CUO Continental Materials Corp

Certain Relationships and Related Transactions

The Company purchases insurance coverage for workers’ compensation, property and excess liability with another company controlled by the Gidwitz Family to minimize insurance costs and to obtain other more favorable terms. The cost of such insurance is allocated based upon a formula that considers, among other things, nature of risk, loss history and size of operations. From time to time, the Company will advance payments to the insurance carriers on behalf of the other company. The Company invoices the other company its respective share of each payment. During fiscal 2016, the other company paid its respective share in the same month that it was invoiced. The Company’s participation in this arrangement has, in management’s opinion, resulted in significant savings to the Company in terms of the cost of insurance premiums and other related charges.

The Company leases office space at 440 South LaSalle Street, Chicago, Illinois that is used as its corporate headquarters. The Company subleases some of the office space to two companies controlled by the Gidwitz Family as well as one of the Company’s directors. The lease expense is allocated using a formula based primarily upon the square footage occupied by each of the tenants. Common space within the office is allocated based upon the ratio of the square footage occupied by each of the tenants to the total square footage under lease. In management’s opinion, the Company participation in this lease arrangement has resulted in its ability to lease space at more favorable rates than had it sought to lease a smaller space on its own.

Theodore R. Tetzlaff has served as a director of the Company since 1981. Mr. Tetzlaff formed Tetzlaff Law Offices, LLC in April 2012 and has been engaged to represent the Company in various legal matters since that time. During 2016, Tetzlaff Law Offices continued to represent the Company in its lawsuit against Valco, Inc. seeking, among other things, to rescind its Pueblo, Colorado sand and gravel lease. The suit against Valco, Inc. is ongoing. The Company has also engaged Tetzlaff Law Offices, LLC to represent the Company in various personnel matters, two of which have continued into 2017. During the 2016 fiscal year, which began on January 4, 2016, the Company has been billed approximately $414,000 for services provided by Tetzlaff Law Offices, LLC.

COMPENSATION DISCUSSION AND ANALYSIS

The following Compensation Discussion and Analysis describes the Compensation Committee’s executive compensation philosophy, objectives and programs, and explains the basis on which fiscal 2016 compensation determinations were made with respect to the Company’s named executive officers. For purposes of this discussion, the Company’s named executive officers in fiscal 2016 were as follows:

Compensation Committee Governance and Compensation Philosophy

The Compensation Committee makes recommendations to the Board concerning compensation for the named executive officers and determines compensation for other officers. The Compensation Committee also oversees benefit plans in which the named executive officers participate. A copy of the Charter of the Compensation Committee, which is reviewed and revised as appropriate, is available as noted in the section captioned “Committees of the Board” section of this proxy statement.

The Company believes that executive compensation should be closely linked to corporate performance. Accordingly, in years in which performance goals are achieved or exceeded, executive compensation should be higher than in years in which the performance is below expectations. At the same time, the Compensation Committee is cognizant of its need to offer compensation that is competitive. By providing the opportunity for compensation that is comparable to the levels offered by other similarly situated companies, the Company is able to attract and retain key executives. The Compensation Committee regularly reviews the Company’s compensation programs to ensure that pay levels and incentive opportunities are competitive and reflect the performance of the Company. The Committee periodically engages an independent compensation consulting firm to assist it in determining the competitiveness of the Company’s overall compensation structure. Compensation is reviewed from a base salary standpoint as well as considering the total compensation package received by each executive. A written report of the conclusions of the independent compensation consulting firm is provided to management and the Compensation Committee. In years that compensation is not reviewed by an independent compensation consultant, the Compensation Committee tends to consider the consumer price index as a benchmark for base salary increases.

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Compensation Program Components

To achieve its compensation goals, the executive compensation program consists primarily of the following components:

·                   base salary;

·                   cash bonus;

·                   defined contribution profit sharing plan; and

·                   perquisites and other benefits.

All components are reviewed annually, individually and in the aggregate, considering corporate performance and individual initiative and performance. While each component is discussed in more detail below, it is the Compensation Committee’s intention to establish base salaries commensurate with those paid by companies of similar size and complexity, while providing the named executive officers with the ability to receive a significant portion of their total compensation through the Company’s bonus program, which is contingent on meeting corporate and personal performance goals related to the Company’s operations. This places a large percentage of their compensation at risk while more closely aligning their interests with the interests of the Company’s stockholders. The employee benefits and perquisites offered by the Company have generally been established in response to competitive offerings and also with the goal of enabling the executives to focus on their job duties. As noted above, the Compensation Committee considers the written report from the independent compensation consulting firm in years when a formal review is performed, the recommendations of the Chief Executive Officer and the Compensation Committee’s own discretion in establishing both the base salary and total compensation packages for the executives.

Base Salaries

Base salaries are used to provide annual cash income to executives to compensate them for services rendered during the fiscal year. The Compensation Committee establishes salaries annually based on a review of each officer’s individual responsibilities, performance and through comparisons with companies of similar size and complexity. Officer salaries are typically reviewed and adjusted each year at the Compensation Committee’s meeting in either March or May. At the suggestion of management, the Compensation Committee did not award a salary increase to the Company’s Chief Executive Officer during 2016. The Committee met on January 11, 2016 to determine the compensation to be paid to Mr. Nichter effective January 1, 2016 upon his appointment to the position of Vice President and Chief Financial Officer. Mr. Nichter’s base salary was increased to $200,000. The last independent compensation review commissioned by the Committee was delivered to the Company in July 2013 and included a formal review of the base salaries and total compensation levels of 30 management personnel at the Company and its subsidiaries.  For those years that no independent review is performed, increases, if awarded, are generally based upon the Department of Labor index of increases in general compensation levels.

Cash Bonuses

The bonus program is intended to provide an opportunity to receive additional cash compensation but only if it is earned through achievement of specified performance goals. At the beginning of each year, the Compensation Committee establishes the annual target goals for earnings and return on net investment considering the Company’s annual business plan and the Company’s prior year’s performance. In this context, “return on net investment” is defined as earnings before interest, income taxes and amortization of intangible assets as a percentage of the sum of the average shareholders’ equity plus the average funded debt for the year. Other Company-wide goals and personal goals may also be considered to the extent these goals further the objectives of the Company. The Committee relies primarily on mathematical formulae in calculating the portion of the bonuses to be granted related to the goals established for earnings and return on net investment. The level of achievement of personal goals is more subjective and is often based on the successful achievement of certain transactions or other goals which may be measured by the Committee on a discretionary, non-quantifiable basis. Personal goals were not included in the determination of bonuses awarded for 2016. The Committee also considers the Company’s liquidity and capital resources. In early 2017, the Committee reviewed the Company’s performance against the established targets for earnings and for the percentage return on net investment for the prior year and concluded that the return on net investment goal was achieved at the Maximum level while the earnings goal was achieved at slightly above the Target level. As calculated under the formula, the Committee awarded bonuses to Messrs. Gidwitz and Nichter in the amounts of $450,000 and $141,000, respectively. The Committee believes that these performance measures serve to align the interests of executives with the interests of stockholders.

Under the bonus program effective for 2016, the bonus criteria were weighted as follows: for Messrs. Gidwitz and Nichter, earnings goal — 60%; return on net investment goal — 40%. The two executives were eligible to earn bonus awards as a percentage of their

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base salaries as follows:

To illustrate hypothetically by way of example, assuming achievement of the threshold level for the earnings goal and target level on the net investment goal, Mr. Gidwitz’ bonus would be calculated as follows: 30% x 60%, or 18% awarded for the earnings performance and 60% x 40%, or 24%, for the net investment goal. This would yield a total award of 42% of Mr. Gidwitz’s 2016 base salary.

The Committee’s policy and belief is that eligible employees should have a reasonable likelihood of achieving the target level of performance such that, over time, the bonuses paid should be at or near the target level.

Profit Sharing Plan, Benefits and Perquisites

Executives participate in each of the benefit plans or arrangements that are made available to all salaried employees generally, including medical and dental benefits, life and disability insurance, and the profit sharing plan, which is qualified under Internal Revenue Code Section 401(k). The Compensation Committee considers all of these plans and benefits when reviewing total compensation of the named executive officers. With respect to life insurance, officers receive coverage of three and a half times their salaries to a maximum of $650,000. The premium associated with this coverage is added to the individual’s taxable wages. Life insurance in excess of those amounts is at the discretion of the employee and the associated premiums are paid by the employee. With respect to the profit sharing plan, any individual whose compensation is in excess of the amount eligible for the Company’s matching contribution to the profit sharing plan, as established by the Internal Revenue Service, participates in an unfunded supplemental profit sharing plan (the “Supplemental Plan”). The Company does not provide any benefit plans intended to benefit only the named executive officers.

The Company provides company-leased cars to the executive officers named in the Executive Compensation Table for their use. An annual payment is made to each named executive officer and included in their individual taxable wages, which is used to reimburse the Company for the lease expense incurred for the year. This payment, which is included in All Other Compensation, is grossed up for the related taxes. In providing the cars to the executives, the Compensation Committee considered the frequency that the executives found it necessary to work outside of normal business hours when other forms of transportation were less available or convenient.

The Company has, on occasion, provided the named executive officers with an insignificant amount of tax or legal service. During 2016, no such services were incurred by any of the named officers. The Company does not provide any other perquisites to the named executive officers such as country club memberships or personal travel.

Stock Option and Long-Term Equity Plans

There are no equity compensation plans, whether approved by security holders or not, existing as of December 31, 2016 related to the named executive officers. The Compensation Committee believes that equity compensation plans are not a necessary component of executive compensation at the present time due to the number of shares currently held by affiliates of the Company and the limited market liquidity for the Company’s Common Stock.

Conclusion

After reviewing all of the components of its existing compensation program, including perquisites, the Compensation Committee has determined that, after giving consideration to the effects of the economy on the Company’s operating performance during the past few years, the total annual compensation received by the named executive officers and other officers of the Company is reasonable and competitive with the compensation programs provided by other corporations of similar size and complexity while also considering the liquidity and capital resources currently available to the Company. Moreover, the Compensation Committee believes that it has maintained compensation at levels that reflect each executive officer’s contribution towards the Company’s objectives.

(1)                                  The imputed gain or loss is determined by applying the same rate of return to the deferred balances as the employee has realized on his 401(k) Plan investments exclusive of investments in the Common Stock, if any.

(2)                                  The amounts paid to Messrs. Gidwitz, Nichter and Sum represent payments to them from which they, in turn, reimbursed the Company for the annual amount expended for the leased cars. The 2016 amounts included a gross-up for taxes of $16,167 and $1,597 for Messrs. Gidwitz and Nichter, respectively. The 2015 amounts included a gross-up for taxes of $16,635, $7,753 and $88 for Messrs. Gidwitz, Nichter and Sum, respectively.

Retirement Benefits

Profit Sharing Plan:   The Company has a contributory profit sharing retirement plan qualified pursuant to Internal Revenue Code Section 401(k) for the benefit of qualifying employees, including the named executives. Company contributions, if any, are determined at the discretion of the Compensation Committee together with management after the review of all the relevant factors, primarily profitability, at year-end.

Unfunded Supplemental Profit Sharing Plan:   The Company also maintains the Supplemental Plan for salaried employees which enables the Company to pay, to any person whose contribution to the Profit Sharing Plan has been restricted as a result of the limitations imposed by Section 401 of the Internal Revenue Code, an amount equal to the difference between the amount the person would have received as Company matching contributions to his/her account under the Profit Sharing Plan had there been no limitations and the amount the person will actually receive under the Profit Sharing Plan giving effect to the limitations.

The Supplemental Plan provides for the employees’ balances to be credited or charged with a gain or loss determined by applying the same rate of return to the deferred balances as the employees realized on their Profit Sharing Plan investments exclusive of investments in the Common Stock.

The Supplemental Plan is unfunded and amounts owed to the employees covered thereby are considered to be general obligations of the Company. The Supplemental Plan was amended in 2007 to remain in compliance with Internal Revenue Service Rule 409A. Two separate plans were created for each participant whose account was credited with contributions both before and after December 31, 2004. The original Supplemental Plan for contributions made prior to January 1, 2005 was amended to add provisions which allow an employee to take an in-service withdrawal of amounts accumulated in the Supplemental Plan prior to or on December 31, 2004 provided the employee forfeits 10% of his then current Supplemental Plan account balance. The forfeited amount reverts back to the Company. The new Supplemental Plan for contributions after 2004 does not permit in-service withdrawals. Contributions and earnings or loss imputed on the balance are disclosed in the above table.

Equity Compensation Plans

The Company has no equity compensation plans for its employees, whether approved by security holders or not, existing as of December 31, 2016; however effective December 30, 2010, the 2010 Non-Employee Directors Stock Plan was established after being approved by a majority of the security holders. The principal features of the plan are described below.

DIRECTOR COMPENSATION

The Board’s policy is to pay each director who is not an officer or employee of the Company an annual retainer (as described below) plus the following fees:

·                   $750 for each Board meeting attended;

·                   $750 for each committee meeting attended;

·                   $6,000 Audit Committee chair retainer fee; and

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·                   $3,000 retainer fee for all other committee chairs.

In December 2010, the holders of shares representing a majority of the voting power of the Common Stock gave their written consent to a resolution by the Company’s Board of Directors adopting the Company’s Non-Employee Director Stock Plan (the “Plan”), pursuant to which the non-employee directors of the Company receive their annual base retainer payment in the form of Common Stock, instead of cash. Notice of this resolution was sent to all shareholders by the mailing of a copy of the “Information Statement Pursuant to Section 14 of the Securities Exchange Act of 1934 and Regulation 14C and Schedule 14C Thereunder” together with a cover letter on December 10, 2010. The Plan, which became effective December 30, 2010, reserved 150,000 treasury shares as the maximum number of shares that could be issued under the Plan. In April 2016, the Compensation Committee approved a grant of 1,500 shares of Common Stock to each qualifying director for 2016 service. The grant date was set as April 6, 2016. The fair market value of this grant, determined by reference to the closing price of the Common Stock as quoted on the NYSE MKT exchange as of Tuesday, April 5, 2016, was $18,945. A total of 66,000 shares remain available for issuance under the Plan. The number of shares to be granted for future years’ service will be determined annually.

(1)                                  James G. Gidwitz, Chief Executive Officer and Chairman of the Board, is not included in this table as he is an employee of the Company and receives no additional compensation for his service as director. Mr. Gidwitz’ compensation is shown in the above Executive Summary Compensation Table.

(2)                                  None of the directors received perquisites or other personal benefits.

(3)                                  Represents 1,500 shares at $12.63 per share issued April 6, 2016.

business development, productivity, customer satisfaction, or any other factor set forth in the Incentive Plan. For 2017, the Compensation Committee determined that for all participants the criteria for awards would be based on the following (weightings of each in parenthesis):

·                   consolidated pre-tax profit (60%);

·                   consolidated return on net investment (40%); and

·                   achievement of significant personal goals (the goals and the award to be determined by the Compensation Committee at its sole discretion).

Eligibility

The Compensation Committee of the Board of Directors retains sole and complete discretion to determine the eligibility of and the amount of the bonus award to each executive officer.

The CEO or the Board of Directors retains sole and complete discretion to determine the eligibility of each executive officer as well as any other full or part-time employee of the Company (excluding collectively bargained employees). Newly hired employees of the Company may participate mid-year.

Expenses

The Company pays the expenses of the Incentive Plan.

Awards to Participants

For awards to participants, including Named Executives, the Compensation Committee selects the performance criteria and establishes the related goals to be used to measure performance. It also establishes the formula for determining the amount of the award that is earned by each individual and identifies any minimum performance levels below which no award will be paid. Awards may range from 0% to 200% of the target award depending upon performance, which will be a specified percentage of a participant’s annual base salary based upon position. The maximum dollar amount of compensation paid as an annual bonus will not under any circumstances exceed 200% of annual base salary for each such employee participant in the Incentive Plan.

Conditions

The Incentive Plan has certain conditions which must be met prior to the distribution of any award to a participant following termination of employment. These conditions include continuing employment with the Company or a subsidiary or, if termination was for a reason other than death, meeting the requirements of a written agreement as set forth in Article 5 of the Incentive Plan. The Incentive Plan also makes provisions for recoupment of a bonus award in the event of a restatement of the Company’s financial results that would reduce a previously granted bonus award’s size or payment.

Termination, Suspension or Modification and Interpretation of the Incentive Plan

The Board may terminate, suspend or modify all or part of the Incentive Plan at any time. The Compensation Committee has sole authority over administration and interpretation of the Incentive Plan including the right to exercise discretion as it sees fit.

Stockholder Approval Condition

As required by the Incentive Plan, the Compensation Committee timely established target award amounts under the Incentive Plan for officers, including Named Executives, as well as other employees for the 2017 performance period. These target awards are subject to Shareholder approval. The amount of the awards which ultimately may be payable for 2017 performance cannot be determined at this time.

If Proposal 2 is approved, the terms of the Incentive Plan will continue for awards to Named Executives and other employees for 2017 and future years. If Proposal 2 is not approved, no bonus awards will be made for 2017 and future years under the Incentive Plan.

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Resolution

Therefore the Company is providing shareholders with the right to vote to approve the following resolution relative to the Company’s Incentive Plan:

“RESOLVED, that the terms of the Company’s Annual Incentive Compensation Plan as described in Proposal 2 of the Proxy Statement and shown in Appendix I thereto, are approved.”

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE TERMS OF THE COMPANY’S

ANNUAL INCENTIVE COMPENSATION PLAN.

SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT

The following information is furnished as to the Common Stock of the Company owned beneficially as of April 5, 2017 by (i) each director, (ii) the named executive officers, (iii) directors and named executive officers as a group, and (iv) persons that have reported beneficial ownership of more than 5% of the Common Stock.

*                                          Percentage of shares beneficially owned does not exceed 1%.

(1)                                  Calculations are based on 1,682,563 shares of Common Stock outstanding as of April 5, 2016.

(2)                                  The Gidwitz Family includes James G. Gidwitz, Ronald J. Gidwitz and their three siblings, and Ralph W. Gidwitz and Betsy R. Gidwitz. These seven family members, together with their descendants and the descendants of one deceased family member, are herein referred to as the “Gidwitz Family.” The Gidwitz Family holdings include the shares identified in the table above and directly owned by James G. Gidwitz, Betsy R. Gidwitz, Ralph W. Gidwitz and Ronald J. Gidwitz, as well as the following shares:

(a)                                  727,126 shares owned by the CMC Partnership whose managing partners are Betsy R. Gidwitz, James G. Gidwitz, Ralph W. Gidwitz, and Ronald J. Gidwitz;

(b)                                  126,208 shares owned by the CMC-GFAM Partnership whose beneficial owners are certain members of the Gidwitz Family, including trusts created for the benefit of the children of James G. Gidwitz and Ronald J. Gidwitz;

(c)                                   30,330 shares held directly by members of the Gidwitz Family other than the directors and executive officers listed in the security ownership table above. James G. Gidwitz, Betsy R. Gidwitz, Ralph W. Gidwitz and Ronald J. Gidwitz disclaim beneficial ownership of the shares referenced in this Note as indirectly owned, except to the extent of their respective beneficial ownership interests in the entities that hold such shares. The combined reporting of the

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shares referenced in this Note does not constitute an admission on the part of any individual member of the Gidwitz Family that the Gidwitz Family constitutes a “group” within the meaning of SEC Regulation 13D; and

(d)                                  6,000 shares held in a trust for which James G. Gidwitz has uncompensated investment authority but disclaims beneficial ownership of these shares except to the extent of his position as Trustee and investment advisor.

With respect to the shares referenced in this Note, the beneficial owners indicated in (c) have sole voting and investment power and the beneficial owners indicated in (a) and (b) have shared voting and investment power.

(3)                                  Includes 33,140 shares credited to James G. Gidwitz’s account in the Employees Profit Sharing Retirement Plan.

(4)                                  Represents ownership of 115,000 shares reported in a Schedule 13G dated December 31, 2016 (the latest Schedule 13G on file), by Franklin Resources, Inc. (FRI), Charles B. Johnson, Rupert H. Johnson, Jr. and Franklin Advisory Services, LLC (FAS). According to the Schedule 13G, the shares are beneficially owned by one or more open or closed-end investment companies or other managed accounts which are advised by direct and indirect investment advisory subsidiaries of FRI. FAS, as the investment adviser, retains sole investment and voting power over the shares.

(5)                                  Does not include 727,126 shares held indirectly by James G. Gidwitz through CMC Partnership or 126,208 shares held indirectly by James G. Gidwitz through CMC-GFAM Partnership, over which he has shared voting and investment power.

(6)                                  Does not include 727,126 shares held indirectly by Betsy R. Gidwitz through CMC Partnership over which she has shared voting and investment power.

(7)                                  Does not include 727,126 shares held indirectly by Ralph W. Gidwitz through CMC Partnership over which he has shared voting and investment power.

(8)                                 Does not include 727,126 shares held indirectly by Ronald J. Gidwitz through CMC Partnership or 126,208 shares held indirectly by Ronald J. Gidwitz through CMC-GFAM Partnership, over which he has shared voting and investment power.

(9)                                  Includes 59,786 shares held by the Company’s Employees Profit Sharing Retirement Plan, which includes: (a) 33,140 shares credited to James G. Gidwitz’s account and (b) 26,646 shares credited to other employees’ or former employees’ accounts, as to which James G. Gidwitz and Mark S. Nichter share voting power (with respect to certain matters) as trustees of such Plan.

·                   discussed with BKD the matters required to be discussed by Statement on Auditing Standards No. 61, Communications with Audit Committees , as amended, regarding the auditor’s judgments about the quality of the Company’s accounting principles as applied in its financial reporting;

·                   discussed with BKD the selection, application and disclosure of the Company’s critical accounting policies;

·                   discussed with BKD the audit plan, scope, identification of audit risks and the Company’s internal control procedures;

·                   received written disclosures and the letter from BKD required by the Public Company Accounting Oversight Board regarding BKD’s communications with the Audit Committee concerning independence;

·                   discussed with representatives of BKD the public accounting firm’s independence from the Company and management; and

·                   considered whether the provision by BKD of non-audit services is compatible with maintaining BKD’s independence.

Conclusion

Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for filing with the Securities and Exchange Commission.

(1)                                  Consists of fees for the audit of our financial statements and the review of the financial statements included in the quarterly reports on Form 10-Q and the provision of attestation services in connection with statutory and regulatory filings or engagements.

(2)                                  Consists of fees for services relating to the audit of the consolidated annual financial statements including discussions of topics initiated by management.

(3)                                  Consists of fees for services related to tax compliance, tax advice and tax planning.

(4)                                  There were no fees incurred during either 2016 or 2015 that would be classified in the All Other Fees category.

In accordance with the applicable rules of the Commission, the Audit Committee has established policies and procedures for pre-approval of all audit and permitted non-audit services to be provided by its independent registered public accounting firm. The Audit Committee must separately pre-approve the engagement of the independent registered public accounting firm to audit the Company’s consolidated financial statements. The Audit Committee has established a pre-approval policy for engaging the independent registered public accounting firm for other audit and permissible non-audit services. Under the policy, the Audit Committee has specified audit, audit-related, tax and regulatory services that may be performed by the independent registered public accounting firm. The engagement for those services specified in the policy requires the further, separate pre-approval of the Chairman of the Audit Committee or the entire Audit Committee, if specific dollar thresholds set forth in the policy are exceeded. Services not

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specified in the policy will require separate pre-approval by the Audit Committee. The audit, audit-related, tax and other services provided by BKD in 2016 and 2015, described above, were all approved by the Audit Committee in accordance with this policy.

Appendix I

Continental Materials Corporation

Annual Incentive Compensation Plan

Effective January 1, 2017

I.                             Establishment and Purpose of the Plan

Continental Materials Corporation has established the Continental Materials Corporation Annual Incentive Compensation Plan (“Plan”). As explained in detail below, the amount of a bonus payable under the Plan is determined under on a formula which is based on both the performance of the Company and the successful individual performance of the participant “Bonus Award”).  For each Bonus Award, the performance of the Company and the participant is determined over the course of the 12-month period beginning on January 1 and ending on the following December 31 (the “Performance Year”).

The Plan’s purpose is to align the Company’s interests and the interests of the participants by providing incentive compensation for the achievement of Company and/ or successful individual performance. The Plan is intended to allow the Compensation Committee of the Company to pay compensation that may be exempt from section 162 of the Internal Revenue Code of 1986, as amended (the “Code.”)  No member of the Board or the Compensation Committee shall be liable for any action or determination made in good faith.

II.                        Eligibility and Participation

You are eligible to participate in the Plan for a Performance Year if you satisfy all of the following eligibility criteria:

·                                           You are an employee of the Company who is classified by the Company as a regular full-time or regular part-time employee.

·                                           You are invited to participate by the Chief Executive Officer of the Company or the Board of Directors.

·                                           You are not covered under a collectively bargained agreement.

If you are eligible to participate in the Plan for only part of the Performance Year, then you may participate in the Plan on a prorated basis for the Performance Year provided your participation in the Plan for the Performance Year would not be inconsistent with Code section 162(m). If you are eligible for prorated participation, the Bonus Award, if any, otherwise payable to you for the Performance Year will be prorated based on your percentage of time in an eligible position during the Performance Year.

III.                   Target Annual Bonus

For each Performance Year in which you are eligible to participate, you will be assigned a Target Annual Bonus, which will be a specified percentage of your annual base salary, determined based on your position. The Bonus Award, if any, that you ultimately receive for the Performance Year will be a percentage of your Target Annual Bonus, determined pursuant to Article IV.

IV.                    Steps for Determining Bonus Awards

Bonus Awards for a Performance Year will be determined pursuant to the following steps:

Step One: Establish Performance Goals

On or before March 31 of a Performance Year, the Compensation Committee of the Company will establish performance goals for each of the Plan’s Performance Metrics for the Performance Year. The Performance Metrics may include the following: earnings before interest, taxes, depreciation and amortization (“EBITDA”); EBITDA subject to adjustment to eliminate the effects of extraordinary transactions and events revenue; earnings before interest, income taxes and amortization of intangible assets as a percentage of the sum of the average shareholders’ equity plus the average funded debt for the year (“return on net investment”); expense levels; business development and financing milestones; total shareholder return; changes in the market price of the Company’s common stock; economic value-added; sales or revenue, developmental; acquisitions or strategic transactions; operating income (loss); cash flow (including, but not limited to, operating cash flow and free cash flow); return on capital, assets, equity, or investment; stockholder returns; return on sales; gross or net profit levels; productivity; expense efficiency; margins; operating efficiency; customer satisfaction; reimbursement decisions; working capital; earnings (loss) per share of the Company’s common stock; sales or market shares;

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number of customers or units of products sold; and operating income and/or net annual recurring revenue, any of which may be (i) measured in absolute terms or compared to any incremental increase, (ii) measured in terms of growth, (iii) compared to another company or companies or to results of a peer group, (iv) measured against the market as a whole and/or as compared to applicable market indices and/or (v) measured on a pre-tax or post-tax basis (if applicable)  and Individual Performance. Adjustments may be made from year to year at the sole discretion of the Compensation Committee (or its designee) to include or exclude certain items in the calculations.

Individual Performance is tied to a successful participant’s performance based on pre-determined objectives, as determined by the Company and Compensation Committee.

The weight given to each Performance Metric to determine the percentage of the Bonus Award attributable to each Performance Metric will also be determined by the Compensation Committee for each Performance Year.

Step Two: Measure Achievement of Performance Metrics

After the end of the Performance Year, the Compensation Committee will evaluate the Company’s financial performance results for the Performance Year and/or each participant’s Individual Performance to determine the extent to which the performance goals were attained. The Compensation Committee will adopt a written resolution as to the extent of the attainment of the performance goals with respect to each of the Performance Metrics.

The specific amount of each Bonus Award for the Performance Year will then be determined by the Compensation Committee.

Special Rules with Respect to Executive Officers

Notwithstanding any other provision of the Plan, the Compensation Committee retains sole and complete discretion to determine the eligibility of, and any Bonus Award payable to, each executive officer covered by Code section 162(m).

V.                         Payment Conditions

Payment Date and Form of Payment . Bonus Awards will be made by March 15 of the year following the Performance Year for which the Bonus Awards are made (“Payment Date”). The Bonus Award, if any, will be paid in a single lump sum payment.

Required Employment on the Payment Date . Except as otherwise expressly provided in this Article V, to be eligible to receive payment of any Bonus Award, you must be employed by the Company on the Payment Date for that Bonus Award. In other words, except as expressly provided in this Article V, if you cease employment with the Company before the Payment Date, you will not be eligible to receive any Bonus Award that would otherwise have been payable to you if you had been a Company employee on that date. Conversely, if you are an employee of the Company on the Payment Date, you will be entitled to your Bonus Award, if any, even if you are not actively performing duties on that date. For example, if you are not required to report to work during a notification period applicable under a Company severance or separation plan, but you are still a Company employee during that period, and the Payment Date occurs during your notification period, you will remain eligible to receive your Bonus Award.

Exception Under Written Company Plan or Agreement . If you are specifically exempted, under a written Company plan or agreement, from the requirement to be employed on the Payment Date, you may remain eligible for payment of your Bonus Award, depending on the terms of the applicable written plan or agreement. In such cases, the terms of such written plan or agreement will govern in all respects.

Death . If your employment ceases prior to the Payment Date by reason of your death, but you otherwise met all eligibility criteria specified in Article II, your estate may receive a prorated portion of the Bonus Award, if any, that would have been paid had you lived to the Payment Date. In such a case, proration will be based on the percentage of time in the Performance Year during which you were employed and eligible to participate in the Plan. The prorated Bonus Award, if any, will be paid on the Payment Date.

No Guarantee of a Bonus Award . Nothing in this Plan guarantees that any Bonus Award will be made to any individual. Receipt of a Bonus Award in one year does not guarantee eligibility in any future year.

VI.                    Incentive Compensation Recoupment Policy

To the extent permitted by governing law, the Board may seek reimbursement of a Bonus Award paid to any executive officer in the event of a restatement of the Company’s financial results that reduced a previously granted Bonus Award’s size or payment. In that event, the Company will seek to recover the amount of the Bonus Award paid to the executive officers that exceeded the amounts that would have been paid based on the restated financial results.

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VII.               Termination, Suspension or Modification and Interpretation of the Plan

The Board may terminate, suspend or modify (and if suspended, may reinstate with or without modification) all or part of the Plan at any time, with or without notice to participants. The Compensation Committee has sole authority over administration and interpretation of the Plan, and the Compensation Committee retains its right to exercise discretion as it sees fit.

The Compensation Committee reserves the exclusive right to determine eligibility to participate in this Plan and to interpret all applicable terms and conditions, including eligibility criteria, performance objectives and payment conditions, for the Company’s executive officers. The determinations and interpretations of the Compensation Committee will be conclusive.

All Bonus Awards are paid from the Company’s general assets. No trust, account or other separate collection of amounts will be established for the payment of Bonus Awards under the Plan. Bonus Awards are unfunded obligations of the Company, so if and when a Bonus Award becomes due, a participant’s rights to payment are no greater than the rights of a general unsecured creditor.

VIII.          Other

This document sets forth the terms of the Plan and is not intended to be a contract or employment agreement between an employee and the Company. As applicable, it is understood that both the employee and the Company have the right to terminate the employee’s employment with the Company at any time, with or without cause and with or without notice, in acknowledgement of the fact that an employee’s employment relationship with the Company is “at will.”

This Plan is intended to be compliant with Section 409A of the Code and the guidance promulgated thereunder. Notwithstanding any other provision of this Plan, the Company and the Compensation Committee shall administer and interpret the Plan, and exercise all authority and discretion under the Plan, to satisfy the requirements of Section 409A of the Code and the guidance promulgated thereunder and any noncompliant provisions of this Plan will either be void or deemed amended to comply with Section 409A of the Code and the guidance promulgated thereunder.

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