<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
AMERICAN PAD & PAPER COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
AMERICAN PAD & PAPER COMPANY
17304 PRESTON ROAD, SUITE 700
DALLAS, TEXAS 75252
TELEPHONE: (972) 733-6200
March 21, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of
Stockholders of American Pad & Paper Company ("AP&P"), which is scheduled to be
held on Tuesday, April 22, 1997, at 10:00 a.m. at the Westin Hotel Galleria
Dallas, 13340 Dallas Parkway, Dallas, Texas 75240.
At the meeting, we will report to you on current business conditions and
recent developments at AP&P. Members of the Board of Directors and our
executive officers will be present to discuss the affairs of AP&P with you.
The Company has enclosed a copy of its 1996 Annual Report for the fiscal
year ended December 31, 1996 with this letter, notice of annual meeting of
stockholders and proxy statement. If you would like another copy of the 1996
Annual Report, please contact William W. Solomon, Jr., Vice President-
Controller, and you will be sent one.
It is important that your shares be represented and voted at the Annual
Meeting, regardless of the size of your holdings. Accordingly, please
complete, sign and date the enclosed proxy card and return it promptly in the
enclosed envelope to ensure your shares will be represented. If you do attend
the Annual Meeting, you may, of course, withdraw your proxy should you wish to
vote in person.
On behalf of the Board of Directors and management of AP&P, I would like
to thank you for choosing to invest in our Company. We are very excited about
the future of the Company and are looking forward to our first annual meeting
since the successful completion of our initial public offering in July 1996.
Sincerely,
Charles G. Hanson III
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
AMERICAN PAD & PAPER COMPANY
17304 PRESTON ROAD, SUITE 700
DALLAS, TEXAS 75252
TELEPHONE: (972) 733-6200
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MARCH 21, 1997
The Annual Meeting of Stockholders of American Pad & Paper Company, a
Delaware corporation (the "Company"), is scheduled to be held on Tuesday, April
22, 1997, at 10:00 a.m. (the "Annual Meeting"), at the Westin Hotel Galleria
Dallas, 13340 Dallas Parkway, Dallas, Texas 75240, for the purpose of:
(1) Electing two (2) Class I Directors to serve until the annual
meeting of stockholders in 2000 and until their successors are
duly elected and qualified (the Board of Directors of the Company
recommends a vote FOR the nominees named in the Company's Proxy
Statement);
(2) Approving the appointment of the independent accountants of the
Company for the fiscal year ending December 31, 1997 (the Board
of Directors of the Company recommends a vote FOR this proposal);
and
(3) Transacting such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on March 4, 1997,
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the Annual Meeting or any adjournment or postponement thereof.
By Order of the Board of Directors
Kevin W. McAleer
Secretary
March 21, 1997
The Company's 1996 Annual Report for the fiscal year ended December 31,
1996 is enclosed. The 1996 Annual Report contains financial and other
information about the Company, but is not incorporated into the Proxy Statement
and is not deemed to be a part of the proxy soliciting material.
================================================================================
EVEN IF YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE PROMPTLY COMPLETE,
SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD. A SELF-ADDRESSED ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES. STOCKHOLDERS WHO ATTEND THE ANNUAL MEETING MAY REVOKE THEIR PROXIES
AND VOTE IN PERSON IF THEY SO DESIRE.
================================================================================
<PAGE> 4
AMERICAN PAD & PAPER COMPANY
17304 PRESTON ROAD, SUITE 700
DALLAS, TEXAS 75252
TELEPHONE: (972) 733-6200
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
ON APRIL 22, 1997
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of American Pad & Paper Company, a Delaware corporation
(the "Company"), of proxies to be used at the annual meeting of stockholders of
the Company scheduled to be held on April 22, 1997 (the "Annual Meeting").
This Proxy Statement and the related proxy card are being mailed to holders of
the Company's common stock, par value $.01 per share (the "Common Stock"),
commencing on or about March 24, 1997.
If the enclosed proxy card is executed and returned, the shares
represented by it will be voted as directed on all matters properly coming
before the Annual Meeting for a vote. Returning your completed proxy will not
prevent you from voting in person at the Annual Meeting should you be present
and desire to do so. In addition, the proxy may be revoked at any time prior
to its exercise either by giving written notice to the Company or by submission
of a later-dated proxy.
Stockholders of record of the Company's Common Stock at the close of
business on March 4, 1997 will be entitled to vote at the Annual Meeting. On
that date, the Company had outstanding 27,435,839 shares of Common Stock. A
list of the Company's stockholders will be open to the examination of any
stockholders, for any purpose germane to the meeting, at the Company's
headquarters for a period of ten days prior to the meeting. Each share of
Common Stock entitles the holder thereof to one vote on all matters submitted
to stockholders. At the Annual Meeting, inspectors of election shall determine
the presence of a quorum and shall tabulate the results of the stockholders'
voting. The holders of a majority of the total number of outstanding shares of
Common Stock entitled to vote must be present in person or by proxy to
constitute the necessary quorum for any business to be transacted at the Annual
Meeting. In accordance with the General Corporation Law of the State of
Delaware (the "DGCL"), properly executed proxies marked "abstain" as well as
proxies held in street name by brokers that are not voted on all proposals to
come before the Annual Meeting ("broker non-votes"), will be considered
"present" for the purposes of determining whether a quorum has been achieved at
the Annual Meeting. The Board of Directors recommends that the stockholders
vote FOR Proposals 1 and 2.
The two nominees for Director receiving the greatest number of votes
cast at the Annual Meeting in person or by proxy shall be elected.
Consequently, any shares of Common Stock present in person or by proxy at the
Annual Meeting but not voted for any reason have no impact in the election of
Directors, except to the extent that the failure to vote for an individual may
result in another individual receiving a larger number of votes. All other
matters to be considered at the Annual Meeting require for approval the
favorable vote of a majority of the shares entitled to vote at the meeting
either in person or by proxy. Stockholders have no right to cumulative voting
as to any matter, including the election of Directors. If any proposal at the
Annual Meeting must receive a specific percentage of favorable votes for
approval, abstentions in respect of such proposal are treated as present and
entitled to vote under the DGCL and therefore have the effect of a vote against
such proposal. Broker non-votes in respect of any proposal are not counted for
purposes of determining whether such proposal has received the requisite
approval under the DGCL.
The shares represented by all valid proxies received will be voted in the
manner specified on the proxies. Where specific choices are not indicated on a
valid proxy, the shares represented by such proxies received will be voted: (i)
for the nominees for Director named in this Proxy Statement; (ii) for approval
of the appointment of Price Waterhouse LLP as independent accountants; and (iii)
in accordance with the best judgment of the persons named in the enclosed proxy,
or their substitutes, for any other matters which properly come before the
Annual Meeting or any adjournment or postponement thereof.
<PAGE> 5
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
The Board of Directors is currently comprised of eight Directors divided
into three classes. The term of each class expires in different years. The
Board of Directors has nominated and recommends a vote FOR the election of the
two nominees set forth below. Each nominee currently serves as Director of the
Company. If any nominee becomes unavailable for any reason or should a vacancy
occur before the election (which events are not anticipated), the persons named
on the enclosed proxy card may substitute another person as a nominee or may
add or reduce the number of nominees to such extent as they shall deem
advisable. At the Annual Meeting, two Directors are to be elected as members
of Class I to serve until the annual meeting in 2000 and until their successors
are elected and qualified or until their earlier removal or resignation.
Subject to rights of holders of any series of preferred stock to fill
such newly created directorships or vacancies, any newly created directorships
resulting from an increase in the authorized number of Directors or any
vacancies on the Board of Directors resulting from death, resignation,
disqualification or removal for cause may be filled by a vote of 50% of the
total number of the remaining Directors then in office.
Messrs. Herbert M. Kohn and Scott R. Watterson were appointed to the
Board of Directors on November 11, 1996 and December 10, 1996, respectively, to
fill two vacancies on the Board resulting from an increase in the authorized
number of Directors pursuant to the terms of the Company's Restated Certificate
of Incorporation and Amended and Restated By-Laws.
Information regarding the nominees for Director of the Company is set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gregory M. Benson . . . . . . . . 42 Director
Jonathan S. Lavine . . . . . . . 30 Director
</TABLE>
Information regarding Directors of the Company not subject to reelection
at the Annual Meeting is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles G. Hanson III (1) . . . 56 Chief Executive Officer, Chairman and Director
Russell M. Gard (1) . . . . . . 49 Chief Operating Officer, Vice-Chairman and Director
Robert C. Gay (1)(2) . . . . . . 45 Director
Herbert M. Kohn (3) . . . . . . . 58 Director
Scott R. Watterson (3) . . . . . 41 Director
Marc B. Wolpow (1)(2) . . . . . . 38 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
There are no family relationships between or among any Directors or
executive officers of the Company.
DIRECTOR NOMINEES (CLASS I DIRECTORS)
GREGORY M. BENSON has served as a Director of the Company since 1992.
Mr. Benson currently serves as an Executive Vice President of Bain Capital,
Inc. ("Bain Capital"). Mr. Benson served as Chief Financial Officer and
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<PAGE> 6
Secretary of the Company from 1992 to August 1996 and served as an Executive
Vice President and Director of Strategic Planning and Acquisitions from May
1996 through November 1996. From 1992 to 1995, Mr. Benson also served as Chief
Financial Officer, Chief Administrative Officer and Director of Ampad
Corporation (the principal operating subsidiary of the Company during that
period). Mr. Benson was at GE Capital Corporation from 1977 to 1992.
JONATHAN S. LAVINE has served as a Director of the Company since 1995.
Mr. Lavine has been a Principal at Bain Capital since 1995 and was an associate
at Bain Capital from 1993 to 1995. In 1992, Mr. Lavine was a consultant at
McKinsey & Co. Mr. Lavine attended the Harvard Business School from 1990 to
1992. Previously, Mr. Lavine worked in the mergers and acquisitions department
of Drexel Burnham Lambert, Incorporated. Mr. Lavine is also a director of
Clarity Telecom, Inc.
CLASS II DIRECTORS (TERM EXPIRING AT THE 1998 ANNUAL MEETING)
RUSSELL M. GARD has served as the Chief Operating Officer and a Director
of the Company since 1992. From 1992 to 1995, Mr. Gard also served as
President, Chief Operating Officer and Director of Ampad Corporation. From
1990 to 1992, Mr. Gard was the Executive Vice President of Pen-Tab Industries,
Inc. From 1988 to 1990, Mr. Gard served as the Chief Executive Officer of
Herlitz International.
SCOTT R. WATTERSON has served as a Director of the Company since
December 1996. Mr. Watterson has served as Chairman of the Board and Chief
Executive Officer of IHF Capital, Inc., the parent of ICON Health & Fitness
Inc., since November 1994. Mr. Watterson has served as President and Chief
Executive Officer of Weslo, Inc. since 1977 and has served as President and
Chief Executive Officer of ProForm Fitness Products, Inc. since 1988.
MARC B. WOLPOW has served as a Director of the Company since 1995. Mr.
Wolpow has been a Managing Director of Bain Capital since 1993 and was a
Principal of Bain Venture Capital from 1990 through 1992. From 1988 to 1990,
Mr. Wolpow was a Vice President in the corporate finance department of Drexel
Burnham Lambert, Incorporated. Mr. Wolpow is also a director of Waters
Corporation and The Holson Business Group, Inc.
CLASS III DIRECTORS (TERM EXPIRING AT THE 1999 ANNUAL MEETING)
CHARLES G. HANSON III has served as Chief Executive Officer and Director
of the Company since 1992. From 1992 to 1995, Mr. Hanson also served as
Chairman of the Board, Chief Executive Officer and Director of Ampad
Corporation. Mr. Hanson was formerly the President and Chief Operating Officer
of Stuart Hall Co. Inc. and Group Vice President of Pen-Tab Industries, Inc.
ROBERT C. GAY has served as a Director of the Company since 1992. Mr.
Gay has been a Managing Director of Bain Capital since 1993 and has been a
General Partner of Bain Venture Capital since 1989. From 1988 through 1989, Mr.
Gay was a Principal of Bain Venture Capital. Mr. Gay is also Vice Chairman of
the Board of Directors of IHF Capital, Inc., the parent of ICON Health &
Fitness Inc. In addition, Mr. Gay is a director of Alliance Entertainment
Corp., GT Bicycles, Inc., GS Industries, Inc. and its subsidiary GS
Technologies Operating Co., Inc., and Physio-Control International Corporation.
HERBERT M. KOHN has served as a Director of the Company since November
1996. Mr. Kohn has been a partner in the law firm of Bryan Cave LLP since
1991. Prior thereto, Mr. Kohn was a partner of the law firm of Linde Thomson
Langworthy Kohn & Van Dyke, P.C. Mr. Kohn also serves as a director of several
charitable institutions and private companies.
COMPENSATION OF DIRECTORS
At present, no separate compensation or fees are payable to employee
Directors of the Company. The Company pays non-employee Directors an annual
retainer of $20,000. In addition, Directors are reimbursed by the Company for
reasonable travel expenses incurred in attending Board of Directors' meetings.
Pursuant to the Company's Non-Employee Director Stock Option Plan (the
"Director Option Plan"), non-employee Directors are granted options to
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<PAGE> 7
purchase 25,000 shares of Common Stock upon their initial election or
appointment to the Board (or upon the adoption of the Directors Option Plan for
those Directors in office on the date of such adoption) and will be granted
options to purchase an additional 2,000 shares of Common Stock on an annual
basis beginning on the later of the fourth anniversary of the adoption of the
Director Option Plan (July 8, 2000) or a Director's fourth anniversary of being
elected to the Board. See "Non-Employee Director Stock Option Plan." The
Directors do not receive any additional compensation for committee
participation.
COMMITTEES AND DIRECTORS' MEETINGS
The Board of Directors has three standing committees: the Executive
Committee, the Audit Committee and the Compensation Committee.
The Executive Committee is authorized to review the Company's strategic
planning process and has the power to exercise the authority of the Board on
specific matters assigned to it by the Board from time to time. The Executive
Committee is currently comprised of Messrs. Hanson, Gard, Gay and Wolpow. The
Executive Committee met once in 1996.
The Compensation Committee is authorized to provide a general review of
the Company's compensation and benefit plans to ensure that they meet corporate
objectives. In addition, the Compensation Committee reviews the Chief
Executive officer's recommendations on (i) compensation of all officers of the
Company and (ii) adopting and changing major Company compensation policies and
practices, and reports its recommendations to the whole Board of Directors for
approval and authorization. The Compensation Committee is currently comprised
of Messrs. Gay and Wolpow. The Compensation Committee met three times in 1996
and all members were in attendance.
The Audit Committee is authorized to make recommendations to the Board
of Directors regarding the independent auditors to be nominated for election by
the stockholders and to review the independence of such auditors, approve the
scope of the annual audit activities of the independent auditors, approve the
audit fee payable to the independent auditors and review such audit results.
Price Waterhouse LLP presently serves as the independent accountants of the
Company. The Audit Committee is currently comprised of Messrs. Kohn and
Watterson. Messrs. Lavine and Wolpow served as the Audit Committee during the
Company's last fiscal year. The Audit Committee met twice in 1996 and all
members were in attendance.
The Board of Directors held three meetings and took action by written
consent an additional five times during the Company's preceding fiscal year.
All of the Directors attended 75% or more of the total number of meetings of
the Board of Directors.
The Company does not have a nominating committee. The entire Board of
Directors currently is responsible for filling vacancies on the Board as they
occur and recommending candidates for election as Directors at the annual
meetings of stockholders. The Board will consider individuals recommended for
nominations by stockholders of the Company. Such recommendations should be
submitted in writing to the Chairman of the Board, who will submit them to the
entire Board for its consideration. The recommendation must be accompanied by
the consent of the individual nominated to be elected and to serve.
In addition, the Amended and Restated By-Laws of the Company (the
"By-Laws") require that advance notice of nominations for the election of
Directors to be made by a stockholder (as distinguished from a stockholder's
recommendation to the Board) be given to the Secretary of the Company (i) in
the case of an annual meeting, no later than 60 days and no more than 90 days
before an annual meeting of stockholders, provided, that in the event that the
date of the annual meeting is changed by more than 30 days from the first
anniversary date of the preceding year's annual meeting, notice by stockholders
must be received no later than the close of business on the tenth (10th) day
following the earlier of the date on which this notice was mailed or public
announcement of the meeting was made, and (ii) in the case of a special meeting
at which Directors are to be elected, not later than the close of business on
the 10th day following the earlier of the day on which notice of the date of
the meeting was mailed or public announcement of the meeting was made. Such
notice must include (i) as to each person whom the stockholder proposes to
nominate for election as a Director at such meeting all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (ii) as
to the stockholder giving the
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<PAGE> 8
notice (A) the name and address, as they appear on the Company's books, of such
stockholder and (B) the class and number of shares of the Company which are
beneficially owned by such stockholder and also which are owned of record by
such stockholder; and (iii) as to the beneficial owner, if any, on whose behalf
the nomination is made, (A) the name and address of such person and (B) the
class and number of shares of the Company which are beneficially owned by such
person.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is currently
comprised of Messrs. Gay and Wolpow, each of whom formerly served as an officer
of the Company. Messrs. Gay and Wolpow are both Managing Directors of Bain
Capital, which is a party to the Management Advisory Agreement with the
Company. No officers or employees of the Company serve on the Compensation
Committee. The Compensation Committee was established in May 1996 in
connection with the Company's initial public offering ("IPO"). Previous
compensation levels for the Company's executive officers were approved by the
full Board of Directors upon the recommendation of Charles G. Hanson III,
Chief Executive Officer of the Company. Executive officers who are also
Directors of the Company did not participate in discussions relating to their
individual compensation arrangements. See "Compensation Committee Report on
Executive Compensation."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Advisory Agreement
In October 1995, the Company entered into a ten-year Management Advisory
Agreement (the "Advisory Agreement") with Bain Capital to replace Bain
Capital's prior agreement with the Company. In connection with the Company's
IPO, the Company and Bain Capital amended and restated the Advisory Agreement
to provide for an initial term of four years, subject to automatic one-year
extensions beyond the initial term (not to exceed an aggregate of eight years)
on each anniversary of the effective date of such agreement so long as Bain
Capital continues to own at least 5% of the outstanding Common Stock. Under
the amended Advisory Agreement, the Company will pay Bain Capital an annual
cash advisory fee of $2.25 million, plus out-of-pocket expenses, payable by the
Company on a quarterly basis in arrears and a transaction fee in connection
with the consummation of each acquisition, divestiture or financing by the
Company or its subsidiaries in an amount equal to 1% of the aggregate value of
such transaction. For the year ended December 31, 1996, the Company paid Bain
Capital fees of $7,140,619, plus expenses of $225,706, under the Advisory
Agreement. The Company believes that the fees received for the professional
services rendered are at least as favorable to the Company as those which could
be negotiated with an independent third party.
Registration Agreement
The Company, its executive officers and certain other existing
stockholders, including investment funds controlled by Bain Capital (the "Bain
Capital Funds"), are parties to a registration agreement (the "Registration
Agreement"). Under the Registration Agreement, the holders of a majority of
the registrable securities owned by the Bain Capital Funds and related
investors have the right at any time, subject to certain conditions, to require
the Company to register any or all of their shares of Common Stock under the
Securities Act on Form S-1 on three occasions at the Company's expense and on
Form S-2 or Form S-3 on an unlimited number of occasions at the Company's
expense. In addition, all holders of registrable securities are entitled to
request the inclusion of any shares of Common Stock subject to the Registration
Agreement in any registration statement at the Company's expense whenever the
Company proposes to register any of its securities under the Securities Act,
subject to certain conditions. On December 31, 1996, the holders of an
aggregate of 12,738,125 shares of Common Stock (including 2,226,923 shares
which could be acquired through exercisable options) had demand registration
rights pursuant to the Registration Agreement.
Indebtedness of Management
On July 2, 1996, the Company lent Mr. Needham, the Company's Executive
Vice President, an aggregate of $324,537 in order to permit him to purchase
shares of Common Stock in the Company's IPO. The loan bears interest at 8% per
annum and will be due on July 2, 1998. Mr. Needham will be required to prepay
the loan with 40% of any bonus received by him during the first two years of
his employment agreement with the Company or with any proceeds
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<PAGE> 9
he receives from the sale of any of his shares of Common Stock. The amounts
due under the loan are with full recourse and are secured by a pledge of all
such shares of Common Stock purchased by Mr. Needham. On December 31, 1996,
$324,537 in aggregate principal amount remained outstanding under the loan. On
February 28, 1997, Mr. Needham repaid $54,381 of outstanding principal and
$17,619 of accrued interest under the loan, resulting in an aggregate of
$270,156 of principal remaining outstanding.
In connection with Mr. Hanson's relocation from New York to Dallas in
1993, Mr. Hanson, the Company's Chairman, Chief Executive Officer and a
Director, received a $117,000 loan from the Company that accrued interest at an
annual rate of 6.19%. In June 1996, the loan and all accrued interest thereon
was repaid by Mr. Hanson.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers,
Directors and persons who beneficially own more than ten percent of the
Company's Common Stock to file reports of securities ownership and changes in
such ownership with the Securities and Exchange Commission ("SEC"). Officers,
Directors and greater than ten percent beneficial owners also are required by
rules promulgated by the SEC to furnish the Company with copies of all Section
16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the
Company, or written representations that no Form 5 filings were required, the
Company believes that during the period from July 1, 1996 (the date the
Company's Common Stock became registered under the Exchange Act) through
December 31, 1996, all Section 16(a) filing requirements applicable to its
officers, Directors and greater than ten percent beneficial owners were
complied with other than by Messrs. Kohn and Watterson, each of whom reported
their holdings of Common Stock on a Form 3 more than 10 days after being
appointed to the Board, and Messrs. Hanson, Gard and McAleer, each of whom
reported stock option grants for 1996 on a Form 5 more than 45 days after the
end of the Company's last fiscal year.
PROPOSAL NO. 2 -- RATIFICATION OF APPOINTMENT
OF INDEPENDENT ACCOUNTANTS
The Board of Directors recommends a vote FOR approval of the appointment
of Price Waterhouse LLP as the independent accountants of the Company and its
subsidiaries to audit the books and accounts for the Company and its
subsidiaries for the year ending December 31, 1997. Price Waterhouse LLP
audited the financial statements of the Company and its subsidiaries for the
year ended December 31, 1996. It is expected that representatives of Price
Waterhouse LLP will attend the Annual Meeting, with the opportunity to make a
statement if they so desire, and will be available to answer appropriate
questions.
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<PAGE> 10
BENEFICIAL OWNERSHIP OF COMMON STOCK
Except as otherwise noted, the following table sets forth certain
information as of March 4, 1997 as to the security ownership of equity
securities of the Company by (i) each of the executive officers named in the
Summary Compensation Table, (ii) each of the Directors and Director nominees of
the Company, (iii) all Directors and executive officers as a group and (iv)
those persons owning of record or known to the Company to be the beneficial
owner of more than five percent of the voting securities of the Company. All
information with respect to beneficial ownership has been furnished by the
respective Director, Director nominee, executive officer or five percent
beneficial owner, as the case may be. Unless otherwise indicated, the persons
named below have sole voting and investment power with respect to the number of
shares set forth opposite their names. Beneficial ownership of the Common
Stock has been determined for this purpose in accordance with the applicable
rules and regulations promulgated under the Exchange Act.
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
EXECUTIVE OFFICERS, NUMBER OF PERCENT
DIRECTORS AND 5% STOCKHOLDERS SHARES OF CLASS
- ---------------------------------------------------- --------- ---------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Charles G. Hanson III (1) . . . . . . . . . . . . 1,091,860 3.9%
Russell M. Gard (2) . . . . . . . . . . . . . . . 1,051,108 3.7
Kevin W. McAleer . . . . . . . . . . . . . . . . 2,270 *
Timothy E. Needham . . . . . . . . . . . . . . . 69,565 *
Gregory M. Benson (3) . . . . . . . . . . . . . . 845,842 3.0
Robert C. Gay (4) . . . . . . . . . . . . . . . . 9,196,495 33.6
Herbert M. Kohn . . . . . . . . . . . . . . . . . 1,000 *
Jonathan S. Lavine . . . . . . . . . . . . . . . _ _
Scott R. Watterson . . . . . . . . . . . . . . . _ _
Marc B. Wolpow . . . . . . . . . . . . . . . . . _ _
All Directors and executive
officers as a group (10 persons) (5) . . . . . . 12,258,140 41.3
5% STOCKHOLDERS:
Bain Capital Funds (6) . . . . . . . . . . . . . 9,942,141 36.2%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
J.&W. Seligman & Co. Incorporated (7) . . . . . . 2,217,029 8.1
100 Park Avenue
New York, New York 10017
T. Rowe Price Associates, Inc. (8) . . . . . . . 2,106,150 7.7
100 E. Pratt Street
Baltimore, Maryland 21202
FMR Corp. (9) . . . . . . . . . . . . . . . . . . 2,048,200 7.5
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
- --------------------
* Less than one percent.
- 7 -
<PAGE> 11
(1) Includes 840,712 shares of Common Stock that can be acquired through
currently exercisable options.
(2) Includes 798,548 shares of Common Stock that can be acquired through
currently exercisable options.
(3) Includes 587,663 shares of Common Stock that can be acquired through
currently exercisable options.
(4) Mr. Gay is a Director of the Company. Mr. Gay is also a general partner
of Bain Venture Capital, a California limited partnership ("BVC"), which
is the general partner of the Tyler Capital Fund, L.P., Tyler
Massachusetts L.P. and Tyler International L.P.-II. Accordingly, Mr.
Gay may be deemed to beneficially own shares held by such investment
funds. Mr. Gay disclaims beneficial ownership of such shares in which
he does not have a pecuniary interest. The address of Mr. Gay is c/o
Bain Capital, Inc., Two Copley Place, Boston, Massachusetts 02116.
(5) Includes shares which may be deemed to be beneficially owned by Mr. Gay
as a result of his relationship with the Bain Capital Funds and shares
that Messrs. Hanson, Gard and Benson can acquire through currently
exercisable options.
(6) Includes: (i) 7,270,836 shares held by Tyler Capital Fund, L.P.
("TCF"); (ii) 1,489,744 shares held by Tyler Massachusetts L.P. ("TM");
(iii) 435,915 shares held by Tyler International, L.P.-II ("TI"); (iv)
620,562 shares held by BCIP Associates; and (v) 125,084 shares held by
BCIP Trust Associates, L.P. ("BCIP Trust," and collectively with TCF,
TM, TI and BCIP Associates, the "Bain Capital Funds"). BVC, as the sole
general partner of TCF, TM and TI, may be deemed to be the beneficial
owner of the shares of Common Stock held by such investment funds. In
addition to Mr. Gay, the other general partners of BVC include: Joshua
Bekenstein, Paul B. Edgerly, Adam W. Kirsch, Geoffrey S. Rehnert, W.
Mitt Romney and Robert F. White. All such persons disclaim beneficial
ownership of all such shares in which they do not have a pecuniary
interest.
(7) J. & W. Seligman & Co. Incorporated reported on a Schedule 13G filed
with the SEC, as of December 31, 1996, sole voting power of 1,880,900
shares of Common Stock and sole dispositive power of 2,217,029 shares of
Common Stock.
(8) T. Rowe Price Associates, Inc. reported on a Schedule 13G filed with the
SEC, as of December 31, 1996, sole voting power of 341,850 shares of
Common Stock and sole dispositive power of 2,106,150 shares of Common
Stock.
(9) Fidelity Management & Research Company, a wholly owned subsidiary of FMR
Corp. ("Fidelity"), reported on a Schedule 13G filed with the SEC, as of
December 31, 1996, beneficial ownership of 2,027,700 shares of Common
Stock as a result of acting as investment advisor to several investment
funds that hold such shares of Common Stock (the "Funds"). The voting
of these 2,027,700 shares of Common Stock is directed by each of the
Funds' Boards of Trustees. Edward C. Johnson 3d, FMR Corp. and the
Funds each reported the sole power to dispose of such 2,027,700 shares
of Common Stock. In addition, Fidelity Management Trust Company, a
wholly owned subsidiary of FMR Corp. ("FMTC"), reported beneficial
ownership of 20,500 shares of Common Stock. Edward C. Johnson 3d and
FMR Corp. each reported sole power to dispose of such 20,500 shares of
Common Stock.
- 8 -
<PAGE> 12
COMPENSATION OF EXECUTIVE OFFICERS
GENERAL
In addition to Messrs. Hanson and Gard, the following persons serve as
executive officers of the Company:
KEVIN W. MCALEER was named Vice President -Finance in June 1996 and
Chief Financial Officer in August 1996 and Secretary in October 1996. From
1990 to 1996, Mr. McAleer served as an Executive Vice President and Chief
Financial Officer of Rexene Corporation, a manufacturer of plastic films and
resins. Mr. McAleer is a certified public accountant with over 24 years of
financial and accounting experience. Mr. McAleer is 46 years old.
TIMOTHY E. NEEDHAM has served as Executive Vice President since November
1995. Mr. Needham served as Chairman of the Board of Williamhouse-Regency of
Delaware, Inc. ("Williamhouse") prior to its acquisition by the Company in
October 1995 and as a director from 1993 to 1995. From 1987 to 1995, Mr.
Needham served as President of Williamhouse and from 1992 to 1995, as Chief
Operating Officer of Williamhouse. Mr. Needham is 48 years old.
Executive officers of the Company are elected by and serve at the
discretion of the Board of Directors.
SUMMARY COMPENSATION TABLE
The table below provides information relating to compensation for the
Company's last two fiscal years for the Company's Chief Executive Officer, its
three other current executive officers and a former employee of the Company who
served as an executive officer during the Company's last completed fiscal year
(collectively, the "Named Executive Officers"). The amounts shown include
compensation for services in all capacities that were provided to the Company
and its subsidiaries.
Summary Compensation Table
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION (2) OPTIONS COMPENSATION (3)
--------------------------- ---- ------ --------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Charles G. Hanson III . . . . . . 1996 $407,239 $386,500 __ 153,400 $7,765
Chief Executive Officer 1995 250,000 809,859 __ 58,029 4,595
Russell M. Gard . . . . . . . . 1996 360,905 343,000 __ 121,200 2,423
Chief Operating Officer 1995 225,000 723,837 __ 57,628 1,553
Kevin W. McAleer (4) . . . . . . 1996 131,167 141,000 __ 60,000 900
Chief Financial Officer
Timothy E. Needham (5) . . . . . 1996 300,000 180,000 __ 70,000 1,179,811
Executive Vice President 1995 300,000 75,000 __ 62(6) 2,012
Gregory M. Benson (7) . . . . . 1996 210,000 378,400 __ __ 611
1995 175,000 400,000 __ 55,517 683
</TABLE>
(1) Bonus levels were established by the Board based on the Company
exceeding operating targets established at the beginning of such year.
(2) The aggregate amount of perquisites and other personal benefits given to
each of the Named Executive Officers, valued on the basis of the
aggregate incremental cost to the Company, was less than either $50,000
or 10% of
- 9 -
<PAGE> 13
the total of annual salary and bonus for that Named Executive Officer
during each of the periods presented. Such benefits included automobile
allowances.
(3) The amounts shown for "All Other Compensation" for Messrs. Hanson, Gard,
McAleer and Benson represent life insurance premiums paid by the Company
for such individuals. The amounts shown for Mr. Needham in 1996 reflect
a change in control payment made by the Company of $1,156,500, as a
result of Mr. Needham's relocation to Dallas and certain other changes
in his terms of employment, and relocation expenses paid by the Company
of $14,220 and the gross up for taxes on imputed income from such
payment ($9,091). The amounts shown for Mr. Needham for 1995 includes
$1,662, representing the taxable portion of group life insurance
premiums paid by Williamhouse for Mr. Needham, and $350, which
represents a matching contribution made by Williamhouse on the behalf of
Mr. Needham to Williamhouse's 401(k) Plan.
(4) Mr. McAleer became an executive officer of the Company in June 1996 and
Chief Financial Officer in August 1996.
(5) For the first ten months of 1995, Mr. Needham served as the Chairman of
the Board of Williamhouse. On October 31, 1995, the Company acquired
Williamhouse.
(6) Options were for common stock of WR Acquisition, Inc., the former parent
corporation of Williamhouse.
(7) Mr. Benson served as the Company's Chief Financial Officer through
August 1996 and as Director of Strategic Planning and Acquisitions from
May 1996 through November 1996.
STOCK OPTION GRANTS
The following table provides information relating to the stock options
awarded to the Named Executive Officers during the Company's last fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(3)
----------------- ---------------------------
% OF TOTAL
NUMBER OF OPTIONS MARKET
SECURITIES GRANTED TO EXERCISE PRICE ON
UNDERLYING EMPLOYEES OR DATE OF
OPTIONS IN BASE PRICE GRANT EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) ($/SH) DATE 5%($) 10%($)
---- ----------- ----------- ------ ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Charles G. Hanson III . . 153,400 20.7% $15.00 $15.00 8/13/06(1) $1,446,562 $3,667,794
Russell M. Gard . . . . . 121,200 16.3 15.00 15.00 8/13/06(1) 1,142,916 2,897,892
Kevin W. McAleer. . . . . 60,000 8.1 15.00 15.00 7/9/06(1) 1,434,600
565,800
Timothy E. Needham . . . 70,000 9.4 15.00 15.00 7/2/06(2) 660,100 1,637,700
Gregory M. Benson . . . . -- -- -- -- -- -- --
</TABLE>
- --------------------
(1) Options vest in four installments as follows (set forth on a cumulative
basis): (i) 16 2/3% on the first anniversary of the date of grant; (ii)
50% on the second anniversary of the date of grant; (iii) 83 1/3% on the
third anniversary of the date of grant; and (iv) 100% on the fourth
anniversary of date of grant. Options also expire upon the termination
of the executive's employment with the exception of options which are
then exercisable in the following circumstances: (i) 180 days following
the executive's death or disability; (ii) 90 days following the
executive's retirement; and (iii) 30 days following the termination of
the executive's employment by the Company other than by cause.
- 10 -
<PAGE> 14
(2) Options vest in three equal installments on each anniversary of the date
of grant (July 2, 1996). Options also expire 30 days after the date of
the termination of such executive officer's employment with the Company.
(3) Amounts reflect certain assumed rates of appreciation set forth in the
SEC's executive compensation disclosure rules. Actual gains, if any, on
stock options exercises depend on future performance of the Company's
Common Stock and overall market conditions. At an annual rate of
appreciation of 5% per year for the option term, the stock price would
be $24.43 per share. At an annual rate of appreciation of 10% per year
for the option term, the stock price would be $38.91 per share.
STOCK OPTION HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers concerning stock options outstanding as of December 31,
1996. There were no options exercised by the Named Executive Officers in the
last fiscal year for securities of the Company.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FY-END
AT FY-END (#) ($)(1)
SHARES ---------------------- ---------------------------
ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- -------------- ------------------ ---------------------- ---------------------------
<S> <C> <C> <C> <C>
Charles G. Hanson III (2) . . --- --- 840,712 / 153,400 $18,878,188 / $1,169,675
Russell M. Gard (3) . . . . . --- --- 798,548 / 121,200 17,963,337 / 924,150
Kevin W. McAleer . . . . . . --- --- 0 /60,000 0 / 457,500
Timothy E. Needham . . . . . --- --- 0 / 70,000 0 / 525,000
Gregory M. Benson (4) . . . --- --- 587,663 / 0 13,242,986 / 0
</TABLE>
(1) The closing sale price of the Common Stock on December 31, 1996 was
$22.625 per share, as reported by the New York Stock Exchange. The
value of such options at fiscal year end is calculated on the basis of
the difference between the option exercise price and $22.625 multiplied
by the number of shares of Common Stock underlying the option.
(2) Represents options to purchase an aggregate of 840,712 shares of Common
Stock at a weighted average exercise price of approximately $0.17 per
share.
(3) Represents options to purchase an aggregate of 798,548 shares of Common
Stock at a weighted average exercise price of approximately $0.13 per
share.
(4) Represents options to purchase an aggregate of 587,663 shares of Common
Stock at a weighted average exercise price of approximately $0.09 per
share.
EMPLOYMENT AGREEMENTS
In June 1996, the Company and Mr. Hanson entered into an employment
agreement (the "Employment Agreement"), pursuant to which Mr. Hanson agreed to
serve as the Chief Executive Officer of the Company for a period of three
years. Under the Employment Agreement, Mr. Hanson will receive (i) an annual
base salary equal to at least $450,000, (ii) an annual bonus up to 100% of his
annual base salary (upon the Company achieving certain operating targets) and
(iii) certain fringe benefits. Mr. Hanson will be entitled to a payment of
$2.5 million upon a "change of control" of the Company (defined to include a
person or group (other than Bain Capital) becoming an owner of more than 50% of
the outstanding Common Stock or nominating a majority of the Directors who are
then elected to the Board). If Mr. Hanson's employment is terminated for any
reason prior to the termination of such agreement other than for Cause (as
defined therein) or his resignation, he will be entitled to receive his base
salary and fringe benefits for 24 months following such termination in addition
to 50% of his bonus for the year in which his employment was terminated if the
termination is during the first six months of the year or 100% if such
termination was during the last six months of the year. Mr. Hanson has agreed
not to compete with the Company for a period of two years following his
termination
- 11 -
<PAGE> 15
of employment with the Company and not to disclose any confidential information
at any time without the prior written consent of the Company.
In June 1996, Mr. Gard entered into an employment agreement with the
Company containing substantially similar terms. Under such agreement, Mr. Gard
has agreed to serve as the Chief Operating Officer of the Company for (i) an
annual base salary equal to at least $400,000, (ii) an annual bonus up to 100%
of his annual base salary (upon the Company achieving certain operating
targets) and (iii) certain fringe benefits. Mr. Gard will be entitled to a
payment of $2.5 million upon a "change of control" of the Company (defined to
include a person or group (other than Bain Capital) becoming an owner of more
than 50% of the outstanding Common Stock or nominating a majority of the
Directors who are then elected to the Board). If Mr. Gard's employment is
terminated for any reason prior to the termination of such agreement other than
for Cause (as defined therein) or his resignation, he will be entitled to
receive his base salary and fringe benefits for 24 months following such
termination in addition to 50% of his bonus for the year in which his
employment was terminated if the termination is during the first six months of
the year or 100% if such termination was during the last six months of the
year. Mr. Gard has agreed not to compete with the Company for a period of two
years following his termination of employment with the Company and not to
disclose any confidential information at any time without the prior written
consent of the Company.
In June 1996, the Company entered into an employment agreement with
Timothy E. Needham, pursuant to Mr. Needham agreed to serve as an Executive
Vice President to the Company in exchange for (i) an annual base salary during
the first three years of the agreement of at least $300,000, (ii) an annual
bonus up to 100% of his annual base salary (upon the Company achieving certain
operating targets) and (iii) certain fringe benefits, including reimbursement
for expenses resulting from Mr. Needham's relocation from New York to Dallas.
The employment agreement will remain in effect until Mr. Needham resigns or
until the Board determines in its good faith that the termination of Mr.
Needham is in the best interests of the Company. If Mr. Needham's employment
is terminated for any reason other than for Cause (as defined therein) or his
resignation, he will be entitled to receive his base salary and fringe benefits
for 12 months following such termination in addition to 50% of his bonus for
the year in which his employment was terminated if the termination is during
the first six months of the year or 100% if such termination was during the
last six months of the year. Mr. Needham entered into a change in control
agreement with WR Acquisition, Inc., the former parent of Williamhouse, prior
to the Company's acquisition of Williamhouse in October 1995. In July 1996,
the Company paid Mr. Needham $1,156,500 under such agreement as a result of Mr.
Needham's relocation to Dallas and certain other changes in his terms of
employment.
In June 1996, Mr. Benson and the Company entered into an agreement which
amended Mr. Benson's existing management agreement. Specifically, restrictions
relating to the transferability of shares of Common Stock held by Mr. Benson
and provisions granting certain investors and the Company the option to
repurchase Mr. Benson's Common Stock in certain circumstances were deleted.
Mr. Benson served as the Company's Chief Financial Officer through August 1996
and as Director of Strategic Planning and Acquisitions through November 1996.
Under Mr. Benson's management agreement, Mr. Benson agreed not to compete with
the Company for a period of two years following the termination of his
employment with the Company.
In March 1997, the Company's Board of Directors approved the general
terms of a change of control agreement with Mr. McAleer. The specific terms of
the change of control agreement are in the process of being finalized and are
expected to be approved by the Board of Directors by the end of the second
quarter of 1997. The agreement will include change of control provisions
similar to those included in the employment agreements of Messrs. Hanson and
Gard.
MANAGEMENT STOCK PURCHASE PLAN
On June 22, 1996, the Company adopted the American Pad & Paper Company
Management Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is
designed to provide equity incentives to selected members of the Company's
management, including employee Directors and the Named Executive Officers. The
eligible participants were selected by the Compensation Committee upon the
recommendation of the Company's Chief Executive Officer. Currently, over 40
management employees participate in the Purchase Plan. Under the Purchase
Plan, eligible participants are able to elect to purchase shares of Common
Stock in lieu of up to 25% of their annual incentive bonuses. The Common Stock
available for sale under the Purchase Plan is sold at a 25% discount from the
fair market value on the date of purchase. An aggregate of 250,000 shares of
Common Stock have been reserved and are available for
- 12 -
<PAGE> 16
issuance under the Purchase Plan. To date, an aggregate of 36,030 shares of
Common Stock have been sold under the Purchase Plan.
1996 KEY EMPLOYEE STOCK INCENTIVE PLAN
The Company's 1996 Key Employee Stock Incentive Plan (the "Incentive
Plan") provides that the Compensation Committee (the "Committee") of the Board,
on behalf of the Company, may enter into any type of arrangement with an
employee that is consistent with the provisions of the Incentive Plan and that
by its terms involves the issuance or potential issuance of (i) shares of
Common Stock or (ii) a Derivative Security (as such term is defined in Rule
16a-1 promulgated under the Exchange Act, as such Rule may be amended from time
to time) with an exercise or conversion right at a price related to the Common
Stock or with a value derived from the value of the shares of Common Stock.
The entering into of any such arrangement is referred to under the Incentive
Plan as the grant of an "Award."
The maximum number of shares of Common Stock available for issuance upon
exercise of Awards granted to employees under the Incentive Plan is 1,500,000,
subject to adjustment in the event of a stock dividend, stock split or similar
change in outstanding shares of Common Stock. Common Stock purchased under the
Incentive Plan will be purchased from the Company; therefore the Company will
receive the purchase price paid for the Common Stock, if any.
The following description of certain features of the Incentive Plan is
qualified in its entirety by reference to the Incentive Plan, which has
previously been filed with the SEC as an exhibit to the Company's Quarterly
Report on Form 10-Q for the six months ended June 30, 1996 and may be inspected
and copied at the public reference facilities maintained by the SEC.
Purpose and Adoption. The purpose of the Incentive Plan is to enable
the Company and its subsidiaries to attract, retain and motivate their
employees by providing for or increasing the proprietary interests of such
employees in the corporation. The Incentive Plan was originally adopted by the
Board of Directors, approved by the stockholders of the Company and became
effective all on June 22, 1996.
Awards. Awards are not restricted to any specified form or structure
and may include, without limitation, sales or bonuses of stock, restricted
stock, stock options, reload stock options, stock purchase warrants, other
rights to acquire stock, securities convertible into or redeemable for stock,
stock appreciation rights, limited stock appreciation rights, phantom stock,
dividend equivalents, performance units or performance shares, and an Award may
consist of one or more such security or benefit. To date, the Company has only
granted stock options that are not intended to qualify as incentive stock
options under Section 422 of the Code ("NQOs"). The Company anticipates that
it will only issue NQOs under the Incentive Plan.
Administration. The Incentive Plan is administered by the Committee.
The Committee currently consists of two Directors, and, subject to certain
limitations in the Incentive Plan, the Committee (or its Authorized Delegate)
is authorized and empowered to do all things necessary or desirable in
connection with the administration of the Incentive Plan, including the
following:
(i) adopt, amend and rescind rules and regulations relating to the
Incentive Plan;
(ii) determine which persons meet the requirements for eligibility
under the Incentive Plan and to which of such eligible persons, if any,
Awards shall be granted;
(iii) determine whether, and the extent to which adjustments are
required under the Incentive Plan;
(iv) interpret and construe the Incentive Plan and the terms and
conditions of any Award granted under the Incentive Plan; and
(v) correct any defect or supply any omission or reconcile any
inconsistency in the Incentive Plan or in any Award in the manner and to
the extent the Committee deems necessary or desirable to carry it into
effect.
- 13 -
<PAGE> 17
Any decision of the Committee (or any Authorized Delegate) in the
interpretation and administration of the Incentive Plan lies within its sole
and absolute discretion and is final, conclusive and binding on all parties
concerned.
Transferability. Except as may be approved by the Committee where such
approval would not adversely affect compliance of the Incentive Plan with Rule
16b-3 under the Exchange Act, an employee's rights and interest under the
Incentive Plan may not be assigned or transferred, hypothecated or encumbered
in whole or in part either directly or by operation of law or otherwise (except
in the event of an employee's death) including, but not by way of limitation,
execution, levy, garnishment, attachment, pledge, bankruptcy or in any other
manner.
Eligibility. Any person employed by the Company or any of its
subsidiaries including any Director who is so employed is eligible to be
considered for the grant of Awards under the Incentive Plan. As of December
31, 1996, approximately 55 employees have been granted nonqualified stock
options under the Incentive Plan.
Amendment, Termination and Adjustment. The Board may amend or terminate
the Incentive Plan at any time and in any manner; provided, however, that no
such amendment or termination may deprive the recipient of an Award previously
granted under the Incentive Plan of any of his or her rights thereunder without
the consent of such recipient; and; provided further, that no amendment shall
become effective without stockholder approval if such stockholder approval is
required by law, rule or regulation. No Awards may be granted under the
Incentive Plan after June 22, 2006. Shares of Common Stock may be issued after
June 22, 2006 pursuant to Awards granted prior to such date; however, no Shares
of Common Stock may be issued under the Incentive Plan after June 22, 2016.
Adjustments. If the outstanding securities of the class then subject to
the Incentive Plan are increased, decreased or exchanged for or converted into
cash, property or a different number or kind of securities, or if cash,
property or securities are distributed in respect of such outstanding
securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, restructuring, reclassification, dividend
(other than a regular, quarterly cash dividend) or other distribution, stock
split, reverse stock split or the like, or if substantially all of the property
and assets of the Company are sold, then, unless the terms of such transaction
provide otherwise, the Committee must make appropriate and proportionate
adjustments in (a) the number and type of shares or other securities or cash or
other property that may be acquired pursuant to Awards theretofore granted
under the Incentive Plan, (b) the maximum number and type of shares or other
securities that may be issued pursuant to Awards thereafter granted under the
Incentive Plan and (c) to the extent permitted under the Incentive Plan, the
maximum number of shares of Common Stock with respect to which Awards may be
granted to any employee during any calendar year; provided, however, that no
adjustment may be made to the number of shares of Common Stock that may be
acquired pursuant to outstanding Incentive Stock Options or the maximum number
of shares of Common Stock with respect to which incentive stock options may be
granted under the Incentive Plan to the extent such adjustment would result in
such options being treated as other than Incentive Stock Options; provided
further, that no such adjustment may be made to the extent the Committee
determines that such adjustment would result in the disallowance of a federal
income tax deduction for compensation attributable to Awards hereunder by
causing such compensation to be other than performance-based compensation.
Consideration. Common Stock may be issued pursuant to an Award for any
lawful consideration as determined by the Committee, including without
limitation, services rendered by the recipient of such Award.
Granting of Awards. As of December 31, 1996, options to purchase an
aggregate of 741,600 shares of Common Stock had been granted under the
Incentive Plan.
TAX CONSEQUENCES TO PARTICIPANTS. The following is a brief summary of
the principal federal income tax consequences to participants of the grant and
exercise of certain Awards under the Incentive Plan. This summary does not
purport to address all aspects of federal income taxes that may affect
participants in light of their individual circumstances. Moreover, this
summary is based upon the current provisions of the Code, Treasury Regulations
(including proposed Treasury Regulations) promulgated thereunder, rulings,
administrative pronouncements and court interpretations thereof in effect as of
the date hereof. It is possible that future legislative, regulatory, judicial
or administrative changes or interpretations could modify such tax consequences
and the conclusions reached below and that any such change could apply
retroactively. This summary applies only to participants who acquire options
under the Incentive Plan in connection with their employment by the Company or
one of its affiliates and exercise such options during their lifetimes.
Because federal income tax consequences will vary as a result of individual
circumstances, each
- 14 -
<PAGE> 18
option holder is urged to consult a tax advisor with respect to the tax
consequences (including those under state and local tax laws) of the grant and
exercise of stock options under the Incentive Plan. Moreover, the following
summary relates only to option holders' federal income tax treatment. The
state, local and foreign tax consequences may be substantially different from
the federal income tax consequences described herein.
A. Taxation of Ordinary Income and Capital Gains.
The ordinary income of an individual taxpayer currently is generally
subject to a maximum federal income tax rate of 39.6%, while long-term capital
gains of an individual currently are generally subject to a maximum tax rate of
28%. The effective marginal rates of some taxpayers may be higher to the
extent that they are subject to the phase-out of personal exemptions or the
reduction of itemized deductions that occur at certain income levels. The
classification of income as capital or ordinary is also relevant for taxpayers
who have capital losses or investment interest.
B. Options.
Under the Incentive Plan, a participant may be granted options that
qualify as incentive stock options under Section 422 of the Code ("ISOs") or
NQOs or both. Generally, the tax consequences to an option holder with respect
to ISOs will be different from the tax consequences with respect to NQOs. The
Company currently intends only to grant NQOs under the Incentive Plan. As a
result, the Company has only set forth herein the tax consequences relating to
NQOs. In addition, the discussion below assumes that at the time an NQO is
exercised, the shares received are either fully vested or the holder makes a
timely election under Section 83(b).
The holder of an NQO does not recognize taxable income upon the grant of
the NQO, nor is the Company entitled, for income tax purposes, to a deduction
upon such a grant. The option holder recognizes ordinary compensation income
(subject to withholding taxes) on the exercise of an NQO equal to the excess of
the fair market value of the shares received on exercise over the option
exercise price. The fair market value of the shares is measured on the
exercise date. If such taxable compensation is properly included in the
holder's gross income by the holder or is deemed to have been properly included
as a result of the timely satisfaction of certain reporting requirements by the
Company, the Company should be entitled to a deduction in computing its federal
income taxes in an amount equal to the ordinary income recognized by the option
holder on the exercise of the NQO.
If an option holder sells shares acquired pursuant to the exercise of an
NQO, the option holder will recognize capital gain or loss equal to the
difference between the selling price of the shares and their fair market value
on the exercise date. The capital gain is long-term or short-term, depending
on whether the option holder has held the option shares for more than one year
after the exercise date. The Company is not entitled to any deduction with
respect to any capital gain recognized by the option holder.
The previous paragraph assumes, for simplicity, that the option holder's
tax basis in the option shares sold is equal to the fair market value of such
shares on the exercise date. While this would be the case if the option holder
had paid the exercise price for such shares in cash, it would not normally be
the case if the option holder paid the exercise price in whole or in part by
delivery of other shares of Common Stock. In the latter case, the option
holder's tax basis in, and holding period for, the previously acquired shares
surrendered carries over to an equal number of the option shares received on a
share-for-share basis. Shares received in excess of the shares surrendered
have a tax basis equal to the fair market value of those received shares on the
exercise date and the option holder's holding period for such received shares
begins on the exercise date. The option holder's capital gain or loss on a
sale of option shares would be determined based on the option holder's actual
basis in the shares sold and the long-term or short-term nature of any gain
would be based on the option holder's actual holding period.
C. Effect of Section 16(b) of the Securities Exchange Act of 1934.
The tax consequences to an option holder of the exercise of either an
ISO or an NQO may vary from those described above if the option holder is a
person who is subject to liability under Section 16(b) of the Exchange Act
(typically, officers, directors and major stockholders of a corporation) for
certain dealings in the Common Stock (a"16(b) Person"). In general, an option
holder who is a 16(b) Person will not recognize income on receipt of the Common
Stock until such holder is no longer subject to a liability under Section 16(b)
with respect to the disposition of such Common
- 15 -
<PAGE> 19
Stock. However, the option holder may elect to be taxed based on the fair
market value of the shares on the exercise date (and have a holding period
beginning on the exercise date) by filing an election under Section 83(b) of
the Code within 30 days of the exercise date.
D. Effect of Section 162(m) of the Internal Revenue Code.
Starting with tax years beginning after January 1, 1994, a publicly held
corporation may not deduct compensation paid to its chief executive officer and
its four other most-highly compensated officers in excess of $1 million per
officer during a corporate taxable year except to the extent such amounts in
excess of $1 million qualify for an exception to this limitation. To qualify
for this exception, such amounts must be determined on the basis of
preestablished, objective, nondiscretionary formulae that meet certain
shareholder and outside director approval requirements. For this purpose,
"compensation" is broadly defined and would include, for example, income
realized on the exercise of non-qualified options or SARs, disqualifying
dispositions of ISO shares, and the receipt (if a timely Section 83(b) election
is made) or vesting (if no Section 83(b) election is made) of restricted stock.
Thus, to the extent awards granted to the Chief Executive Officer and the four
other most highly compensated officers do not qualify for the performance
based-exception, the Company's deductions with respect to such awards may be
subject to the $1 million per executive deduction limitation.
Incentive Plan Benefits. The following table sets forth the number of
non-qualified stock options that have been granted under the Incentive Plan as
of the date of this Proxy Statement to (i) each Named Executive Officer, (ii)
all current executive officers as a group, (iii) all current Directors who are
not executive officers, as a group, and (iv) all employees, including all
current officers who are not executive officers, as a group.
1996 KEY EMPLOYEE STOCK INCENTIVE PLAN
<TABLE>
<CAPTION>
NUMBER OF NONQUALIFIED
NAME AND POSITION STOCK OPTIONS GRANTED
----------------- ----------------------
<S> <C>
Charles G. Hanson III, Chief Executive Officer. . . . . 153,400
Russell M. Gard, Chief Operating Officer . . . . . . . 121,200
Kevin W. McAleer, Chief Financial Officer . . . . . . 60,000
Timothy E. Needham, Executive Vice President . . . . . 70,000
Gregory M. Benson . . . . . . . . . . . . . . . . . . . ---
Executive Group (4 persons) . . . . . . . . . . . . . . 404,600
Non-Executive Director Group . . . . . . . . . . . . . ---
Non-Executive Officer Employee Group . . . . . . . . . 337,000
</TABLE>
The type or number of future Awards that will be granted under the
Incentive Plan to the above-named individuals and groups in the future is not
determinable at this time.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The following description of certain features of the Director Option
Plan is qualified in its entirety by reference to the Director Option Plan,
which has previously been filed with the SEC as an exhibit to the Company's
Quarterly Report on Form 10-Q for the six months ended June 30, 1996 and may be
inspected and copied at the public reference facilities maintained by the SEC.
Purpose and Adoption. The purpose of the Director Option Plan is to
promote the interests of the Company by providing an inducement to obtain and
retain the services of qualified persons as members of the Board and to align
- 16 -
<PAGE> 20
more closely the interests of such persons with the interests of the Company's
stockholders by providing a significant portion of the compensation provided to
such persons in the form of equity securities of the Company. The Director
Option Plan was adopted by the Board of Directors, approved by the stockholders
of the Company and became effective all on June 22, 1996.
Awards. All options granted under the Director Option Plan are non-
qualified options ("NQOs") and are not entitled to special tax treatment under
Internal Revenue Code Section 422, as may be amended from time to time. The
maximum number of shares of Common Stock available for issuance upon exercise
of options granted to employees under the Director Option Plan is 350,000,
subject to adjustment in the event of a stock dividend, stock split or similar
change in outstanding shares of Common Stock.
Administration. The Director Option Plan is administered by the
Committee. Subject to certain limitations in the Director Option Plan, the
Committee (or its Authorized Delegate) has the full power to construe and
interpret the Director Option Plan and options granted thereunder, to establish
and amend rules for its administration and to correct any defect or omission
and to reconcile any inconsistency in the Director Option Plan or in any option
granted thereunder to the extent the Committee deems desirable to carry the
Director Option Plan or any option granted thereunder into effect. All
decisions of the Committee in the administration of the Plan are final and
conclusive on the parties involved. No member of the Committee (or its
Authorized Delegates) shall incur liability with respect to any action taken or
omitted to be take in connection with the Director Option Plan and all members
of the Committee (and its Authorized Delegates) are fully protected in relying
in good faith upon the advice of counsel, to the fullest extent permitted under
applicable law. The Company and its Subsidiaries pay the expenses of the
Director Option Plan.
Transferability. A non-employee Director's options granted under the
Director Option Plan are not transferable by the Non-Employee Director, other
than by will or the laws of descent and distribution or pursuant to a qualified
domestic relations order, as defined by Section 1 et seq, of the Code, Title I
of ERISA or the rules and regulations thereunder, and are exercisable during
the Non-Employee Director's lifetime only by such Non-Employee Director or by
such Non-Employee Director's guardian or other legal representative.
Eligibility. Each non-employee Director is eligible for the grant of
Awards under the Director Option Plan. As of December 31, 1996, the Company
had six non-employee Directors eligible to participate in the Director Option
Plan.
Grant for Newly Appointed Directors. Each non-employee Directors
initially elected or appointed to the Board after June 22, 1996 are
automatically granted, on the date he or she joins the Board, options to
purchase 25,000 shares of Common Stock.
Annual Grant of Options. Each non-employee Director serving on the
Board on June 22, 1996 will be granted options to purchase 2,000 shares of
Common Stock beginning on the fourth anniversary of such date and continuing on
each subsequent anniversary thereof. Each non-employee Director elected or
appointed to the Board after June 22, 1996, will automatically be granted
options to purchase 2,000 shares of Common Stock beginning on the fourth
anniversary of such Non-Employee Director's election or appointment to the
Board and continuing on each subsequent anniversary thereof.
Terms. Each option is exercisable for ten years after the date of
grant. Each option granted pursuant to the annual grant of options vests in
three equal installments on the first, second and third anniversaries of the
date of the grant. Each option granted pursuant to the grant for newly
appointed Directors vests in three installments, with 50% of the shares of
Common Stock vesting on the first anniversary of the date of grant and 25% of
the shares of Common Stock vesting on each of the second and third
anniversaries of the date of the grant. Upon the termination of a non-employee
Director's tenure for any reason other than voluntary resignation from the
Board, the unvested portions of any outstanding options become fully vested.
Upon the termination of a non-employee Director's tenure for any reason, each
outstanding vested and previously unexercised option (after giving effect to
any vesting of the option pursuant to the proceeding sentence) expires two
years after the date of such termination; provided, however that the original
expiration date cannot be extended by such termination.
- 17 -
<PAGE> 21
Exercise. The exercise price per share of Common Stock for each option
is 100% of the Fair Market Value of a share of Common Stock on the date of
grant determined by the mean between the high and low prices of the Common
Stock as reported on the New York Stock Exchange-Composite Tape, or if no such
reported sale of the Common Stock has occurred on such date, on the next
succeeding date on which there was such a reported sale.
Rights as a Stockholder. Non-employee Directors participating in the
Director Option Plan have no rights as a stockholder with respect to the shares
of Common Stock which he or she may have a right to purchase under the Director
Option Plan until the date such shares of Common Stock are issued to such non-
employee Director or to a nominee on behalf of such non-employee Director.
Nothing under the Director Option Plan shall be construed as giving any non-
employee Director any right to be retained in the service of the Company.
Adjustments. The maximum number of shares of Common Stock issuable
under the Director Option Plan, the number of options granted pursuant to the
Director Option Plan and the option price and the number of shares of Common
Stock which may be purchased under any outstanding option granted under the
Director Option Plan will be proportionately adjusted in the event of stock
dividends, stock splits, consolidations of the Common Stock into a smaller
number of outstanding shares or similar type changes in the Company's
capitalization. Adjustments shall be made by the Committee, whose
determination shall be final, binding and conclusive upon the parties involved.
Compliance with Laws; Securities Act Registration. No shares of Common
Stock will be issued under the Director Option Plan unless counsel for the
Company is satisfied that such issuance will be in compliance with applicable
federal, state, local and foreign securities, securities exchange and other
applicable laws and requirements.
Sale, Liquidation or Dissolution of the Company. In the event of a
merger of the Company with or into another corporation constituting a change of
control of the Company, a sale of all or substantially all of the Company's
assets or a sale of a majority of the Company's outstanding voting securities
(a "Sale of the Company"), the options may be assumed by the successor
corporation or a parent of such successor corporation or substantially
equivalent options may be substituted by the successor corporation or a parent
of such successor corporation, and if the successor corporation does not assume
the options or substitute options, then all outstanding and unvested options
shall become immediately exercisable and all outstanding options shall
terminate if not exercised as of the date of the Sale of the Company (or other
prescribed period of time).
Amendment, Termination and Adjustment. The Board may amend the Director
Option Plan at any time and in any manner; provided, however that no amendment
shall become effective without stockholder approval if such stockholder
approval is required by law, rule or regulation; and provided further that to
the extent required by Rule 16b-3 under Section 16 of the Exchange Act,
Director Option Plan provisions shall not be amended more than once every six
months, except that the foregoing shall not preclude any amendment to comport
with changes in the Code, ERISA or the rules thereunder. The Director Option
Plan will terminate upon the earlier of an adoption of a resolution of the
Board terminating the Director Option Plan or June 22, 2006. No amendment or
termination may deprive the recipient of an Award previously granted under the
Director Option Plan of any of his or her rights thereunder without the consent
of such recipient, except for modifications required to maintain compliance
with any federal or state statute or regulation.
Granting of Awards. As of December 31, 1996, options to an aggregate of
125,000 shares of Common Stock have been granted under the Director Option
Plan.
TAX CONSEQUENCES TO PARTICIPANTS. The following is a brief summary of
the principal federal income tax consequences to participants of the grant and
exercise of options under the Director Option Plan. This summary does not
purport to address all aspects of federal income taxes that may affect
participants in light of their individual circumstances. Moreover, this
summary is based upon the current provisions of the Code, Treasury Regulations
(including proposed Treasury Regulations) promulgated thereunder, rulings,
administrative pronouncements and court interpretations thereof in effect as of
the date hereof. It is possible that future legislative, regulatory, judicial
or administrative changes or interpretations could modify such tax consequences
and the conclusions reached below and that any such change could apply
retroactively. This summary applies only to participants who acquire options
under the Director Option Plan in connection with their participation of the
board of directors of the Company and exercise such options during their
lifetimes. Because federal income tax consequences will vary as a result of
individual circumstances, each option holder is urged to consult a tax advisor
with respect to the tax consequences (including those
- 18 -
<PAGE> 22
under state and local tax laws) of the grant and exercise of stock options
under the Director Option Plan. Moreover, the following summary relates only
to option holders' federal income tax treatment. The state, local and foreign
tax consequences may be substantially different from the federal income tax
consequences described herein.
A. Taxation of Ordinary Income and Capital Gains.
The ordinary income of an individual taxpayer currently is generally
subject to a maximum federal income tax rate of 39.6%, while long-term capital
gains of an individual currently are generally subject to a maximum tax rate of
28%. Short-term capital gains are generally subject to the same federal income
tax rate as the ordinary income of an individual taxpayer. The effective
marginal rates of some taxpayers may be higher to the extent that they are
subject to the phase-out of personal exemptions or the reduction of itemized
deductions that occur at certain income levels. The classification of income
as capital or ordinary is also relevant for taxpayers who have capital losses
or investment interest.
B. Nonqualified Options.
The holder of an NQO does not recognize taxable income upon the grant of
the NQO, nor is the Corporation entitled, for income tax purposes, to a
deduction upon such a grant. Assuming that, at the time the NQO is exercised,
the shares received are fully vested or the holder makes a timely election
under Code Section 83(b), the option holder recognizes ordinary compensation
income (subject to withholding taxes) on the exercise of an NQO equal to the
excess of the fair market value of the shares received on exercise over the
option exercise price. The fair market value of the shares is measured on the
exercise date. If the taxable compensation resulting from the exercise of the
NQO is properly included in the holder's gross income by the holder or is
deemed to have been properly included as a result of the timely satisfaction of
certain reporting requirements by the Corporation, the Corporation should be
entitled to a deduction in computing its federal income taxes in an amount
equal to the ordinary income recognized by the option holder on the exercise of
the NQO.
Assuming that, at the time the NQO is exercised, the shares received are
fully vested or the holder makes a timely election under Code Section 83(b),
the option holder will, upon selling such shares, recognize capital gain or
loss equal to the difference between the selling price of the shares and the
option holder's tax basis in such shares. The capital gain will be long-term
or short-term, depending on whether the option holder has held the option
shares for more than one year after the exercise date. The Corporation is not
entitled to any deduction with respect to any capital gain recognized by the
option holder.
If the option holder paid the exercise price for the option shares in
cash, the option holder's tax basis in the option shares will be equal to the
fair market value of such shares on the exercise date. However, if the option
holder paid the exercise price in whole or in part by delivery of other shares
of Common Stock, the option holder's tax basis in, and holding period for, the
previously acquired shares surrendered will carry over to an equal number of
the option shares received on a share-for-share basis. Shares received in
excess of the shares surrendered will have a tax basis equal to the fair market
value of those received shares on the exercise date and the option holder's
holding period for such excess shares will begin on the exercise date. The
option holder's capital gain or loss on a sale of option shares would be
determined based on the option holder's actual basis in the shares sold and the
long-term or short-term nature of any gain would be based on the option
holder's actual holding period.
C. Effect of Section 16(b) of the Securities Exchange Act of 1934.
The tax consequences to an option holder of the exercise of an NQO may
vary from those described above if the option holder is a 16(b) Person. In
general, an option holder who is a 16(b) Person will not recognize income on
receipt of the Common Stock until such holder is no longer subject to a
liability under Section 16(b) with respect to the disposition of such Common
Stock. However, the option holder may elect to be taxed based on the fair
market value of the shares on the exercise date (and have a holding period
beginning on the exercise date) by filing an election under Section 83(b) of
the Code within 30 days of the exercise date.
Director Option Plan Benefits. The following table sets forth the
number of non-qualified stock options that have been granted under the Director
Option Plan as of the date of this Proxy Statement to (i) each Named Executive
- 19 -
<PAGE> 23
Officer, (ii) all current executive officers as a group, (iii) all current
Directors who are not executive officers, as a group, and (iv) all employees,
including all current officers who are not executive officers, as a group.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER OF NONQUALIFIED STOCK
NAME AND POSITION OPTIONS GRANTED
----------------- ------------------
<S> <C>
Charles G. Hanson III, Chief Executive Officer. . . . . . . . . --
Russell M. Gard, Chief Operating Officer . . . . . . . . . . . --
Kevin W. McAleer, Chief Financial Officer . . . . . . . . . . . --
Timothy E. Needham, Executive Vice President . . . . . . . . . --
Gregory M. Benson . . . . . . . . . . . . . . . . . . . . . . . --
Executive Group (4 persons) . . . . . . . . . . . . . . . . . . --
Non-Executive Director Group . . . . . . . . . . . . . . . . . 125,000
Non-Executive Officer Employee Group . . . . . . . . . . . . . --
</TABLE>
To date, all options granted under the Director Option Plan have been
granted at fair market value. As a result, future gains from such option
grants, if any, are not determinable at this time. No other options have been
granted under the Non-Director Employee Plan to date. The type or number of
future grants under the Director Option Plan to the above-named individuals and
groups in the future is not determinable at this time.
- 20 -
<PAGE> 24
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This Compensation Committee report shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act or under the Exchange Act,
except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
The following report has been submitted by the Compensation Committee of
the Board of Directors:
The Compensation Committee was established by the Board of Directors in
June 1996 in connection with the Company's IPO. At such time, Messrs. Robert
C. Gay and Marc B. Wolpow were appointed to the Committee. Messrs. Gay and
Wolpow are Managing Directors of Bain Capital. The Bain Capital Funds
collectively own approximately 36.2% of the outstanding Common Stock. Prior to
the Company's IPO, the Bain Capital Funds and related investors, together with
the Company's senior management, owned substantially all of the outstanding
capital stock of the Company. The Board selected Messrs. Gay and Wolpow to
help ensure that the compensation policies of the Company serve to align the
interests of the Company's management with those of its stockholders.
On a going forward basis, the Compensation Committee will be responsible
(i) for reviewing the recommendations of the Company's Chief Executive Officer
on compensation levels of all other officers of the Company and (ii) adopting
and changing compensation policies and practices of the Company and to report
its recommendations to the full Board of Directors. In addition, the
Compensation Committee will be responsible for the administration of the
Company's Incentive Plan and Purchase Plan. In reviewing the Company's
compensation programs, the Compensation Committee intends to adhere to a
compensation philosophy that (i) attracts and retains qualified executives that
will add to the long-term success of the Company; (ii) relates to the
achievement of operational and strategic objectives; and (iii) is commensurate
with each executive's performance, level of responsibility and overall
contribution to the success of the Company. In making its recommendations to
the full Board of Directors concerning adjustments to compensation levels, the
Compensation Committee intends to consider the financial condition and
operational performance of the Company during the prior year. The Compensation
Committee expects the Company's executive compensation program to consist of
three principal components: (i) base salary; (ii) annual bonus; and (iii)
long-term equity incentives. Although the Compensation Committee did not
participate per se in determining the compensation for the Company's executive
officers for 1996, the Committee has set forth below a discussion as to how
such compensation was determined by the full Board of Directors.
Base Salary. At the time of the Company's IPO, each of the Company's
executive officers entered into a new compensation arrangement with the
Company. Messrs. Hanson and Gard, each of whom participated in acquisition of
Ampad Corporation from Mead Corporation in 1992 ("Ampad Acquisition"), entered
into new employment agreements with the Company. See "Compensation of
Executive Officers - Employment Agreements." Such agreements replaced the
Management Agreements that each entered into at the time of the Ampad
Acquisition. Both Mr. Hanson and Mr. Gard received significant increases in
base salary as a result of the significant growth of the Company and improved
operating results. The Company's net sales have increased from approximately
$104 million in 1993 (the first complete year after the Ampad Acquisition) to
$584 million in 1996. The base salaries of Messrs. Hanson and Gard were
determined based upon a survey of compensation paid to similar officers at
comparably-sized companies and a recognition of their importance to the
Company. Mr. McAleer was hired by the Company in June 1996 as the Vice
President of Finance and was appointed the Chief Financial Officer in August
1996 and Secretary in October 1996. Mr. Needham joined the Company in November
1995 in connection with the Company's acquisition of Williamhouse. In June
1996, Mr. Needham entered into an employment agreement with the Company. Both
Mr. McAleer and Mr. Needham's base salary were determined based on the expected
level of responsibility of each and competitive market conditions.
Annual Bonus. In connection with the Company's IPO, each of the
Company's then-existing executive officers was paid a special one-time bonus.
Mr. Hanson received $116,500, Mr. Gard received $103,000 and Mr. Benson
received $78,400. Such bonus was awarded by the Board of Directors as a result
of the operating performance of the Company during the first half of 1996 and
the management team's efforts in completing the IPO. Each of the executive
officers of the Company is entitled under the terms of his employment
relationship to receive an annual bonus up to 100% of his base salary upon the
Company achieving certain operating targets. In general, such operating
targets relate
- 21 -
<PAGE> 25
to the Company achieving certain minimum levels of EBITDA. The Company
achieved such levels in 1996 and, as a result, bonus payments were awarded by
the Board for 1996.
Long-Term Equity Incentives. Both Mr. Hanson and Mr. Gard participated
in the acquisition of the Company from Mead. As a result of such
participation, such executive officers own on an aggregate basis approximately
2.0% of the outstanding Common Stock of the Company. Therefore, to a large
extent, the interests of the Company's senior management are already aligned
with those of its stockholders since the value of management's holdings is tied
directly to the market price of the Company's Common Stock. Similarly, under
the Company's stock option plan adopted at the time of the Ampad Acquisition,
options exercisable for an aggregate of 1,639,256 shares of Common Stock were
granted to management. The exercise price for such options was established at
the fair market value of the Common Stock on the date of grant. All such
options are currently exercisable. The Company's senior management currently
owns approximately 7% of the outstanding Common Stock on a fully-diluted basis.
Prior to the completion of the IPO, the Company adopted the Incentive
Plan and the Purchase Plan. Under the Incentive Plan, the Committee was
granted broad authority to award equity-based compensation arrangements to any
eligible employee of the Company. An aggregate of 1,500,000 shares of Common
Stock were reserved for issuance upon the exercise of awards granted to
eligible participants under the Incentive Plan. Under the Purchase Plan,
eligible management employees of the Company are entitled to purchase shares of
Common Stock at a purchase price equal to 75% of its fair market value using up
to 25% of their annual incentive bonuses. The Purchase Plan is designed to
encourage management employees of the Company to acquire an ownership interest
in the Company and thereby permitting such employees to share in the growth in
value of the Company. To further broaden equity participation in the Company,
the Compensation Committee approved the granting of options for an aggregate of
741,600 shares of Common Stock in August 1996 to 51 employees of the Company.
Such options generally vest over a four-year period and have an exercise price
equal to the fair market value of the Common Stock on the date of grant. Since
the ultimate value of stock options bear a direct relationship to market price
of the Common Stock, the Committee believes that awards under the Incentive
Plan are an effective incentive for the Company's management to create value
for the Company's stockholders.
The foregoing report has been approved by all members of the Compensation
Committee.
Robert C. Gay, Chairman
Marc B. Wolpow
- 22 -
<PAGE> 26
PERFORMANCE GRAPH
The following graph compares the Company's cumulative total stockholder
return since the Common Stock became publicly traded on July 2, 1996 with the
Standard & Poor's Mid-Cap Stock Index and an index of certain companies
selected by the Company as comparative to the Company in that each is either a
manufacturer, distributor or retailer of office products. The graph assumes
that the value of the investment in the Company's Common Stock at its initial
public offering price of $15.00 per share and each index was $100.00 on July 2,
1996.
COMPARISON OF THE COMPANY'S COMMON STOCK,
STANDARD & POOR'S MID-CAP STOCK INDEX AND A PEER GROUP INDEX(1)
[chart to come]
<TABLE>
<CAPTION>
July 2, 1996 December 31, 1996
------------ -----------------
<S> <C> <C>
American Pad & Paper Company $100 $150
Standard & Poor's Mid-Cap Stock Index $100 $108
Peer Group Index $100 $ 97
</TABLE>
- -----------
(1) The companies selected to form the Company's peer group index are A.T.
Cross Company, American Business Products, Inc., Avery Dennison
Corporation, CSS Industries, Inc., Day Runner, Inc., Hunt Manufacturing
Co., Newell Co., Nu-Kote Holdings, Inc., Rubbermaid Incorporated and The
Coleman Company, Inc. Total returns are based on market capitalization.
(2) The closing sale price of the Common Stock on December 31, 1996 was
$22.625 per share, as reported by the New York Stock Exchange.
- 23 -
<PAGE> 27
SUBMISSION OF STOCKHOLDERS' PROPOSALS AND ADDITIONAL INFORMATION
Proposals of stockholders intended to be eligible for inclusion in the
Company's proxy statement and proxy card relating to the 1998 annual meeting of
stockholders of the Company must be received by the Company on or before the
close of business December 23, 1997. Such proposals should be submitted by
certified mail, return receipt requested.
The Company's By-Laws provide that a stockholder wishing to present a
nomination for election of a director or to bring any other matter before an
annual meeting of stockholders must give written notice to the Company's
Secretary not less than 60 days nor more than 90 days prior to the meeting and
that such notice must meet certain other requirements. Any stockholder
interested in making such a nomination or proposal should request a copy of the
By-Laws provisions from the Secretary of the Company.
The Company will furnish without charge to each person whose proxy is
being solicited, upon written request of any such person, a copy of the Annual
Report on Form 10-K of the Company for the fiscal year ended December 31, 1996,
as filed with the SEC, including the financial statements and schedules
thereto. Requests for copies of such Annual Report on Form 10-K should be
directed to the Controller, American Pad & Paper Company, 17304 Preston Road,
Suite 700, Dallas Texas 75252.
OTHER MATTERS
The Company will bear the costs of soliciting proxies from its
stockholders. In addition to the use of the mails, proxies may be solicited by
the Directors, officers and employees of the Company by personal interview,
telephone or telegram. Such Directors, officers and employees will not be
additionally compensated for such solicitation, but may be reimbursed for out-
of-pocket expenses incurred in connection therewith. Arrangements will also be
made with brokerage houses and other custodians, nominees and fiduciaries for
the forwarding of solicitation materials to the beneficial owners of Common
Stock held of record by such persons, and the Company will reimburse such
brokerage houses, custodians, nominees and fiduciaries for reasonable out-of-
pocket expenses incurred in connection therewith.
- 24 -
<PAGE> 28
The Directors know of no other matters which are likely to be brought
before the Annual Meeting, but if any such matters property come before the
meeting the persons named in the enclosed proxy, or their substitutes, will
vote the proxy in accordance with their best judgment.
By Order of the Board of Directors
Kevin W. McAleer, Secretary
March 21, 1997
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. EVEN IF YOU
EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE PROMPTLY COMPLETE, SIGN, DATE AND
MAIL THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES.
- 25 -
<PAGE> 29
AMERICAN PAD & PAPER COMPANY
PROXY
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 22, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Charles G. Hanson III, Russell
M. Gard and Kevin W. McAleer, and each or any of them, proxies of the
undersigned, with full power of substitution, to vote all of the shares of
American Pad & Paper Company, a Delaware corporation (the "Company") which the
undersigned may be entitled to vote at the Annual Meeting of Stockholders of
the Company to be held at the Westin Hotel Galleria Dallas, 13340 Dallas
Parkway, Dallas, Texas 75240, on Tuesday, April 22, 1997 at 10:00 a.m. or at
any adjournment or postponement thereof, as shown on the voting side of this
card.
See Reverse Side
<PAGE> 30
[X] Please mark your votes as in this example.
This proxy will be voted as specified. If a choice is not specified, this
proxy will be voted FOR the nominees for Class I Directors and FOR Proposal 2.
1. Election of All Nominees for Class I Directors Listed Hereon.
Nominees: Gregory M. Benson FOR WITHHELD
Jonathan S. Lavine [ ] [ ]
For all nominees listed hereon, except vote withheld from the following
nominee:
____________________________________
2. Approval of the appointment of Price Waterhouse LLP
as the independent accountants for the Company's
1997 fiscal year.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting or any
adjournment or postponement thereof.
This proxy should be dated, signed by the stockholder exactly as the
stockholder's name appears hereon and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate.
Please sign exactly as name(s) appear hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
_________________________________________
________________________________________
Signature(s) Date
