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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-13669
TAG-IT PACIFIC, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4654481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
21900 BURBANK BLVD., SUITE 270
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Executive Offices) (Zip Code)
(818) 444-4100
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $.001 PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [_] No [X]
Indicate by check mark if the registration is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [_] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [_] No [X]
At June 30, 2006 the aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was $12,147,000. At April 10,
2007 the issuer had 18,466,433 shares of Common Stock, $.001 par value, issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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EXPLANATORY NOTE
This Amendment No. 1 to Form 10-K on Form 10-K/A (this "Amendment") amends
Tag-It Pacific, Inc.'s (the "Company") Annual Report on Form 10-K for the fiscal
year ended December 31, 2006, originally filed on April 12, 2007 (the "Original
Filing"). The Company is filing this Amendment to include the information
required by Part III and not included in the Original Filing as the Company will
not file its definitive proxy statement within 120 days of the end of the
Company's fiscal year ended December 31, 2006.
Except as described above, no other changes have been made to the Original
Filing. This Amendment continues to speak as of the date of the Original Filing,
and the Company has not updated the disclosures contained therein to reflect any
events which occurred at a date subsequent to the filing of the Original Filing.
As a result of these amendments, we are also filing as exhibits to this
Amendment the certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Because no financial statements are contained within this Amendment, we
are not including certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. In this Amendment, unless the context indicates otherwise, the
terms "Company," "we," "us," and "our" refer to Tag-It Pacific, Inc., and its
subsidiaries.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of our
executive officers and directors as of April 16, 2007.
NAME AGE POSITION
---- --- --------
Stephen P. Forte......... 40 Chief Executive Officer and Director
Mark Dyne (1)........... 46 Chairman of the Board of Directors
Colin Dyne (1)........... 44 Vice Chairman of the Board of Directors
Jonathan Burstein (2).... 40 Director
Brent Cohen.............. 48 Director
Joseph Miller............ 43 Director
Raymond Musci ........... 46 Director
William Sweedler......... 40 Director
Susan White.............. 57 Director
Lonnie D. Schnell........ 58 Chief Financial Officer
Wouter van Biene......... 58 Chief Operating Officer
(1) Colin Dyne and Mark Dyne are brothers.
(2) Jonathan Burstein is Colin Dyne's and Mark Dyne's brother-in-law.
CLASS I DIRECTORS: TERMS EXPIRING IN 2007
JOSEPH MILLER Mr. Miller has served on the Board of
Directors since June 2005. Since 2003, he
has been a Managing Director of Europlay
Capital Advisors, LLC, a merchant banking
and advisory firm. From 1998 to 2003, Mr.
Miller was a Senior Vice President at
Houlihan Lokey Howard & Zukin, a leading
middle-market investment bank.. From 1994 to
1998, Mr. Miller served as the Vice
President, Corporate Development for
Alliance Communications Corporation,
Canada's leading independent producer and
distributor of filmed entertainment. Mr.
Miller has bachelor's degree in Economics
and Business from the University of
California, Los Angeles
MEMBER: AUDIT COMMITTEE
1
BRENT COHEN Mr. Cohen has served on the Board of
Directors since 1998. Mr. Cohen has served
as Chief Executive Officer and a director of
Dovebid Inc. since August 2005. Mr. Cohen
served as President and was a member of the
Board of Directors of First Advantage
Corporation (formed by the merger of US
Search and First American Financial
screening companies) from June 2003 to 2005.
Mr. Cohen served as Chairman of the Board,
President and Chief Executive Officer of US
Search from February 2000 until June 2003.
Mr. Cohen previously held various management
positions in both the management consulting
and auditing practice of Arthur Young &
Company (now Ernst & Young). Mr. Cohen holds
a Bachelor of Commerce degree, a Graduate
Diploma in Accounting and an MBA from the
University of Cape Town in South Africa. He
is also a chartered accountant.
MEMBER: COMPENSATION, NOMINATING AND
GOVERNANCE COMMITTEES
WILLIAM SWEEDLER Mr. Sweedler has served on the Board of
Directors since 2006. He is presently
Chairman & CEO of Windsong Allegiance Group,
a diversified brand management and operating
company that specializes in the acquisition,
development, licensing, and comprehensive
creative management of consumer branded
intellectual property. The company owns and
licenses the brands, Como Sport, Calvin
Klein Golf, Joseph Abboud Golf, and PRX. Mr.
Sweedler previously served as President &
CEO of Joe Boxer, a wholly owned division of
the Iconix Brand Group (NASDAQ: ICON) of
which he was Executive Vice President and
member of the Board of Directors during 2005
to June 2006. Prior to Mr. Sweedler joining
Iconix Brand Group, he was CEO & President
of Windsong Allegiance Apparel Group from
2001 to 2005. The company owned, managed,
and licensed the brands Joe Boxer, Hathaway,
New Frontier, Pivot Rules, Alexander Julian,
Geoffrey Beene, Ron Chereskin, and Hawaiian
Tropic. In 1995, Mr. Sweedler co-founded,
Windsong, Inc., a full service apparel
operating and marketing company. Prior to
Windsong, he worked as a Regional Account
Manager at Polo Ralph Lauren. He graduated
from Babson College with a B.S. in Finance &
Investments in 1988. He has served as a
public director at Iconix Brand Group and
Bank of Westport as well as numerous private
organizations.
MEMBER: AUDIT AND COMPENSATION COMMITTEES
2
CLASS II DIRECTORS: TERMS EXPIRING IN 2008
STEPHEN P. FORTE Mr. Forte has served as our Chief Executive
Officer since October 2005. Prior to joining
us Mr. Forte served as a principal at the
Forte Group, LLC, a business development
consulting company founded by Mr. Forte in
February of 2005, which focuses on assisting
U.S. companies expand business overseas and
foreign corporations expand their business
in the U.S. Prior to founding the Forte
Group, Mr. Forte served as President of
Ascendent Telecommunications, Inc., a
premier voice mobility company, which he
founded in 1999. Before launching Ascendent,
Mr. Forte founded Travelers Telecom (aka
Wilshire Cellular) in 1993, a leading
cellular rental provider and wireless
carrier for short term users and government.
Mr. Forte earned a bachelor's degree from
the University of Southern California and an
MBA from George Washington University. He
currently serves on the Board for the School
of Business at The George Washington
University, and serves as a mentor at the
Marshall School of Business, at the
University of Southern California.
SUSAN WHITE Ms. White has served on the Board of
Directors since June 2005. Ms. White has
served as Chief Executive Officer and
President of Brand Identity Solutions, LLC,
a branding, marketing and licensing
consulting company, since 1984. Ms. White
has also served as Chief Executive Officer
and President of Whitespeed, LLC, an
Internet design, branding and marketing
company, since 2000. Ms. White also
previously served as Director of Marketing
and Advertising Worldwide for Warnaco from
November 1997 through August 1999. Ms. White
received a BA from Bay State College.
JONATHAN BURSTEIN Mr. Burstein served as our Vice President of
Operations from 1999 until January 2007, and
has served on our Board of Directors since
1999. During this period, Mr. Burstein has
been responsible for many of our internal
operations, including logistics, purchasing
and managing key customer relationships.
From 1987 until 1999, Mr. Burstein was
responsible for managing many of our largest
customer accounts. Mr. Burstein has served
as our Secretary beginning November 2004.
CLASS III DIRECTORS: TERMS EXPIRING IN 2009
MARK DYNE Mr. Dyne has served as Chairman of the Board
of Directors since 1997. Mr. Dyne currently
serves as the Chief Executive Officer and
the Managing Partner of Europlay Capital
Advisors, LLC, a merchant banking and
advisory firm. Mr. Dyne previously served as
Chairman and Chief Executive Officer of Sega
Gaming Technology Inc. (USA), a gaming
company, and Chairman and Chief Executive
Officer of Virgin Interactive Entertainment
Ltd., a distributor of computer software
programs and video games based in London,
England. Mr. Dyne was a founder and director
of Packard Bell NEC Australia Pty. Ltd., a
manufacturer and distributor of personal
computers through the Australian mass
merchant channel, and he was a founder and
former director of Sega Ozisoft Pty Ltd., a
leading distributor of entertainment
software in both Australia and New Zealand.
MEMBER: NOMINATING AND GOVERNANCE COMMITTEES
3
COLIN DYNE Currently, Mr. Dyne serves as Vice Chairman
of the Board of Directors. Mr. Dyne founded
Tag-It, Inc., one of our subsidiaries, in
1991 with his father, Harold Dyne. Mr. Dyne
served as our President from inception and
as our Chief Executive Officer from 1997 to
2005. Before founding Tag-It, Inc. in 1991,
Mr. Dyne worked in numerous positions within
the stationery products industry, including
owning and operating retail stationery
businesses and servicing the larger
commercial products industry through
contract stationery and printing operations.
RAYMOND MUSCI Ray Musci has served as a Director of the
Company since June 2005. Mr. Musci serves as
a Director and President of MPLC, Inc.
(OTCBB:MPNC) , a publicly traded company
that develops, publishes and distributes
mobile entertainment services and products.
From October 1999 to June 2005, Mr. Musci
served as the President and Chief Executive
Officer and a director of BAM!
Entertainment, Inc., a publicly traded
company that develops, publishes and
distributes entertainment software products
and video games. Mr. Musci currently serves
as a director of Brilliant Digital
Entertainment, Inc., a publicly traded
corporation (OTCBB: BDEI). From May 1990 to
July 1999, Mr. Musci served as the
President, Chief Executive Officer and as a
director of Infogrames Entertainment, Inc.
(formerly Ocean of America, Inc.), a company
that develops, publishes and distributes
software products. Mr. Musci also previously
served as a director of Ocean International,
Ltd., the holding company of Ocean of
America, Inc. and Ocean Software, Ltd., and
as Executive Vice President/General Manager
of Data East USA, Inc., a subsidiary of Data
East Corp., a Japanese company.
MEMBER: AUDIT AND COMPENSATION COMMITTEES
OTHER EXECUTIVE OFFICERS
LONNIE D. SCHNELL Mr. Schnell joined the Company in January
2006 as our Chief Financial Officer. Mr.
Schnell served as Vice President of Finance
for Capstone Turbine Corporation, a
manufacturer of micro-turbine electric
generators from 2004 until 2005. From 2002
to 2004 Mr. Schnell served as Chief
Financial Officer of EMSource, LLC, an
electronic manufacturing service company.
Prior to EMSource, in 2002, Mr. Schnell
served as Chief Financial Officer of Vintage
Capital Group, a private equity investment
firm. From 1999 through 2002, Mr. Schnell
served as Chief Financial Officer of
Need2Buy, Inc. a business-to-business
internet marketplace for electronic
components. Mr. Schnell has completed an
executive MBA program with the Stanford
University Executive Institute, and earned
his Bachelor of Science in Accounting at
Christian Brothers University. Mr. Schnell
is a Certified Public Accountant with
experience in the international accounting
firm of Ernst & Young LLP.
4
WOUTER VAN BIENE Mr. van Biene joined the Company in March
2006 as our Chief Operating Officer. Prior
to joining us, Mr. van Biene served as
Senior Vice President - Operations for
Ascendent Telecommunications Inc., a
provider of mobile telecommunications
solutions, from 2002 through February 2006.
Prior to joining Ascendent, Mr. van Biene
served from 2001 to 2002 as CFO of AbraComm
Inc., a private, high tech start up company
in the telecommunications arena, and from
2000 to 2001 as Vice President of Operations
of CentreCom, another high tech
telecommunications firm. Earlier in his
career, Mr. van Biene served as CIO of
UStel, Inc, a regional Long Distance Carrier
and as Founder/CFO of Consortium 2000, Inc.
a telecommunications marketing organization.
Prior to that, Mr. van Biene held several
executive positions over a fourteen-year
time span at American Medical International,
Inc. Mr. van Biene holds a Masters degree in
Economics and Business Administration from
the University of Amsterdam in the
Netherlands.
AUDIT COMMITTEE; AUDIT COMMITTEE FINANCIAL EXPERT
We currently have a separately designated standing Audit Committee established
in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee
currently consists of Raymond Musci, Joseph Miller and William Sweedler, all of
whom qualify as "independent directors" as defined in the listing standards of
the American Stock Exchange ("AMEX"). The Board of Directors has further
determined that Mr. Musci is an "audit committee financial expert" as such term
is defined in Item 401(h) of Regulation S-K promulgated by the SEC.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our executive
officers, directors, and persons who own more than ten percent of a registered
class of our equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Executive officers,
directors and greater-than-ten percent stockholders are required by Securities
and Exchange Commission regulations to furnish the Company with all Section
16(a) forms they file. Based solely on our review of the copies of the forms
received by us and written representations from certain reporting persons that
they have complied with the relevant filing requirements, we believe that,
during the year ended December 31, 2006, all of our executive officers,
directors and greater-than-ten percent shareholders complied with all Section
16(a) filing requirements, except for the following: (i) one Statement of
Changes in Beneficial Ownership on Form 4, reporting one transaction, was filed
late by Lonnie D. Schnell; (ii) one Statement of Changes in Beneficial Ownership
on Form 4, reporting one transaction, was filed late by Colin Dyne; (iii) one
Statement of Changes in Beneficial Ownership on Form 4, reporting one
transaction, was filed late by Mark Dyne; (iv) one Statement of Changes in
Beneficial Ownership on Form 4, reporting one transaction, was filed late by
Joseph Miller; (v) one Statement of Changes in Beneficial Ownership on Form 4,
reporting one transaction, was filed late by Raymond Musci; and (vi) one
Statement of Changes in Beneficial Ownership on Form 4, reporting one
transaction, was filed late by Brent Cohen; (vii) one Statement of Changes in
Beneficial Ownership on Form 4, reporting one transaction, was filed late by
William Sweedler; (viii) one Statement of Changes in Beneficial Ownership on
Form 4, reporting one transaction, was filed late by Susan A. White, and (ix)
one Statement of Changes in Beneficial Ownership on Form 4, reporting two
transactions, was filed late by Jonathan Burstein.
5
CODE OF ETHICS
We have adopted a Code of Ethical Conduct that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, as well as to our other
employees and directors generally. A copy of our Code of Ethical Conduct was
filed as an exhibit to our Annual Report on Form 10-K.
6
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Tag-It Pacific, Inc.'s executive compensation program is administered by the
Compensation Committee of our Board of Directors, or referred to in this section
as the "Committee." The Committee is responsible for, among other functions: (1)
reviewing and approving corporate goals and objectives relevant to the Chief
Executive Officer's compensation and evaluating the performance of the Chief
Executive Officer in light of these corporate goals and objectives; (2)
reviewing and making recommendations to the Board of Directors with respect to
the compensation of other executive officers; (3) administering our
incentive-compensation and equity based plans, which may be subject to the
approval of the Board of Directors; and (4) negotiating, reviewing and
recommending the annual salary, bonus, stock options and other benefits, direct
and indirect, of the Chief Executive Officer, and other current and former
executive officers. The Committee also has the authority to select and/or retain
outside counsel, compensation and benefits consultants, or any other consultants
to provide independent advice and assistance in connection with the execution of
its responsibilities.
Our named executive officers for 2006 were as follows:
o Stephen P. Forte, Chief Executive Officer;
o Wouter van Biene, Chief Operating Officer (appointed as of
March 1, 2006);
o Lonnie D. Schnell, Chief Financial Officer (appointed as of
January 26, 2006);
o August DeLuca, former Chief Financial Officer (resigned as of
January 20, 2006); and
o Jonathan Burstein, former Executive Vice President of
Operations (resigned as of January 1, 2007)
COMPENSATION PHILOSOPHY
Our executive compensation program is designed to drive company performance to
maximize shareholder value while meeting our needs and the needs of our
employees. The specific objectives of our executive compensation program include
the following:
o ALIGNMENT - to align the interests of executives and
shareholders through equity-based compensation awards;
o RETENTION - to attract, retain and motivate highly qualified,
high performing executives to lead our continued growth and
success; and
o PERFORMANCE - to provide rewards commensurate with performance
by emphasizing variable compensation that is dependant upon
the executive's achievements and company performance.
In order to achieve these specific objectives, our executive compensation
program is guided by the following core principles:
o Rewards under incentive plans are based upon our short-term
and longer-term financial results and increasing shareholder
value;
o Senior executive pay is set at sufficiently competitive levels
to attract, retain and motivate highly talented individuals
who are necessary for us to achieve our goals, objectives and
overall financial success;
7
o Compensation of an executive is based on such individual's
role, responsibilities, performance and experience, taking
into account the desired pay relationships within the
executive team; and
o Our executive compensation program places a strong emphasis on
performance-based variable pay to ensure a high
pay-for-performance culture. Annual performance of our company
and the executive are taken into account in determining annual
bonuses that ensures a high pay-for-performance culture.
COMPENSATION ELEMENTS
We compensate senior executives through a variety of components, including base
salary, annual incentives, equity incentives, and benefits and perquisites, in
order to provide our employees with a competitive overall compensation package.
The mix and value of these components are impacted by a variety of factors, such
as responsibility level, individual negotiations and performance and market
practice. The purpose and key characteristics for each component are described
below.
BASE SALARY
Base salary provides executives with a steady income stream and is based upon
the executive's level of responsibility, experience, individual performance and
contributions to our overall success. Competitive base salaries, in conjunction
with other pay components, enable us to attract and retain highly talented
executives. The Committee typically sets base salaries for our senior executives
at market levels. However, base salaries will vary in practice based upon an
individual's performance, individual experience and negotiations and for changes
in job responsibilities.
ANNUAL INCENTIVE BONUSES
Annual incentive bonuses are a variable performance-based component of
compensation. The primary objective of an annual incentive bonus is to reward
executives for achieving corporate and individual goals and to align a
meaningful portion of total pay opportunities for executives and other key
employees to the attainment of our company's performance goals. Annual incentive
awards are also used as a means to recognize the contribution of our executive
officers to overall financial, operational and strategic success. In conjunction
with our employment agreement with our Chief Executive Officer, we established a
Management Incentive Program (the "MIP") which provides that 15% of the
Company's earnings before interest and taxes (or "EBIT") will be set aside each
fiscal year for payment to the CEO and such other members of management as
determined by the Board of Directors. For 2006, one-half of the MIP fund is
allocable to the CEO, with the distribution of the balance to other members of
management as determined by the Board of Directors. For 2007 and future periods
through 2009 (or until the CEO's employment agreement terminates, if earlier),
one-third of the MIP Fund is allocable to the CEO.
EQUITY INCENTIVES
Equity incentives are intended to align senior executive and shareholder
interests by linking a meaningful portion of executive pay to long-term
shareholder value creation and financial success over a multi-year period.
Equity incentives are also provided to our executives to attract and enhance the
retention of executives and other key employees and to facilitate stock
ownership by our senior executives. The Committee also considers individual and
company performance when determining long-term incentive opportunities.
HEALTH & WELFARE AND 401-K BENEFITS
The named executive officers participate in a variety of retirement, health and
welfare, and paid time-off benefits designed to enable us to attract and retain
our workforce in a competitive marketplace. Health and welfare and paid time-off
benefits help ensure that we have a productive and focused workforce.
8
SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
We do not have a formal plan for severance or separation pay for our employees,
but we typically include a severance provision in the employment agreements of
our executive officers that is triggered in the event of involuntary termination
without cause or in the event of a change in control.
In order to preserve the morale and productivity and encourage retention of our
key executives in the face of the disruptive impact of an actual or rumored
change in control, we provide a bridge to future employment in the event that an
executive's job is eliminated as a consequence of a change in control. This
provision is intended to align executive and shareholder interests by enabling
executives to consider corporate transactions that are in the best interests of
the shareholders and other constituents without undue concern over whether the
transactions may jeopardize the executive's own employment. Our employment
agreements with our current named executive officers provide a lump sum payment
and benefits continuation as a result of an involuntary termination without
cause or for good reason following a change in control, plus accelerated vesting
of stock or option awards.
OTHER BENEFITS
In order to attract and retain highly qualified executives, we provide some of
our named executive officers, including our CEO, with automobile allowances that
we believe are consistent with current market practices. Our executives also may
participate in a 401(k) plan under which we match contributions for all
employees up to 100% of an employee's contributions to a maximum of $1,000 and
subject to any limitations imposed by ERISA.
OTHER FACTORS AFFECTING COMPENSATION
ACCOUNTING AND TAX CONSIDERATIONS
We consider the accounting implications of all aspects of our executive
compensation program. Our executive compensation program is designed to achieve
the most favorable accounting (and tax) treatment possible as long as doing so
does not conflict with the intended plan design or program objectives.
PROCESS FOR SETTING EXECUTIVE COMPENSATION
When making pay determinations for named executive officers, the Committee
considers a variety of factors including, among others: (1) actual company
performance as compared to pre-established goals, (2) overall company
performance and size relative to industry peers, (3) individual executive
performance and expected contribution to our future success, (4) changes in
economic conditions and the external marketplace and (5) in the case of named
executive officers, other than Chief Executive Officer, the recommendation of
our Chief Executive Officer. Ultimately, the Committee uses its judgment when
determining how much to pay our executive officers. The Committee evaluates each
named executive officer's performance during the year against established goals,
leadership qualities, business responsibilities, current compensation
arrangements and long-term potential to enhance shareholder value. The opinions
of outside consultants are also taken into consideration in deciding what
salary, bonus, long-term incentives and other benefits and severance to give
each executive in order to meet our objectives stated above. The Committee
considers, compensation information from data gathered from annual reports and
proxy statements from companies that the Committee generally considers
comparable to the Company; compensation of other Company employees for internal
pay equity purposes; and levels of other executive compensation plans from
compensation surveys. The Committee sets the pay for the named executive
officers and other executives, by element and in the aggregate, at levels that
it believes are competitive and necessary to attract and retain talented
executives capable of achieving the Company's long-term objectives.
9
FACTORS CONSIDERED
In administering the compensation program for senior executives, including named
executive officers, the Committee considers the following:
o CASH VERSUS NON-CASH COMPENSATION. The pay elements are
cash-based except for the long-term incentive program, which
is equity-based. In 2006, the long-term incentive program for
the named executive officers consisted entirely of stock
grants and option awards that vest in installments over a one
to four year period;
o PRIOR YEAR'S COMPENSATION. The committee considers the prior
year's bonuses and long-term incentive awards when approving
bonus payouts or equity grants;
o ADJUSTMENTS TO COMPENSATION. On an annual basis, and in
connection with setting executive compensation packages, the
Committee reviews our operating income growth, earnings before
interest and taxes growth, earnings per share growth, cash
flow growth, operating margin, revenue growth, and total
shareholder return performance. In addition, the Committee
considers peer group pay practices, emerging market trends and
other factors. No specific weighing is assigned to these
factors nor are particular targets set for any particular
factor. Total compensation from year to year can vary
significantly based on our and the individual executive's
performance. The base compensation of our Chief Executive
Officer increased at the end of 2006 from $275,000 annually to
$325,000 for 2007 in accordance with the provisions in his
employment contract. Additionally, in October 2006 our Chief
Financial Officer's base compensation was increased from
$185,000 annually to $225,000 as a consequence of superior
performance and individual contributions to achievement of the
Company's objectives.
o APPLICATION OF DISCRETION. It is our policy and practice to
use discretion in determining the appropriate compensation
levels considering performance.
10
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of our Board of Directors consists of Brent Cohen,
Raymond Musci and William Sweedler. The Compensation Committee is responsible
for considering and making recommendations to the Board of Directors regarding
executive compensation and is responsible for administering the Company's stock
option and executive incentive compensation plans.
The Compensation Committee has reviewed and discussed with management the
Compensation Discussion and Analysis included in this report. Based on the
review and discussion with management, the Compensation Committee recommended to
the Board of Directors that the Compensation Discussion and Analysis be included
in the Company's Annual Report on Form 10-K.
COMPENSATION COMMITTEE
Brent Cohen
Raymond Musci
William Sweedler
April 30, 2007
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to each person serving as Chief Executive
Officer and Chief Financial Officer during 2006, and the three most highly
compensated executive officers other than the Chief Executive Officer and Chief
Financial Officer who were serving as executive officers at the end of the 2006
whose compensation exceeded $100,000 (referred to as "named executive
officers"), information concerning all compensation earned for services to us in
all capacities for 2006.
NON-EQUITY
INCENTIVE
STOCK OPTION PLAN ALL OTHER
NAME AND SALARY BONUS AWARDS AWARDS COMPENSATION COMPENSATION TOTAL
PRINCIPAL POSITION YEAR ($) ($) ($)(5) ($)(6) ($) ($)(7) ($)
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
Stephen P. Forte 2006 275,000 - 77,468 73,995 90,050 35,497 552,010
Chief Executive Officer
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
Wouter van Biene (1) 2006 180,000 - - 27,526 45,025 7,006 259,557
Chief Operating Officer
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
Lonnie D. Schnell (2) 2006 171,346 - - 31,998 45,025 24,634 273,003
Chief Financial Officer
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
August DeLuca (3) 2006 19,372 - 1,071 - - 7,868 28,311
(former Chief Financial
Officer)
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
Jonathan Burstein (4) 2006 240,000 - 28,516 - - 33,031 301,547
(former Executive V.P.)
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
(1) Mr. van Biene was appointed Chief Operating Officer effective March 1,
2006.
(2) Mr. Schnell was appointed Chief Financial Officer effective January 26,
2006.
(3) Mr. DeLuca resigned as Chief Financial Officer effective January 20,
2006.
(4) Mr. Burstein resigned as Executive Vice President of Operations effective
January 1, 2007.
(5) The amounts in this column represent the dollar amounts recognized for
financial statement reporting purposes in fiscal 2006 with respect to
stock awards and options granted in 2006 as well as prior fiscal years
under our 1997 Stock Plan in accordance with SFAS No. 123R. Pursuant to
SEC rules, the amounts shown exclude the impact of estimated forfeitures
related to service-based vesting conditions. For additional information
on the valuation assumptions with respect to these grants, refer to note
9 to our consolidated financial statements in our Annual Report on Form
10-K for the year ended December 31, 2006. These amounts do not reflect
the actual value that may be realized by the named executive officers
which depends on the value of our shares in the future.
(6) The amounts in this column represent the dollar amounts recognized for
financial statement reporting purposes in fiscal 2006 with respect to
inducement stock options granted in 2006 in accordance with SFAS 123R.
For additional information on the valuation assumptions with respect to
option grants, including the options granted in 2006, see note 9 to the
consolidated financial statements in our Annual Report on Form 10-K for
the year ended December 31, 2006. These amounts do not reflect the actual
value that may be realized by the named executive officers which depends
on the value of our shares in the future.
(7) All other compensation consists of the following (amounts in dollars):
------------------------------- ------------- -------------- ------------- ------------- --------------
Mr. Forte Mr. van Biene Mr. Schnell Mr.DeLuca Mr. Burstein
------------------------------- ------------- -------------- ------------- ------------- --------------
Health & medical insurance (a) 12,916 6,925 12,673 7,868 15,136
------------------------------- ------------- -------------- ------------- ------------- --------------
Life & disability insurance (b) 81 81 81 5,012
------------------------------- ------------- -------------- ------------- ------------- --------------
Automobile allowances 22,500 12,883
------------------------------- ------------- -------------- ------------- ------------- --------------
Consulting services (c) 11,880
------------------------------- ------------- -------------- ------------- ------------- --------------
Total 35,497 7,006 24,624 7,868 33,031
------------------------------- ------------- -------------- ------------- ------------- --------------
(a) Includes payments of medical premiums.
(b) Includes executive and group term life insurance.
(c) Represents fees for services provided prior to employment.
12
EXECUTIVE COMPENSATION
The 2006 compensation for our Chief Executive Officer was in accordance with our
employment agreement completed with Mr. Forte in March 2006. The terms and
conditions established in this agreement were the result of our consideration of
our 2005 operating performance, our 2005 Restructuring and Strategic Plan and
current operating performance levels, as well as the compensation levels for our
previous CEO, comparative industry compensation levels, and negotiations with
Mr. Forte. The base compensation was evaluated in conjunction with the long-term
equity awards and annual bonus incentives to establish a compensation
arrangement providing a substantial incentive for the achievement of our
long-term objectives and for adding shareholder value. Accordingly, the base
compensation was established near minimum industry levels for the same role in
comparable companies, and a long-term equity option of 900,000 shares of common
stock, representing approximately 4.9% of our outstanding shares, was
established as an inducement to maximum performance achievements and increased
shareholder values. The option grant was established to vest monthly over a
three-year term, after a minimum initial term of twelve months, to coincide with
the objectives of the Company's Strategic Plan. In addition to the long-term
equity incentive, a cash incentive, the MIP fund, was established as provided in
Mr. Forte's employment agreement setting aside 15% of the Company's EBIT for
annual bonus awards to Mr. Forte and the other senior executives. One-half of
this MIP Fund was allocated to Mr. Forte in 2006 and is shown in the table above
as non-equity incentive plan compensation, and one-third of the MIP fund is to
be allocated to Mr. Forte in 2007 through 2009. In addition, Mr. Forte was
provided a stock grant of 135,135 shares, and an additional option grant,
vesting in one year, for 135,135 shares of common stock, in consideration of his
significant contributions in the initial development and implementation of the
Company's 2005 Restructuring Plan, and the development of the Company's
Strategic Plan.
Messrs. van Biene and Schnell were employed early in 2006 at the recommendation
of the Chief Executive Officer to assist in the completion of the 2005
Restructuring and Strategic Plan. The terms and conditions established in their
employment agreements were also the result of our consideration of our 2005
operating performance, our 2005 Restructuring and Strategic Plan and current
operating performance levels, as well as our previous compensation levels for
similar positions, comparative industry compensation levels, and individual
negotiations. The base compensation was evaluated in conjunction with the
long-term equity awards and annual bonus incentives to establish a compensation
arrangement providing a substantial incentive for the achievement of our
long-term objectives and for adding shareholder value. Accordingly, the base
compensation for their positions was established near minimum industry levels
for the same role in comparable companies, and long-term equity incentives in
the form of grants of options to purchase 325,000 shares to Mr. van Biene and
400,000 shares to Mr. Schnell, were established as an inducement to maximum
performance achievements and increased shareholder values. The options vest
monthly over a three-year term for Mr. van Biene, and a four-year term for Mr.
Schnell, after a minimum initial term of twelve months, to coincide with the
objectives of the Company's Strategic Plan. In addition Mr. van Biene and Mr.
Schnell are participants in the MIP fund established by us as described above,
pursuant to which we set aside 15% of our EBIT for annual bonus awards to the
CEO and the other senior executives as approved by the Board of Directors. The
payments allocated to Mr. van Biene and Mr. Schnell under the MIP fund are shown
in the summary compensation table as non-equity incentive plan compensation.
We entered into an employment agreement with Mr. Burstein in March 2006
providing for base compensation of $240,000, and stock options to purchase
425,000 shares of common stock, vesting monthly over three years after a minimum
initial term of twelve months. January 1, 2007, we and Mr. Burstein mutually
terminated this employment agreement in exchange for a consulting agreement as
further described below in this report under "Employment Agreements, Termination
of Employment and Change of Control Arrangements".
13
GRANTS OF PLAN-BASED AWARDS IN FISCAL 2006
The following table provides information about equity-awards granted to each
named executive officer in 2006 under our 1997 Stock Plan and inducement grants
made outside of the plan.
ALL OTHER EXERCISE
ALL OTHER OPTION AWARDS: OR BASE GRANT DATE
STOCK AWARDS: NUMBER OF PRICE OF MARKET FAIR VALUE
NUMBER OF SECURITIES OPTION PRICE ON OF OPTION
GRANT APPROVAL SHARES OF UNDERLYING AWARDS GRANT DATE AWARDS
NAME DATE(1) DATE(1) STOCK (#) OPTIONS (#) ($/SH) (2) ($/SH) (2) ($)(3)
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
Stephen P. Forte 1/16/06 1/16/06 135,135 - - $0.37 50,000
1/16/06 1/16/06 - 135,135 $0.37 $0.37 27,468
1/16/06 1/16/06 - 900,000 $0.37 $0.37 187,515
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
Wouter van Biene 3/1/06 1/26/06 - 325,000 $0.53 $0.50 98,552
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
Lonnie D. Schnell 1/26/06 1/26/06 - 400,000 $0.59 $0.57 137,387
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
Jonathan Burstein 1/16/06 1/16/06 - 425,000 $0.37 $0.37 89,223
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
(1) The grant date of an option award is the date that the compensation
committee fixes as the date the recipient is entitled to receive the
award. The approval date is the date that the compensation committee
approves the award.
(2) The exercise price of option awards differs from the market price on the
date of grant. The exercise price of options granted in 2006 is equal to
the average closing sales prices of our common stock for the five trading
days prior to and including the grant date, as reported on AMEX, , while
the market price on the date of grant is the closing price of our common
stock on that date.
(3) The grant date fair value is generally the amount the company would
expense in its financial statements over the award's service period, but
does not include a reduction for forfeitures.
Option awards granted to our executive officers are for a 10 year term, and
generally vest on a monthly pro rata basis over a 3 or 4 year period, with a
12-month delay required prior to the initial vesting of any shares. Upon a
change of control or involuntary termination without cause, the vesting of all
options granted to the named executive officers in 2006 is accelerated to the
date of termination, as described below under "Employment Agreements,
Termination of Employment and Change of Control Arrangements."
14
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR 2006
The following table provides information with respect to outstanding stock
options held by each of the named executive officers as of December 31, 2006
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS
------------------------------ OPTION OPTION
(#) (#) EXERCISE EXPIRATION
NAME GRANT DATE EXERCISABLE UNEXERCISABLE PRICE ($) DATE
---------------------- -------------- -------------- --------------- -------------- ---------------
Stephen P. Forte 1/16/06 135,135 - $0.37 1/16/2016
1/16/06 350,000 550,000 (1) $0.37 1/16/2016
---------------------- -------------- -------------- --------------- -------------- ---------------
Wouter van Biene 3/1/06 - 325,000 (2) $0.53 3/1/2016
---------------------- -------------- -------------- --------------- -------------- ---------------
Lonnie D. Schnell 1/26/06 - 400,000 (3) $0.59 1/26/2016
---------------------- -------------- -------------- --------------- -------------- ---------------
Jonathan Burstein 1/16/06 - 425,000 (4) $0.37 1/16/2016
4/11/03 35,000 - $3.50 4/11/13
12/31/02 25,000 - $3.63 12/31/12
11/08/01 15,000 - $3.64 11/08/11
12/12/00 20,000 - $3.75 12/12/10
4/10/00 15,000 - $4.25 4/10/10
2/28/00 15,000 - $4.63 2/28/10
12/20/99 20,000 - $4.31 12/20/09
10/10/98 30,000 - $1.30 10/10/08
---------------------- -------------- -------------- --------------- -------------- ---------------
(1) Mr. Forte's options become exercisable at 25,000 shares per month over
the next 22 months.
(2) Mr. van Biene's options become exercisable with regard to 108,333 shares
on March 1, 2007 and then with respect to 9,028 shares per month over the
next 24 months.
(3) Mr. Schnell's options become exercisable with regard to 100,000 shares on
January 26, 2007 and then with respect to 8,333 shares per month over the
next 36 months.
(4) Mr. Burstein's options become exercisable with regard to 141,667 shares
on January 16, 2007 and then with respect to 11,806 shares per month over
the next 24 months.
OPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR 2006
The following table provides information with respect to vesting of stock during
the year ended December 31, 2006. There were no stock option exercises by any of
the named executive officers during 2006
STOCK AWARDS
------------------------------------
NUMBER OF SHARES VALUE REALIZED
ACQUIRED ON ON VESTING
NAME VESTING (#) ($)(1)
------------------------------- ------------------ -----------------
Stephen P. Forte 135,135 50,000
------------------------------- ------------------ -----------------
Wouter van Biene - -
------------------------------- ------------------ -----------------
Lonnie D. Schnell - -
------------------------------- ------------------ -----------------
Jonathan Burstein - -
------------------------------- ------------------ -----------------
(1) Represents the number of shares vested times the closing price of our
common stock on the vesting date as reported by AMEX.
15
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
EMPLOYMENT AGREEMENTS
We have entered into the following employment agreements with our named
executive officers.
On March 16, 2006, we entered into an Executive Employment Agreement with
Stephen Forte, pursuant to which Mr. Forte serves as our Chief Executive
Officer. This employment agreement has a term continuing though December 31,
2008, which may be extended to December 31, 2009. Pursuant to this agreement,
Mr. Forte receives an annual base salary of $275,000 for 2006 and $325,000 for
each subsequent year of the term and will be entitled to receive an annual
incentive bonus based upon our earnings before interest and taxes. In the event
that prior to the end of the term, Mr. Forte's employment is terminated by us
"without cause" (as defined in the agreement), by Mr. Forte for "good reason"
(as defined in the agreement) or due to Mr. Forte's death or disability, then
Mr. Forte or his estate will be entitled to receive, in addition to all accrued
salary, (i) severance payments equal to Mr. Forte's base salary for the
remaining term of the agreement or, in the case of death or disability, through
December 31, 2008, (ii) a pro rated portion of the annual incentive bonus for
the year in which the termination occurred, (iii) full acceleration of vesting
of the options issued to Mr. Forte pursuant to the agreement and (iv) continued
healthcare coverage for Mr. Forte and his dependents for the remaining term of
the agreement. In connection with the employment agreement and as an inducement
to employment, we previously granted Mr. Forte an option to purchase 900,000
shares of our common stock, which vests over a period of three years. In
addition, in lieu of $50,000 in cash compensation, we granted Mr. Forte 135,135
shares of common stock and an option to purchase 135,135 shares of common stock
that vested in full on October 24, 2006. All of these options will vest in full
upon a change of control of our company or upon termination of Mr. Forte's
employment without cause, for good reason or due to his death or disability.
On March 16, 2006, we entered into an employment agreement with Wouter van
Biene, pursuant to which Mr. van Biene serves as our Chief Operating Officer on
an "at-will" basis. Pursuant to this offer letter, Mr. van Biene is entitled to
an annual base salary of $225,000 and will be eligible to receive an annual
incentive bonus based upon our earnings before interest and taxes. In the event
that Mr. van Biene's employment is terminated by us without "cause" (as defined
in the agreement) or due to Mr. van Biene's death or disability, then Mr. van
Biene or his estate will be entitled to receive as severance, in addition to all
accrued salary, (i) salary continuation and continuation of coverage under our
group health plan for a period of six months if the termination occurs during
the first year of employment, a period of twelve months if the termination
occurs during the second year of employment or a period of eighteen months if
the termination occurs after the second year of employment, and (ii) twelve
months acceleration of vesting of all outstanding options. In connection with
the offer letter and as an inducement to employment, we previously granted Mr.
van Biene an option to purchase 325,000 shares of our common stock, which vests
over a period of three years. Upon a change of control of our company, 50% of
Mr. van Biene's then-outstanding unvested stock options shall vest and the
remaining unvested options shall vest in full if Mr. van Biene is terminated,
his position or base pay is reduced or he is required to relocate within twelve
months following the change of control.
On March 16, 2006, we entered into an employment agreement with Lonnie Schnell,
pursuant to which Mr. Schnell serves as our Chief Financial Officer on an
"at-will" basis. Pursuant to this offer letter, Mr. Schnell is entitled to
receive an annual base salary of $185,000 and will be eligible to receive an
annual incentive bonus based upon our earnings before interest and taxes. In the
event that Mr. Schnell's employment is terminated by us without "cause" (as
defined in the agreement) or due to Mr. Schnell's death or disability, then Mr.
Schnell or his estate will be entitled to receive as severance, in addition to
all accrued salary, (i) salary continuation and continuation of coverage under
our group health plan for a period of six months and (ii) six months
acceleration of vesting of all outstanding options. In connection with the offer
letter and as an inducement to employment, we previously granted Mr. Schnell an
option to purchase 400,000 shares of our common stock, which vests over a period
of four years. Upon a change of control of our company, 50% of Mr. Schnell's
then-outstanding unvested stock options shall vest and the remaining unvested
options shall vest in full if Mr. Schnell is terminated, his position or base
pay is reduced or he is required to relocate within six months before or twelve
months following the change of control.
16
Effective January 1, 2007, we entered into a consulting agreement with Jonathan
Burstein, previously our Executive Vice President of Operations. Under the terms
of the consulting agreement, Mr. Burstein will provide specified consulting
services to us for a term of up to 24 months. As consideration for the services,
we will pay Mr. Burstein an amount of $225,000 per annum plus an additional
$3,333.33 per month for the first 18 months of the term of the agreement. We
also agreed to provide Mr. Burstein with medical benefits and an automobile
allowance for a period of 18 months. In addition, the consulting agreement
provides that the employment offer letter previously entered into with Mr.
Burstein on March 16, 2006, is terminated as of January 1, 2007. The termination
of the employment offer letter was mutually agreed upon by both parties and Mr.
Burstein will not be entitled to receive any severance or other benefits in
connection with the termination. All outstanding stock options held by Mr.
Burstein will continue to vest in accordance with their terms as long as Mr.
Burstein continues to provide services to us or serves on our Board of
Directors.
POTENTIAL SEVERANCE PAYMENTS
As described above, our employment agreements with Messrs. Forte, van Biene and
Schnell provide for severance benefits in the event that the executive's
employment is terminated due to executive's death or disability or by the
Company without "cause" and, in the case of Mr. Forte, for "good reason.." The
following table sets forth severance payments and benefits that we would have
been obligated to pay to Messrs. Forte, van Biene and Schnell assuming a
triggering event had occurred under each of their respective agreements as of
December 31, 2006:
CONTINUATION OF VALUE OF
CONTINUATION OF ACCELERATION OF
CASH SEVERANCE BONUS VALUE HEALTH BENEFITS VESTING OF EQUITY TOTAL SEVERANCE
NAME PAYMENT ($)(1) ($)(2) ($) AWARDS ($)(3) BENEFITS ($)
---------------------- ----------------- -------------- ----------------- ------------------- --------------------
Stephen P. Forte 565,847 90,050 16,415 566,500 1,238,812
---------------------- ----------------- -------------- ----------------- ------------------- --------------------
Wouter van Biene 132,149 - 5,538 195,273 332,960
---------------------- ----------------- -------------- ----------------- ------------------- --------------------
Lonnie D. Schnell 124,994 - 6,005 154,498 285,497
---------------------- ----------------- -------------- ----------------- ------------------- --------------------
(1) Includes (i) earned and unpaid base salary through the date of
termination, (ii) accrued but unpaid vacation and (iii) cash severance
payments based on the executive's salary payable in a lump sum or periodic
payments as provided in the executive's employment agreement.
(2) Includes (i) bonus amounts under the MIP earned for the completed fiscal
year and (ii) a pro rated portion of bonus under the MIP for partial
fiscal years prior to the termination date.
(3) Based on the closing price of our common stock on December 29, 2006 of
$1.03, as reported by AMEX.
POTENTIAL CHANGE IN CONTROL PAYMENTS
As described above, our employment agreements with Messrs. Forte, van Biene and
Schnell provide for accelerated vesting of all or a portion of the options held
by such executives upon a change in control. The following table sets forth the
change in control benefits that we would have been obligated to pay to our named
executive officers assuming a change of control had occurred as of December 31,
2006:
VALUE OF ACCELERATION OF VESTING OF EQUITY AWARDS ($)(1)
---------------------------------------------------------
CHANGE IN CONTROL WITH
NAME CHANGE IN CONTROL ONLY (2) ADDITIONAL TRIGGER (3)
-------------------- --------------------------- -----------------------------
Stephen P. Forte 556,500 556,500
-------------------- --------------------------- -----------------------------
Wouter van Biene 167,375 334,750
-------------------- --------------------------- -----------------------------
Lonnie D. Schnell 206,000 412,000
-------------------- --------------------------- -----------------------------
(1) Based on the closing price of our common stock on December 29, 2006 of
$1.03, as reported by AMEX.
17
(2) Upon a change in control, (i) Mr. Forte is entitled to full acceleration
of currently outstanding options and (ii) Messrs. van Biene and Schnell
are each entitled to accelerated vesting with respect to 50% of the
unvested portion of outstanding options.
(3) Messrs. van Biene and Schnell are each entitled to full acceleration of
vesting of the remaining unvested portion of all outstanding stock options
if, within in 12 months following the change in control: (i) he is
terminated by the acquirer, (ii) his position is reduced to less than a
general manager position or a vice president level position, (iii) his
base pay is reduced below his prevailing base pay amount at the time of
the change in control or (iv) he is asked to relocate to an office more
than 60 miles from his office prior to the change in control.
DIRECTOR COMPENSATION
The general policy of the Board of Directors is that compensation for
independent directors should be a mix of cash and equity-based compensation. We
do not pay management directors for Board service in addition to their regular
employee compensation. The full Board of Directors has the primary
responsibility for reviewing and considering any revisions to director
compensation.
The following table details the total compensation earned by the company's
non-employee directors in 2006.
FEES EARNED OR OPTION ALL OTHER
NAME PAID IN CASH ($) AWARDS ($)(8) COMPENSATION ($) TOTAL ($)
------------------------ ------------------- ----------------- ---------------- ----------------
Mark Dyne (1) 42,000 12,139 25,000 79,139
------------------------ ------------------- ----------------- ---------------- ----------------
Colin Dyne (2) - 12,139 335,000 347,139
------------------------ ------------------- ----------------- ---------------- ----------------
Brent Cohen (3) 39,500 12,139 - 51,639
------------------------ ------------------- ----------------- ---------------- ----------------
Joseph Miller (4) 44,500 12,139 - 56,639
------------------------ ------------------- ----------------- ---------------- ----------------
Raymond Musci (5) 46,000 12,139 - 58,139
------------------------ ------------------- ----------------- ---------------- ----------------
William Sweedler (6) 18,583 12,033 - 30,616
------------------------ ------------------- ----------------- ---------------- ----------------
Susan White (7) 30,500 12,139 - 42,639
------------------------ ------------------- ----------------- ---------------- ----------------
Total 221,083 84,867 360,000 665,950
------------------------ ------------------- ----------------- ---------------- ----------------
(1) As of December 31, 2006, Mr. Mark Dyne held options to purchase a total of
323,000 shares. The Other compensation consists of per diem fees earned
for services rendered.
(2) As of December 31, 2006, Mr. Colin Dyne held options to purchase a total
of 565,000shares. The other compensation consists of consulting fees for
services rendered.
(3) As of December 31, 2006, Mr. Cohen held options to purchase a total of
125,000 shares.
(4) As of December 31, 2006, Mr. Miller held options to purchase a total of
60,000 shares.
(5) As of December 31, 2006, Mr. Musci held options to purchase a total of
60,000 shares.
(6) As of December 31, 2006, Mr. Sweedler held options to purchase a total of
30,000 shares.
(7) As of December 31, 2006, Ms. White held options to purchase a total of
60,000 shares.
(8) The amounts in this column represent the dollar amounts recognized for
financial statement purposes in fiscal 2006 with respect to stock options
granted in 2006 as well as prior fiscal years, in accordance with SFAS
123R. For additional information on the valuation assumptions with respect
to option grants, including the options granted in 2006, see note 9 to the
consolidated financial statements in our Annual Report on Form 10-K for
the year ended December 31, 2006. These amounts do not reflect the actual
value that may be realized by the named executive officers which depends
on the value of our shares in the future.
Our policy is to pay non-employee directors $1,500 for their personal attendance
at any meeting of the Board of Directors, $1,000 for their personal attendance
at any committee meeting, and $500 for attendance at any telephonic meeting of
the Board of Directors or of a committee of the Board of Directors. We also pay
non-employee directors an annual retainer of $20,000 for Board service and an
additional retainer of $5,000 for service on each committee. The Chairman of the
Board receives an annual retainer of $25,000 for Board service. We also
reimburse directors for their reasonable travel expenses incurred in attending
board or committee meetings and pay non-employee directors a per diem for board
services.
18
We do not have a formal policy with regard to option grants to our Board of
Directors, but we generally follow a practice of granting an option for 30,000
shares of stock upon initial appointment or election to the Board of Directors,
and thereafter issuing annual option grants to all non-employee members of
30,000 shares.
During 2006 and through March 31, 2007 we had a verbal agreement with Mr. Colin
Dyne to provide consulting services following his resignation in 2005 as our
Chief Executive Officer. For the year ended December 31, 2006, we paid Mr. Dyne
$275,000 annually for these services in addition to $60,000 in a cash settlement
of a prior stock option commitment. We entered into a written agreement was
completed with Mr. Dyne effective April 1, 2007 that provides for continued
consulting services through November 30, 2008 in exchange for a consulting fee
of $25,000 per month.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board of Directors currently consists of Brent
Cohen, Raymond Musci and William Sweedler. No current executive officer of the
Company has served as a member of the board of directors or compensation
committee of any entity for which a member of our Board of Directors or
Compensation Committee has served as an executive officer.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information as of December 31,
2006 regarding equity compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance:
NUMBER OF SECURITIES
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE REMAINING AVAILABLE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF FOR FUTURE ISSUANCE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS UNDER EQUITY
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
----------------------- ------------------- --------------------
Equity compensation plans
approved by security holders..... 3,452,635 $ 1.84 2,321,977
Equity compensation plans not
approved by security holders..... 2,868,813 $ 2.14 -
----------------------- ------------------- --------------------
Total......................... 6,321,448 $ 1.98 2,321,977
======================= =================== ====================
Options and warrants issued pursuant to equity compensation plans not approved
by security holders are summarized as follows:
o 150,000 warrants issued in conjunction with private placement
transaction in 2001 and 2002, are exercisable at $3.50 per share and
expire at various date through February 2007.
o 30,000 warrants issued for services in 2004, are exercisable at
$4.29 per share and expire in July 2007.
o 172,500 warrants issued for services in 2003, are exercisable at
$5.06 per share and expire in May 2008.
o 572,818 warrants issued for services in 2003, are exercisable at
$4.74 per share and expire in December 2008.
o 102,741 warrants issued in conjunction with a private placement
transaction in 2004, are exercisable at $3.65 per share and expire
in November 2009.
o 215,754 warrants issued for services in 2004, are exercisable at
$3.65 per share and expire in November 2009.
o 1,625,000 inducement options issued to employees in 2006 are
exercisable at a weighted average exercise price of $0.46 per share
and expire in January and March of 2016.
Each of the above plans provides that the number of shares with respect to which
options and warrants may be granted, and the number of shares of common stock
subject to an outstanding option or warrant, shall be proportionately adjusted
in the event of a subdivision or consolidation of shares or the payment of a
stock dividend on common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information regarding the beneficial ownership of
our common stock as of April 30, 2007:
o each person who is known to us to be the beneficial owner of more
than 5% of our outstanding common stock;
o each of our directors;
o each of our named executive officers; and
o all of our directors and executive officers as a group
20
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially owned by
any person who has or shares voting or investment power with respect to such
shares. Shares of common stock under warrants or options currently exercisable
or exercisable within 60 days of the date of this information are deemed
outstanding for purposes of computing the percentage ownership of the person
holding such warrants or options but are not deemed outstanding for computing
the percentage ownership of any other person. As a result, the percentage of
outstanding shares of any person as shown in this table does not necessarily
reflect the person's actual ownership or voting power with respect to the number
of shares of common stock actually outstanding at April 30, 2007. Unless
otherwise indicated, the persons named in this table have sole voting and sole
investment power with respect to all shares shown as beneficially owned, subject
to community property laws where applicable. As of April 30, 2007, we had
18,466,433 shares of common stock issued and outstanding.
The address of each person listed is in our care, at 21900 Burbank Boulevard,
Suite 270, Woodland Hills, California 91367, unless otherwise set forth below
such person's name.
NUMBER OF PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS
-------------------------------------------- ------------- -----------
DIRECTORS:
Mark Dyne (1)............................... 1,353,112 7.1%
Colin Dyne (2).............................. 1,137680 6.0%
Stephen P. Forte (3)........................ 832,087 4.4%
Jonathan Burstein (4)....................... 514,485 2.7%
Lonnie D. Schnell (5) ...................... 208,332 1.1%
Wouter van Biene (6)........................ 172,917 *
William Sweedler (7)........................ 132,000 *
Brent Cohen (8) ............................ 125,000 *
Raymond Musci (8)........................... 60,000 *
Joseph M. Miller (8)........................ 60,000 *
Susan White (8) ............................ 60,000 *
Directors and executive officers as a group
(11 persons) (9) ........................ 4,655,613 22.1%
OTHER 5% HOLDERS:
The Pinnacle Fund, L.P. (10)................ 1,095,890 5.6%
4965 Preston Park Blvd., Suite 240
Plano, TX 75093
Todd Kay.................................... 1,003,500 5.4%
3151 East Washington Blvd.
Los Angeles, CA 90023
* Less than one percent.
(1) Includes 323,000 shares of common stock reserved for issuance upon
exercise of stock options which are currently exercisable, 83,334 shares
of common stock reserved for issuance upon exercise of warrants which are
currently exercisable and 111,111 shares of common stock reserved for
issuance upon conversion of debt which is currently convertible. Includes
176,600 shares held by a limited liability company of which Mr. Dyne is
the manager and a member.
(2) Includes 565,000 shares of common stock reserved for issuance upon
exercise of stock options that are currently exercisable.
(3) Includes 535,135 shares of common stock reserved for issuance upon
exercise of stock options that are currently exercisable.
(4) Includes 375,697 shares of common stock reserved for issuance upon
exercise of stock options that are currently exercisable.
(5) Includes 141,665 shares of common stock reserved for issuance upon
exercise of stock options that are currently exercisable.
(6) Includes 135,417 shares of common stock reserved for issuance upon
exercise of stock options that are currently exercisable.
21
(7) Includes 30,000 shares of common stock reserved for issuance upon exercise
of stock options that are currently exercisable.
(8) Consists of shares of common stock reserved for issuance upon the exercise
of the stock options that are currently exercisable.
(9) Includes 2,410,914 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable, 111,111 shares
of common stock reserved for issuance upon conversion of debt which is
currently convertible and 83,334 shares of common stock reserved for
issuance upon exercise of warrants which currently are exercisable.
(10) Information taken from Schedule 13G filed with the SEC on February 14,
2007. Consists of 1,095,890 shares of common stock reserved for issuance
upon conversion of convertible promissory notes that are currently
convertible.
The information as to shares beneficially owned has been individually furnished
by the respective directors, named executive officers, and other stockholders of
the company, or taken from documents filed with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REVIEW AND APPROVAL OF RELATED PARTY TRANSACTIONS
We have adopted a policy that requires Board approval of transactions with
related persons as defined by SEC regulations, including any sales or purchase
transaction, asset exchange transaction, operating agreement, or advance or
receivable transaction that could put our assets or operating performance at
risk. All of our directors and executive officers of the Company are required at
all times, but not less than annually, to disclose all relationships they have
with companies or individuals that have conducted business with, or had an
interest in, the Company. Our executive officers monitor our operations giving
consideration to the disclosed relationships and refer potential transactions to
the Board of Directors for approval. The Board of Directors considers a related
party transaction for its potential economic benefit to the Company, to ensure
the transaction is "arms length" and in accordance with our policies and that it
is properly disclosed in our reports to shareholders.
REPORTABLE RELATED PARTY TRANSACTIONS
Other than the employment arrangements described elsewhere in this report and
the transactions described below, since January 1, 2006, there has not been, nor
is there currently proposed, any transaction or series of similar transactions
to which we were or will be a party:
o in which the amount involved exceeds $120,000; and
o in which any director, executive officer, shareholder who
beneficially owns 5% or more of our common stock or any member of
their immediate family had or will have a direct or indirect
material interest.
Colin Dyne, a member of our Board, is a significant shareholder in People's
Liberation, Inc., the parent company of Versatile Entertainment, Inc. During
2006, we had sales of $147,000 to Versatile Entertainment. At December 31, 2006
accounts receivable of $83,400 were outstanding from Versatile Entertainment.
At December 31, 2006, we had an aggregate of $655,489 of unsecured notes,
advances and accrued interest receivable due from Colin Dyne. The notes and
advances bear interest at 7.5% and are due on demand.
As December 31, 2006, we had an aggregate of $664,971 in notes and advances due
to Mark Dyne, the Chairman of our Board of Directors or to parties related to or
affiliated with Mark Dyne. The notes are payable on demand and accrue interest
at rates ranging from 0% to 11% per annum.
22
We paid consulting fees to Diversified Investments, a company owned by Mark
Dyne, in the amount of $150,000 during the year ended December 31, 2006.
We paid consulting fees of $335,000 to Colin Dyne during year ended December 31,
2006 for consulting services provided, and have an agreement with Mr. Dyne for
services through November 30, 2008. See the "Director Compensation" section in
item 11 of this report for a description of this agreement.
On January 1, 2007 we entered into an agreement with Mr. Jonathan Burstein,
previously our Executive Vice President of Operations, and a Director of the
Board, to provide consulting services to the Company through December 31, 2008.
See the "Employment Agreements, Termination of Employment and Change of Control
Arrangements" section in item 11 of this report for a full description of this
agreement.
DIRECTOR INDEPENDENCE
Since July 2006, majority of our Board of Directors has been comprised of
"independent" directors within the meaning of the applicable rules for companies
traded on the American Stock Exchange. The Board determined that each of Brent
Cohen, Joseph Miller, Raymond Musci, William Sweedler and Susan White were
independent. The Board has also determined that each of Joseph Miller, Raymond
Musci and William Sweedler meet the independence requirements for services on
the Audit Committee pursuant to the rules for companies traded on the American
Stock Exchange.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
SERVICES PROVIDED BY THE INDEPENDENT AUDITORS
The audit committee of our Board of Directors is responsible for the
appointment, compensation, retention and oversight of the work of the
independent auditors.
On December 16, 2005, we engaged Singer Lewak Greenbaum & Goldstein LLP ("SLGG")
as our independent registered public accounting firm. BDO Seidman, LLP ("BDO"),
served as our principal independent public accounting firm for the year ended
December 31, 2004. BDO resigned as the Company's independent public accounting
firm on November 22, 2005 upon its completed review of information to be
included in our Form 10-Q for the quarter ended September 30, 2005.
AUDIT FEES - The aggregate fees billed by our independent registered accounting
firms for professional services rendered for the audit of our annual financial
statements and review of our financial statements included in our Forms 10-Q or
services that are normally provided in connection with statutory and regulatory
filings, were $554,600 for fiscal year 2005 and $403,400 for fiscal year 2006.
AUDIT-RELATED FEES - The aggregate fees billed by our independent registered
accounting firms for professional services rendered for assurance and related
services reasonably related to the performance of the audit or review of our
financial statements (other than those reported above) was $0 for fiscal year
2005 and $0 for fiscal year 2006.
TAX FEES - The aggregate fees billed by our independent registered accounting
firms for professional services rendered for tax compliance, tax advice and tax
planning were $44,100 for fiscal year 2005 and $29,100 for fiscal year 2006.
ALL OTHER FEES - There were no fees billed by our independent registered
accounting firms for services rendered to us during 2005 and 2006 other than the
services described above under "Audit Fees," "Audit-Related Fees" and "Tax
Fees."
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The audit committee approved all of the foregoing services provided by BDO and
SLGG.
POLICY REGARDING PRE-APPROVAL OF SERVICES PROVIDED BY THE INDEPENDENT AUDITORS
The audit committee has established a general policy requiring it's pre-approval
of all audit services and permissible non-audit services provided by the
independent auditors, along with the associated fees for those services. For
both types of pre-approval, the audit committee considers whether the provision
of a non-audit service is consistent with the SEC's rules on auditor
independence, including whether provision of the service (1) would create a
mutual or conflicting interest between the independent auditors and the Company,
(2) would place the independent auditors in the position of auditing its own
work, (3) would result in the independent auditors acting in the role of
management or as an employee of the Company, or (4) would place the independent
auditors in a position of acting as an advocate for the Company. Additionally,
the audit committee considers whether the independent auditors are best
positioned and qualified to provide the most effective and efficient service,
based on factors such as the independent auditors' familiarity with our
business, personnel, systems or risk profile and whether provision of the
service by the independent auditors would enhance our ability to manage or
control risk or improve audit quality or would otherwise be beneficial to us.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS AND SCHEDULES. (Previously filed with the
Original Filing.)
(b) Exhibits:
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities and Exchange Act of 1934,
as amended
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities and Exchange Act of 1934,
as amended
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TAG-IT PACIFIC, INC.
/S/ LONNIE D. SCHNELL
--------------------------------
By: Lonnie D. Schnell
Its: Chief Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chief Executive Officer April 30, 2007
------------------------- (Principal Executive
Stephen P. Forte Officer) and Director
/S/LONNIE D. SCHNELL Chief Financial Officer April 30, 2007
------------------------- (Principal Accounting and
Lonnie D. Schnell Financial Officer)
* Chairman of the Board of April 30, 2007
------------------------- Directors
Mark Dyne
* Director April 30, 2007
-------------------------
Jonathan Burstein
Director April 30, 2007
-------------------------
Brent Cohen
* Director April 30, 2007
-------------------------
Colin Dyne
* Director April 30, 2007
-------------------------
Joseph Miller
* Director April 30, 2007
-------------------------
Raymond Musci
* Director April 30, 2007
-------------------------
William Sweedler
* Director April 30, 2007
-------------------------
Susan White
* By: /S/ LONNIE D. SCHNELL
-----------------------------------
Lonnie D. Schnell, Attorney-in-fact
25