," a termination due to disability, Mr. Packard's death or the occurrence of a change in control of us, all of Mr. Packard's unvested stock options and restricted stock would accelerate and vest in full.
The employment agreement also provides that Mr. Packard is subject to restrictive covenants during the term of the agreement and for certain periods following termination of employment, including confidentiality restrictive covenants during the term and for three years following termination, intellectual property restrictive covenants during the term, and non-solicitation and noncompetition restrictive covenants, including investment limitations in direct competitors, while he is employed by us and during the 18-month period following termination.
Summary of Employment Agreement with James J. Rhyu
Mr. Rhyu's letter agreement, dated May 1, 2013 and effective as of his start date, June 4, 2013, provides for his employment with us on an "at-will" basis. Upon a termination of Mr. Rhyu's employment for "good reason" (generally, a material breach of the employment agreement by us that is not cured within 60 days after written notice from Mr. Rhyu), or by us without "cause," Mr. Rhyu is entitled to 12 months of base salary continuation, payable at the same time and in the same manner as such salary had been paid prior to termination, and an amount equal to any accrued and earned annual bonus for the completed fiscal year immediately preceding the date of termination declared by the Committee but not yet paid.
The agreement also provides that Mr. Rhyu is subject to the terms of our Confidentiality, Proprietary Rights and Non-Solicitation Agreement which generally prohibits the unauthorized disclosure of our confidential information during and after the period of employment, ensures our right of ownership of any intellectual property developed during the period of employment, prohibits the solicitation of employees during employment and for one year following termination of employment and requires that any disputes regarding employment or termination of employment be subject to binding arbitration.
Summary of Employment Agreement with Timothy L. Murray
Mr. Murray's employment agreement, effective as of April 23, 2012, provides for his employment with us on an "at-will" basis. Upon a termination of Mr. Murray' employment for "good reason" (generally, a material breach of the employment agreement by us that is not cured within 60 days after written notice from Mr. Murray), or by us without "cause," Mr. Murray is entitled to 12 months of base salary continuation, payable at the same time and in the same manner as such salary had been paid prior to termination and 12 months of benefit continuation. In addition, 25% of the shares subject to the stock options and restricted stock awards granted to Mr. Murray in fiscal 2012 will vest upon a termination of his employment without cause or for good reason within one year of the applicable grant date. Further, the restricted stock award granted to Mr. Murray in fiscal 2012 and fiscal 2013 will vest in full upon a termination of his employment without cause or for good reason immediately prior to or following a change in control of the Company.
The agreement also provides that Mr. Murray is subject to the terms of our Confidentiality, Proprietary Rights and Non-Solicitation Agreement which generally prohibits the unauthorized disclosure of our confidential information during and after the period of employment, ensures our right of ownership of any intellectual property developed during the period of employment, prohibits the solicitation of employees during employment and for one year following termination of employment and requires that any disputes regarding employment or termination of employment be subject to binding arbitration.
Summary of Employment Agreement with Howard D. Polsky
Mr. Polsky's employment agreement, effective as of June 1, 2004, as amended on July 1, 2007, provides for his employment with us on an "at-will" basis. Upon a termination of Mr. Polsky's employment for "good reason" (generally, a material breach of the employment agreement by us), or by us without "cause," Mr. Polsky is entitled to 12 months of base salary continuation, payable at the same time and in the same manner as such salary had been paid prior to termination. The agreement also provides that Mr. Polsky is subject to the terms of our Confidentiality, Proprietary Rights and Non-Solicitation Agreement which generally prohibits the unauthorized disclosure of our confidential information during and after the period of employment, ensures our right of ownership of any intellectual property developed during the period of employment, prohibits the solicitation of employees during employment and for one year following termination of employment and requires that any disputes regarding employment or termination of employment be subject to binding arbitration.
Summary of Employment Agreement with Celia M. Stokes
Ms. Stokes' employment agreement, effective as of March 20, 2006, provides for her employment with us on an "at-will" basis. Upon a termination of Ms. Stokes' employment for "good reason" (generally, a material breach of the employment agreement by us that is not cured within 30 days), or by us without cause, Ms. Stokes' employment agreement provides that she is entitled to 180 days of base salary continuation; however, under the Company's severance policy (which would supersede her employment agreement), she would be eligible to receive nine months of salary continuation. The agreement also provides that Ms. Stokes is subject to the terms of our Confidentiality, Proprietary Rights and Non-Solicitation Agreement which generally prohibits the unauthorized disclosure of our confidential information during and after the period of employment, ensures our right of ownership of any intellectual property developed during the period of employment, prohibits the solicitation of employees during employment and for one year following termination of employment and requires that any disputes regarding employment or termination of employment be subject to binding arbitration.
Summary of Employment Agreement with Bruce J. Davis
Mr. Davis' employment agreement, effective as of January 3, 2007, provides for his employment with us on an "at-will" basis. Upon a termination of Mr. Davis' employment for "good reason" (generally, a material breach of the employment agreement by us that is not cured within 60 days, a reduction in base salary, a diminution or adverse change to title or the person to whom Mr. Davis reports prior to a change in control of the Company, a material diminution in authority, responsibilities or duties, a relocation of place of employment more than 25 miles from our headquarters, a material reduction in Mr. Davis' compensation, assignment of a materially different title and responsibilities effectively demoting Mr. Davis, or if the employment agreement is not assumed by the successor within 90 days following a change in control of the Company), or by us without cause, Mr. Davis is entitled to 12 months of base salary continuation. The agreement also provides that Mr. Davis will be subject to the terms of our Confidentiality, Proprietary Rights and Non-Solicitation Agreement which generally prohibits the unauthorized disclosure of our confidential information during and after the period of employment, ensures our right of ownership of any intellectual property developed during the period of employment, prohibits the solicitation of employees during employment and for one year following termination of employment and requires that any disputes regarding employment or termination of employment be subject to binding arbitration.
Harry T. Hawks' Termination of Employment
Mr. Hawks' employment agreement, effective as of May 5, 2010, provided for his employment with us on an "at-will" basis. In fiscal 2013, Mr. Hawks' employment terminated without cause and he received the following as severance: (i) one year base salary at the rate in effect in fiscal 2013 ($440,000); (ii) his annual bonus, calculated with the same percentage for financial goals as for all NEOs and with full credit for all individual PMOs ($193,600); (iii) accelerated vesting of all outstanding restricted stock awards ($633,036); (iv) accelerated vesting for all stock options ($153,250); (v) one year continued health and welfare benefits ($20,000); (vi) an additional three-month Consulting Agreement, with compensation at his fiscal 2013 base salary rate ($110,000 in the aggregate); and (vii) options remain exercisable for 90 days after the termination of the Consulting Agreement.
Change-in-Control Arrangements
The stock option agreements for outstanding stock options, including those held by our NEOs, generally provide for accelerated and full vesting of unvested stock options upon a change in control of the Company. In addition, Mr. Packard's outstanding shares of unvested restricted stock will become fully vested immediately prior to a change in control of the Company. Other than the foregoing, none of the NEOs is entitled to any payments or benefits upon a change in control of the Company, absent a qualifying termination in connection with the change in control.
Potential Value of Termination and Change-in-Control Benefits
The following table provides the dollar value of the potential payments and benefits that each NEO would be entitled to receive upon certain terminations of employment (including in connection with a change in control of the Company) and upon a change in control of the Company absent a termination of employment, assuming that the termination or change in control, as applicable, occurred on June 30, 2013, and the price per share of our Common Stock subject to the stock options equaled $26.27, the value of one share of our Common Stock on the last day of fiscal 2013. Mr. Hawks' employment terminated without cause during fiscal 2013, and the table reflects actual payments made to him upon his termination.
Name | Payment | Death | Disability (1) | Termination Without Cause | Constructive Termination/ Good Reason | Change in Control (no Termination) | Change in Control (and Qualifying Termination) | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nathaniel A. Davis | Salary continuation | $120,000 | $120,000 | $1,440,000 (2) | $1,440,000 (2) | $ — | $1,440,000 (2) | |||||||
Target bonus | 528,000 | 528,000 | 528,000 | 528,000 | — | 528,000 | ||||||||
Benefit Continuation (3) | 9,700 | 9,700 | 9,700 | 9,700 | 9,700 | 9,700 | ||||||||
Option vesting | 702,783 | 702,783 | 702,783 | 702,783 | 1,930,233 | 1,930,233 | ||||||||
Restricted stock vesting | 1,838,900 | 1,838,900 | 1,838,900 | 1,838,900 | — | 5,209,394 | ||||||||
| ||||||||||||||
Ronald J. Packard | Salary continuation | 337,500 | — | 2,025,000 | 2,025,000 | — | 2,025,000 | |||||||
Target bonus | 702,000 | 702,000 | — | — | — | — | ||||||||
Benefit Continuation(3) | — | 6,000 | 6,000 | 6,000 | 6,000 | 6,000 | ||||||||
Option vesting | 780,398 | 780,398 | 780,398 | 780,398 | 780,398 | 780,398 | ||||||||
Restricted stock vesting | 2,555,756 | 2,555,756 | 2,555,756 | 2,555,756 | 2,555,756 | 2,555,756 | ||||||||
| ||||||||||||||
James J. Rhyu | Salary continuation | — | — | 460,000 | 460,000 | — | 460,000 | |||||||
Benefit Continuation(3) | 10,300 | 10,300 | 10,300 | 10,300 | 10,300 | 10,300 | ||||||||
Restricted stock vesting | 2,869,998 | 2,869,998 | 2,869,998 | 2,869,998 | — | 2,869,998 | ||||||||
| ||||||||||||||
Timothy L. Murray | Salary continuation | — | — | 500,000 | 500,000 | — | 500,000 | |||||||
Target bonus | — | — | 309,000 | 309,000 | — | 309,000 | ||||||||
Benefit Continuation(3) | 10,300 | 10,300 | 10,300 | 10,300 | 10,300 | 10,300 | ||||||||
Option vesting | — | — | — | — | 86,625 | 86,625 | ||||||||
Restricted stock vesting | 1,287,230 | 1,287,230 | 1,287,230 | 1,287,230 | — | 1,287,230 | ||||||||
| ||||||||||||||
Howard D. Polsky | Salary continuation | — | — | 300,000 | 300,000 | — | 300,000 | |||||||
Benefit Continuation(3) | — | 5,300 | 5,300 | 5,300 | 5,300 | 5,300 | ||||||||
Option vesting | — | — | — | — | 10,907 | 10,907 | ||||||||
Restricted stock vesting | 564,805 | 564,805 | 564,805 | 564,805 | — | 564,805 | ||||||||
| ||||||||||||||
Celia M. Stokes | Salary continuation | — | — | 262,500 | 262,500 | — | 262,500 | |||||||
Benefit Continuation(3) | 11,300 | 11,300 | 11,300 | 11,300 | 11,300 | 11,300 | ||||||||
Option vesting | — | — | — | — | 19,900 | 19,900 | ||||||||
Restricted stock vesting | 667,258 | 667,258 | 667,258 | 667,258 | — | 667,258 | ||||||||
| ||||||||||||||
Bruce J. Davis | Salary continuation | — | — | 340,000 | 340,000 | — | 340,000 | |||||||
Benefit Continuation(3) | 10,300 | 10,300 | 10,300 | 10,300 | 10,300 | 10,300 | ||||||||
Option vesting | — | — | — | — | 16,360 | 16,360 | ||||||||
Restricted stock vesting | 575,313 | 575,313 | 575,313 | 575,313 | 575,313 | 575,313 | ||||||||
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
Policies and Procedures for Related-Party Transactions
We recognize that related-party transactions present a heightened risk of conflicts of interest and have adopted a policy to which all related-party transactions shall be subject. Pursuant to the policy, the Audit Committee of our Board of Directors, or in the case of a transaction in which the aggregate amount is, or is expected to be, in excess of $250,000, the Board of Directors, will review the relevant facts and circumstances of all related-party transactions, including, but not limited to: (i) whether the transaction is on terms comparable to those that could be obtained in arm's length dealings with an unrelated third party; and (ii) the extent of the related party's interest in the transaction. Pursuant to the policy, no director, including the Chairman
Certain types of transactions, which would otherwise require individual review, have been pre-approved by the Audit Committee. These types of transactions include, for example: (i) compensation to an officer or director where such compensation is required to be disclosed in our proxy statement; (ii) transactions where the interest of the related party arises only by way of a directorship or minority stake in another organization that is a party to the transaction; and (iii) transactions involving competitive bids or fixed rates. Additionally, pursuant to the terms of our related-party transaction policy, all related-party transactions are required to be disclosed in our applicable filings as required by the Securities Act of 1933 and the Exchange Act and related rules. Furthermore, any material related-party transactions are required to be disclosed to the full Board of Directors. In connection with becoming a public company, we established internal policies relating to disclosure controls and procedures, which include policies relating to the reporting of related-party transactions that must be pre-approved under our related-party transactions policy.
Employment Agreements
We have entered into employment agreements with certain of our executive officers. For more information regarding these agreements, see "Compensation Discussion and Analysis—Employment Agreements."
Compensation Committee Interlocks and Insider Participation
In fiscal 2013, there were no interlocking relationships existing between members of our Board of Directors and our Compensation Committee and members of the Board of Directors or the compensation committee of any other company.
Steven B. Fink (Chairman)SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCEGuillermo Bron
Fredda J. Cassell
Section 16 of the Exchange Act requires directors and executive officers and persons, if any, owning more than 10% of a class of the Company's equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of the Company's equity and equity derivative securities. Based solely upon a review of the copies of such reports and written representations from reporting persons, we believe that all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% stockholders were complied with on a timely basis during fiscal 2013.
PROPOSAL 2:ADVISORY VOTE ON EXECUTIVE COMPENSATION
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, we are providing our stockholders with a non-binding advisory vote to approve the compensation paid to our NEOs as disclosed in this Proxy Statement in accordance with rules promulgated by the SEC.
Our Board of Directors is committed to corporate governance best practices and recognizes the substantial interests that stockholders have in executive compensation matters. The Compensation Committee of our Board of Directors has designed our executive compensation programs with the following key objectives:
The foregoing report shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, each as amended (together, the "Acts"), except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Acts.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 19, 2016, certain information with respect to the beneficial ownership of Common Stock by each beneficial owner of more than 5% of the Company's voting securities (based solely on review of filings with the SEC), each director and each named executive officer and all directors and executive officers of the Company as a group, except as qualified by the information set forth in the notes to this table. To our knowledge, except as noted below, no person or entity is the beneficial owner of more than 5% of the voting power of the Company's voting securities. As of October 19, 2016, [40,659,472] shares of our Common Stock were issued and outstanding.
Unless otherwise noted, the address for each director and executive officer is c/o K12 Inc., 2300 Corporate Park Drive, Herndon, VA 20171.
We encourage stockholders to review the Compensation Discussion and Analysis in this Proxy Statement, which describes our executive compensation philosophy and the design of our executive compensation programs in great detail. Our Board of Directors believes the Company's executive compensation programs are effective in creating value for our stockholders and moving the Company towards realization of its long-term goals.
We are asking our stockholders to signal their support for the compensation of our NEOs by casting a vote "FOR" the following resolution:
"RESOLVED, that the Company's stockholders approve, on a non-binding advisory basis, the compensation of the Company's named executive officers, as disclosed in the Proxy Statement for the 2013 Annual Meeting pursuant to the compensation disclosure rules of the U.S. Securities and Exchange Commission, including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and narrative disclosure."
The vote sought by this proposal is advisory and not binding on the Company, the Board of Directors or the Compensation Committee. Although the vote is non-binding and advisory, the Company, the Board of Directors and the Compensation Committee value the input of the Company's stockholders, and the Compensation Committee will consider the outcome of the vote when making future executive compensation determinations.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE U.S. SECURITIES AND EXCHANGE COMMISSION
PROPOSAL 3:RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
Subject to stockholder ratification, the Audit Committee has appointed the firm of BDO USA, LLP, or BDO USA, as the Company's independent registered public accounting firm for fiscal 2014. Although ratification is not required by law, our Board of Directors believes that stockholders should be given the opportunity to express their view on the subject. While not binding on the Audit Committee, if the stockholders do not ratify this appointment, the appointment will be reconsidered by the Audit Committee. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our stockholders. A representative of BDO USA will attend the Annual Meeting and this representative will be provided with an opportunity to make a statement, if he or she desires, and will be available to respond to appropriate questions of stockholders, if any.
The affirmative vote of the holders of a majority of the shares of Common Stock present in person or represented by proxy and entitled to vote at the Annual Meeting is required to ratify the appointment of BDO USA as the Company's independent registered public accounting firm.
OUR BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" RATIFICATION OF BDO USA AS THECOMPANY'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL 2014.
Fees Paid to Independent Registered Public Accounting Firm
The following table sets forth the aggregate fees and expenses billed to us by BDO USA for fiscal years 2012 and 2013:
| 2012 | 2013 | ||
---|---|---|---|---|
Audit Fees | $1,291,000 | $1,115,000 | ||
Audit-Related Fees | 43,000 | 39,276 | ||
Tax Fees | — | — | ||
All Other Fees | — | — | ||
Total | $1,334,000 | $1,154,276 | ||
Audit Fees are for professional services for the Company's annual audit, including the audit of internal control over financial reporting for fiscal 2012 and 2013, reviews of the interim financial statements included in the Company's quarterly reports on Form 10-Q, and other professional services provided in connection with statutory and regulatory filings or engagements. Audit-related fees in fiscal 2012 and 2013 were for professional services associated with an audit of a managed school and other minor matters.
The Audit Committee maintains policies and procedures for the pre-approval of work performed by the independent auditors in that, under the Audit Committee charter, all auditor engagements must be approved in advance by the Audit Committee. All of the services provided to the Company by BDO USA during fiscal 2012 and 2013 were pre-approved by the Audit Committee.
Interest of Certain Persons in Matters to be Acted On
No director or executive officer of K12 who has served in such capacity since July 1, 2013, or any associate of any such director or officer, to the knowledge of the executive officers of K12, has any material interest, direct or indirect, through security holdings or otherwise, in any matter proposed to be acted on at the Annual Meeting, which is not shared by all other stockholders or as is otherwise described in this Proxy Statement.
In accordance with a written charter adopted by the Board of Directors, the Audit Committee, or the Committee, assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the Company's financial reporting processes and its internal audit function. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls and for assessing the effectiveness of the Company's internal control over financial reporting. The independent auditors are responsible for performing an independent audit of the Company's consolidated financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board and for issuing reports thereon.
In this context, the Committee has met and held discussions with management and the independent auditors, as well as legal counsel. Management represented to the Committee that the Company's consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Committee has reviewed and discussed the consolidated financial statements with management and the independent auditors. The Committee discussed with the independent auditors matters required to be discussed by Auditing Standard No. 16, Communications with Audit Committees, as currently in effect and as adopted by the Public Company Accounting Oversight Board.
In addition, the Committee has received the written disclosures and the letter from the independent auditors required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant's communications with the Committee concerning independence and has discussed with the independent auditors the auditors' independence from the Company and its management.
The Committee discussed with the Company's internal and independent auditors the overall scope and plans for their respective audits. The Committee meets with the internal and independent auditors, with and without management present, to discuss the results of their examinations, the evaluations of the Company's internal controls and the overall quality of the Company's accounting principles.
In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board of Directors approved, the inclusion of the audited financial statements of the Company for the fiscal year ended June 30, 2013, in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2013, filed with the SEC on August 29, 2013. The Committee also recommended to the Board of Directors, subject to stockholder ratification, the selection of BDO USA as the Company's independent registered public accounting firm for the fiscal year ending June 30, 2014, and the Board of Directors accepted its recommendation.
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The foregoing report shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, each as amended (together, the "Acts"), except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Acts.
DELIVERY OF DOCUMENTS TO SECURITY HOLDERSSHARING AN ADDRESS
The SEC's rules permit the Company to deliver a single set of Annual Meeting materials to one address shared by two or more of the Company's stockholders. The Company has delivered only one Proxy Statement and Annual Report to multiple stockholders who share an address, unless the Company received contrary instructions from the affected stockholders prior to the mailing date. The Company will promptly deliver, upon written or oral request, a
separate copy of the Annual Meeting materials, as requested, to any stockholder at the shared address to which a single copy of those documents was delivered. If you prefer to receive separate copies of the Proxy Statement or Annual Report, contact K12 Inc., 2300 Corporate Park Drive, Herndon, VA 20171, Attention: Investor Relations, or call us at 703-483-7000.
Stockholder proposals intended for inclusion in next year's proxy statement under Rule 14a-8 of the Exchange Act should be sent to our principal executive offices and must be received not less than 120 calendar days prior to October 28, 2014. Accordingly, stockholder proposals must be received no later than June 30, 2014. As the rules of the SEC make clear, simply submitting a proposal does not guarantee that it will be included.
Rule 14a-5(e) of the Exchange Act additionally provides that stockholders desiring to nominate a director or bring any other business before the stockholders at an annual meeting must notify our Secretary of this proposal in writing at least 45 days prior to the anniversary of the date on which we mailed our proxy materials for the prior year's annual meeting of stockholders. Accordingly, for our 2014 annual meeting, any notification must be made no earlier than August 7, 2014 and no later than September 8, 2014. If during the prior year we did not hold an annual meeting, or if the date of the meeting has changed more than 30 days from the prior year, then notice must be received a reasonable time before we mail our proxy materials for the current year. The stockholder must be a stockholder of record both at the time of giving notice and at the time of the annual meeting. The fact that the Company may not insist upon compliance with these requirements should not be construed as a waiver of our right to do so at any time in the future.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information filing requirements of the Exchange Act and, in accordance with the Exchange Act, file certain reports and other information with the SEC relating to our business, financial condition and other matters. You may read and copy any reports, statements or other information that the Company filed with the SEC at the SEC's public reference room at 100 F Street, NE, Washington, DC 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Copies of these materials can be obtained, upon payment of the SEC's customary charges, by writing to the SEC's principal office at 100 F Street, NE, Washington, DC 20549. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information.
Any person from whom proxies for the meeting are solicited may obtain, if not already received, from the Company, without charge, a copy of the Company's Annual Report on Form 10-K for fiscal 2013, by written request addressed to K12 Inc., 2300 Corporate Park Drive, Herndon, VA 20171, Attention: Investor Relations Department. The Annual Report on Form 10-K is not soliciting material and is not incorporated in this document by reference.
In order to obtain any documents you request from the Company in time for the Annual Meeting, you must request the documents from the Company by Wednesday, November 27, 2013, which is five business days prior to the date of the Annual Meeting.
You should rely only on the information contained in this document to vote your shares of Common Stock at the Annual Meeting. We have not authorized anyone to provide you with information that is different from what is contained in this document. This document is dated as of October 28, 2013. You should not assume that the information contained in this document is accurate as of any date other than that date, and the mailing of this document to stockholders does not create any implication to the contrary. This document does not constitute a solicitation of a proxy in any jurisdiction where, or to or from any person to whom, it is unlawful to make such solicitation in that jurisdiction.
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. IMPORTANT ANNUAL MEETING INFORMATION IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 15, 2016. THE PROXY STATEMENT AND THE ANNUAL REPORT ARE AVAILABLE AT: http://proxy.ir.K12.com q IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q REVOCABLE PROXY — K12 INC. + 2016 ANNUAL MEETING OF STOCKHOLDERS This Proxy is solicited by the Board of Directors for the Annual Meeting of Stockholders on December 15, 2016, 10:00 A.M. The undersigned stockholder of K12 Inc., a Delaware corporation (the “Company”), hereby constitutes and appoints Stuart J. Udell and Howard D. Polsky, and each of them, with the power to act without the other and with the power of substitution, as proxies (the “Proxy Holders”) and attorneys-in-fact for the undersigned, to attend the annual meeting of stockholders of the Company to be held at the law firm of Latham & Watkins LLP, located at 555 Eleventh Street, NW, Suite 1000, Washington, DC 20004-1304, on December 15, 2016, 10:00 A.M., Eastern Time, and any adjournment(s), continuation(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the undersigned is entitled to cast at such annual meeting and in their discretion, to vote upon such other business as may properly come before the annual meeting and otherwise to represent the undersigned at the annual meeting with all powers possessed by the undersigned if personally present at the annual meeting. This Proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no instruction is indicated but the Proxy Card is signed, this Proxy Card will be voted “FOR” the election of the Board of Directors nominees named in the proxy statement; “FOR” the approval, on a non-binding advisory basis, of the compensation of the named executive officers of the Company; “FOR” the approval of the 2016 Equity Incentive Award Plan; “FOR” the ratification of the appointment of BDO USA, LLP as the Company’s independent registered public accounting firm for the fiscal year ending June 30, 2017; “FOR” the approval of the amendment to the Company’s Third Amended and Restated Certificate of Incorporation; and “AGAINST” the stockholder proposal regarding a report on lobbying activities and expenditures. Stockholders who plan to attend the annual meeting may revoke their Proxy by attending and casting their vote at the annual meeting in person. PLEASE ACT PROMPTLY PLEASE COMPLETE, DATE, SIGN, AND MAIL THIS PROXY CARD PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. The above signed hereby acknowledge(s) receipt of a copy of the accompanying Notice of 2016 Annual Meeting of Stockholders and the proxy statement with respect thereto and hereby revoke(s) any proxy or proxies heretofore given with respect to such annual meeting. THESE PROPOSALS ARE FULLY EXPLAINED IN THE ENCLOSED NOTICE OF 2016 ANNUAL MEETING OF STOCKHOLDERS AND PROXY STATEMENT. Non-Voting Items Change of Address — Please print new address below. Meeting Attendance Mark box to the right if you plan to attend the Annual Meeting. + IF VOTING BY MAIL, YOU MUST COMPLETE SECTIONS A - C ON BOTH SIDES OF THIS CARD. C