The vesting date of each option is listed in the table below by expiration date.
29,209 and 8,762 shares for Mr. Morgan and Mr. Ginnan will vest in February 2013. All of the remaining shares are subject to a three year cliff vesting period and will vest in February 2015.
The stock price used to calculate values in the above table is $0.61, the closing price on December 28, 2012, the last trading day of 2012.
All of the shares shown are performance-based restricted shares. 50% of the shares are subject to a one-year performance goal for 2012, of which half will vest in March 2013 if the goal is achieved and half will vest in March 2014. The other 50% of the share are subject to a two year cumulative performance goal for 2012-2013, which will vest in March 2015 if the goal s achieved.
The Stanreco Retirement Plan (Qualified Plan) is our qualified defined benefit pension plan. The traditional formula provides a defined benefit calculated as 1.3 percent of final average pay (average of highest five years of base and annual cash incentive) times years of credited service. Mr. Ginnan participates under this formula. Effective June 30, 2008, we modified the Qualified Plan and the nonqualified supplementary benefit plan discussed below for participants that were still accruing benefits under the plans. As a result, these participants ceased accruing pension benefits and final pension benefit amounts will be based on pay and service through June 29, 2008. Normal retirement age is 65, but unreduced benefits are available at age 62. Plan participants can elect payment in the form of a partial lump sum or an annuity.
The benefit amount for certain participants (primarily those hired after December 31, 1999) was frozen in 2004 and these participants no longer earn any additional benefit credits; however, their lump sum earns 4% interest annually until termination of employment with the Company (pension equity formula). Mr. Morgan participates and Mr. Furey participated under this formula.
The Non-Qualified Retirement Plan supplements the Qualified Plan and was available to all Qualified Plan participants who were affected by limits imposed by the Tax Reform Act of 1986, including executive officers. It provides retirement benefits that would have been payable from the Qualified Plan but for such limits. Benefits are calculated using the same formula as the Qualified Plan, traditional or pension equity, and all features of the Non-Qualified Retirement Plan are the same as the Qualified Plan. Mr. Morgan participates in this plan.
Mr. Morgan also participated in the Officers Supplemental Non-Qualified Plan which provided additional retirement benefits based on years of credited service as an executive officer in excess of five years. It provided a defined benefit calculated as 3.05 percent of final average pay (the average of the highest five years of base and annual cash incentive) times years of officer service in excess of five years. The plan is frozen to new participants and benefits are frozen for most participants, including Mr. Morgan. This plan was replaced by the defined contribution plan discussed below.
The sum of annual benefits payable under the above retirement plans cannot exceed more than 50% of the executive officers final average pay.
With the exception of our Qualified Plan, we do not fund any retirement plans, but we accrue for projected benefits and pay benefits from general corporate assets. None of the defined benefit retirement plans provide flexibility to enhance the years of service or other components of the formula other than by plan amendment. We have not enhanced years of service or other components of the formulas for any executive officer.
We have a Supplemental Executive Retirement Plan for executive officers designed to supplement benefits available under our 401(k) savings plan. Participant accounts are credited annually on the last day of the year with 15% of their annual compensation, which includes base salary and annual cash incentive awards. However, the Companys contribution was suspended in 2012. Accounts are credited annually with an investment return based on the applicable federal long-term rate which was 3.09% in 2012. Participants are fully vested after ten years of credited service, eligibility for early retirement, death, or disability. Benefit payments are made in ten equal installments and are paid from general company assets. We currently do not fund this plan. Messrs. Morgan, Ginnan, and Lee currently participate and Mr. Furey participated in this plan.
None of our named executive officers have a written employment agreement, but are covered by written severance agreements. Under the agreement, if the Company terminates the executive officers employment without cause or the executive officer terminates his or her employment for good reason, then the executive officer will be entitled to an amount equal to 0.5 1.0 times his or her base salary, depending on length of service with the Company. Where the executive officers length of service is at least six months but not longer than 24 months, the amount will be 0.5 time the executives annual base salary. Where such length of service is longer than 24 months, the amount will be 1.0 times the executives annual base salary.
executive officer who remains employed through the incentive period, but is terminated prior to the payment date, is entitled to receive any incentive award if the performance goals are achieved. If an executive officers employment terminates for any reason other than
due to death or disability during the incentive period, the balance of any unpaid cash incentive awards will be forfeited by the executive officer.
Any option shall become exercisable within one year or the remainder of option term, whichever is less.
Shares of nonvested service-based restricted stock are immediately vested, and
A pro-rated number of shares of performance-based restricted stock are immediately vested, based upon the percentage of the maximum applicable performance goals represented by the Companys actual performance through the date of the change in control.
Under the 2002 and 2011 Equity Incentive Plan, upon termination of employment, all nonvested shares of restricted stock are forfeited, unless the employee leaves the Company as a result of retirement in accordance with our normal retirement policy, after age 62 with ten years of service, or due to death or permanent disability. In these cases, service-based restricted shares immediately vest and a pro-rated number of shares of performance-based restricted stock continue to be subject to the vesting provisions of the awards.
The change of control provisions in the Officers Supplemental Non-Qualified Retirement Plan and the Supplemental Executive Retirement Plan provide that upon the involuntary termination of employment of a participant by the Company or its successor within one year after a change of control, the plan will pay the participant their benefit in a single lump sum approximately six months after termination. Involuntary termination following a change of control means the participant was not offered a similar position in responsibility and compensation as they held prior to the change in control or their normal place of work is relocated more than 50 miles away and within six months of the change of control the participant voluntarily terminates his employment.
Death benefits under the Qualified Plan and the Non-Qualified Plan are equal to approximately 50% of the total accumulated benefit amount. Under the Officers Supplemental Non-Qualified Retirement Plan, death benefits equal 100% of the accumulated benefit amount.
DIRECTOR COMPENSATION
Our directors play a critical role in guiding our strategic direction and overseeing the management of our Company. The following table contains information concerning the compensation earned in 2012 by our non-employee directors.
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|
|
|
|
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Name
|
Fees Earned or Paid in Cash
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Stock
Awards
|
|
Total
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($)
|
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($)
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($)
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|
|
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F. David Clarke, III (Chairman)
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100,000
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-
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100,000
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David P. Bailis
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56,750
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-
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56,750
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Roy W. Begley, Jr.
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71,000
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-
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71,000
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Julie D. Klapstein
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62,000
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-
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62,000
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Michael E. Kohlsdorf *
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21,500
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-
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21,500
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R. Eric McCarthey
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68,500
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-
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68,500
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John J. Schiff, Jr.
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53,500
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-
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53,500
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John Q. Sherman, II
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70,270
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-
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70,270
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* Mr. Kohlsdorf retired from the board on April 26, 2012
Fee Earned or Paid in Cash -
Non-employee members of our Board of Directors receive an annual retainer fee of $25,000 and $1,000 for each Board of Directors meeting attended. Mr. Morgan, our Chief Executive Officer, did not receive any fees for serving as a member of the Board of Directors. Non-employee board members also receive additional compensation for serving on board committees as follows:
·
Compensation Committee members receive an annual retainer fee of $5,500, and a per-meeting fee of $750. Current members of the Compensation Committee are: Messrs. Clarke, Begley, Sherman and Ms. Klapstein. Mr. Begley is Chairman of the Committee and receives an additional retainer fee of $10,000. Messrs. Bailis and Kohlsdorf, served on the committee until April, 2012.
·
Corporate Governance and Nominating Committee members receive an annual retainer fee of $5,500, and a per-meeting fee of $750. Current members of the Corporate Governance and Nominating Committees are: Messrs. Bailis, Begley, McCarthey, and Sherman. Mr. Sherman is Chairman of the Committee and receives an additional retainer fee of $10,000.
·
Audit Committee members receive an annual retainer fee of $7,500, and a per-meeting fee of $1,000. Current members of the Audit Committee are: Messrs. Bailis, McCarthey, Schiff and Ms. Klapstein. Mr. McCarthey is Chairman of the Committee and receives an additional retainer fee of $10,000. Mr. Kohlsdorf served on the committee until April, 2012.
·
Executive Committee members receive no annual retainer but are paid $1,000 per meeting attended. Current members of the Executive Committee are: Mr. Clarke, Chairman, with Mr. Bailis and Mr. Morgan as the other members. Mr. Clarke and Mr. Morgan do not receive any payments for attending Executive Committee meetings.
·
The annual retainer fee for our Chairman of the Board is $100,000. The Chairman of the Board does not receive any additional fees.
Our directors are paid $750 for each half-day of board-related work outside of regular board or committee meetings, and are entitled to receive reimbursement of reasonable out-of-pocket expenses incurred by them to attend board meetings.
Stock Awards
No stock awards were granted to directors in 2012.
The table below provides information for the number of restricted shares that remain unvested and the number of options that are outstanding at December 30, 2012.
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Restricted Stock Awards
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Stock Option Awards
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Name
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Number of shares that have not vested (#)
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Number of shares Outstanding (#)
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F. David Clarke, III (Chairman)
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24,265
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4,000
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David P. Bailis
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24,982
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-
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Roy W. Begley, Jr.
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24,265
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4,000
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Julie D. Klapstein
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14,382
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-
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R. Eric McCarthey
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24,982
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-
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John J. Schiff, Jr.
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24,265
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4,000
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John Q. Sherman, II
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24,265
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4,000
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On February 22, 2013 director David P. Bailis informed the Chairman he would retire from the board at the end of his term, April 2013. Pursuant to the terms of the 2002 Equity Incentive Plan, upon Mr. Bailis's retirement, all shares of restricted stock still subject to restrictions under the Plan, and all retained dividends associated with such shares, will be forfeited; provided, however, that the Compensation Committee may, in its discretion, waive in whole or in part any or all remaining restrictions with respect to shares of restricted stock. The Compensation Committee has determined that in recognition of Mr. Bailis's service as a director of the Company, that the restrictions relating to the shares scheduled to vest in late April and early May of 2013 (totaling 11,650 shares) will be waived. All other unvested shares of restricted stock held by Mr. Bailis will be forfeited as of April 25, 2013.
PROPOSAL 4: To vote on a proposal to approve an amendment to The Standard Register Company 2011 Equity Incentive Plan;
Background
The 2011 Equity Incentive Plan (the 2011 Plan), coupled with the 2002 Equity Incentive Plan 2002 Plan, allows us to grant equity awards (including stock options, restricted stock units and performance share awards) to our employees, officers and directors.
We believe that future success depends on the ability to attract and retain high caliber personnel. The ability to grant equity awards is a necessary and powerful recruiting and retention tool for us to obtain the quality personnel we need to move our business forward.
Summary of the Proposal
The Board approved an amendment to the 2011 Plan on February 18, 2013, subject to approval by our shareholders at our 2013 annual meeting. We are seeking shareholder approval of an amendment to the 2011 Plan that increases the number of shares reserved for issuance thereunder by 3,900,000 shares (before giving effect to the reverse stock split submitted for shareholder approval as Proposal 5 below).
The Importance of the Proposed Increase in Shares
We believe the ability to grant competitive equity awards is a necessary and powerful recruiting and retention tool for us to obtain the quality personnel we need to move our business forward. If we are unable to offer competitive equity packages to retain and hire employees, this could significantly hamper our plans for growth and adversely affect our ability to operate our business. In addition, if we are unable to grant competitive equity awards, we may be required to offer additional cash-based incentives to replace equity as a means of competing for talent.
Other reasons the Board recommends shareholders vote for the equity plan proposal
§
At risk equity awards foster an ownership culture closely aligning the interests of employees with shareholders. We maintain ownership policies requiring executives to hold 50% of their net shares until they meet their ownership guidelines (5x salary for the CEO and 1x-2x for other executive officers).
§
Restricted stock with performance conditions are currently heavily emphasized in our long-term incentive program
—
Aligns pay with performance since payouts do not occur unless specified goals are achieved
—
Enables the Company to deduct the full value of the awards for federal income tax purposes
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§
Future grants will be subject to clawback provisions
§
The Equity Plan conforms to best practices
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Prohibits repricing or exchanging of underwater options without shareholder approval
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Requires option exercise prices to equal 100% or more of fair market value on date of grant
—
Applies a fungible share design whereby each full-value award issued (other than options and SARs) results in a debit to the Equity Plan share pool of 2 shares
—
Prohibits material alterations of plan without shareholder approval
Share Information
As of February 25, 2013, the 2011 Plan had 2,513,230 shares subject to currently outstanding equity awards including 1,157,115 shares subject to outstanding restricted stock awards and performance share awards and 1,356,115 outstanding options with a weighted average remaining term of 8.2 years and a weighted average exercise price of $3.09 and 1,545,865 shares available for future issuance.
Also as of February 25, 2013, the 2002 Plan had 2,047,845 shares subject to currently outstanding equity awards including 227,603 shares subject to outstanding restricted stock awards and performance share awards and 1,820,242 outstanding options with a weighted average remaining term of 5.6 years and a weighted average exercise price of $7.72 and 837,914 shares available for future issuance.
Description of the 2011 Plan
Nature of Incentives; Eligibility; Purposes
Stock incentives which may be issued under the 2011 Plan include stock options (which for federal income tax purposes may be either nonqualified options or incentive options which meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended), stock appreciation rights, restricted stock awards, performance share awards, and restricted share units, as well as any combination thereof. Stock incentives may be granted to key employees of the Company and its subsidiaries. Key employees are defined as employees of the Company or a subsidiary who in the opinion of the Committee (as defined below) are deemed to have the capacity to contribute significantly to the growth and successful operations of the Company. The Committee determines those persons who are key employees. Independent directors, defined as directors who are not employees of the Company, are also eligible to receive incentives under the 2011 Plan.
Shares Available for Grant
A total of 5,780,000 shares of common stock are available for stock incentives granted under the 2011 Plan. For purposes of this maximum amount, shares underlying options and stock appreciation rights are counted on a one-for-one basis, but shares issued in the form of restricted stock awards, performance share awards or restricted stock units are counted against the maximum at the rate of two shares for every one share covered by an award. If any shares of common stock that are subject to stock incentives are forfeited, such shares are again available under the 2011 Plan. For this purpose, forfeited shares means any shares that were issued pursuant to prior grants of stock incentives that expire or terminate for any reason without having been exercised. In the future, if another company is acquired by the Company or combines with the Company, any of the Companys shares covered by or issued as a result of the assumption or substitution of outstanding grants of the acquired company would not be deemed issued under the 2011 Plan and would not be subtracted from the shares of common stock available for grant under the 2011 Plan.
Grants of stock incentives under the 2011 Plan are subject to the further limitation that the maximum number of shares granted to any one person in a calendar year may not exceed either 1,500,000 options or stock appreciation rights or 750,000 restricted stock awards, performance shares or restricted stock units.
Administration
The 2011 Plan is administered by a committee (the Committee) consisting of no fewer than two directors designated by the Board of Directors of the Company. The Board has designated its Compensation Committee as the Committee for purposes of the 2011 Plan, and the Compensation Committee has designated a subcommittee (called the Section 162(m) Subcommittee) for purposes of administering compliance with the performance standards of Section 162(m) of the Internal Revenue Code. The Committee determines which employees of the Company and its subsidiaries are key employees who might participate in the 2011 Plan and the form, terms and number of shares covered by each stock incentive granted to such persons under the 2011 Plan.
29
Available Awards Under the 2011 Plan
Incentive and Nonqualified Stock Options
. A stock incentive in the form of a stock option will provide for the purchase of shares of common stock in the future at an option price per share which will not be less than 100% of the fair market value of the shares covered thereby on the date the stock option is granted. Each option first becomes exercisable in full or in part 12 months after the date the option is granted, or may become exercisable in one or more installments and at such later time or times, as the Committee shall determine. Options may be, but are not required to be, made subject to the attainment of specified performance objectives. Upon the exercise of an option, the purchase price may be paid in cash or, unless otherwise provided in the option, in shares of common stock (including shares withheld by the Company from the shares issuable upon exercise of the option) or in a combination of cash and such shares. The Company may cancel all or a portion of an option subject to exercise, and pay the holder cash or shares equal in value to
the excess of the fair market value of the shares subject to the portion of the option so canceled over the option price of such shares. All stock options granted under the 2011 Plan expire within ten years from the date of grant. A stock option is not transferable or assignable by an optionee otherwise than by will or by the laws of descent and distribution, and each option is exercisable, during the optionees lifetime, only by the optionee. Unexercised options terminate on the 90th day following termination of employment.
Stock Awards and RSUs
. Under the 2011 Plan, the Committee may award common stock or restricted stock units (i.e. the right to receive stock at a later date upon the achievement of specified conditions). Any such stock award or RSU will be subject to such terms, conditions and restrictions (including restrictions on the transfer of the shares issued pursuant to the award) as the Committee may determine, including specified corporate or personal performance objectives the attainment of which may, but is not required to be, specified as a condition to the vesting of the stock award or RSU.
Stock Appreciation Rights
. The 2011 Plan also authorizes the issuance of stock appreciation rights or phantom stock awards. Such rights, if granted, confer upon the recipient the right to receive upon exercise the excess (or spread) of the fair market value of Company common stock over the exercise price of the right. The exercise price must be at least equal to the fair market value of common stock on the date of grant. The Committee may impose such conditions or restrictions on stock appreciation rights as it deems appropriate.
The Committee has the authority to determine whether, to what extent and under what circumstances any stock incentive will be canceled or suspended. In particular, but without limitation, all outstanding stock incentives to any participant will be canceled if the participant, without the consent of the Committee, while employed by the Company or after termination of such employment, engages in any activity which is in competition with the Company, as determined by the Committee.
Federal Income Tax Consequences
The following is only a brief summary of the federal tax consequences of awards made under the 2011 Plan and is not intended to be an exhaustive discussion. Award recipients should always consult with their personal tax advisors regarding their personal tax situations.
Nonstatutory Stock Options
. Nonstatutory stock options are not taxable to the optionee upon grant, but will result in taxable ordinary income to the optionee at the date of exercise of the option. The taxable amount will be equal to the difference between the market price of the optioned shares on the date of exercise and the exercise price.
Incentive Stock Options
. Incentive stock options are generally not taxable to the optionee upon grant or exercise if the optionee has continuously been an employee from the time the option has been granted until at least three months before it is exercised. However, the spread at exercise is an adjustment item for alternative minimum tax purposes. Any gain realized on the sale or other disposition of stock acquired on exercise of an incentive stock option is considered as long-term capital gain for tax purposes if the stock has been held more than two years after the date the option was granted and more than one year after the date of exercise of the option. If the stock is disposed of within one year after exercise, the lesser of any gain on such disposition or the spread at exercise (i.e., the excess of the fair market value of the stock on the date of exercise over the exercise price) is treated as ordinary income, and any appreciation after the date of exercise is considered long-term or short-term capital gain to the optionee depending on the holding period prior to sale. However, the spread at exercise (even if greater than the gain on the disposition) is treated as ordinary income if the disposition is one on which a loss, if sustained, is not recognized e.g., a gift, a wash sale or a sale to a related party.
Stock Appreciation Rights
. Like nonstatutory options, stock appreciation rights are not taxable to the recipient upon grant, but result in taxable ordinary income as of the date of exercise equal to the amount paid to the recipient, i.e., the difference between the exercise price and the value of the shares on the date of exercise.
Restricted and Unrestricted Stock
. Restricted stock is generally taxable as ordinary income in the first taxable year in which the recipients rights to the stock are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. Recipients may also elect to include the income in their tax returns for the taxable year in which they receive the shares by filing an election to do
30
so with the appropriate office of the Internal Revenue Service within 30 days of the date the shares are transferred to them. The amount includable in income with respect to restricted stock is the fair market value of the shares as of the day the shares are transferable or not subject to a substantial risk of forfeiture, whichever is applicable; if the recipient has elected to include the income in the year in which the shares are received, the amount of income includable is the fair market value of the shares at the time of transfer. Unrestricted stock is taxable as ordinary income when it is granted to the recipient. Dividends paid on restricted stock during the restricted period are taxable as ordinary income as paid. The Company is entitled to a deduction for restricted or unrestricted stock in the year the recipient is subject to ordinary income tax with respect to the stock.
Restricted Stock Units
. Restricted stock units are generally taxable to the recipient as ordinary income when stock or cash is payable with respect to the restricted stock units, even if the restricted stock units become vested at an earlier date. Dividend equivalents with respect to restricted stock units are generally accumulated and paid to the recipient when the stock or cash payable under the restricted stock units become payable, and the dividend equivalents are taxable at the time of such payment.
Performance Related Awards
. Section 162(m) of the Internal Revenue Code generally limits to $1,000,000 the amount that a publicly held corporation may deduct for the compensation paid to its Chief Executive Officer and its three most highly compensated officers other than the Chief Executive Officer and Chief Financial Officer. Qualified performance-based compensation, however, is not subject to the $1,000,000 deduction limit. Accordingly, the 2011 Plan permits the Committee (which has delegated certain authority to its Section 162(m) Subcommittee) to establish performance goals consistent with Section 162(m) and authorizes the granting of cash, stock options, stock appreciation rights, common stock, RSUs, or any combination thereof to employees upon achievement of such established performance goals. In setting the performance goals, the Committee and/or the Section 162(m) Subcommittee may use such measures as stock price, market share, sales revenue, organic sales growth, cash flow, cash flow efficiency, earnings per share, return on equity, total shareholder return, gross margin, costs, operating income or any of a number of other criteria defined in the 2011 Plan. The performance goals may relate to the individual participant, to the Company as a whole, or to a subsidiary, division, department, region, function or business unit of the Company in which the participant is employed.
Additional Information
The Board may amend the 2011 Plan, provided that no amendment may increase the number of shares issuable pursuant to the 2011 Plan, reduce the exercise price or alter the class of individuals eligible to receive stock options without shareholder approval. However, shareholder approval may not necessarily be required of every amendment to the 2011 Plan that can increase the cost to the Company of the 2011 Plan or alter the allocation of benefits between the Companys named executive officers, other executive officers, and other employees.
The 2011 Plan prohibits the re-pricing of underwater stock options by forbidding any stock option or stock appreciation right from being cancelled in exchange for cash, other awards, or stock options or stock appreciation rights having a lower exercise price without the prior approval of the shareholders of the Company.
On February 25, 2013, the average of the high and low market prices of the Companys common stock on the New York Stock Exchange was $0.58 per share.
In the event that the 2011 Plan is terminated, recipients of stock options, stock appreciation rights, RSUs and common stock granted prior to such expiration shall retain all rights to such shares in accordance with their terms, including the right to exercise stock options or stock appreciation rights.
Notwithstanding any vesting schedule contained in any stock incentives granted under the 2011 Plan, if a change in control (as such term is defined in the 2011 Plan) of the Company occurs, any stock incentives under the 2011 Plan that have been outstanding for over six months will become immediately exercisable in full.
A full copy of the 2011 Plan, including the proposed amendments, is attached to this proxy statement as
Annex [B]
.
Members of our Board and our named executive officers have an interest in this proposal because they are eligible to receive awards under the 2011 Plan.
New Plan Benefits
2011 Equity Incentive Plan
The Committee, in its discretion, selects the person(s) to whom awards may be granted and the number of shares subject to each such grant under the 2011 Plan. For this reason, it is not possible to determine the benefits or amounts that will be received by any particular individual(s) in the future under the 2011 Plan.
31
Shareholder Approval
The affirmative vote of the holders of a majority of voting power of the Companys outstanding voting stock present in person or by proxy at the annual meeting is required to adopt the foregoing amendment to the 2011 Plan. Proxies in the form solicited hereby which are returned to the Company will be voted in favor of the approval of the amendment to the 2011 Plan unless otherwise instructed by the shareholders. Abstentions will have the same effect as votes cast against the proposal, provided such shares are properly present at the meeting in person or by proxy. Shares not voted by brokers and other entities holding shares on behalf of beneficial owners will have no effect on the outcome of the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE STANDARD REGISTER COMPANY 2011 EQUITY INCENTIVE PLAN.
PROPOSAL 5: To vote on a proposal to approve an Amendment to Standard Registers Amended Articles of Incorporation to effect a One-For-Five reverse stock split of its common stock and its Class A stock
The Companys Board of Directors has adopted an amendment to the Amended Articles of Incorporation to effect a one-for-five reverse stock split, and we are asking our shareholders to approve the reverse stock split at the Annual Meeting. The affirmative vote of two-thirds of the Companys outstanding shares, including both common stock and Class A stock, is required to approve the reverse stock split. The form of the proposed amendment to the Companys Amended Articles of Incorporation to effect the reverse stock split is attached to this Proxy Statement as
Annex C
.
We had outstanding, on February 25, 2013, 26,173,540 shares of common stock and 4,725,000 shares of Class A stock. Based on the number of common shares and Class A shares currently issued and outstanding, immediately following the completion of the reverse stock split at a ratio of one-for-five, without giving effect to the treatment of fractional shares, the Company would have approximately 5,234,708 common shares and 945,000 Class A shares outstanding. The actual number of shares outstanding after the reverse stock split will depend on the effect of cashing out fractional shares in connection with the reverse stock split. The Company does not expect the reverse stock split itself to have any economic effect on the shareholders, except to the extent the reverse stock split will result in fractional shares as discussed below.
The Reverse Stock Split
If the reverse stock split is approved and implemented, each five issued and outstanding common shares and Class A shares of the Company will automatically be converted into one common share and one Class A share, respectively. If the reverse stock split is approved by our shareholders, the Board of Directors will cause an amendment to our Amended Articles of Incorporation to be filed with the Ohio Secretary of State to carry out the reverse stock split. We anticipate that we will take action to file the amendment with the Ohio Secretary of State shortly after our Annual Meeting.
Reasons for the Reverse Stock Split
Our common shares are listed on the New York Stock Exchange (NYSE) and we are therefore subject to certain continued listing standards and requirements. On May 14, 2012, the NYSE notified us that the bid price of our common stock had closed below the required $1.00 per share for 30 consecutive trading days, and, accordingly, that we did not comply with the applicable NYSE minimum bid price requirement. We were been provided 180 calendar days, or until our next annual meeting of shareholders, to regain compliance with this requirement. To demonstrate compliance with the bid price requirement, we must maintain a bid price of greater than $1.00 for a minimum of 30 consecutive business days, although in certain circumstances the NYSE may require a longer compliance period.
The Board has considered the potential harm to the Company and its shareholders of a delisting of the Companys common stock and has determined that, if the Companys common stock continues to trade below $1.00 per share, the consummation of the reverse stock split is the best way to maintain liquidity by achieving compliance with the NYSE requirements if the Companys common stock continues to trade below $1.00 per share.
The Board also believes that the current low per share market price of the Companys common stock has had a negative effect on the marketability of the Companys existing shares. The Board believes there are several reasons for this effect. First, certain institutional investors have internal policies preventing the purchase of low-priced stocks. Second, a variety of policies and practices of broker-dealers discourage individual brokers within those firms from dealing in low-priced stocks. Third, because the brokers commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current share price of the Companys common stock can result in individual shareholders paying transaction costs (commissions, markups or markdowns) that are a higher percentage of their total share value than would be the case if the share price of the common stock were substantially higher. The Board also believes this factor may limit the willingness of some institutions to purchase the common stock.
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The Board anticipates that the reverse stock split will result in a higher bid price for the Companys common stock, which may help to alleviate some of these problems.
The Company believes that maintaining listing on the NYSE will provide it with a market for its common stock that is more accessible than if the Companys common stock were traded on the OTC Bulletin Board or in the pink sheets maintained by the OTC Markets Group, Inc. Such alternative markets are generally considered to be less efficient than, and not as broad as, the NYSE. Among other factors, trading on the NYSE increases liquidity and may potentially minimize the spread between the bid and asked prices quoted by market makers. Further, an NYSE listing may enhance the Companys access to capital, increase the Companys flexibility in responding to anticipated capital requirements and facilitate the use of its common stock in any strategic or financing transactions that it may undertake. The Company believes that prospective investors will view an investment in the Company more favorably if its shares qualify for listing on the NYSE as compared with the OTC markets.
The Company expects that a reverse stock split of its common stock will increase the market price of the common stock so that the Company is able to maintain compliance with the NYSE minimum bid price listing standard. However, the effect of a reverse stock split on the market price of the common stock cannot be predicted with any certainty, and the history of similar stock split combinations for companies in like circumstances is varied. It is possible that the per share price of the common stock after the reverse stock split will not rise in proportion to the reduction in the number of shares of the common stock outstanding resulting from the reverse stock split, effectively reducing the Companys market capitalization, and there can be no assurance that the market price per post-reverse split share will either exceed or remain in excess of the $1.00 minimum bid price for a sustained period of time. The market price of the Companys common stock may vary based on other factors that are unrelated to the number of shares outstanding, including the Companys future performance.
In order to maintain the Companys listing on the NYSE, under Section 802.01B of the New York Stock Exchanges continued listing requirement the Company must maintain a minimum global market capitalization of at least $50 million unless it has at least $50 million in shareholder equity and a minimum global market capitalization of at least $15 million under any circumstances. As of February 25, 2013, the Companys global market capitalization was $16,685,212 million. Even if the Company meets the bid price requirement, if it is unable to comply with the other NYSE requirements, the NYSE may determine to delist the common stock from the NYSE. The Company must notify the NYSE of its intention to cure the deficiency in this situation, and if the NYSE determines that it does not appear possible for the Company to cure the bid price deficiency, the NYSE may not afford the Company an additional 180-day grace period on the NYSE. If the NYSE makes a determination to delist its common stock, the delisting procedure will begin with a notification of delisting and may involve a hearing and the possibility of appeal. There is no assurance that at the end of this process the common stock would continue to be listed on the NYSE.
Effects of the Reverse Stock Split
Effectiveness of Reverse Stock Split
The reverse stock split, if approved by our shareholders, would become effective upon the effectiveness of a Certificate of Amendment to our Amended Articles of Incorporation, filed with the Ohio Secretary of State. If the reverse stock split is approved, the Company intends to file the Certificate of Amendment shortly after the Annual Meeting, and no other action or approval by our shareholders will be required to effectuate the reverse stock split.
General
If implemented, the reverse stock split will affect all holders of our common shares and Class A common shares uniformly. Proportionate voting rights and other rights of the holders of our common shares and Class A common shares will not be affected by the reverse stock split, other than as a result of the treatment of fractional shares as described below. For example, a holder of 2% of the voting power of the outstanding common shares immediately prior to the effectiveness of the reverse stock split will generally continue to hold 2% of the voting power of the outstanding common shares after the reverse stock split. The number of shareholders of record will not be affected by the reverse stock split (except to the extent any are cashed out as a result of holding fractional shares).
Effect on Authorized but Unissued Shares of Common Stock and Class A Stock
We are currently authorized to issue 101,000,000 common shares and 9,450,000 Class A shares. The reverse stock split will not alter in any way the number of authorized common shares, or the number or terms of the authorized Class A shares. We are not seeking a reduction in our authorized shares and the number of authorized shares will not be proportionately reduced in the reverse stock split. By reducing the number of our issued and outstanding shares, the reverse stock split would have the effect of creating additional authorized and unissued common shares. If the reverse stock split is approved, we would have approximately 5,234,708 common shares and 945,000 Class A shares outstanding, and will still have 101,000,000 authorized common shares and 9,450,000 authorized
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Class A shares. We have no current plans to issue any of the additional authorized common shares or Class A shares resulting from the reverse stock split.
To the extent that additional common shares or Class A shares are issued in the future, they may decrease existing shareholders percentage equity ownership and could be dilutive to the voting rights of existing shareholders. Further, we have not proposed the reverse stock split with the intention of using the resulting authorized and unissued shares for anti-takeover purposes, but the Company would be able to use the additional shares to oppose a hostile attempt or delay or prevent changes in control or changes in management.
Effect on Par Value
The proposed amendment to the Companys Amended Articles of Incorporation will not affect the par value of the Companys common shares or its Class A shares, which will remain at $1.00 per share.
Effect on the Companys Equity Incentive Plans
As of February 25, 2013, the Company had approximately 2,513,230 shares subject to outstanding awards under the 2011 Equity Incentive Plan, 2,047,845 shares subject to outstanding awards under the 2002 Equity Incentive Plan and 130,600 shares subject to awards under the 1995 Stock Option Plan. Under each equity incentive plan, the Compensation Committee will determine the appropriate adjustment to the awards granted under each plan in the event of a stock split. Should the reverse stock split be effected, the Compensation Committee will approve proportionate adjustments to outstanding awards and shares available for issuance under each equity incentive plan, as applicable. These adjustments would include changes to the number of shares underlying awards and the related exercise price.
Accordingly, if the reverse stock split is approved by our shareholders, the number of all outstanding equity awards and the number of shares available for issuance, as applicable, under the each of the Companys equity incentive plans will be proportionately adjusted using the split ratio of one-for-five (subject to the treatment of fractional shares).
Effect on Holders of Odd Lots
The reverse stock split may result in some shareholders owning odd lots of less than 100 common shares. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in round lots of even multiples of 100 shares.
Effect on Beneficial Owners of Our Common Shares
If the reverse stock split is implemented, we intend to treat shares held by shareholders through a bank, broker, custodian or other nominee in the same manner as registered shareholders whose shares are registered in their names. Shareholders who hold shares in street name through a nominee (such as a bank or broker) will be treated in the same manner as shareholders whose shares are registered in their names, and nominees will be instructed to effect the reverse split for their beneficial holders. However, nominees may have different procedures and shareholders holding shares in street name should contact their nominees.
Exchange of Share Certificates
If the reverse stock split is effected, shareholders holding certificated shares (i.e., shares represented by one or more physical stock certificates) will be required to exchange their old certificate(s) for new certificate(s) representing the appropriate number of shares resulting from the reverse stock split or to convert their shares to a book entry account. Shareholders of record at the effective time of the reverse stock split will receive a transmittal letter and instructions from the Companys transfer agent on how to exchange their certificates. Shareholders will not have to pay any transfer fee or other fee in connection with such exchange.
YOU SHOULD NOT SEND IN YOUR CERTIFICATES NOW OR DESTROY YOUR CERTIFICATES. YOU SHOULD SEND THEM ONLY AFTER YOU RECEIVE THE LETTER OF TRANSMITTAL FROM THE TRANSFER AGENT.
As soon as practicable after the surrender to the transfer agent of any old certificate(s), together with a properly completed and duly executed transmittal letter and any other documents the transfer agent may specify, the transfer agent will deliver a new certificate registered in the name of the shareholder.
Until surrendered as contemplated herein, a shareholders old certificate(s) will be deemed at and after the effective time of the reverse stock split to represent the number of full common shares or Class A shares, as applicable, of the Company resulting from the reverse stock split and any payment due in lieu of the issuance of a fractional share. Until you have returned your properly completed and
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duly executed transmittal letter and surrendered your old certificate(s) for exchange, you will not be entitled to receive any other distributions that may be declared and payable to holders of record following the reverse stock split.
Any shareholder whose old certificate(s) have been lost, destroyed or stolen will be entitled to a new certificate only after complying with the requirements that the Company and the transfer agent customarily apply in connection with lost, stolen or destroyed certificates.
No service charges, brokerage commissions or transfer taxes will be payable by any holder of any old certificate, except that if any new certificate is to be issued in a name other than that in which the old certificate(s) are registered, it will be a condition of such issuance that (1) the person requesting such issuance must pay to us any applicable transfer taxes or establish to our satisfaction that such taxes have been paid or are not payable, (2) the transfer complies with all applicable federal and state securities laws, and (3) the surrendered certificate is properly endorsed and otherwise in proper form for transfer.
No Going Private Transaction
Notwithstanding the decrease in the number of outstanding shares following the proposed reverse stock split, the Board of Directors does not intend for this transaction to be the first step in a going private transaction within the meaning of Rule 13e-3 of the Securities Exchange Act of 1934. The reverse stock split is not being undertaken in response to an effort by any person to accumulate our common shares.
Our common shares are currently registered under Section 12(b) of the Exchange Act, and we are subject to the periodic reporting and other requirements of the Exchange Act. The reverse stock split will not affect the registration of the Companys common shares under the Exchange Act or the listing of the Companys common shares on the NYSE.
Fractional Shares
We do not currently intend to issue fractional shares in connection with the reverse stock split and will not issue certificates representing fractional shares. Shareholders who would otherwise hold fractional shares because the number of common shares or Class A shares they hold before the reverse stock split is not evenly divisible by the one-for-five split ratio will be entitled to receive cash (without interest or deduction) in lieu of such fractional shares. We estimate that this will result in the reduction of our total number of record shareholders by 246. Payment for fractional shares will be made by our transfer agent, upon its receipt of a properly completed and duly executed transmittal letter and, where shares are held in certificated form, the surrender of all old certificate(s). The amount of the payment will be equal to (i) the closing sale price of our common shares on the NYSE on the business day immediately preceding the effective time of the reverse stock split, multiplied by (ii) the number of common shares or Class A shares, as applicable, that would have been exchanged for the fractional interest. The ownership of a fractional share will not give the holder any voting, dividend or other rights, except the right to receive the cash payment.
Shareholders should be aware that, under the escheat laws of various jurisdictions, sums due for fractional interests that are not timely claimed after the effective time of the reverse stock split may be required to be paid to the designated agent for each such jurisdiction, unless correspondence has been received by us or our transfer agent concerning ownership of such funds within the time permitted in such jurisdiction. Thereafter, if applicable, shareholders otherwise entitled to receive such funds, but who do not receive them due to, for example, their failure to timely comply with the transfer agents instructions, will have to seek to obtain such funds directly from the state to which they were paid.
Accounting Matters
Following the reverse stock split, reported per share net income or loss will be higher because there will be fewer common shares and Class A shares outstanding.
No Dissenters Rights
Under Ohio law, holders of our common shares and Class A shares will not be entitled to dissenters rights with respect to the reverse stock split.
Vote Required
Under Ohio law and our Amended Articles of Incorporation, the affirmative vote of two-thirds of our outstanding common shares and Class A shares, voting together as a single class, is required to approve the reverse stock split. As such, broker non-votes and abstentions will count as votes against the reverse stock split.
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Certain Federal Income Tax Consequences of the Reverse Stock Split
The following summary describes certain material U.S. federal income tax consequences of the reverse stock split to holders of our common shares and Class A shares.
We have not sought, and will not seek, an opinion of counsel or a ruling from the Internal Revenue Service (IRS) regarding the United States federal income tax consequences of the reverse stock split and there can be no assurance the IRS will not challenge the statements and conclusions set forth below or that a court would not sustain any such challenge.
Unless otherwise specifically indicated herein, this summary addresses the tax consequences only to a beneficial owner of our common shares that is a citizen or individual resident of the United States, a corporation organized in or under the laws of the United States or any state thereof or the District of Columbia or otherwise subject to U.S. federal income taxation on a net income basis in respect of our common shares and Class A shares (a U.S. holder). This summary does not address all of the tax consequences that may be relevant to any particular investor, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of taxpayers or that are generally assumed to be known by investors. This summary also does not address the tax consequences to (i) persons that may be subject to special treatment under U.S. federal income tax law, such as banks, insurance companies, thrift institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, U.S. expatriates, persons subject to the alternative minimum tax, traders in securities that elect to mark to market and dealers in securities or currencies, (ii) persons that hold our common shares as part of a position in a straddle or as part of a hedging, conversion or other integrated investment transaction for federal income tax purposes, or (iii) persons that do not hold our common shares or Class A shares as capital assets (generally, property held for investment).
This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, U.S. Treasury regulations, administrative rulings and judicial authority, all as in effect as of the date hereof. Subsequent developments in U.S. federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have a material effect on the U.S. federal income tax consequences of the reverse stock split.
Each shareholder should consult its own tax advisor regarding the U.S. federal, state, local, and foreign income and other tax consequences of the reverse stock split.
If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our common shares, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership.
Partnerships that hold our common shares or Class A shares, and partners in such partnerships, should consult their own tax advisors regarding the U.S. federal income tax consequences of the reverse stock split.
U.S. Holders
The reverse stock split should be treated as a recapitalization for U.S. federal income tax purposes. Accordingly, except for shareholders who receive cash in lieu of fractional shares, a shareholder will not recognize any gain or loss as a result of the receipt of post-reverse stock split common stock or Class A stock pursuant to the reverse stock split. The aggregate tax basis in the common shares or Class A shares received under the terms of the reverse stock split should equal the aggregate tax basis in the common shares or Class A shares surrendered, and the holding period for the common shares or Class A shares received should include the holding period for the common shares or Class A shares surrendered. Shareholders who receive cash for fractional shares will be treated as having sold their fractional shares and will recognize a gain or loss in an amount equal to the difference between the cash received and the portion of their basis for the pre-reverse split common stock or Class A stock allocated to the fractional shares. Such gain or loss will be a capital gain or loss if the stock was held as a capital asset, and such gain or loss will be a long-term gain or loss to the extent that the shareholders holding period exceeds 12 months. Each shareholder who is to receive cash for fractional shares in the reverse stock split will be required to furnish the shareholders social security number or taxpayer identification number. Failure to provide this information may result in backup withholding.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE COMPANYS AMENDED ARTICLES OF INCORPORATION TO EFFECT A ONE-FOR-FIVE REVERSE STOCK SPLIT.
The board of directors does not intend to present any other proposals for action by the shareholders at the annual meeting and has not been informed that anyone else intends to present any other proposal for action by the shareholders at the annual meeting.
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