UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No. )

Filed by the Registrant  þ                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

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Preliminary Proxy Statement

 

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CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14a-6(e)(2))

 

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Definitive Proxy Statement

 

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Definitive Additional Materials

 

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Soliciting Material Pursuant to ss.240.14a-12

GRAHAM CORPORATION

(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):

 

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No fee required.

 

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Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

 

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Fee paid previously with preliminary materials.

 

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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.

 

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

  

PROXY STATEMENT

  

PROPOSAL ONE: ELECTION OF DIRECTORS

  

CORPORATE GOVERNANCE

  

EXECUTIVE OFFICERS

  

EXECUTIVE COMPENSATION

  

DIRECTOR COMPENSATION

  

PROPOSAL TWO: ADVISORY VOTE ON OUR EXECUTIVE COMPENSATION

  

PROPOSAL THREE: RATIFICATION OF THE SELECTION OF OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

REPORT OF THE AUDIT COMMITTEE

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

  

SECURITY OWNERSHIP OF MANAGEMENT

  

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

  

STOCKHOLDER PROPOSALS FOR 2014 ANNUAL MEETING

  

OTHER MATTERS

  


 

LOGO

GRAHAM CORPORATION

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD JULY 25, 2013

The 2013 annual meeting of stockholders of Graham Corporation will be held on Thursday, July 25, 2013, at 11:00 a.m., Eastern Time, at the Hilton Garden Inn, Buffalo Airport, 4201 Genesee Street, Buffalo, New York 14225, for the following purposes, which are more fully described in the accompanying proxy statement:

 

   

to elect as Directors the two nominees named in the attached proxy statement;

 

   

to approve, on an advisory basis, the compensation of our named executive officers;

 

   

to ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2014; and

 

   

to transact such other business as may properly come before the annual meeting or any adjournment of the annual meeting.

Our Board of Directors has fixed the close of business on June 7, 2013 as the record date for determining the stockholders who are entitled to receive notice of and to vote at the annual meeting as well as at any adjournment of the annual meeting.

BY ORDER OF THE BOARD OF DIRECTORS

 

LOGO

James R. Lines

President and Chief Executive Officer

Dated: June 17, 2013

If you own shares through a broker, we encourage you to follow the instructions provided by your broker regarding how to vote. Your broker may not vote your shares for director nominees or on the advisory vote on executive compensation unless you provide your broker with voting instructions.


LOGO

GRAHAM CORPORATION

PROXY STATEMENT

We are furnishing this proxy statement to our stockholders in connection with the solicitation by our Board of Directors of proxies for use at the annual meeting of stockholders for our fiscal year ended March 31, 2013, which we refer to as fiscal year 2013, as well as for use at any adjournment of the annual meeting.

Date and Location of Annual Meeting

The annual meeting will be held on Thursday, July 25, 2013, at 11:00 a.m., Eastern Time, at the Hilton Garden Inn, Buffalo Airport, 4201 Genesee Street, Buffalo, New York 14225.

Record Date and Shares Outstanding

Owners of record of shares of our common stock having a par value of $0.10, which we refer to as common stock, at the close of business on June 7, 2013, the record date for the annual meeting, are entitled to notice of and to vote at the annual meeting. As of the record date, there were 10,038,631 shares of our common stock issued and outstanding.

Mail Date

This proxy statement and the accompanying form of proxy are being first mailed to our stockholders on or about June 17, 2013.

Proxy Cards and Voting

Each owner of record of our common stock on June 7, 2013 is entitled to one vote for each share of common stock so held.

If we receive the enclosed proxy, properly executed and dated, in time to be voted at the annual meeting, the shares represented by the proxy will be voted in accordance with the instructions marked on the proxy. An executed proxy without instructions marked on it will be voted:

 

   

FOR each of the two nominees for election as Director;

 

   

FOR approval, on an advisory basis, of the compensation of our named executive officers; and

 

   

FOR the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2014.

The shares may also be voted by the named proxies for such other business as may properly come before the annual meeting or at any adjournment or postponement of the annual meeting.

Please note, if your shares are held of record by a broker, bank or other nominee, and you wish to vote in person at the annual meeting, you must bring to the annual meeting a letter from the broker, bank or other nominee confirming both (1) your beneficial ownership of the shares as of the June 7, 2013 record date, and (2) that the broker, bank or other nominee is not voting the shares at the annual meeting.

Stockholders may vote in person at the annual meeting. We will provide ballots to any stockholder who wishes to vote at the annual meeting.


Quorum

A quorum is required for our stockholders to conduct business at the annual meeting. Pursuant to our amended and restated by-laws, the holders of record of a majority of the shares of our common stock present in person or by proxy and entitled to vote at the annual meeting will constitute a quorum.

Vote Required

The table below shows the vote required to approve each of the proposals described in this proxy statement, assuming the presence of a quorum, in person or by proxy, at the annual meeting.

 

Proposal Number    Proposal Description    Vote Required

One

   Election of two Directors    Plurality of the shares present, in person or by proxy, and entitled to vote

Two

   Approval, on an advisory basis, of the compensation of our named executive officers    Majority of the shares present, in person or by proxy, and entitled to vote (1)

Three

   Ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2014    Majority of the shares present, in person or by proxy, and entitled to vote (2)

 

 

(1) 

The result of proposal two is not binding upon our Board of Directors or the Compensation Committee. However, our Board of Directors and our Compensation Committee value the opinions of stockholders, and will consider the outcome of this vote when making future compensation decisions.

 

(2) 

The selection of Deloitte & Touche LLP is being presented to our stockholders for ratification. The Audit Committee of our Board of Directors will consider the outcome of this vote in its future discussions regarding the selection of our independent registered public accounting firm.

Effect of Not Casting Your Vote and Broker Non-Votes

If you hold your shares in street name, it is critical that you cast your vote if you want it to count in the election of directors and the advisory vote on the compensation of our named executive officers. If you hold your shares in street name and do not indicate how you want your shares voted on these two proposals, your bank or broker is not permitted to, and will not, vote your shares on your behalf. This is known as a broker non-vote. Your bank or broker will, however, continue to have discretion to vote any non-instructed shares to ratify the selection of our independent registered public accounting firm.

Shares subject to broker non-votes are counted for the purpose of determining the presence of a quorum but are not counted for the purpose of determining the number of shares voting in the election of directors or the advisory vote on the compensation of our named executive officers. Thus, broker non-votes will have no effect on the outcome of these proposals.

If you are a stockholder of record and you do not cast your vote, no votes will be cast on your behalf on any of the items of business at the annual meeting.

Abstentions

Abstentions are counted for the purpose of determining the presence of a quorum and the number of shares voting on a proposal. Abstentions will have the same effect as a vote against a proposal requiring the approval of a majority of the shares present, in person or by proxy, and entitled to vote.

 

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Revocability of Proxies

Your attendance at the annual meeting will not automatically revoke your proxy. However, you can revoke your proxy at any time before it is voted at the annual meeting by:

 

   

delivering a written notice of revocation to our Corporate Secretary;

 

   

delivering a duly executed proxy bearing a later date to our Corporate Secretary; or

 

   

attending the annual meeting, filing a written notice of revocation with our Corporate Secretary, and voting in person.

Notices of revocation and revised proxies should be sent to our Corporate Secretary at the following address: Graham Corporation, Attention: Corporate Secretary, 20 Florence Avenue, Batavia, New York 14020.

Solicitation of Proxies

This proxy solicitation is made by our Board of Directors on our behalf, and we will bear the cost of soliciting proxies. In addition to solicitation by mail, our Directors, officers and employees may solicit proxies personally or by telephone or other telecommunication. We will not compensate our Directors, officers or employees for making proxy solicitations on our behalf. We will provide persons holding shares in their name or in the names of nominees, which in either case are beneficially owned by others, proxy materials for delivery to those beneficial owners and will reimburse the record owners for their expenses in doing so.

Principal Executive Offices

Our principal executive offices are located at 20 Florence Avenue, Batavia, New York 14020. Our telephone number is 585-343-2216.

Annual Report to Stockholders and Annual Report on Form 10-K

We have enclosed our fiscal year 2013 annual report to stockholders with this proxy statement. Our annual report on Form 10-K for the fiscal year ended March 31, 2013, as filed with the Securities and Exchange Commission, is included in the fiscal year 2013 annual report. The fiscal year 2013 annual report includes our audited financial statements, along with other information about us, which we encourage you to read.

You can obtain, free of charge, an additional copy of our annual report on Form 10-K by:

 

   

accessing our website at www.graham-mfg.com/proxy;

 

   

writing to us at: Graham Corporation, Attention: Annual Report Request, 20 Florence Avenue, Batavia, New York 14020; or

 

   

telephoning us at 585-343-2216.

You can also obtain a copy of our annual report on Form 10-K and all other reports and information that we file with, or furnish to, the Securities and Exchange Commission from the Securities and Exchange Commission’s EDGAR database located at www.sec.gov.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON JULY 25, 2013

As required by the rules adopted by the Securities and Exchange Commission, we are making this proxy statement and our fiscal year 2013 annual report to stockholders available on the Internet at:

www.graham-mfg.com/proxy

For directions on how to attend the annual meeting and vote in person, please review “Proxy Cards and Voting” and “Revocability of Proxies” above.

 

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PROPOSAL ONE:

ELECTION OF DIRECTORS

Our Board of Directors currently consists of seven members. Our amended and restated by-laws provide for a classified Board of Directors consisting of three classes of Directors, with each class serving a staggered three-year term. As a result, only a portion of our Board of Directors is elected each year. The term of two of our seven Directors, Jerald D. Bidlack and James J. Malvaso, will expire at the 2013 annual meeting.

The Nominating and Corporate Governance Committee of our Board of Directors has nominated Mr. Bidlack and Mr. Malvaso for re-election as Directors. If re-elected, each of them will hold office for a three-year term expiring in 2016 or until his successor is duly elected and qualified. Our Board of Directors does not contemplate that either of the two nominees will be unable to serve as a Director, but if that contingency should occur before the proxies are voted, the persons named in the enclosed proxy reserve the right to vote for such substitute nominee(s) as they, in their discretion, determine.

Our amended and restated by-laws require mandatory retirement at age 75 for Directors who become members of our Board of Directors for the first time after October 30, 2002. No retirements pursuant to this provision occurred during fiscal year 2013.

The Securities and Exchange Commission’s rules require us to discuss briefly the specific experience, qualifications, attributes or skills that led our Board of Directors to conclude that each Director or Director nominee should serve on our Board of Directors. We have provided this discussion in a separate paragraph immediately following the biographical information provided by each Director below.

Board Recommendation

Our Board of Directors unanimously recommends a vote FOR the election of each of Mr. Bidlack and Mr. Malvaso as Directors for a three-year term expiring in 2016.

Nominees Proposed for Election as Directors at the 2013 Annual Meeting

Name and Background

 

Jerald D. Bidlack, age 77, has served as President of Griffin Automation, Inc., a manufacturer of special automation machinery and systems located in West Seneca, New York, since 1992. Mr. Bidlack has served as Chairman of our Board of Directors since 1998.

        Director     
Since  

1985  

   
   
Mr. Bidlack is an experienced business leader and licensed professional engineer with the skills necessary to be the Chairman of our Board. As one of our Directors for more than 28 years and as our non-executive Chairman of our Board since 1998, he has a deep understanding of our company and our markets. Mr. Bidlack also provides our Board of Directors with critical insight, innovation and guidance based on his substantial engineering and financial background, and his experience in leading, managing and growing complex multi-national businesses for over 40 years. Mr. Bidlack also serves as a Trustee Emeritus of Keuka College.    
   
   
James J. Malvaso, age 63, is a senior advisor to Toyota Material Handling Group, a distributor of Toyota material handling equipment. Until his retirement on March 31, 2012, he was the President and Chief Executive Officer of Toyota Material Handling North America and the Managing Officer of Toyota Industries Corporation, positions he held since April 2010. Previously, and since 1997, Mr. Malvaso served as the Chairman, President and Chief Executive Officer of The Raymond Corporation, a subsidiary of Toyota and the North American market leader in electric warehouse trucks, located in Greene, New York. Previously, from 1993 to 1996, Mr. Malvaso served as Chief Operating Officer and Vice President-Operations of The Raymond Corporation. Mr. Malvaso is a former President of the Industrial Truck Association and a current member of its Industrial Truck Standards Development Board. Mr. Malvaso has also served as a Trustee of LeMoyne College.         Director    
Since  

2003  

   
   
   
   
   
   
   
   
   
   
   

 

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Mr. Malvaso has proven business acumen, having successfully served as the chief executive officer of large, complex businesses with global operations. His experience with a major industrial equipment company is particularly helpful to our Board of Directors in understanding the challenges of global manufacturing, distribution and sales as it relates to the business and strategy of our company.

   
   

Directors Whose Terms Do Not Expire at the 2013 Annual Meeting

Name and Background

 

James J. Barber, Ph.D., age 59, has been an independent consultant and the principal of Barber Advisors, LLC since September 2007. From January 2000 to May 2007, Dr. Barber was the President and Chief Executive Officer of Metabolix, Inc. (NASDAQ: MBLX), a bioscience company focused on plastics, chemicals and energy. He was responsible for transforming Metabolix from a research boutique into a leader in “clean tech” and industrial biotechnology.         Director     
Since  

2011  

 

Term  
    Expires    

2014

 

   
Following his tenure at Metabolix, and from August 2008 through March 2009, Dr. Barber served as a Director of Codon Devices, a start up company focused on synthesizing DNA and other genetic material, which is no longer in business. From February 2008 through November 2010, Dr. Barber was a Director and on the Finance Committee of Bluewater Holdings Corp., a provider of sewage and water-treatment services, which filed for Chapter 11 bankruptcy protection in October 2010. Between June 2008 and August 2009, he served as the acting Executive Director of Diagnostics For All, a not-for-profit company which develops low-cost, easy-to-use, point-of-care diagnostic devices designed for use in resource-poor settings.    
   
Prior to joining Metabolix, Dr. Barber served as Global Business Director for the Organometallics and Catalysts business of Albemarle Corporation, a specialty chemicals company. Prior to his tenure at Albemarle, Dr. Barber was Director of Business Development at Ethyl Corporation, a fuel additives company. He also previously served as President of Geltech, Inc., a precision molded micro optics company, and as Chief Operating Officer of Hyperion Catalysis International, a carbon developer and producer. From May through August 2007, Dr. Barber pursued personal interests.    
   
Dr. Barber was awarded the American Chemical Society’s Henry F. Whalen, Jr. award for Business Development in September 2003. He received his B.S. in Chemistry from Rensselaer Polytechnic Institute and a Ph.D. in Organic Chemistry from the Massachusetts Institute of Technology. He currently serves on the Advancement Council of the College of Polymer Science and Polymer Engineering at the University of Akron.    
   
Dr. Barber is currently, and has been since November 2010, a Director of Agrivida, a developer of proprietary crops and processes designed to transform the economics of producing renewable chemicals, fuels, and bioproducts from non-food cellulosic biomass. He also presently serves as an advisor to Solazyme, Inc. (NASDAQ: SZYM), which specializes in renewable oil and bioproducts, as well as to other firms. Since May 2012, Dr. Barber has served as a Director, and as of May 2013, as Chairman of Allylix Inc., a private renewable chemicals company that develops terpene products and their derivatives for the flavor and fragrance, food ingredient, pharmaceutical, agricultural and biofuel markets, and, since July 2012, he has served as a Director of Segetis, Inc. a private technology-enabled green chemistry company producing versatile chemical building blocks.    
   
Dr. Barber brings to our Board of Directors substantial executive level leadership experience and a deep understanding of product and business development in highly technical industries and alternative energy markets. Dr. Barber also has significant experience in structuring both joint venture and acquisition transactions and assists our Board of Directors in pursuing our business objectives.    
   

 

5


Gerard T. Mazurkiewicz, age 66, has been a Tax Partner with Dopkins & Company, LLP, a regional accounting firm located in Buffalo, New York, since 2004. Prior to his tenure at Dopkins & Company, Mr. Mazurkiewicz spent more than 32 years with KPMG, LLP, and was the Partner in Charge of KPMG’s upstate New York/Albany tax practice prior to his retirement in 2002. Mr. Mazurkiewicz also serves as a Director of Trebor, Inc., a distributor of tissue, pulp, paper and container board and as a Director of Robert James Sales, Inc., a distributor of corrosion resistant piping products. Mr. Mazurkiewicz previously served as a Director of Great Lakes Bancorp, Inc. until its merger with First Niagara Bank in 2008. Mr. Mazurkiewicz received his B.S. in Business Administration from the State University of New York at Buffalo School of Management, where he currently serves on the Dean’s Advisory Council. He is a member of the American Institute of Certified Public Accountants and the Buffalo Chapter of the New York State Society of Certified Public Accountants. Mr. Mazurkiewicz also serves on numerous not-for-profit boards and foundations, including the Women’s and Children’s Hospital of Buffalo Foundation, the Kaleida Foundation, Hilbert College, the University of Buffalo Foundation and the Community Foundation for Greater Buffalo.    

Director Since

2007

 

Term Expires

2014

   
   
   
   
   
   
   
   
   
   
   
   
   
   
Mr. Mazurkiewicz is well qualified to serve as a member of our Board of Directors. He is our Board’s “audit committee financial expert” whose significant accounting and financial background, as well as his substantial leadership experience, position him well to understand and provide value related to finance, management, operations, and risk.    
   

Helen H. Berkeley, age 84, is a private investor.

   

Director Since

1998

 

Term Expires

2015

 

As a long-term private investor in our company, Ms. Berkeley brings a unique perspective to our Board of Directors. During her 15-year tenure on our Board of Directors, Ms. Berkeley has acquired a deep understanding of our company and our markets. Ms. Berkeley has served on several not-for-profit boards including her current service on the board of the Memorial Art Gallery of the University of Rochester and Genesee Country Village & Museum.

   
   
   
   
   
   

Alan Fortier, age 56, has served as President of Fortier & Associates, Inc., a strategy and profit improvement consulting firm located in Fort Lee, New Jersey focused on petrochemicals and capital goods companies, since 1988. Mr. Fortier received his B.S. in Chemical Engineering from Cooper Union and his MBA from Harvard Business School.

 

Mr. Fortier brings to our Board of Directors more than 30 years of industrial experience as a strategy consultant, educator and manager. Our Board of Directors and management team benefits from his extensive background in our served markets and his extensive experience advising boards and senior executives of global capital goods businesses on business strategy, mergers and acquisitions, global growth, organizational development and management control.

   

Director Since

2008

 

Term Expires

2015

   
   
   
   
   
   
   
   
   

James R. Lines, age 52, became our President and Chief Executive Officer in January 2008. Previously, Mr. Lines served as our President and Chief Operating Officer since June 2006. Mr. Lines has served us in various capacities since 1984, including Vice President and General Manager, Vice President of Engineering, and Vice President of Sales and Marketing. Prior to joining our management team, he served us as an application engineer and sales engineer as well as a product supervisor. Mr. Lines holds a B.S. in Aerospace Engineering from the State University of New York at Buffalo.

 

As our President and Chief Executive Officer, and as a result of his day-to-day leadership of the business, Mr. Lines provides our Board of Directors with valuable insight regarding the operations of our company and our management team and he performs a critical role in Board discussions regarding strategic planning and development. Our Board of Directors also benefits from his historical knowledge of our company and his broad and in-depth understanding of our markets and customers. Mr. Lines has served our company in various executive capacities for more than 20 years, and has more than 29 years of experience interacting with our customers, engineering contractors, competitors and similar companies serving the energy markets.

   

Director Since

2006

 

Term Expires

2015

   
   
   
   
   
   
   
   
   
   
   
   
   
   

 

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CORPORATE GOVERNANCE

Our Board of Directors has an Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee, and an Employee Benefits Committee. The function, composition, and number of meetings of each of these committees held during fiscal year 2013 are described below.

Director Independence

Our Board of Directors has affirmatively determined that Directors Barber, Berkeley, Bidlack, Fortier, Malvaso and Mazurkiewicz are each independent under the independence standards of the NYSE MKT.

Board Leadership Structure

We have a non-executive, independent Director, Mr. Bidlack, who serves as Chairman of our Board of Directors. Our Board of Directors believes that its leadership structure, with a non-executive chairman position separate from our President and Chief Executive Officer, provides appropriate, independent oversight of management. As Chairman of our Board of Directors, Mr. Bidlack presides at all meetings of our Board of Directors and stockholders; presides during regularly held sessions with only the independent Directors; encourages and facilitates active participation of all Directors; develops the calendar of and agendas for Board meetings in consultation with our Chief Executive Officer and other members of our Board; determines, in consultation with our Chief Executive Officer, the information that should be provided to our Board in advance of meetings; and performs any other duties requested by our Board from time to time.

Committees and Meetings of the Board; Meeting Attendance

The duties and responsibilities of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Employee Benefits Committee are set forth in their respective charters. The current charter of each Board committee is available on our website at www.graham-mfg.com under the heading “Investor Relations” and the subheading “Corporate Governance.” The information contained on our website is not a part of this proxy statement.

The following table lists the four committees of our Board of Directors, the chairs of each committee, the Directors who currently serve on them and the number of committee meetings held in fiscal year 2013.

 

     Committee Membership
Name    Independent   

Audit

Committee

  

Compensation

Committee

  

Nominating and

Corporate Governance

Committee

  

Employee Benefits

Committee

Dr. Barber

   Yes    X          X

Ms. Berkeley

   Yes       X       C

Mr. Bidlack

   Yes    X    X    X    X

Mr. Fortier

   Yes    X    X    C   

Mr. Malvaso

   Yes    X    C    X   

Mr. Mazurkiewicz

   Yes    C          X

Meetings in

Fiscal Year 2013

      6    5    1    0

C = Chairperson

X = Member

              

During fiscal year 2013, our Board of Directors held a total of five meetings. Except for Ms. Berkeley, each Director attended at least 75% of the aggregate of (1) the total number of meetings of our Board of Directors, and (2) the total number of meetings of all committees of our Board of Directors on which he or she served.

 

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Our policy requires that each Director attend our annual meeting of stockholders or provide the Chairman of our Board with advance notice of the reason for not attending. All of our Directors other than Dr. Barber, who provided the Chairman of our Board with the appropriate advance notice, attended our 2012 annual meeting of stockholders.

Audit Committee

We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Our Board of Directors has affirmatively determined that each member of the Audit Committee satisfies the independence standards of the NYSE MKT applicable to audit committee members and applicable Securities and Exchange Commission rules. Our Board of Directors has also determined that Mr. Mazurkiewicz qualifies as an “audit committee financial expert” in accordance with applicable Securities and Exchange Commission rules based on his professional work experience as described in his biography under “Proposal One: Election of Directors.”

The Audit Committee reviews with Deloitte & Touche LLP, our independent registered public accounting firm, our financial statements and internal control over financial reporting, Deloitte & Touche LLP’s auditing procedures and fees, and the possible effects of professional services upon the independence of Deloitte & Touche LLP.

The Audit Committee works closely with our Board of Directors, our executive management team, and our independent registered public accounting firm to assist our Board in overseeing our accounting and financial reporting processes and financial statement audits. In furtherance of these responsibilities, the Audit Committee is charged with assisting our Board of Directors in its oversight of:

 

   

the integrity of our financial statements and internal controls;

 

   

our compliance with legal and regulatory requirements;

 

   

the qualifications and independence of our independent registered public accounting firm;

 

   

the performance of our independent registered public accounting firm; and

 

   

the planning for and performance of our internal audit function.

The Audit Committee is also responsible for preparing the Audit Committee’s report that Securities and Exchange Commission rules require be included in our annual proxy statement, and performing such other tasks that are consistent with the Audit Committee’s charter. The Audit Committee’s report relating to fiscal year 2013 appears under the heading “Report of the Audit Committee.”

Compensation Committee

The Compensation Committee annually reviews and determines salaries, incentive cash awards and other forms of compensation paid to our executive officers and management, approves recipients of equity-based awards and establishes the number of shares and other terms applicable to such awards. The Compensation Committee also construes the provisions of and generally administers the Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value, which we refer to as the Incentive Plan. The Compensation Committee operates pursuant to its charter and is not authorized to delegate its authority or responsibility to another person or subcommittee.

The Compensation Committee also determines the compensation paid to our Board of Directors, including fees paid for meeting attendance and equity-based awards. More information about the compensation of our Directors is set forth under the heading “Director Compensation.” The Compensation Committee annually conducts a performance evaluation of its operation and function and recommends any proposed changes to our Board of Directors for approval.

In addition, the Compensation Committee is responsible for reviewing and discussing with management the Compensation Discussion and Analysis that Securities and Exchange Commission rules require be included in our

 

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annual proxy statement, preparing the Compensation Committee’s report that Securities and Exchange Commission rules require be included in our annual proxy statement, and performing such other tasks that are consistent with its charter. The Compensation Committee’s report relating to fiscal year 2013 appears under the heading “Compensation Committee Report.”

The Compensation Committee has for several years recognized the importance of using an independent consultant that provides services solely to the Committee and not to management or to our company. The Compensation Committee continued to utilize the services of the Hay Group, a nationally recognized compensation consulting firm, as its independent compensation consultant in fiscal year 2013. For more information on the role of the Compensation Committee in determining executive compensation, including its use of an independent consultant, see Compensation Discussion and Analysis under the heading “Executive Compensation.”

Nominating and Corporate Governance Committee

The Nominating and Corporate Governance Committee evaluates, interviews and nominates candidates for election to our Board of Directors and is responsible for oversight of our corporate governance practices.

When identifying Director nominees, the Nominating and Corporate Governance Committee solicits suggestions from incumbent Directors, management, stockholders and others. In identifying and evaluating nominees, the Nominating and Corporate Governance Committee seeks candidates possessing the highest standards of personal and professional ethics and integrity; practical wisdom, independent thinking, maturity and the ability to exercise sound business judgment; skills, experience and demonstrated abilities that help meet the current needs of our Board of Directors; and a firm commitment to the interests of our stockholders. Although the Nominating and Corporate Governance Committee does not maintain a specific written diversity policy, it recognizes the value of diversity and seeks diverse candidates when possible and appropriate and considers diversity in its review of candidates. The Nominating and Corporate Governance Committee believes that diversity includes not only gender and ethnicity, but the various perspectives that come from having differing geographic and cultural backgrounds, viewpoints and life experiences.

In addition, the Nominating and Corporate Governance Committee takes into consideration such other factors as it deems appropriate. These factors may include knowledge of our industry and markets, experience with businesses and other organizations of comparable size, the interplay of the nominee’s experience with the experience of other members of our Board of Directors, and the extent to which the candidate would be a desirable addition to our Board of Directors and any of its committees. The Nominating and Corporate Governance Committee may consider, among other factors, experience or expertise in our industry, global business, science and technology, competitive positioning, corporate governance, risk management, finance or economics, and public affairs.

Pursuant to our amended and restated by-laws, stockholders of record entitled to vote in the election of Directors at any annual meeting may recommend individuals for consideration by the Nominating and Corporate Governance Committee as potential nominees by submitting written recommendations to our Corporate Secretary so that they are delivered or received no earlier than 150 days and no later than 120 days prior to the one-year anniversary of the date of the mailing of proxy materials for the prior annual meeting. Thus, for the 2014 annual meeting, written recommendations must delivered between January 18, 2014 and February 17, 2014. Nominations should be mailed to the following address: Graham Corporation, Attention: Corporate Secretary, 20 Florence Avenue, Batavia, New York 14020. Stockholder recommendations must contain: (1) each nominee’s name, age, business and residence addresses; (2) the nominee’s principal occupation or employment; (3) the nominee’s written consent to serve as a Director, if elected; and (4) such other information regarding the nominee as would be required to be included in a proxy statement filed pursuant to applicable rules of the Securities and Exchange Commission.

In addition, any stockholder submitting a recommendation must provide his or her own name and address as they appear on our books and records, as well as the class and number of our shares owned of record and the dates he or she acquired such shares. The stockholder also must describe all arrangements or understandings between the stockholder and the nominee and any other person or persons (naming such person or persons)

 

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pursuant to which the nominations are made by the stockholder. Furthermore, the stockholder must (1) identify any person employed, retained, or to be compensated by the stockholder submitting the nomination or by the person nominated, or any person acting on his or her behalf, to make solicitations or recommendations to stockholders for the purpose of assisting in the election of such nominee, and (2) briefly describe the terms of such employment, retainer or arrangement for compensation.

The Nominating and Corporate Governance Committee will evaluate Director nominees proposed by stockholders using the same criteria, and in the same manner, as described above for other nominees.

Employee Benefits Committee

The Employee Benefits Committee serves as the plan administrator of our employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended, including our Retirement Income Plan, Incentive Savings Plan, Medical Plan, Life Insurance Plan, Long-Term Disability Plan, Employee Stock Ownership Plan and any other employee benefit plan we maintain for which a named fiduciary is designated. The Employee Benefits Committee oversees the operation, administration, investments and compliance of each of these plans.

The Board of Director’s Role in Risk Oversight

Our Board of Directors is responsible for overseeing our risk profile and management’s processes for managing risk. This oversight is conducted primarily through our Board committees. Our Audit Committee focuses on financial risks, including those that could arise from our accounting and financial reporting processes. Additionally, our Audit Committee monitors and directs the formal risk management projects implemented by management. Our Nominating and Corporate Governance Committee focuses on the management of risks associated with board organization, membership and structure, corporate governance, and the recruitment and retention of talented board members. Our Compensation Committee focuses on the management of risks that could arise from our compensation policies and programs and, in particular, our executive compensation programs and policies.

As part of its risk oversight responsibilities, our Board of Directors and its committees review the policies and processes that senior management uses to manage our risk exposure. In doing so, our Board and its committees review our overall risk function and senior management’s establishment of appropriate systems and processes for managing areas of material risk to our company, including, but not limited to, operational, financial, legal, regulatory and strategic risks.

Communications from Stockholders

Stockholders may send communications to our Board of Directors, or to an individual member of our Board, to the attention of: Corporate Secretary, Graham Corporation, 20 Florence Avenue, Batavia, New York 14020. The Corporate Secretary will convey all such communications to our Board, or if addressed to an individual member of our Board, to that individual Director.

EXECUTIVE OFFICERS

As of March 31, 2013, we were served by the following executive officers, each of whom was appointed by our Board of Directors:

James R. Lines, age 52, became our President and Chief Executive Officer in January 2008. Further information about Mr. Lines is set forth under “Proposal One: Election of Directors.”

Jeffrey F. Glajch, age 50, became our Vice President - Finance & Administration and Chief Financial Officer in March 2009. From October 2006 until February 2009, he served as the Chief Financial Officer of Nukote International, a privately held global re-manufacturer of printing and imaging products. Previously, and between June 2000 and May 2006, Mr. Glajch was the Chief Financial Officer of Fisher Scientific Canada, a global healthcare and laboratory equipment company. Mr. Glajch has also previously worked at Walt Disney World Company, Great Lakes Chemical Corporation and Air Products and Chemicals, Inc.

 

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Alan E. Smith, age 46, was appointed our Vice President of Operations in July 2007. Previously, from 2005 until July 2007, Mr. Smith served as Director of Operations for Lydall, Inc., a designer and manufacturer of specialty engineering products. Prior to that, he had been employed by us for fourteen years, progressing from Project Engineer to Engineering Manager.

Jennifer R. Condame, age 48, became our Chief Accounting Officer in July 2008. She also serves as our Controller, a position she has held since 1994. Previously, and from 1992 to 1994, she was our Manager of Accounting and Financial Reporting. Prior to joining us in 1992, Ms. Condame was employed as an Audit Manager by Price Waterhouse, a predecessor to PricewaterhouseCoopers LLP.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This Compensation Discussion and Analysis, which we refer to as CD&A, provides information about the compensation programs for our executive officers named in the Fiscal Year 2013 Summary Compensation Table and referred to in this CD&A and in the subsequent tables as our named executive officers. These named executive officers are:

 

   

James R. Lines, our President and Chief Executive Officer;

 

   

Jeffrey F. Glajch, our Vice President-Finance & Administration and Chief Financial Officer;

 

   

Alan E. Smith, our Vice President of Operations;

 

   

Jennifer R. Condame, our Chief Accounting Officer and Controller; and

 

   

Robert A. Platt, our former Vice President of Sales.1

This CD&A includes the philosophy and objectives of the Compensation Committee of our Board of Directors, descriptions of each of the elements of our executive compensation programs and the basis for the compensation decisions we made during fiscal year 2013.

Executive Summary

The Compensation Committee’s philosophy focuses on aligning the interests of our named executive officers with those of our stockholders by rewarding performance that enhances the objective of increasing both current and long-term stockholder value. Our executive compensation programs are designed to provide a strong link between the amounts earned by our named executive officers and company and individual performance.

The economic environment improved during fiscal year 2013, but nevertheless remained challenging. Our named executive officers continued to implement our strategic plan to diversify, expand and reduce volatility of our earnings by containing costs, increasing productivity, improving processes and growing our market share in our existing business and delivered the following successes:

 

   

We ended the fiscal year with a backlog of $85.8 million;

 

   

We had a record level of sales of $105 million that generated $11.1 million of net income ($1.11 diluted earnings per share) and increased our cash and investments by $10.0 million;

 

 

1 Mr. Platt resigned as our Vice President of Sales on January 9, 2013. Because he was a named executive officer for fiscal year 2012 and his compensation paid during fiscal year 2013 would place him in the top three most highly compensated executive officers for fiscal year 2013 (in addition to our Chief Executive Officer and Chief Financial Officer) had he been employed on March 31, 2013, he is included in this proxy statement as a named executive officer for fiscal year 2013.

 

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We achieved a 14.5% operating margin on a 1.7% increase in sales;

 

   

We continued to perform as a top-tier industrial company with EBIT margin in the upper quartile relative to the Baird Industrial Company Composite; and

 

   

Our cash and investment holdings were $51.7 million, and we ended the fiscal year with an exceptionally strong balance sheet that was free of bank debt, providing us substantial financial flexibility.

The Compensation Committee believes that in fiscal year 2013 our named executive officers performed exceptionally well in a challenging business environment. The Compensation Committee believes that our company was able to seize both existing and unique business opportunities due to management’s judgment to defend or advance market share during the harsh economic period of fiscal years 2010 and 2011. These decisions led to an improvement in net income for fiscal years 2012 and 2013 as compared to fiscal years 2010 and 2011, but also had an adverse impact to working capital. The impact to working capital was manageable and was appropriate considering the resultant growth in earnings. These decisions resulted in stable growth through a tumultuous period, as summarized in the charts below.

 

Graham has Maintained Growth and Stability

in a Challenging Environment

 

  

Graham has Maintained Effective

Control Over Working Capital

 

LOGO    LOGO

Moreover, our historical operating performance has improved dramatically when compared to past performance. The improvement in operating performance is, in our opinion, directly linked to stockholder benefit as evidenced by our total stockholder return of 13.4% and 34.0% for the periods of fiscal year 2013 and fiscal year 2011 through fiscal year 2013, respectively. We calculate total stockholder return for this purpose as our stock price at the end of the relevant period minus the stock price at the beginning of the relevant period plus any dividends paid during such period divided by our stock price at the beginning of the relevant period.

Based on our fiscal year 2013 financial performance, along with the individual performance of our named executive officers, we took the following actions:

 

   

Effective April 1, 2012, the Compensation Committee approved salary increases to the base salaries of our named executive officers as part of a company-wide base salary increase (except for Mr. Platt, who was hired in October 2011). The base salaries of these named executive officers were increased by 3.0%, reflecting the same percentage salary increase implemented company-wide.

 

   

Effective August 1, 2012, the Compensation Committee approved additional increases to the base salaries of all of our named executive officers after analyzing their individual performance and peer group compensation data provided by our compensation consultant. These increases were 16.1% for our Chief Executive Officer and between 4.6% and 7.4% for our other named executive officers.

 

   

As described more fully under the heading “Annual Cash Incentive Compensation” in this CD&A, our Cash Bonus Program is strongly linked with company performance against key financial metrics, in addition to individual performance goals, in line with our “pay for performance” philosophy. For fiscal year 2013, the Compensation Committee set aggressive targets for the two key financial metrics used in evaluating company performance under our Cash Bonus Program, net income and average working capital as a percentage of sales.

 

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Our performance exceeded the target level for the net income metric and did not meet the threshold level for the average working capital metric. These levels of company performance, as well as achievement against individual goals, resulted in the payment of annual cash incentive compensation at or below target levels for our named executive officers. The annual cash incentive compensation earned by each of the named executive officers during fiscal year 2013 is shown in the Non-Equity Incentive Plan Compensation column of the Fiscal Year 2013 Summary Compensation Table.

 

   

As described more fully under the heading “Long-Term Equity Incentive Compensation” in this CD&A, in May 2013, we awarded long-term incentive compensation under our Stock Bonus Plan in the form of stock options and performance-vested restricted stock. Due to the reporting rules of the Securities and Exchange Commission, the long-term incentive awards included in the Stock Awards column of the Fiscal Year 2013 Summary Compensation Table reflect the performance-vested restricted stock awards that were granted in fiscal year 2013, and not the time-vested restricted stock and performance-vested restricted stock awards that were granted in May 2013.

Our executive compensation programs contain other key components and features that are designed to reinforce our “pay for performance” philosophy. For example:

 

   

We award a significant portion of our long-term incentive compensation in shares of performance-vested restricted stock, time-vested restricted stock, and stock options. The shares of performance-vested restricted stock vest on the third anniversary of the date of grant only upon the achievement of performance metrics, the shares of time-vested restricted stock vest pro-rata on the second and fourth anniversaries of the date of grant based upon continuous service through each such date, and the stock options only have value if our stock increases in value above the value on the date of grant.

 

   

We require all of our named executive officers to hold substantial amounts of our stock. We believe that our robust stock ownership guidelines drive an ownership culture, and enhance the connection between our management and our stockholders.

 

   

We do not reimburse or “gross-up” our named executive officers for any of the taxes associated with any of the compensation and benefits we provide to them.

 

   

We maintain “double-triggered” agreements with certain of our named executive officers under which payment is triggered only by certain terminations of employment subsequent to a change in control of our company.

 

   

The Compensation Committee incorporates tally sheets as an analytical tool as part of its annual executive compensation review to help ensure that compensation is consistent with performance goals.

 

   

We have a policy prohibiting executive officers and directors from engaging in any hedging or monetization transactions involving our securities.

 

   

Our insider trading policy requires executive officers and directors to obtain the prior approval of our legal counsel prior to pledging our stock. As of the record date, none of our executive officers or directors had outstanding pledges of our stock.

Principles and Objectives

In establishing executive compensation, the guiding principles and objectives of the Compensation Committee are as follows:

 

   

To provide a reasonable level of compensation sufficient to attract and retain executive personnel best suited by training, ability, and other relevant criteria for our management requirements;

 

   

To balance base compensation (non-contingent) and incentive compensation (contingent upon performance) for the purpose of motivating executive personnel; and

 

   

To determine the extent and method of aligning the financial interest of our executive officers with the interests of our stockholders in the appreciation of their investment.

 

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The Compensation Committee considers various measures of company and industry performance when determining named executive officer compensation, including revenue, net income, earnings per share, total market value, average working capital, performance relative to the market and total stockholder return. As described further below under the heading “Use of Peer Group Compensation Data and Tally Sheets,” the Compensation Committee also reviews data on the executive compensation programs of other comparably-sized companies both within our industry and in our geographic region as part of the process of establishing and maintaining our executive compensation programs.

Our executive compensation programs are designed to reward our named executive officers for company and individual performance that creates both current and long-term stockholder value. We describe the company and individual performance measures that the Compensation Committee takes into account in determining cash and equity-based incentive awards for our named executive officers below under the headings “Annual Cash Incentive Compensation” and “Long-Term Equity Incentive Compensation,” respectively.

How We Make Compensation Decisions

Role of the Compensation Committee

The Compensation Committee designs and implements compensation programs that further the intent and purpose of our fundamental compensation philosophy, principles and objectives. The Compensation Committee is responsible for setting appropriate compensation levels for our named executive officers, and determines base salary, as well as cash and equity-based incentive awards for each of our named executive officers. We have included additional information about the Compensation Committee under the heading “Corporate Governance.”

Role of Named Executive Officers in Compensation Decisions

Within the framework of the executive compensation programs approved by the Compensation Committee and based on management’s review of market competitive positions, our Chief Executive Officer annually reviews the performance of our other named executive officers and presents such performance information to the Compensation Committee. In addition, our Chief Executive Officer makes recommendations to the Compensation Committee with respect to the salary, cash incentive and equity-based incentive compensation paid to our other named executive officers. The Compensation Committee considers such performance information in determining each element of compensation for the other named executive officers. The Compensation Committee uses its discretion to determine whether to accept, reject or modify any adjustments to awards that may be recommended by our Chief Executive Officer. The Compensation Committee annually reviews the performance of our Chief Executive Officer. Our Chief Executive Officer does not play any role with respect to any matter affecting his own compensation.

On an annual basis, our Chief Executive Officer also approves and recommends to the Compensation Committee the individual objectives for our other named executive officers under the Stock Bonus Plan and Cash Bonus Program. The Chairman of our Compensation Committee, in consultation with the Chairman of our Board of Directors, approves individual objectives for our Chief Executive Officer.

Utilization of Outside Consultants by the Compensation Committee

The Compensation Committee believes that it benefits from external advice and assistance to help meet its objectives and fulfill its responsibilities. Outside consultants engaged by the Compensation Committee educate and inform Committee members with regard to compensation matters, including the advantages and disadvantages of existing and proposed compensation programs, and keep the Compensation Committee abreast of current and emerging compensation trends both within our industry and for companies of similar size and stature. These consultants also advise the Compensation Committee with respect to various compensation alternatives, provide the Committee with relevant market compensation data and assist the Committee in analyzing such data when making compensation decisions.

 

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In fiscal year 2009, our Compensation Committee engaged the Hay Group, a nationally recognized compensation consulting firm, to act as its compensation consultant. The Hay Group provided consultation and advice to the Committee regarding our executive officer and director compensation programs. Although the Compensation Committee does not routinely engage the Hay Group or any other consultant to provide formal analysis in accordance with a pre-determined schedule, in practice, the Committee has undertaken a comprehensive analysis of its compensation programs every several years. In early fiscal year 2013, the Compensation Committee engaged the Hay Group to examine and update the peer group of companies that we use as a point of reference for validating our compensation decisions, as well as certain other services related to our executive compensation programs. The Compensation Committee also asked the Hay Group to assist in redesigning our incentive programs to better support our current and intended business state. The Hay Group interviewed select key stakeholders, collected data, performed analysis, and then prepared reports and presentations on its recommendations. The Hay Group also attended various Compensation Committee meetings to facilitate discussions of these issues. The Compensation Committee also requests outside legal counsel to provide it with advice from time to time.

The Compensation Committee assessed the independence of the Hay Group in light of the new Securities and Exchange Commission rules regarding compensation advisor independence. The Hay Group provided the Compensation Committee with a letter addressing all of the factors related to its independence. The Compensation Committee reviewed and discussed the information provided by the Hay Group, and concluded that the services provided by the Hay Group do not raise any conflicts of interest.

Use of Peer Group Compensation Data and Tally Sheets

Peer Group Compensation Data. When making compensation decisions, the Compensation Committee considers executive compensation programs and individual elements of compensation paid to other named executive officers at a group of comparably-sized companies both within our industry and in our geographic region or which we otherwise consider to be our peers.

The Compensation Committee believes that a review of compensation at our peer group companies should be one point of reference for validating our compensation decisions; however, in any given year, actual individual compensation elements or total compensation for a named executive officer may be set above or below that of our peer group companies based on factors such as individual experience or tenure with us, specialized skills, achievement of performance goals, retention and the Compensation Committee’s desire to achieve a specified mix of compensation. The Compensation Committee uses this peer group compensation data to provide an informational perspective on our compensation practices, levels of base salary and target levels of annual cash and long-term equity incentive compensation. The Compensation Committee also examines national and regional trends when making executive compensation decisions.

We formalized our peer group in connection with an examination of our executive compensation programs during fiscal year 2009. In fiscal year 2013, the Compensation Committee engaged the Hay Group to examine and recommend updates to our peer group.

The Hay Group examined the revenue, net income, profit margin, total assets, and market capitalization of prospective peer group companies and recommended the elimination of thirteen companies and the addition of seven companies to our peer group list. The Compensation Committee considered and then adopted these recommendations, and our peer group now consists of:

 

Allied Motion Technologies Inc.    Dynamic Materials Corp.    Omega Flex, Inc.
Astronics Corp.    Fuel Tech, Inc.    PMFG, Inc.
Badger Meter Inc.    Hurco Companies Inc.    Sifco Industries Inc.
Breeze-Eastern Corp.    Met Pro Corp.    Sun Hydraulics Corp.
CPI Aerostructures Inc.      

At the time we selected our peer group, we were between the 25th and 75th percentiles for most financial measures of our peer group.

 

15


Tally Sheets. The Compensation Committee analyzes tally sheets prepared for each named executive officer as part of its responsibilities for our executive compensation programs. Tally sheets present the dollar amount of each component of compensation for each named executive officer. The purpose of tally sheets is to bring together, in summary form, all of the elements of total direct compensation for our named executive officers, so that the Compensation Committee may analyze both the individual elements of compensation (including the weighting of each element as compared to each other element) and the aggregate amount of total direct compensation. During fiscal year 2013, the Compensation Committee regularly used tally sheets to assist in its review of the compensation of our named executive officers. No compensation changes were made in fiscal year 2013 based on those reviews.

Executive Compensation Components

As discussed in greater detail below, our compensation philosophy focuses on aligning the total direct compensation of our named executive officers with the interests of our stockholders by rewarding performance that enhances the objective of increasing both current and long-term stockholder value. We use the term “total direct compensation” to refer to the sum of base salary, annual incentive compensation and long-term incentive compensation.

 

  Total Direct

    Compensation    

      =       Base

    Salary    

      +       Annual

Incentive

    Compensation    

      +       Long-Term

Incentive

    Compensation    

  

The components of total direct compensation during fiscal year 2013 are:

 

Compensation Element

  

Form of Compensation

   Purpose    Performance
Criteria

Base Salary

   Cash    Provide compensation
that is not “at-risk” to
compensate our named
executive officers for
services rendered
during the fiscal year
   Not performance based

Annual Incentive
Compensation

   Cash    Motivate our named
executive officers to
attain vital short-term
company and
individual objectives
   Net income, average
working capital
percentage and
personal goals

Long-term Incentive
Compensation

  

Performance-vested

Restricted Stock

   Incent our named
executive officers to
focus on company
growth, align their
compensation with our
business strategy and
create value for our
stockholders
   Our EBIT margin for
fiscal year 2015 as
compared to the Baird
Industrial Company
Composite for calendar
year 2014 and our net
income for fiscal year
2015
  

Stock Options

      Stock options only
have value based on the
appreciation of our
stock following the
date of grant

For fiscal year 2014, our annual and long-term incentive compensation elements have been modified to implement changes recommended by our compensation consultant. For annual incentive compensation, the performance criteria will consist of net income, orders, and personal goals. For long-term incentive compensation, performance-vested restricted stock (with performance criteria based on EBITDA margin as compared to the Baird Industrial Company Composite and revenue as compared to our strategic plan) and time-vested restricted stock will be granted every year and stock options no longer will be granted.

 

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Target total direct compensation is established for the named executive officers each year. We do not have a specific policy for the allocation of compensation between short-term and long-term compensation or cash and equity compensation, as the allocation of these items is primarily driven by market compensation information and company performance.

We generally do not consider gains realized from prior compensation, such as stock option exercises and restricted stock vesting, in setting other elements of compensation. We believe that reducing or limiting current stock option grants or restricted stock awards because of prior gains realized by a named executive officer would unfairly penalize the officer for outstanding past performance and reduce the motivation for continued outstanding achievement. Similarly, our severance and change-in-control arrangements, which we discuss in detail under the heading “Potential Payments upon Termination or Change in Control,” do not affect our decisions regarding other elements of compensation. Those arrangements serve specific purposes that are unrelated to the determination of a named executive officer’s compensation for a specific year.

In support of our “pay for performance” philosophy, our executive compensation is heavily weighted toward incentive (variable) compensation, and the level of variable, or “at risk,” compensation increases as the level of responsibility increases. As shown below, 50% of our Chief Executive Officer’s compensation is provided through annual and long-term incentive compensation, and, on average, 39% of our other named executive officers’ compensation is provided through annual and long-term incentive compensation. (Mr. Platt is not included in this calculation because he resigned on January 9, 2013.)

 

Chief Executive Officer

Target Total Direct Compensation

Fiscal Year 2013

 

LOGO

  

All Other Named Executives

Target Total Direct Compensation

Fiscal Year 2013

 

LOGO

 

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We also provide compensation and benefits to our named executive officers through the following programs:

 

Compensation Element

 

Form of Compensation

   Purpose

Health and welfare plans

  Eligibility to receive health and other welfare benefits paid for by the company, including life insurance, short- and long-term disability insurance and a comprehensive medical and dental plan.    Provide a competitive employee
benefits program

Retirement benefits

  Named executive officers hired prior to January 1, 2003 (Mr. Lines, Mr. Smith and Ms. Condame only) participate in a qualified defined benefit pension plan, a qualified defined contribution plan and a non-qualified supplemental retirement plan. Named executive officers hired on or after January 1, 2003 participate only in the qualified defined contribution plan, and receive an additional company contribution under such plan in lieu of their participation in the defined benefit pension plan.    Provide an incentive for long-term
retention of our named executive
officers

Limited perquisites and other personal
benefits

  A $5,000 allowance for the Chief Executive Officer ($2,500 for our other named executive officers) to purchase term life insurance and an additional amount necessary to purchase a personal umbrella insurance policy as well as executive travel accident insurance.    Provide a competitive compensation
package, facilitate strong, focused
performance and better enable us to
attract and retain superior employees
for key positions

Stockholder Advisory Vote on Executive Compensation

At our 2012 annual meeting of stockholders, our stockholders overwhelmingly approved, on an advisory basis, the compensation of our named executive officers as disclosed in our 2012 proxy statement, referred to as a “say-on-pay” vote. At our 2011 annual meeting of stockholders, our stockholders expressed a preference that the “say-on-pay” vote take place on the annual basis recommended by our Board of Directors. This preference was subsequently adopted by our Board of Directors, and so we are providing our stockholders with a “say-on-pay” vote this year.

The Compensation Committee evaluated the positive results of the 2012 “say-on-pay” vote as well as the other factors discussed in this CD&A. While each of these factors informed the Compensation Committee’s decisions regarding our executive compensation programs, the Compensation Committee did not implement changes to our executive compensation programs as a result of the 2012 “say-on-pay” vote.

Annual Base Salaries

The Compensation Committee reviews base salaries for each of our named executive officers at least annually. For fiscal year 2013, the Compensation Committee set the base salaries based on the following factors:

 

   

company performance;

 

   

individual performance;

 

   

job responsibilities; and

 

   

internal pay equity.

 

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The Compensation Committee approved 3% increases to the base salaries of each of our named executive officers, effective April 1, 2012, and additional increases effective August 1, 2012 as follows:

 

Named Executive Officer

   Fiscal year 2012
Base Salary
     Percentage Increase     Fiscal year 2013
Base Salary
 

James R. Lines

   $ 283,250         20.0   $ 340,000   

Jeffrey F. Glajch

   $ 222,789         7.7   $ 240,000   

Alan E. Smith

   $ 189,042         8.4   $ 205,000   

Jennifer R. Condame

   $ 136,591         9.8   $ 150,000   

Robert A. Platt

   $ 158,000         10.8   $ 175,000   

The base salaries we paid to our named executive officers during fiscal year 2013 are shown in the “Salary” column of the Fiscal Year 2013 Summary Compensation Table. The fiscal year 2013 base salary in the chart above represents the annualized base salary after the August 1, 2012 increase, and the percentage increase represents the aggregate increase of that base salary over the base salary for fiscal year 2012.

Based on the analysis from our compensation consultant, the August 1, 2012 increases placed the base salary of our Chief Executive Officer at slightly below the median base salary for chief executive officers in our peer group and the base salaries of our other named executive officers at slightly below or at the median base salaries for those positions in our peer group.

Annual Cash Incentive Compensation

Our Annual Executive Cash Bonus Program, which we refer to as the Cash Bonus Program, is designed to compensate our named executive officers for above-average performance through an annual cash incentive award related both to company and individual performance. We instituted the Cash Bonus Program because we believe it effectively rewards both short-term individual and company performance.

For fiscal year 2013, the Compensation Committee set target bonus levels at 100% attainment of both company and individual objectives as follows: Mr. Lines - 60% of base salary; Mr. Glajch - 35% of base salary; Mr. Smith - 35% of base salary; Ms. Condame - 25% of base salary; and Mr. Platt - 25% of base salary. Each named executive officer may receive anywhere from 0% to 150% of his or her target bonus level depending on the attainment of objectives, as follows:

 

LOGO

 

   

If the threshold level of performance is not achieved, no bonus is payable to the named executive officer.

 

   

If the threshold level of performance is achieved, 50% of the target bonus is payable to the named executive officer.

 

   

100% of the target bonus is payable if the target level of performance is achieved.

 

   

A maximum of 150% of the target bonus is payable if the maximum level of performance is achieved.

 

   

Linear interpolation is used to determine the percentage of the target bonus payable based on performance in between threshold and target or target and maximum.

 

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A summary of the performance goals for our named executive officers (except for Mr. Platt, who resigned on January 9, 2013) and their respective weightings for fiscal year 2013 is as follows:

Performance Goals under the Cash Bonus Program

 

LOGO

The net income performance metric is defined as gross sales minus expenses and taxes. The average working capital percentage performance metric is defined as gross inventory plus gross trade accounts receivable minus trade payables divided by sales. The Compensation Committee selected net income and average working capital percentage as the measures of short-term performance because they capture our profitability and the efficiency of our use of cash during the applicable time period.

Company objectives for net income and average working capital percentage are typically set during our annual budgeting process and are approved by our Board of Directors along with our annual budget immediately prior to the beginning of the relevant fiscal year. Individual objectives are also typically set near the determination of the annual budget. The Chairman of our Compensation Committee, in consultation with the Chairman of our Board, approves individual objectives for our Chief Executive Officer. The individual objectives for our other named executive officers are developed by our Chief Executive Officer in alignment with our corporate strategy and recommended to our Compensation Committee Chair for approval.

For fiscal year 2013, the threshold, target, maximum and actual performance metrics used under the Cash Bonus Program were as follows:

 

Performance Measure

   Threshold     Target     Maximum     Actual  

Net Income

   $ 9.0 million      $ 10.5 million      $ 12.0 million      $ 11.1 million   

Average Working Capital Percentage

     12.7%        12.0%        11.3%        13.2%   

Each year, the Compensation Committee also establishes individual objectives for our named executive officers, which are used to determine whether the personal goals performance metric has been met. During fiscal year 2013, the individual objectives for our named executive officers were as follows:

 

   

Mr. Lines—accelerate sales and share growth in the defense market sector, outline a plan for organizational development that enables the company to successfully execute growth initiatives, and implement a process to drive officer focus on goal completion, among other things.

 

   

Mr. Glajch—continue the implementation of our acquisition strategy, identity information technology solutions and implement information technology projects to achieve long term process improvement and reliability, identify human resources solutions to improve our capability to hire employees for hard to fill production positions, and continue to expand industry market knowledge, among other things.

 

   

Mr. Smith—implement initiatives to enhance net income and naval sales opportunities, among other things.

 

20


   

Ms. Condame—implement process improvements to shorten the consolidated closing time and establish a structure and framework to prepare for growth through acquisition and process improvement, among other things.

At its May 30, 2013 meeting, the Compensation Committee reviewed each named executive officer’s achievement of company and individual objectives during fiscal year 2013 and approved the award of cash incentive compensation under the Cash Bonus Program. Based on our performance during fiscal year 2013, the Compensation Committee determined that our named executive officers exceeded the target level of performance under the net income component of their respective awards under the Cash Bonus Program, but did not achieve the threshold level of performance under the average working capital percentage component of the Cash Bonus Program. The Compensation Committee further determined that our named executive officers achieved the following percentages of their respective personal goals: Mr. Lines - 44%; Mr. Glajch - 100%; Mr. Smith - 109%; and Ms. Condame - 110%. Insufficient progress was achieved by Mr. Lines regarding succession planning because his priorities shifted as the year progressed, which required him to place greater focus on general management than on his personal goal completion. Succession planning and organizational development personal goals for Mr. Lines have carried forward to fiscal 2014. The personal goals component of each named executive officer’s respective award under the Cash Bonus Program was not directly tied to the financial performance objectives. As a result, while we did exceed the target level of performance for our net income measure, each of our named executive officers could have earned the percentage of the Cash Bonus Program attributable to achievement of personal goals even if we did not reach the required target for such performance measure.

Based on these achievements, the cash incentive compensation earned under the Cash Bonus Program for our named executive officers for fiscal year 2013 was as follows:

 

Named Executive Officer

   Bonus Award      Percent of
Target Bonus
    Percent of
Maximum
Available Bonus
 

James R. Lines

   $ 173,165         89     59

Jeffrey F. Glajch

   $ 80,785         98     65

Alan E. Smith

   $ 70,444         100     67

Jennifer R. Condame

   $ 36,559         100     66

The Compensation Committee sets challenging goals for maximum bonus awards and expects that maximum bonus awards will be made only in extraordinary circumstances.

The amount of these cash awards earned by each named executive officer in fiscal year 2013 is shown in the “Non-Equity Incentive Plan Compensation” column of the Fiscal Year 2013 Summary Compensation Table.

In accordance with his Separation Agreement, Mr. Platt received an additional separation benefit of $42,750, which was equivalent to his target bonus, as prorated for his period of employment during fiscal year 2013.

Under the Cash Bonus Program, special awards may be made to a named executive officer who has made an extraordinary contribution to us during the fiscal year. Such awards are generally recommended in writing by our Chief Executive Officer to the Chairman of the Compensation Committee and approved by the Compensation Committee before grant. The Compensation Committee also has the discretion to include or exclude extraordinary events that either positively or negatively affect financial performance in the financial calculations regarding the achievement of company objectives. No such awards were made in fiscal year 2013 and no extraordinary events were considered by the Compensation Committee during the year.

Long-Term Equity Incentive Compensation

Our Annual Stock-Based Long-Term Incentive Award Plan for Senior Executives, which we refer to as the Stock Bonus Plan, is designed to motivate our named executive officers to increase stockholder value by providing them with long-term stock-based awards for above-average company performance.

 

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Our long-term incentive opportunities are intended to be competitive with the long-term incentive opportunities offered by the companies constituting our peer group and by other comparably-sized companies in our geographic region. Restricted stock is approved by the Compensation Committee on an annual basis at a meeting after the fiscal year end. All shares of restricted stock are issued under our Incentive Plan, a comprehensive executive compensation plan that provides for the grant of stock options, restricted stock, and other stock-related awards, as well as other awards that may be settled in cash or other property. All of our named executive officers are eligible to participate in the Stock Bonus Plan. Beginning with fiscal year 2014, one half of a restricted stock award will consist of time-vested restricted stock, and the other half will consist of performance-vested restricted stock. Stock options will not be granted after fiscal year 2013.

Time-Vested Restricted Stock. We utilize time-vested restricted stock as an element of compensation because we believe that time-vested restricted stock helps us retain our named executive officers by offering our named executive officers the opportunity to receive shares of our common stock if they continue to be employed by us on the date the time-vested restricted stock vests. The number of shares of time-vested restricted stock awarded to our named executive officers under the Stock Bonus Plan is determined based on a percentage of each named executive officer’s annual base salary. Unless the Compensation Committee determines otherwise, 50% of the shares of time-vested restricted stock will vest on the second anniversary of the date of grant and the remaining 50% of the shares will vest on the fourth anniversary of the date of grant. Beginning with fiscal year 2014, 33 1/3 % of the shares of time-vested restricted stock will vest on each anniversary of grant.

Performance-Vested Restricted Stock. We utilize performance-vested restricted stock as an element of compensation because we believe that performance-vested restricted stock helps us reward our named executive officers by conditioning the grant of restricted stock upon the satisfaction of certain company objectives. The number of shares of performance-vested restricted stock awarded to our named executive officers is also determined based on a percentage of each named executive officer’s annual base salary. Unless the Compensation Committee determines otherwise, the shares of performance-vested restricted stock will vest on the last day of the second fiscal year following the fiscal year of grant, subject to satisfaction of the performance metrics for the applicable three-year period.

Options. Through fiscal year 2013, stock options have been issued under the Incentive Plan in fiscal years that ended in odd years. Compensation is only realized by our named executive officers if our stock price increases over the term of the award. Outstanding stock options vest over a three-year period, with 33 1/3% of the shares subject to such option vesting on each of the first, second and third anniversaries of the date of grant.

Awards Granted in Fiscal Year 2013. In accordance with the provisions of the Stock Bonus Plan, the Compensation Committee granted awards of long-term equity incentive compensation on May 30, 2012, with respect to all the named executive officers. Such awards consisted of stock options and shares of performance-vested restricted stock.

The number of stock options and shares of performance-vested restricted stock awarded by the Compensation Committee to our named executive officers was determined using each such officer’s Long-Term Incentive Percentage, which we refer to as the L-T Percentage, in effect for fiscal year 2012. For fiscal year 2012, the L-T Percentage for each of our named executive officers was as follows: Mr. Lines - 42%; Mr. Glajch - 35%; Mr. Smith - 35%; Ms. Condame - 25%; and Mr. Platt - 25%.

 

   

The number of stock options awarded was determined by multiplying 50% of each named executive officer’s base salary in effect for fiscal year 2012 by such officer’s L-T Percentage, and then dividing the product by the value of a stock option using the Black-Scholes valuation as of the ninth day prior to the date of grant.

 

   

The number of shares of performance-vested restricted stock was determined by multiplying 50% of each named executive officer’s base salary in effect for fiscal year 2012 by such officer’s L-T Percentage, and then dividing the product by the closing price of our common stock on the NYSE MKT on the seventh day prior to the date of grant.

 

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The closing price of our common stock on the NYSE MKT on May 30, 2012 was $18.65. The number of shares of time-vested restricted stock and the number of shares of performance-vested restricted stock awarded to our named executive officers in fiscal year 2013 are as follows:

 

Named Executive Officer

   Number of Stock Options
Awarded
     Number of Shares  of
Performance-Vested
Restricted Stock Granted(1)
 

James R. Lines

     10,894         3,222   

Jeffrey F. Glajch

     7,141         2,112   

Alan E. Smith

     6,059         1,792   

Jennifer R. Condame

     3,127         925   

Robert A. Platt

     3,617         1,070   

 

(1) 

The number of shares assumes achievement of the performance criteria for a target award. The number of shares that will vest at the end of fiscal year 2015 is based upon our achievement of two performance criteria. Those performance criteria consist of a relative metric (our EBIT margin for fiscal year 2015 as compared to the Baird Industrial Company Composite for calendar year 2014) and an absolute metric (net income for fiscal year 2015). Once achievement of the performance criteria is determined for fiscal year 2015, the actual number of shares to which each named executive officer is entitled will be adjusted accordingly, with any unearned shares being forfeited back to the company. In the event a named executive officer’s employment terminates prior to the conclusion of fiscal year 2015 for reasons other than death or retirement, such officer’s right to receive the restricted stock will be forfeited.

The Compensation Committee seeks to establish performance goals that are challenging but attainable based on our business and financial plan for the year. When establishing performance goals, the Compensation Committee reviews and discusses our business and financial plans for that year and the opportunity to generate stockholder value. The Compensation Committee establishes a range of performance goals for the year as well as individual payment thresholds, targets and maximums for each goal.

Information regarding the stock option awards and performance-vested restricted stock awards granted to each named executive officer in fiscal year 2013 is set forth in the Fiscal Year 2013 Summary Compensation Table, as well as in the Fiscal Year 2013 Grants of Plan-Based Awards Table.

Awards Granted in Fiscal Year 2014. Long-term equity incentive awards were granted during fiscal year 2014 on May 30, 2013. Such awards consisted of shares of time-vested restricted stock and performance-vested restricted stock, as described above under “Long-Term Equity Incentive Compensation” for fiscal years beginning with 2014. Pursuant to the Securities and Exchange Commission’s disclosure rules, such restricted stock awards will be reported in next year’s proxy statement in our Fiscal Year 2014 Summary Compensation Table and Fiscal Year 2014 Grants of Plan-Based Awards table.

Perquisites and Other Personal Benefits

We provide perquisites to our named executive officers to provide health and welfare benefits at the same level as those available to all employees. Additional perquisites and benefits are designed to attract, retain and reward named executive officers by providing an overall benefit package similar to those received by similarly-situated executive officers at comparably-sized companies in our industry and geographic region.

During fiscal year 2013, we paid premiums for life insurance policies for the benefit of each of our named executive officers. In addition, all of our named executive officers presently participate in our short-term disability program that is available to our managers and executive officers. We also make available to our named executive officers health insurance and long-term disability programs that are generally available to our salaried employees.

Our named executive officers also receive an executive travel accident policy and up to $2,500 for the purpose of purchasing term life insurance with a named beneficiary of each officer’s choosing as well as an

 

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additional amount necessary for our named executive officers to purchase a personal umbrella insurance policy. Our Chief Executive Officer is entitled to up to $5,000 for the purpose of purchasing term life insurance.

Retirement Benefits

We provide retirement benefits to our named executive officers that are designed to attract, retain and reward named executive officers by providing an overall benefit package similar to those received by similarly-situated executive officers at comparably-sized companies in our industry and geographic region.

Mr. Lines, Mr. Smith and Ms. Condame are all eligible to participate in our Retirement Income Plan, which is a defined benefit pension plan for the benefit of our domestic employees hired prior to January 1, 2003. Benefits are based on the employee’s years of service and average annual base salary for the five highest consecutive calendar years of compensation in the ten-year period preceding retirement, reduced to take into account a participant’s Social Security benefits paid for by the company.

All of our named executive officers participate in our Incentive Savings Plan, which is a defined contribution plan that provides for both employer and employee contributions. The Incentive Saving Plan uses a “safe harbor” design that provides for a matching contribution of 100% of a participant’s deferrals up to 3% of compensation plus 50% of deferrals in excess of 3% but not in excess of 5% of compensation (for a maximum 4% matching contribution). Additionally, eligible employees hired after January 1, 2003 with at least one hour of service during the relevant plan year who are employed by us at the end of such year receive a contribution in an amount equal to 3.25% of eligible compensation received during such year, which contribution is paid on the first $255,000 of compensation, as adjusted for cost-of-living increases, in accordance with Section 401(a)(17) of the Code. The amounts allocated to participants under the Incentive Savings Plan fully vest after four years of employment.

We also make available to our named executive officers who participate in our Retirement Income Plan our Supplemental Executive Retirement Plan, which we refer to the Supplemental Plan. The Supplemental Plan is intended to provide eligible participants and their surviving spouses and beneficiaries with the amount of employer-provided retirement benefits that the Retirement Income Plan would provide, but for the limitation on compensation that may be recognized under tax-qualified plans imposed by Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, and the limitations on benefits imposed by Section 415 of the Code.

We have provided more information about our defined benefit retirement plans and the benefits payable to our named executive officers under such plans under the heading “Pension Benefits at March 31, 2013.”

Employment Agreements and Potential Payments upon Termination or Change in Control

We have employment agreements with Mr. Lines, Mr. Glajch, and Mr. Smith. The decisions to enter into employment agreements with such officers and the terms of those agreements were based on our need to motivate and retain talent for our long-term growth. The material terms of the employment agreements with our named executive officers are described under the heading “Employment Agreements.”

We have agreed to provide payments to each of our named executive officers in the event of a termination of employment as a result of normal and early retirement, involuntary termination, death and disability. Mr. Lines and Mr. Glajch are also eligible to receive additional payments in the event of termination following a change in control. These arrangements are designed to promote stability and continuity of our named executive officers. Information on these arrangements for the named executive officers is provided below under the heading “Potential Payments upon Termination or Change in Control.”

 

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Stock Ownership Guidelines

In order to more closely align the interests of our named executive officers with the interests of our stockholders, the Compensation Committee has established minimum stock ownership guidelines that require our named executive officers to work towards acquiring and maintaining specific levels of equity ownership interests in our common stock within specified time frames. A summary of our current stock ownership guidelines for our named executive officers is as follows:

 

Position

  

Stock Ownership Guideline

Chief Executive Officer

   Common stock with a value equal to at least 3.00 times his annual base salary

Other named executive officers

   Common stock with a value equal to at least 1.00 times his or her annual base salary

Our stock ownership guidelines also require our named executive officers to retain 50% of the net shares they realize (after tax) when a restricted stock award vests or a stock option is exercised until they are in compliance with the guidelines, unless waived by the Chairman of the Compensation Committee.

The Compensation Committee monitors the progress made by our named executive officers in achieving their stock ownership guidelines and, if circumstances warrant, may modify the guidelines and/or time frames for one or more of our named executive officers. Under the guidelines, our named executive officers are directed to be in compliance with their respective ownership objectives within five years of becoming a named executive officer or by the end of our fiscal year ending March 31, 2014 (five years from the date when the stock ownership guidelines were last amended). In the event that a named executive officer does not meet his or her ownership guidelines, this fact may be taken into consideration by the Compensation Committee when evaluating such executive’s overall performance. As of the end of fiscal year 2013, each of our named executive officers was making meaningful progress towards compliance with our stock ownership guidelines.

Certain Tax and Accounting Implications

We periodically review accounting and tax laws, rules and regulations that may apply to our compensation programs. However, tax and accounting considerations have not significantly impacted the compensation programs that we offer to our named executive officers.

The Impact of Deductibility of Compensation. As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Code, which provides that we may not deduct compensation of more than $1,000,000 that is paid to certain individuals. The Compensation Committee reserves the ability to approve compensation that will not meet these requirements in order to ensure competitive levels of total compensation for its named executive officers.

Accounting for Stock-Based Compensation. We account for stock-based employee compensation at fair value of the awards on the grant date and recognize the related cost in our statements of operations and retained earnings in accordance with Financial Accounting Standards Board Accounting Standards Codification 718, Compensation-Stock Compensation, which we refer to as FASB ASC Topic 718, formerly SFAS No. 123(R), “Share-Based Payment,” which we adopted effective April 1, 2006 utilizing the modified prospective method. These stock-based payments include awards made under our Incentive Plan.

 

25


Compensation Committee Report1

The Compensation Committee, which is comprised entirely of independent Directors, has reviewed and discussed with management the Compensation Discussion and Analysis included in this proxy statement in accordance with Item 402(b) of Regulation S-K, as promulgated by the Securities and Exchange Commission. Based on such review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and our annual report on Form 10-K for the year ended March 31, 2013.

Compensation Committee:

James J. Malvaso, Chairman

Helen H. Berkeley

Jerald D. Bidlack

Alan Fortier

Risk Considerations in our Compensation Programs

In fiscal year 2011, we undertook a detailed company-wide analysis of our compensation programs to assess whether they create risks that are reasonably likely to have a material adverse effect on our business. In fiscal year 2012, the Compensation Committee again conducted its own risk assessment. As part of that assessment, the Compensation Committee reviewed the intent, purposes and practices of our compensation programs and plans. Such review was made in connection with a review of our business and acquisition strategies. As part of our fiscal year 2012 review, we also undertook a review of any new compensation arrangements or any existing compensation arrangements that were modified since fiscal year 2011. During fiscal year 2013, the Compensation Committee worked with our compensation consultant to redesign our incentive plans, and the risk profiles of these programs were analyzed and considered as part of that process. Based on these reviews, we have concluded that our compensation programs are appropriately tailored to encourage employees to grow our business, but not incent them to do so in a way that is reasonably likely to have a material adverse effect on our company.

For example, our Cash Bonus Program and our Stock Bonus Plan, which are our two primary executive compensation programs, balance each other by providing compensation that rewards short-term (Cash Bonus Program) and long-term (Stock Bonus Plan) performance. The Cash Bonus Program balances risk by considering several performance metrics and capping the maximum payout a named executive officer can receive at 150% of target bonus level (target bonus level is between 60% and 25% of base salary for each of our named executive officers). In addition, our Stock Bonus Plan provides balanced incentives through the mix of equity-based compensation awards including stock options, time-vested restricted stock and performance-vested restricted stock, which varies from year to year, and by considering several performance metrics. Together with our executive stock ownership guidelines and our conservative approach to annual bonuses, the Compensation Committee believes this mix of incentives encourages our named executive officers to achieve both short-term operating and long-term strategic objectives, including the long-term performance of our stock.

 

1 The material in this report is not “soliciting material,” is not deemed to be filed with the Securities and Exchange Commission and is not incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filings.

 

26


Fiscal Year 2013 Summary Compensation Table

The following table shows information regarding the compensation of our President and Chief Executive Officer (our principal executive officer), our Vice President - Finance & Administration and Chief Financial Officer (our principal financial officer) and our three other most highly compensated named executive officers for services rendered to us in all capacities for the fiscal years ended March 31, 2013, 2012 and 2011.

 

Name and Principal Position  

Fiscal

Year

   

Salary(1)

($)

   

Bonus

($)

   

Stock

Awards(2)(3)

($)

   

Option

Awards(4)

($)

   

Non-Equity
Incentive Plan
Compensation(5)

($)

   

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings(6)

($)

   

All

Other

Compensation(7)

($)

   

Total

($)

 

James R. Lines,

    2013        323,916               60,090        58,501        173,165        408,265        19,043        1,042,980   

President and Chief

    2012        283,250               110,697               191,194        237,977        15,712        838,830   

Executive Officer

    2011        275,000               39,360        40,722        200,970        126,100        12,402        694,554   

(principal executive officer)

                 

Jeffrey F. Glajch

    2013        236,491               39,389        38,347        80,785               22,664        417,676   

Vice President - Finance & Administration and Chief Financial Officer

(principal financial officer)

   

 

2012

2011

  

  

   

 

222,789

216,300

  

  

   

 


  

  

   

 

72,555

31,186

  

  

   

 


32,267

  

  

   

 

93,571

94,915

  

  

   

 


  

  

   

 

19,155

16,122

  

  

   

 

408,070

390,790

  

  

                 

Alan E. Smith

    2013        201,571               33,421        32,537        70,444        77,836        14,744        430,553   

Vice President of Operations

    2012        189,042               61,578               79,563        91,780        10,174        432,137   
    2011        183,536               26,459        27,376        76,057        42,281        7,919        363,628   

Jennifer R. Condame

    2013        146,896               17,251        16,792        36,559        63,700        12,235        293,433   

Controller and Chief Accounting Officer

    2012        136,591               31,785               43,538        67,935        9,189        289,038   
    2011        132,613               13,664        14,127        43,166        29,502        7,287        240,359   

Robert A. Platt (8)

    2013        141,975               19,956        19,423                      82,909        264,263   

Former Vice President of Sales

    2012        75,560        18,000  (9)      45,377               21,251               4,045        164,233   

 

 

(1) 

The amounts shown in this column include cash compensation earned and paid, and cash compensation deferred at the election of each named executive officer under our Incentive Savings Plan (our 401(k) plan).

 

(2) 

Restricted stock awards are granted under our Incentive Plan. The dollar values of time-vested restricted stock awards shown in this column are equal to the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. The grant date fair value of the performance-vested restricted stock awards shown in this column is computed based upon the probable outcome of the performance goals as of the grant date, in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The maximum value of the performance-vested restricted stock awards, assuming the highest level of performance conditions is achieved, is as follows for fiscal year 2013: Mr. Lines - $120,181; Mr. Glajch - $78,778; Mr. Smith - $66,842; Ms. Condame - $34,503; Mr. Platt - $39,911. A discussion of the assumptions used to calculate grant date fair value is set forth in Note 12 (Stock Compensation Plans) to the Consolidated Financial Statements in our annual reports on Form 10-K for the fiscal years ended March 31, 2013 and 2012 and in Note 11 for the fiscal year ended March 31, 2011.

 

(3) 

Additional information regarding the performance-vested restricted stock granted to our named executive officers in fiscal year 2013 is shown in the Fiscal Year 2013 Grants of Plan-Based Awards table.

 

(4) 

Stock option awards are granted under our Incentive Plan. The dollar values of stock option awards shown in this column are equal to the aggregate grant date fair value computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. A discussion of the assumptions used to calculate grant date fair value is set forth in Note 12 (Stock Compensation Plans) to the Consolidated Financial Statements in our annual reports on Form 10-K for the fiscal years ended March 31, 2013 and 2012 and in Note 11 for the fiscal year ended March 31, 2011.

 

27


(5) 

The amounts shown in this column reflect the cash payment made to our named executive officers under the Cash Bonus Program in effect for fiscal year 2013. Awards under the Cash Bonus Program were made by the Compensation Committee of our Board of Directors on May 30, 2013.

 

(6) 

The amounts shown in this column reflect the changes in the actuarial present values under our Retirement Income Plan and our Supplemental Executive Retirement Plan. See “Pension Benefits at March 31, 2013” for more information on our Retirement Income Plan and our Supplemental Executive Retirement Plan.

 

(7) 

All Other Compensation consists of the following:

 

Named Executive Officer   

Insurance

($)

    

401(k) Plan

Matching

Contributions

($)

    

401(k) Plan

Non-elective

Contributions

($)

     Severance     

Total

($)

 

James R. Lines

     8,471         10,572                         19,043   

Jeffrey F. Glajch

     4,946         10,172         7,546                 22,664   

Alan E. Smith

     4,427         10,317                         14,744   

Jennifer R. Condame

     4,595         7,640                         12,235   

Robert A. Platt

     3,683         8,434         5,417         65,375         82,909   

 

(8) 

Mr. Platt resigned on January 9, 2013, and he forfeited his restricted stock and stock option awards on that date.

 

(9) 

Mr. Platt received a sign-on bonus of $18,000 in connection with his commencement of employment with us in October 2011.

 

28


Fiscal Year 2013 Grants of Plan-Based Awards

The following table shows information regarding the grants of annual incentive cash compensation, stock options and restricted stock during fiscal year 2013 to our named executive officers.

 

Name  

Type of

Award

  Grant
Date
    Estimated Possible Payouts
Under Non-Equity
Incentive Plan Awards (1)
    Estimated Future Payouts
Under Equity
Incentive Plan Awards (2)
   

All other
stock
awards:
Number
of shares
of stock
or units

(#)

   

Grant Date
Fair Value

of Stock

and Option
Awards ($)(3)

 
      Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
($)
    Target
($)
    Maximum
($)
     

James R. Lines

  Options     5/30/12                    10,894        58,501   
  Performance-Vested Restricted Stock     5/30/12              30,045        60,090        120,181          60,090   
  Annual Incentive       97,175        194,350        291,525             

Jeffrey F. Glajch

  Options     5/30/12                    7,141        38,347   
  Performance-Vested Restricted Stock     5/30/12              19,694        39,389        78,778          39,389   
  Annual Incentive       41,386        82,772        124,158             

Alan E. Smith

  Options     5/30/12                    6,059        32,537   
  Performance-Vested Restricted Stock     5/30/12              16,710        33,421        66,842          33,421   
  Annual Incentive       35,275        70,550        105,825             

Jennifer R. Condame

  Options     5/30/12                    3,127        16,792   
  Performance-Vested Restricted Stock     5/30/12              8,626        17,251        34,503          17,251   
  Annual Incentive       18,362        36,724        55,086             

Robert A. Platt

  Options     5/30/12                    3,617        19,423   
  Performance-Vested Restricted Stock     5/30/12              9,978        19,956        39,911          19,956   
  Annual Incentive       21,365        42,729        64,094             

 

 

(1) 

The amounts shown in these columns reflect the incentive cash compensation amounts that potentially could have been earned during fiscal year 2013 based upon the achievement of company and individual performance goals under our Cash Bonus Program. The amounts of actual cash awards earned in fiscal year 2013 by our named executive officers under our Cash Bonus Program are set forth in the “Non-Equity Incentive Plan Compensation” column in the Fiscal Year 2013 Summary Compensation Table. For more information regarding annual incentive cash compensation under our Cash Bonus Program, see “Annual Cash Incentive Compensation” in CD&A.

 

(2) 

Our performance-vested restricted stock awards are denominated in dollars, but payable in stock. We determine the number of shares of restricted stock to grant by dividing the dollar value of the maximum award by the closing price of a share of our common stock on the seventh day prior to the date of grant. For more information regarding restricted stock awards under our Stock Bonus Plan, see “Performance-Vested Restricted Stock” and “Awards Granted in Fiscal Year 2013” under the heading “Long-Term Equity Incentive Compensation” in CD&A.

 

(3) 

The dollar values of stock options and restricted stock disclosed in this column are equal to the aggregate grant date fair value computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The grant date fair value of the performance-vested restricted stock awards is computed based upon the probable outcome of the performance goals as of the grant date. A discussion of the assumptions used to calculate the grant date fair values is set forth in Note 12 (Stock Compensation Plans) to the Consolidated Financial Statements in our annual report on Form 10-K for the fiscal year ended March 31, 2013.

 

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Employment Agreements

During fiscal year 2013, we were a party to employment agreements with Mr. Lines, Mr. Glajch, Mr. Smith and Mr. Platt. The following is a summary of the key terms of each of these employment agreements.

James R. Lines. On August 1, 2006, we entered into an employment agreement with Mr. Lines which provides that Mr. Lines will receive an annual minimum base salary as well as other customary benefits. Mr. Lines is also eligible under the agreement to receive discretionary bonuses. The agreement automatically renews such that it always has a one-year term remaining, unless we or Mr. Lines elect not to extend the term further, in which case the term will end on the first anniversary of the date on which notice of such election not to extend is given. If not terminated sooner, the agreement will end on the last day of the month in which Mr. Lines turns 65.

Pursuant to our employment agreement with Mr. Lines, if he resigns for reasons other than a material breach of the agreement by us, departs from our employment without the approval of our Board of Directors, or is discharged for cause, he will be subject to an 18-month covenant not to compete with us, not to interfere in certain of our business relationships, and not to disclose to anyone our confidential information.

Our employment agreement with Mr. Lines also provides for us to make certain payments to him in the event we terminate his employment without cause or upon the occurrence of certain events relating to a change in control of the company, as described under “Involuntary Termination” and “Termination Following a Change in Control” under the heading “Potential Payments Upon Termination or Change in Control.”

Our employment agreement with Mr. Lines provides that we will indemnify him for all acts or omissions and for any suits brought against him which relate to duties he performed in good faith for us.

Jeffrey F. Glajch. On March 2, 2009, we entered into an employment agreement with Mr. Glajch, as subsequently amended on July 29, 2010, to serve as our Vice President - Finance & Administration and Chief Financial Officer. The agreement provides that Mr. Glajch will receive an annual minimum base salary as well as other customary benefits. The agreement automatically renews such that it always has a one-year term remaining, unless we or Mr. Glajch elect not to extend the term further, in which case the term will end on the first anniversary of the date on which notice of such election not to extend is given. If not terminated sooner, the agreement will end on the last day of the month in which Mr. Glajch turns 65.

Pursuant to our employment agreement with Mr. Glajch, if his employment with us is terminated for any reason, he will be subject to an 18-month covenant not to compete with us, not to interfere in certain of our business relationships, and not to disclose to anyone our confidential information.

Our employment agreement with Mr. Glajch also provides for us to make certain payments to him in the event we terminate his employment without cause or upon the occurrence of certain events relating to a change in control of the company, as described under “Involuntary Termination” and “Termination Following a Change in Control” under the heading “Potential Payments Upon Termination or Change in Control.”

Our employment agreement with Mr. Glajch provides that we will indemnify him for all acts or omissions and for any suits brought against him which relate to duties he performed in good faith for us.

Alan E. Smith. On July 30, 2007, we entered into an employment agreement with Mr. Smith to serve as our Vice President of Operations. The agreement provides that Mr. Smith will receive an annual minimum base salary as well as other customary benefits. Mr. Smith’s agreement automatically renews such that it always has a one-year term remaining, unless we or Mr. Smith elect not to extend the term further, in which case the term will end on the first anniversary of the date on which notice of such election not to extend is given. If not terminated sooner, the agreement will end on the last day of the month in which Mr. Smith turns 65.

Pursuant to our employment agreement with Mr. Smith, if his employment with us is terminated for any reason, he will be subject to an 18-month covenant not to compete with us, not to interfere in certain of our business relationships, and not to disclose to anyone our confidential information.

 

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Our employment agreement with Mr. Smith also provides for us to make certain payments to him in the event we terminate his employment without cause as described below under “Involuntary Termination” under the heading “Potential Payments Upon Termination or Change in Control.”

Our employment agreement with Mr. Smith provides that we will indemnify him for all acts or omissions and for any suits brought against him which relate to duties he performed in good faith for us.

Robert A. Platt. On October 3, 2011, we entered into an employment agreement with Mr. Platt to serve as our Vice President of Sales. The agreement provided that Mr. Platt would receive an annual minimum base salary as well as other customary benefits. Pursuant to the agreement, we paid Mr. Platt a sign-on bonus of $18,000.

On January 9, 2013, Mr. Platt resigned, and on January 31, 2013 we entered into a separation agreement with him. Pursuant to the separation agreement, Mr. Platt is entitled to six months of salary continuation in the aggregate amount of $87,500 and a prorated target bonus for fiscal year 2013 in the amount of $42,750. Mr. Platt remains subject to the 18-month non-competition and non-solicitation covenants under his employment agreement, and he also executed a customary waiver and release of claims in favor of the company. Mr. Platt forfeited all of his outstanding equity awards upon his resignation.

Additional Information

We have provided additional information regarding the compensation we pay to our named executive officers in CD&A, and encourage you to read the above tables and their footnotes in conjunction with such information.

 

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Outstanding Equity Awards at March 31, 2013

The following table shows information regarding the number of unexercised stock options and the number and value of unvested restricted stock awards held by our named executive officers at March 31, 2013.

 

     Option Awards     Stock Awards  
Name  

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

   

Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

   

Option

Exercise

Price

($)

   

Option

Expiration

Date

   

Number

of Shares

or Units

of Stock

That Have

Not Vested

(#)

   

Market

Value of

Shares or

Units of

Stock

That Have

Not Vested

($)

   

Equity Incentive Plan
Awards: Number of

Unearned Shares, Units or
Other Rights that have

Not Vested

(#)

   

Equity Incentive

Plan Awards: Market
or Payout Value of
Unearned Shares,
Units or Other
Rights That Have
Not Vested

($)

 

James R. Lines

    2,532               30.88        5/29/2018           
    1,974               15.22        5/28/2019           
    1,546        1,546 (1)      15.25        5/20/2020           
           10,894 (2)      18.65        5/30/2022           
            1,597 (3)      39,510       
            2,612 (4)      64,612       
                5,161 (5)      127,683   
                5,224 (6)      129,242   
                6,444 (7)      159,425   

Jeffrey F. Glajch

    1,000               8.01        3/2/2013           
    4,693               15.22        5/28/2019           
    2,450        1,225 (1)      15.25        5/20/2020           
           7,141 (2)      18.65        5/30/2022           
            1,712 (4)      42,355       
                4,090 (5)      101,187   
                3,424 (6)      84,710   
                4,224 (7)      104,502   

Alan E. Smith

    1,114               30.88        5/29/2018           
    3,571               15.22        5/28/2019           
    2,078        1,040 (1)      15.25        5/20/2020           
           6,059 (2)      18.65        5/30/2022           
            963 (3)      23,812       
            1,453 (4)      35,947       
                3,471 (5)      85,873   
                2,906 (6)      71,894   
                3,584 (7)      88,668   

Jennifer R. Condame

    2,500               7.98        6/1/2016           
    4,974               6.90        5/31/2017           
    576               30.88        5/29/2018           
    1,000               44.50        7/31/2018           
    2,678               15.22        5/28/2019           
    1,072        537 (1)      15.25        5/20/2020           
           3,127 (2)      18.65        5/30/2022           
            750 (4)      18,555       
                1,791 (5)      44,309   
                1,500 (6)      37,110   
                1,850 (7)      45,769   

Robert A. Platt(8)

                                             

 

 

(1) 

One-third of this grant of stock options vested on each of May 20, 2011 and May 20, 2012. The remainder of this grant vests on May 20, 2013.

 

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(2) 

One-third of this grant of stock options vests on each of May 30, 2013, May 30, 2014, and May 30, 2015.

 

(3) 

These time-vested restricted stock awards vest on May 28, 2013.

 

(4) 

One-half of this grant of time-vested restricted stock vests on May 26, 2013 and the remaining one-half vests on May 26, 2015.

 

(5) 

This grant of performance-vested restricted stock vests on the date that the Compensation Committee ratifies the satisfaction of the performance metrics for the applicable three-year performance period ended March 31, 2013. This number reflects the maximum number of shares of restricted stock that may be earned if the maximum level of performance is achieved.

 

(6) 

This grant of performance-vested restricted stock vests on the date that the Compensation Committee ratifies the satisfaction of the performance metrics for the applicable three-year performance period ending March 31, 2014. This number reflects the maximum number of shares of restricted stock that may be earned if the maximum level of performance is achieved.

 

(7) 

This grant of performance-vested restricted stock vests on the date that the Compensation Committee ratifies the satisfaction of the performance metrics for the applicable three-year performance period ending March 31, 2015. This number reflects the maximum number of shares of restricted stock that may be earned if the maximum level of performance is achieved.

 

(8) 

Mr. Platt forfeited all of his outstanding equity awards when he resigned on January 9, 2013.

Fiscal Year 2013 Option Exercises and Stock Vested

The following table shows information regarding the number and value realized of stock options exercised and stock awards that vested during fiscal year 2013 for each of our named executive officers.

 

      Option Awards      Stock Awards  
Name   

Number of
Shares
Acquired on
Exercise

(#)

    

Value
Realized
on
Exercise (1)

($)

    

Number of Shares
Acquired on Vesting

(#)

    

Value
Realized on
Vesting (2)

($)

 

James R. Lines

                     666         12,328   

Jeffrey F. Glajch

                               

Alan E. Smith

     3,750         28,280         293         5,423   

Jennifer R. Condame

                               

Robert A. Platt

                               

 

(1) 

The value realized on exercise of stock options is determined by subtracting the exercise price of the stock option from the selling price of the related common stock and multiplying the resulting amount by the applicable number of shares underlying the stock options.

 

(2) 

The value realized on the vesting of stock awards is the closing price of our common stock on the vesting date multiplied by the number of shares acquired.

 

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Pension Benefits at March 31, 2013

The following table shows information at March 31, 2013 regarding our Retirement Income Plan and our Supplemental Executive Retirement Plan.

 

Name    Plan Name   

Number of Years
Credited

Service (#)

     Present Value
of Accumulated
Benefit(1)
($)
     Payments
During Last
Fiscal Year
($)
 

James R. Lines

   Retirement Income Plan      29         788,805           
   Supplemental Executive Retirement Plan              354,837           

Jeffrey F. Glajch

   Retirement Income Plan                   
   Supplemental Executive Retirement Plan                   

Alan E. Smith

   Retirement Income Plan      20         314,061           
   Supplemental Executive Retirement Plan                        

Jennifer R. Condame

   Retirement Income Plan      21         261,618           
   Supplemental Executive Retirement Plan                        

Robert A. Platt

   Retirement Income Plan                        
   Supplemental Executive Retirement Plan                        

 

 

(1) 

The present value of accumulated benefits indicated in the table were calculated using a 4.28% discount rate, projected to 2015 and weighted 50% blue collar/50% white collar for males, the RP 2000 Combined Mortality Table for females projected to 2015 and an age 63 retirement age, which are the same assumptions used for financial reporting purposes. The amounts indicated represent liabilities funded by the trust fund. Part of the accrued benefit will be provided by John Hancock Insurance Company through an annuity purchased in 1986.

Retirement Income Plan

Our Retirement Income Plan is a defined benefit pension plan for the benefit of our domestic employees hired prior to January 1, 2003. The purpose of the Retirement Income Plan is to supplement Social Security benefits and to provide a reliable source of regular income for participants or their survivors after retirement by the participant. During fiscal year 2013, Mr. Lines, Mr. Smith and Ms. Condame were eligible to participate in the Retirement Income Plan.

Normal retirement under the Retirement Income Plan is generally the later of a participant’s 65th birthday or the 5th anniversary of the date on which he or she became a participant. Early retirement under the Retirement Income Plan is available for a participant who is at least 55 years old and has completed fifteen years or more of creditable service. The Retirement Income Plan also provides for a disability retirement allowance in the event of disability.

The Retirement Income Plan also provides for the payment of a retirement benefit in the event that a participant’s employment was terminated when the participant was not eligible for normal, early or disability retirement. Eligibility for such “vested retirement” requires the completion of five years of service with us. A participant who is entitled to a vested retirement allowance when his or her employment terminates will ordinarily begin receiving payments after reaching normal retirement age. If the participant has completed at least fifteen years of creditable service, he or she may elect to begin receiving payments on the first day of the month after he or she reaches age 55 and up to the first month after he or she reaches normal retirement age. The amount of a participant’s monthly vested retirement payments will vary depending on age, service and time of commencement.

Benefits under the Retirement Income Plan are based on the employee’s years of service and average annual base salary for the five highest consecutive calendar years of compensation in the ten-year period preceding retirement. Benefits under the Retirement Income Plan are reduced to take into account a participant’s Social Security benefits paid for by the company.

 

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The approximate years of creditable service as of March 31, 2013 of each of the named executive officers eligible to participate in the Retirement Income Plan are as follows: Mr. Lines-29; Mr. Smith-20; and Ms. Condame-21. We do not normally grant additional years of service credit.

The form and amount of the payments made under the Retirement Income Plan depends upon marital status when payment begins and the form of payment selected. The normal form of benefit for a married participant is a 100% joint and survivor annuity, which provides a retirement allowance in the form of reduced monthly payments that will continue for the rest of the participant’s life. If the participant is survived by the person who was the participant’s spouse when payments began, such spouse will receive survivor benefits equal to 100% of the amount of the payments made to the participant during his or her lifetime. His or her spouse will be paid survivor benefits for his or her remaining lifetime. Subject (in most cases) to the spouse’s consent, a participant may elect to receive benefits in the form of a single life annuity, 50% joint and survivor annuity, a Social Security Level Income Option, a 10, 15, or 20 year certain annuity or a life annuity with a 10, 15, or 20 year guarantee.

Supplemental Executive Retirement Plan

In addition to the Retirement Income Plan, we maintain the Supplemental Plan that is a non-qualified deferred compensation plan and is intended to provide eligible participants and their surviving spouses and beneficiaries with the amount of employer-provided retirement benefits that the Retirement Income Plan would provide but for the limitation on compensation that may be recognized under tax-qualified plans imposed by Section 401(a)(17) of the Code and the limitations on benefits imposed by Section 415 of the Code.

A participant who has completed a period of service of at least five years under the Retirement Income Plan and whose benefits are limited by the above-referenced provisions of the Code, is entitled to receive a monthly benefit from the Supplemental Plan. All of our named executive officers hired prior to January 1, 2003 are eligible to participate in the Supplemental Plan, but Mr. Lines is the only named executive officer that currently has an accrued benefit under the Supplemental Plan.

The monthly benefit under the Supplemental Plan is equal to the excess, if any, of the retirement benefits that would have been payable to or with respect to the plan participant under the Retirement Income Plan had the limitations imposed by the Code not been applicable over the retirement benefits payable to or with respect to the participant under the Retirement Income Plan. This formula was modified to provide that for calendar years through 2016, the calculation of average compensation for Mr. Lines only takes into account his base salary since August 1, 2012.

A participant’s retirement benefits under the Supplemental Plan generally will be paid to or with respect to the participant in the same form and at the same time as the participant’s retirement benefits under the Retirement Income Plan. The benefits under the Supplemental Plan will terminate upon cessation of benefits to the participant or his beneficiary under the Retirement Income Plan.

Upon a “change in control” of our company, each participant in the Supplemental Plan would automatically become 100% vested in his or her benefits. A “change in control” for the purposes of the Supplemental Plan is defined as:

 

   

the acquisition of the assets or a majority of the shares of the company by a person or group not controlled by the company;

 

   

a cash tender offer or exchange offer, consolidation or merger or other business combination, sale of assets or contested election as a result of which the members of our Board of Directors before the event cease to constitute a majority of our Board;

 

   

the acquisition of 25% or more of the shares of the company by a person or a group; or

 

   

the occurrence of any event that would be required to be reported in response to Item 6(e) of Schedule 14A or to Item 5.01 of Form 8-K.

 

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Incentive Savings Plan

All of our named executive officers are also eligible to participate in our Incentive Savings Plan (our 401(k) savings plan), which is available to all of our employees. Pursuant to the Incentive Savings Plan, we match funds deferred at the election of participants, up to a certain percentage, and we make non-elective contributions to the accounts of eligible participants. Matching contributions under the Incentive Savings Plan always are fully vested. Additionally, eligible employees hired after January 1, 2003 with at least one hour of service during the relevant plan year who are employed by us at the end of such year receive a nonelective contribution as described above.

Potential Payments upon Termination or Change in Control

The following information and the table entitled “Estimated Payments Upon Termination or a Change in Control” set forth the amount of payments to each of our named executives in the event of a termination of employment as a result of normal and early retirement, voluntary termination and termination for cause, involuntary termination, death, disability and termination following a change in control of the company.

Assumptions and General Principles

The following assumptions and general principles apply with respect to the table entitled “Estimated Payments Upon Termination or a Change in Control” and any termination of employment of a named executive officer:

 

   

The amounts shown in the table assume that each named executive officer was terminated on March 31, 2013 (January 9, 2013 for Mr. Platt since he resigned on that date). Accordingly, the table reflects amounts earned as of March 31, 2013 and includes estimates of amounts that would be paid to the named executive officer upon the occurrence of a termination. The actual amounts to be paid to a named executive officer can only be determined at the time of the termination (except for Mr. Platt).

 

   

Unless otherwise noted, the fair market values of stock-based compensation were calculated using the closing price of our common stock on the NYSE MKT on March 28, 2013, the last trading day in fiscal year 2013 ($24.74).

 

   

A named executive officer is entitled to receive certain amounts earned during his term of employment regardless of the manner in which the named executive officer’s employment is terminated. These amounts include base salary, unused vacation pay and annual cash incentive compensation. These amounts are not shown in the table, except for potential prorated annual cash incentive compensation, which is shown in the table based on actual performance for fiscal year 2013.

 

   

A named executive officer may exercise any stock options that are exercisable prior to the date of termination and will be entitled to receive unrestricted shares of common stock with respect to any restricted stock awards for which the vesting period has expired prior to the date of termination. Any payments related to these stock options and restricted stock awards are not included in the table as they are not payable upon the termination of a named executive officer’s employment or upon a change in control of the company.

 

   

A named executive officer will be entitled to receive all amounts accrued and vested under our retirement and savings programs, including our Incentive Plan and any pension plans in which the named executive officer participates. These amounts are not included in the table as these amounts are disclosed under the heading “Pension Benefits at March 31, 2013” unless such amounts are accelerated or enhanced in the event of the termination of a named executive officer’s employment or upon a change in control of the company.

Normal and Early Retirement

A named executive officer is eligible to elect normal retirement at age 65 and early retirement at age 55-64 with at least five and fifteen years, respectively, of creditable service to the company, as discussed under the heading “Pension Benefits at March 31, 2013.”

 

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As of March 31, 2013, none of our named executive officers were eligible for normal retirement.

All unvested shares of performance-vested restricted stock held by the named executive officer will vest pro-rata based on the satisfaction of the applicable performance goals through the end of the quarter immediately preceding the date of retirement.

Voluntary Termination and Termination for Cause

Pursuant to our employment agreements with Messrs. Lines, Glajch, and Smith, cause exists if our Board of Directors determines that there has been willful misconduct by the named executive officer in connection with the performance of his duties or if the named executive officer has engaged in any other conduct that has been materially injurious to the company or has breached any of the representations and warranties in his employment agreement. Under the employment agreements with Mr. Lines and Mr. Smith, upon termination for cause, we would pay all legal fees and other expenses incurred by such named executive officer if he, in good faith, contests the termination. The named executive officer would be required to reimburse us for all such costs if a court of final adjudication were to determine that the executive did not act in good faith in bringing such challenge.

A named executive officer is not entitled to receive any severance payments or other benefits upon his voluntary decision to terminate his employment with the company prior to being eligible for retirement (other than compensation due through the date of termination) or upon termination for cause.

Involuntary Termination

Our employment agreement with Mr. Lines also provides that, upon termination without cause, or if he resigns because of our material breach of his employment agreement, we will have the following obligations: (1) pay to him compensation due him through the date of termination, including any accrued bonus; (2) continue his base salary for nine months following such termination; (3) pay to him a lump sum payment equal to nine months’ base salary; (4) provide him with continuing health care coverage for a period of 18 months following the effective date of termination of his employment; and (5) pay for certain outplacement services.

Our employment agreements with Messrs. Glajch, and Smith provide that, upon termination without cause, or if any such officer resigns because of our material breach of his respective employment agreement, we will pay compensation due to them through the date of termination, including any accrued bonus; and that we will pay, in regular monthly payments, their respective salaries for 12 months following the effective date of their termination of employment.

Our obligation to make payments upon any termination of Messrs. Lines, Glajch, or Smith without cause or upon their resignation because of a material breach of their agreement by us is conditioned on their execution of an enforceable release of all claims against us and their compliance with all provisions of their employment agreement.

Death or Disability

Pursuant to our Stock Bonus Plan, upon the death or disability of a named executive officer, all unvested shares of time-vested restricted stock and stock options held by the named executive officer will become immediately vested and the stock options will become exercisable in full. All unvested shares of performance-vested restricted stock held by the named executive officer will vest pro-rata based on the satisfaction of the applicable performance goals through the end of the quarter immediately preceding the date of the named executive officer’s death or disability.

All of our named executive officers participate in our life insurance plan, whereby his or her beneficiary would be entitled to a death benefit equal to three times base salary. We also provide each of our named executive officers with $2,500 annually (except for Mr. Lines, who receives $5,000 annually) for the purpose of procuring a term life insurance policy.

 

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Each of our named executive officers also participates in our short-term disability program that is available to our managers and executive officers. Pursuant to such program, each named executive officer would be entitled to payments equal to his full base salary for six months following such disability. Each of our named executive officers also participates in our long-term disability plan that is generally available to all of our salaried employees.

Death or disability will not affect the amount of any of the payments to Mr. Platt under his Separation Agreement.

Termination Following a Change In Control

Our employment agreements with Messrs. Lines, Glajch, and Smith require a termination of employment following a change in control of our company (commonly referred to as a “double trigger”) in order to trigger certain payments. A “change in control” is defined in each of our employment agreements with Messrs. Lines, Glajch, and Smith to include the following events:

 

   

any person, party or group (other than the company, any subsidiary of the company or any employee benefit plan sponsored by the company or any subsidiary), directly or indirectly, acquires or has acquired during the 12-month period ending on the date of the most recent acquisition, 30% (except that the employment agreement with Mr. Smith uses a lower 25% standard and does not include the 12-month acquisition period) or more of the combined voting power of the outstanding securities of the company ordinarily having the right to vote in the election of directors;

 

   

a change in the composition of our Board of Directors such that members of our Board as of the effective date of the respective employment agreement cease to constitute at least a majority of our Board (unless the election or nomination of any new directors was approved by a vote of at least three-quarters of the Directors comprising our Board of Directors as of the effective date of the respective employment agreement);

 

   

the closing of a reorganization, merger or consolidation of the company, other than one with respect to which all or substantially all of those persons who were the beneficial owners immediately prior to such event, of outstanding securities of the company ordinarily having the right to vote in the election of directors own, immediately after such transaction, more than three-quarters of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors;

 

   

the closing of a sale or other disposition of all or substantially all of the assets of the company, other than to a subsidiary of the company; or

 

   

the complete liquidation and dissolution of the company.

Mr. Lines. Our employment agreement with Mr. Lines provides that, upon the occurrence of a triggering event that would be deemed an event of termination within two years after a change in control of the company, Mr. Lines would be entitled to certain payments, including, among other things, a lump sum payment equal to one dollar less than three times his annualized tax-includable compensation (including bonus) for the five most recent taxable years ending before the date of such change in control.

In addition, all unvested stock options would become immediately vested and exercisable and any unvested shares of restricted stock would become immediately vested. We would also be required to pay to Mr. Lines six months after the triggering event a lump sum payment amount equal to the excess, if any, of (1) the present value of the aggregate benefits to which he would be entitled under any and all qualified and non-qualified defined benefit pension plans maintained by us as if he were 100% vested under such plans, over (2) the present value of the benefits to which he is actually entitled under such defined benefit pension plans as of the date of his termination. Mr. Lines’ employment agreement contains certain limitations for these payments that relate to our ability to deduct such payments for federal income tax purposes.

Pursuant to our employment agreement with Mr. Lines, our obligation to make payments upon termination following a change in control is conditioned on his execution of an enforceable release of all claims and his compliance with all provisions of the employment agreement.

 

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The triggering events that would be deemed events of termination include, among others, termination of Mr. Lines for any reason other than death, disability or cause, or resignation of Mr. Lines under the following circumstances:

 

   

a change in the nature or scope of his authority from his role and responsibilities immediately prior to the change in control;

 

   

a reduction of his total compensation from that prior to the change in control;

 

   

a failure by the company to make any increase in compensation to which Mr. Lines may be entitled under his employment agreement, or action by the company to decrease his base salary;

 

   

a change requiring Mr. Lines to perform services other than in Batavia, New York or in any location more than thirty miles distant from Rochester, New York, except for certain required travel on the company’s business;

 

   

without his express written consent, the assignment to Mr. Lines of any duties inconsistent with his positions, duties, responsibilities and status with the company immediately prior to the change in control;

 

   

a failure by the company to continue in effect any bonus plans or other benefit or compensation plan in which Mr. Lines was participating at the time of the change in control or the taking of any action by the company which would adversely affect his participation in or materially reduce his benefits under such plans; or

 

   

prior to a change in control of the company, the failure by the company to obtain the assumption of the agreement to perform his employment agreement by any successor company.

Mr. Glajch. Our employment agreement with Mr. Glajch provides that, upon the occurrence of a triggering event that would be deemed an event of termination within two years after a change in control of the company, Mr. Glajch would be entitled to certain payments, including, among other things, a lump sum payment equal to one dollar less than three times his annualized tax-includable compensation (including bonus) for the five most recent taxable years ending before the date of such change in control.

In addition, all unvested stock options would become immediately vested and exercisable and any unvested shares of restricted stock would become immediately vested. We would also be required to pay to Mr. Glajch six months after the triggering event a lump sum payment amount equal to the excess, if any, of (1) the present value of the aggregate benefits to which he would be entitled under any and all qualified and non-qualified defined benefit pension plans maintained by us as if he were 100% vested under such plans, over (2) the present value of the benefits to which he is actually entitled under such defined benefit pension plans as of the date of his termination. Mr. Glajch’s employment agreement contains certain limitations for these payments that relate to our ability to deduct such payments for federal income tax purposes.

Pursuant to our employment agreement with Mr. Glajch, our obligation to make payments upon termination following a change in control is conditioned on his execution of an enforceable release of all claims and his compliance with all provisions of the employment agreement.

The triggering events that would be deemed events of termination include, among others, termination of Mr. Glajch for any reason other than death, disability or cause, or resignation of Mr. Glajch under the following circumstances:

 

   

a change in the nature or scope of his authority from his role and responsibilities immediately prior to the change in control;

 

   

a reduction of his total compensation from that prior to the change in control;

 

   

a failure by the company to make any increase in compensation to which Mr. Glajch may be entitled under his employment agreement, or action by the company to decrease his base salary;

 

39


   

a change requiring Mr. Glajch to perform services other than in Batavia, New York or in any location more than thirty miles distant from Batavia, New York, except for certain required travel on the company’s business;

 

   

without his express written consent, the assignment to Mr. Glajch of any duties inconsistent with his positions, duties, responsibilities and status with the company immediately prior to the change in control;

 

   

a failure by the company to continue in effect any bonus plans or other benefit or compensation plan in which Mr. Glajch was participating at the time of the change in control or the taking of any action by the company which would adversely affect his participation in or materially reduce his benefits under such plans; or

 

   

prior to a change in control of the company, the failure by the company to obtain the assumption of the agreement to perform his employment agreement by any successor company.

Mr. Smith. Under Mr. Smith’s employment agreement, he will not be entitled to any payments by us upon the occurrence of a change in control. Rather, upon the occurrence of a change in control, Mr. Smith must continue to provide us with the services contemplated by the employment agreement until three months after a change in control has occurred.

Mr. Platt. The payments to Mr. Platt under his Separation Agreement will not be affected by a change in control of the company, and he forfeited all of his outstanding equity awards upon his resignation.

General. In the event of any sale, merger or any form of business combination affecting us, our employment agreements with Messrs. Lines, Glajch, and Smith require us to obtain the express written assumption of the agreement by the acquiring or surviving entity, and failure to do so would entitle the executive officer to all payments and other benefits to be provided by us in the event of termination without cause.

In addition, pursuant to the Supplemental Plan, in the event of a “change in control,” each participant in our Supplemental Plan, which currently includes Mr. Lines, Mr. Smith and Ms. Condame, would become 100% vested in his or her benefits.

 

40


ESTIMATED PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

 

Event  

James R. Lines

($)

   

Jeffrey F. Glajch

($)

   

Alan E. Smith

($)

   

Jennifer R. Condame

($)

   

Robert A. Platt

($)

 

Normal and Early Retirement

         

Accelerated vesting of stock options

    81,016        55,114        46,759        24,130          

Accelerated vesting of time-vested and performance-vested restricted stock

    337,206        207,296        199,714        90,796          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    418,222        262,410        246,473        114,926          

Involuntary Termination without Cause or Voluntary Termination for Good Reason

         

Continued salary

    255,000        240,000        205,000               44,000   

Cash severance payment

    255,000                               

Healthcare coverage

    22,565                               

Outplacement services

    40,000 (1)                             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    572,565        240,000        205,000               44,000   

Death

         

Life insurance proceeds

    3,292,759        2,720,000        3,554,765        2,125,000          

Accelerated vesting of stock options

    81,016        55,114        46,759        24,130          

Accelerated vesting of time-vested and performance-vested restricted stock

    337,206        207,296        199,714        90,796          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    3,710,981        2,982,410        3,801,238        2,239,926          

Disability

         

Short-term disability payments

    170,000        120,000        102,500        75,000          

Accelerated vesting of stock options

    81,016        55,114        46,759        24,130          

Accelerated vesting of time-vested and performance-vested restricted stock

    337,206        207,296        199,714        90,796          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    588,222        382,410        348,973        189,926          

Termination Following Change in Control

         

Accelerated vesting of stock options

    81,016        55,114                        

Accelerated vesting of restricted stock

    337,206        207,296                        

Continued salary

                  205,000                 

Cash severance payment

    1,396,547        613,790                        

Healthcare coverage

    22,565                               

Outplacement services

    40,000 (1)                             

Accelerated vesting of defined contribution pension contributions

                                  

Pension enhancement

                                  

Accelerated vesting of SERP benefits

                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,877,334 (2)      876,200 (2)       205,000                 

 

(1) 

Pursuant to our employment agreement with Mr. Lines, reimbursement of outplacement services is limited to a total amount of $40,000.

 

(2) 

Such amount takes into account limitations imposed by our employment agreements with Mr. Lines and Mr. Glajch, whereby certain amounts otherwise payable to Mr. Lines and Mr. Glajch upon termination following a change in control may be reduced in connection with limitations on deductibility by the company for federal income tax purposes imposed by Section 280G of the Code.

 

(3) 

Mr. Platt resigned on January 9, 2013. Figures in this column represent amounts payable after March 31, 2013 under the terms of his January 31, 2013 Separation Agreement.

 

41


DIRECTOR COMPENSATION

Director Compensation Programs

The Compensation Committee annually reviews and approves compensation for our independent Directors. Mr. Lines, our President and Chief Executive Officer, is not an independent Director under applicable NYSE MKT and Securities and Exchange Commission rules and, therefore, he does not receive any additional compensation for services as a Director. The compensation that we pay to Mr. Lines is disclosed in the Fiscal Year 2013 Summary Compensation Table.

We use a combination of cash and equity-based compensation to attract and retain our independent Directors. As described below, independent Director compensation consists of an annual cash retainer; an additional annual cash retainer for the Chairman of our Board of Directors and the chair of each committee of our Board; committee meeting fees; share equivalent units; restricted stock awards; and stock options. We also reimburse our independent Directors for reasonable expenses incurred in connection with their attendance at Board and committee meetings. We do not provide retirement benefits to our independent Directors.

Cash Compensation

Each of our independent Directors receives an annual fee of $15,000 for service on our Board of Directors. Additionally, each independent Director receives a fee of $1,000 for each Board or committee meeting attended, except that if such meeting is held by telephone conference call or by unanimous written consent, the fee is reduced to $500. If our Board of Directors and/or one or more committees meet on the same day, a full meeting fee is paid for one meeting and one-half of the meeting fee is paid for each additional meeting attended that day.

The Chairman of our Board of Directors and each of our independent Directors serving as chairman of committees of our Board of Directors receive additional fees for such service. For fiscal year 2013, the Chairman of our Board of Directors received an additional annual fee of $15,000, the Chairman of the Audit Committee received an additional annual fee of $6,000, the Chairman of the Compensation Committee received an additional annual fee of $5,000, and the Chairman of the Employee Benefits Committee and the Chairman of the Nominating and Corporate Governance Committee each received an additional annual fee of $3,000.

Equity-Based Compensation

Share Equivalent Units.    Independent Directors elected prior to May 2009 participate in the Outside Directors’ Long-Term Incentive Plan, which we refer to as the LTIP. The LTIP credits each of our independent Directors with Share Equivalent Units, or SEUs, for five fiscal years during the term of such independent Director’s service, subject to our attainment of certain performance objectives. Upon termination of an independent Director’s service, but not before, the independent Director may redeem each SEU for one share of our common stock or, alternatively and subject to our discretion, for the cash equivalent at the closing price of the stock on the NYSE MKT on the date of termination of service, subject to certain limitations which are discussed further below.

Under the LTIP, SEUs are credited to each independent Director’s account for each of the first five fiscal years during such independent Director’s term in which we produce consolidated net income in an amount at least equal to the consolidated net income specified in our budget for each such fiscal year. Such determinations are made annually shortly after the end of our fiscal year. Each SEU is valued at the market value of one share of our common stock on the valuation date, which is the last day of trading of the first quarter following the end of a fiscal year for which SEUs are to be credited. The number of SEUs to be credited is determined by dividing the value of one SEU into $10,000.

In the event we elect under the LTIP to redeem an independent Director’s SEUs for cash representing a commensurate number of our shares of our common stock, the cash value will be determined by multiplying the number of SEUs held by such independent Director on the date of his or her termination from service multiplied by the closing price of our common stock on the date of such termination. However, the cash value of each SEU may not exceed the greater of $3.20 per share or the price on the valuation date when initially credited to such independent Director’s account.

 

42


In the event we elect to redeem an independent Director’s SEUs for a commensurate number of shares of our common stock, the number of shares we pay to such independent Director shall be determined as follows:

 

   

if the fair market value is at or below the valuation date price, each SEU will be redeemed for one share of common stock;

 

   

if the fair market value is greater than the valuation date price but less than $3.20 per share, each SEU will be redeemed for one share of our common stock;

 

   

if the fair market value is greater than $3.20 per share and the valuation date price was less than or equal to $3.20 per share, the number of shares constituting the redemption price of an independent Director’s SEUs will be determined by multiplying the number of SEUs times $3.20 and dividing the product by the fair market value; and

 

   

if the fair market value is greater than the valuation date price and the valuation date price was greater than $3.20 per share, the number of shares constituting the redemption price of an independent Director’s SEUs will be determined by multiplying the number of SEUs times the valuation date price and dividing the product by the fair market value.

Outstanding SEUs accrue dividends quarterly in accordance with our regular dividend policy and such dividends are reflected in each independent Director’s account after the end of each fiscal year.

In May 2009, the Compensation Committee determined to suspend the LTIP’s applicability to any independent Director first elected after such date.

Options.    Our independent Directors are also eligible to participate in the Incentive Plan, pursuant to which they may be granted options to purchase shares of our common stock. No options were granted to our independent Directors during fiscal year 2013.

Restricted Stock.    Equity compensation awards to independent Directors are made in the form of time-vested restricted stock awarded under the Incentive Plan. On May 30, 2012, the Compensation Committee awarded 1,340 shares of time-vested restricted stock, with an approximate grant date fair market value of $25,000 to each of our independent Directors. The shares of restricted stock awarded to our independent Directors vest on the first anniversary of the date of grant.

Stock Ownership Guidelines

In order to more closely align the interests of our independent Directors with the interests of our stockholders, on March 27, 2006, the Compensation Committee established minimum stock ownership guidelines that require our independent Directors to work towards acquiring and maintaining specific levels of equity ownership interests in our common stock within specified time frames. The Compensation Committee most recently modified these ownership guidelines on May 26, 2011.

Under our stock ownership guidelines, our independent Directors are required to own shares of our common stock valued at least 3.0 times their annual retainer. New independent Directors are expected to achieve their ownership guidelines within five years of becoming subject to the guidelines. Our stock ownership guidelines also require our independent Directors to retain 50% of the net shares they realize (after tax) when a restricted stock award vests or a stock option is exercised until they are in compliance with the guidelines. The Compensation Committee monitors the progress made by independent Directors in achieving their stock ownership guidelines and, in its discretion, may modify the guidelines and/or time frames for some or all of our independent Directors. As of the end of fiscal year 2013, each of our independent Directors was in compliance with our stock ownership guidelines.

 

43


Fiscal Year 2013 Director Summary Compensation Table

The following table shows information regarding the compensation of our independent Directors for fiscal year 2013.

 

Name   

Fees Earned or

Paid in Cash

($)

    

Stock

Awards (1)(2)

($)

    

SEU
Awards (3)

($)

    

All Other

Compensation (4)

($)

    

Total

($)

 

James J. Barber

     22,500         24,991                         47,491   

Helen H. Berkeley

     25,500         24,991                 1,265         51,756   

Jerald D. Bidlack

     43,000         24,991                 1,814         69,805   

Alan Fortier

     30,500         24,991         10,000         222         65,713   

James J. Malvaso

     33,000         24,991                 322         58,313   

Gerard T. Mazurkiewicz

     29,500         24,991         10,000         247         64,738   

 

(1) 

The table below presents the aggregate number of unexercised stock option awards and unvested restricted stock awards for each of our independent Directors at March 31, 2013.

 

Name    Stock Option
Awards
     Restricted Stock
Awards
 

James J. Barber

             1,340   

Helen H. Berkeley

     5,924         1,340   

Jerald D. Bidlack

     924         1,340   

Alan Fortier

     924         1,340   

James J. Malvaso

     924         1,340   

Gerard T. Mazurkiewicz

     5,924         1,340   

 

(2) 

The amounts shown in this column represent the estimated grant date fair value of the shares of restricted stock granted to each independent Director during fiscal year 2013. The value of each such restricted stock award is computed in accordance with FASB ASC Topic 718 on the same basis as disclosed at footnote (2) to the Fiscal Year 2013 Summary Compensation Table. Each independent Director was granted 1,340 shares of restricted stock during fiscal year 2013 under the Incentive Plan.

 

(3) 

Each SEU is valued at the market value of one share of our common stock on the valuation date, which is the last day of trading of the first quarter following the end of a fiscal year for which SEUs are to be credited. The number of SEUs to be credited is determined by dividing the value of one SEU into $10,000. For more information regarding SEUs, see “Share Equivalent Units” under the heading “Director Compensation Programs.”

 

(4) 

These amounts are dividends earned on outstanding SEUs during fiscal year 2013 pursuant to our regular dividend policy.

 

44


PROPOSAL TWO:

ADVISORY VOTE ON OUR EXECUTIVE COMPENSATION

Pursuant to Section 14A of the of the Exchange Act, we are providing our stockholders the opportunity to vote to approve, on a non-binding, advisory basis, the compensation of our named executive officers as described in the Compensation Discussion and Analysis, accompanying compensation tables and related narrative discussion contained in this proxy statement. Our stockholders were first provided with the opportunity to approve, on an advisory basis, the compensation of our named executive officers at our 2011 annual meeting. At the 2011 annual meeting, our stockholders expressed an overwhelming preference for this vote to occur on the annual basis recommended by our Board of Directors. This preference was subsequently adopted by our Board of Directors and we are providing our stockholders with an advisory vote this year.

We encourage stockholders to carefully review the Compensation Discussion and Analysis section of this proxy statement for additional details on our executive compensation programs, including our compensation philosophy and objectives, as well as the processes our Compensation Committee used to determine the structure and amounts of the compensation of our named executive officers during fiscal year 2013. For your convenience, we have provided an executive summary in the first few pages of the Compensation Discussion and Analysis that highlights information that we believe is particularly important in helping you decide how to vote on this proposal. You should also carefully review the tables that immediately follow the Compensation Discussion and Analysis, together with the related narrative disclosure and footnotes.

We are asking you to indicate your support for the compensation of our named executive officers as described in this proxy statement. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the philosophy, policies and practices described in this proxy statement.

As an advisory vote, this proposal is not binding upon our Board of Directors or our Compensation Committee. However, the Compensation Committee and our Board value the opinions expressed by stockholders in their vote on this proposal, and will consider the outcome of the vote in deciding whether to take any action as a result of the vote and when making future compensation decisions for named executive officers.

Board Recommendation

Our Board of Directors unanimously recommends that stockholders vote FOR the following advisory resolution:

“RESOLVED, that the compensation paid to our named executive officers, as disclosed pursuant to the Securities and Exchange Commission’s compensation disclosure rules, including the Compensation Discussion and Analysis, compensation tables and related narrative discussions set forth in this proxy statement, is hereby approved.”

 

45


PROPOSAL THREE:

RATIFICATION OF THE SELECTION OF OUR

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP served as our independent registered public accounting firm in fiscal year 2013. The Audit Committee of our Board of Directors has selected Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2014, which we refer to as fiscal year 2014. This selection will be presented to our stockholders for ratification at the annual meeting. The Audit Committee will consider the outcome of this vote in its future discussions regarding the selection of our independent registered public accounting firm.

We have been advised by Deloitte & Touche LLP that a representative will be present at the annual meeting and that such representative will be available to respond to appropriate questions. Such representative will be given an opportunity to make a statement if he or she so desires.

Board Recommendation

Our Board of Directors unanimously recommends a vote FOR the proposal to ratify the selection of Deloitte & Touche LLP to serve as our independent registered public accounting firm for fiscal year 2014.

Fees Paid to Deloitte & Touche LLP

We paid the following fees to Deloitte & Touche LLP for fiscal year 2013 and for the fiscal year ended March 31, 2012, which we refer to as fiscal year 2012:

 

      Fiscal Year
2013
     Fiscal Year
2012
 

Audit fees

   $ 345,000       $ 390,000   

Audit-related fees

     29,984         16,265   

Tax fees

               

All other fees

     2,376         2,376   
  

 

 

    

 

 

 

Total fees

   $ 377,360       $ 408,641   
  

 

 

    

 

 

 

Audit fees for each of fiscal year 2013 and fiscal year 2012 included fees associated with audits of our financial statements, audits of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and reviews of financial statements included in our quarterly reports on Form 10-Q.

Audit-related fees for fiscal year 2013 included fees associated with the review of our response to a Securities and Exchange Commission comment letter and out-of-pocket expenses. Audit-related fees for fiscal year 2012 included out-of-pocket expenses. All other fees for fiscal years 2013 and 2012 included the subscription fee for the Deloitte & Touche LLP Technical Library Research Tool.

The Audit Committee has determined that the provision of permitted non-audit services described above has not compromised the independence of Deloitte & Touche LLP.

The Audit Committee has adopted procedures for pre-approving all audit and permitted non-audit services provided by our independent registered public accounting firm. The Audit Committee annually pre-approves a list of specific services and categories of services, subject to a specified cost level. Part of this approval process includes making a determination as to whether permitted non-audit services are consistent with the Securities and Exchange Commission’s rules on auditor independence. The Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee, subject to reporting any such approvals at the next Audit Committee meeting.

The Audit Committee monitors the services rendered and actual fees paid to our independent registered public accounting firm quarterly to ensure that such services are within the scope of approval. All audit and permitted non-audit services for which Deloitte & Touche LLP was engaged were pre-approved by the Chairman of the Audit Committee.

 

46


REPORT OF THE AUDIT COMMITTEE

The Audit Committee is currently comprised of Directors Mazurkiewicz (Chairman), Barber, Bidlack, Fortier and Malvaso, each of whom our Board of Directors has affirmatively determined is independent pursuant to the listing standards of the NYSE MKT and applicable Securities and Exchange Commission rules. The duties and responsibilities of the Audit Committee are set forth in the Audit Committee’s charter, as last amended and restated by our Board of Directors on March 12, 2009.

The Audit Committee oversees the company’s financial reporting process on behalf of our Board of Directors, and has other duties and functions as described in its charter.

Management has the primary responsibility for the company’s financial statements and the reporting process. The company’s independent registered public accounting firm, Deloitte & Touche LLP, is responsible for auditing the company’s financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States.

The Audit Committee has:

 

   

reviewed and discussed the company’s audited financial statements for the fiscal year ended March 31, 2013 with management and the independent registered public accounting firm;

 

   

discussed with the company’s independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T;

 

   

received and discussed the written disclosures and the letter from the company’s independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the audit committee concerning independence; and

 

   

discussed with the company’s independent registered public accounting firm its independence.

When evaluating Deloitte & Touche LLP’s independence, the Audit Committee discussed with Deloitte & Touche LLP any relationships that may impact such firm’s objectivity and independence. The Audit Committee has also considered whether the provision of permitted non-audit services by Deloitte & Touche LLP is compatible with maintaining such firm’s independence, and has satisfied itself with respect to Deloitte & Touche LLP’s independence from the company and its management.

The Audit Committee discussed with the personnel responsible for the internal audit function and the company’s independent registered public accounting firm the overall scope and plans for their respective audits. The Audit Committee meets with the personnel responsible for overseeing the internal audit function and with the company’s independent registered public accounting firm, with and without management present, to discuss the results of their examinations, the evaluations of the company’s internal controls, and the overall quality of the company’s financial reporting.

Based on the reviews and discussions referred to above, the Audit Committee recommended to our Board of Directors (and our Board has approved) that the audited financial statements be included in the company’s annual report on Form 10-K for the year ended March 31, 2013 for filing with the Securities and Exchange Commission. The Audit Committee has also selected the company’s independent registered public accounting firm for the fiscal year ending March 31, 2014 and has submitted such selection for ratification by the stockholders at the company’s annual meeting.

 

Audit Committee:

Gerard T. Mazurkiewicz, Chairman

James J. Barber

Jerald D. Bidlack

Alan Fortier

James J. Malvaso

 

47


Compensation Committee Interlocks and Insider Participation

The members of our Compensation Committee during fiscal year 2013 were Directors Malvaso (Chairman), Berkeley, Bidlack and Fortier.

During fiscal year 2013, no member of our Compensation Committee: (1) was an officer or employee of ours or any of our subsidiaries; (2) was formerly an officer of ours or any of our subsidiaries; or (3) had any relationship requiring disclosure in this proxy statement pursuant to Securities and Exchange Commission rules. In addition, no executive officer served: (1) as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our Compensation Committee; (2) as a director of another entity, one of whose executive officers served on our Compensation Committee; or (3) as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our Board of Directors.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Policies and Procedures for Review, Approval or Ratification of Related Person Transactions

Our Audit Committee reviews all relationships and transactions in which the company and our Directors and executive officers or their immediate family members are participants in advance for review and approval. All existing related person transactions are reviewed at least annually by the Audit Committee. Any Director or executive officer with an interest in a related person transaction is expected to recuse himself or herself from any consideration of the matter.

Although the Audit Committee has not established a written policy regarding the approval of related person transactions, when evaluating these transactions, the Audit Committee considers, among other factors:

 

   

the nature of the related person’s interest in the transaction;

 

   

the material terms of the transaction, including the amount and type of transaction;

 

   

the importance of the transaction to the related person and to the company;

 

   

whether the transaction would impair the judgment of a Director or executive officer to act in the best interest of the company; and

 

   

any other matters the Committee deems appropriate.

To the extent that the transaction involves an independent Director, consideration is also given, as applicable, to the listing standards of the NYSE MKT and other relevant rules related to independence.

In addition, our Audit Committee also reviews all transactions between us and any entity with which an independent Director is an affiliate, taking into account the factors listed above as well as all other factors deemed appropriate by the Committee.

 

48


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The table below shows certain information, as of June 7, 2013, regarding the only persons known to us to be the beneficial owners of more than five percent of the outstanding shares of our common stock, with percentages based on 10,038,631 shares issued and outstanding.

 

Name and Address of Beneficial Owner    Number of Shares
Beneficially Owned
     Percent of Class
Beneficially Owned
 

Royce & Associates, LLC(1)

745 Fifth Avenue

New York, New York 10151

     1,121,785         11.2

The Killen Group, Inc.(2)

1189 Lancaster Avenue

Berwyn, Pennsylvania 19312

     681,391         6.8

BlackRock, Inc.(3)

40 East 52nd Street

New York, New York 10022

     576,489         5.7

Next Century Growth Investors, LLC(4)

5500 Wayzata Boulevard, Suite 1275

Minneapolis, Minnesota 55416

     509,028         5.1

 

(1) 

This information as to the beneficial ownership of shares of our common stock is based on an Amendment to Schedule 13G filed with the Securities and Exchange Commission on January 11, 2013 by Royce & Associates, LLC. Royce & Associates, LLC reports sole voting and sole dispositive power with respect to all of the shares. The interest of one account, Royce Micro Cap Fund, an investment company registered under the Investment Company Act of 1940 and managed by Royce & Associates, LLC, amounted to 601,249 shares or 6.0% of the total shares outstanding as of June 7, 2013.

 

(2) 

This information as to the beneficial ownership of shares of our common stock is based on an Amendment to Schedule 13G filed with the Securities and Exchange Commission on February 20, 2013 by The Killen Group, Inc. The Killen Group, Inc. reports sole voting power with respect to 621,915 shares and sole dispositive power with respect to all 681,391 shares.

 

(3) 

This information as to the beneficial ownership of shares of our common stock is based on an Amendment to Schedule 13G filed with the Securities and Exchange Commission on February 8, 2013 by BlackRock, Inc. BlackRock, Inc. reports sole voting and sole dispositive power with respect to all of the shares.

 

(4) 

This information as to the beneficial ownership of shares of our common stock is based on a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2013 by Next Century Growth Investors, LLC (“NCGI”), Thomas L. Press, Director, Chairman and Chief Executive Officer of NCGI, and Donald M. Longlet, Director and President of NCGI. Mr. Press reports that he owns in excess of 25% of NCGI and is a controlling person of NCGI. NCGI and Mr. Press report shared voting and shared dispositive power with respect to all the shares. NCGI, Mr. Press and Mr. Longlet disclaim beneficial ownership of the shares except to the extent of each of their respective pecuniary interest therein, if any.

 

49


SECURITY OWNERSHIP OF MANAGEMENT

The table below shows certain information, as of June 7, 2013, regarding shares of our common stock held by (1) each of our Directors; (2) each our of named executive officers; and (3) all Directors and executive officers as a group.

 

Name of Beneficial Owner   Number of Shares
Beneficially Owned (1)
    Percent of Class
Beneficially  Owned (1)(2)
 

James J. Barber, Ph.D. (3)

    3,679 (5)        

Helen H. Berkeley (3)

    190,418 (6)      1.9

Jerald D. Bidlack (3)

    8,306 (7)        

Jennifer R. Condame (4)

    25,666 (8)        

Alan Fortier(3)

    14,768 (9)        

Jeffrey F. Glajch (4)

    52,207 (10)        

James R. Lines (3)(4)

    69,711 (11)        

James J. Malvaso (3)

    15,584 (12)        

Gerard T. Mazurkiewicz (3)

    13,068 (13)        

Robert A. Platt (4)

    —     (14)        

Alan E. Smith (4)

    26,418 (15)        

All directors and executive officers as a group (11 persons) (16)

    419,825        4.2

 

(1) 

As reported by such persons as of June 7, 2013 with percentages based on 10,038,631 shares issued and outstanding except where the person has the right to receive shares within the next 60 days (as indicated in the other footnotes to this table), which increases the number of shares owned by such person and the number of shares outstanding. Under the rules of the Securities and Exchange Commission, “beneficial ownership” is deemed to include shares for which an individual, directly or indirectly, has or shares voting or dispositive power, whether or not they are held for the individual’s benefit, and includes shares that may be acquired within 60 days, including, but not limited to, the right to acquire shares by the exercise of options. Shares that may be acquired within 60 days are referred to in the footnotes to this table as “presently exercisable options.” Unless otherwise indicated in the other footnotes to this table, each stockholder named in the table has sole voting and investment power with respect to all of the shares shown as owned by the stockholder.

 

(2) 

We have omitted percentages of less than 1% from the table.

 

(3) 

Director.

 

(4) 

Named executive officer.

 

(5) 

The amount shown for Dr. Barber includes 1,042 shares of time-vested restricted stock.

 

(6) 

The amount shown for Mrs. Berkeley includes 1,042 shares of time-vested restricted stock and presently exercisable options to purchase 5,924 shares.

 

(7) 

The amount shown for Mr. Bidlack includes 1,042 shares of time-vested restricted stock and presently exercisable options to purchase 924 shares.

 

(8) 

The amount shown for Ms. Condame includes 1,140 shares of time-vested restricted stock and 4,880 shares of performance-vested restricted stock (assuming maximum achievement of performance criteria), presently exercisable options to purchase 14,379 shares, and 2,506 shares held by the Employee Stock Ownership Plan of Graham Corporation trustee and allocated to Ms. Condame’s account, as to which Ms. Condame has sole voting power but no dispositive power, except in limited circumstances.

 

(9) 

The amount shown for Mr. Fortier includes 1,042 shares of time-vested restricted stock and presently exercisable options to purchase 924 shares.

 

(10)

The amount shown for Mr. Glajch includes 2,580 shares of time-vested restricted stock and 11,096 shares of performance-vested restricted stock (assuming maximum achievement of performance criteria), and presently exercisable options to purchase 11,748 shares.

 

50


(11) 

The amount shown for Mr. Lines includes 4,140 shares of time-vested restricted stock and 17,336 shares of performance-vested restricted stock (assuming maximum achievement of performance criteria), presently exercisable options to purchase 11,229 shares, and 5,570 shares held by the Employee Stock Ownership Plan of Graham Corporation trustee and allocated to Mr. Lines’ account, as to which Mr. Lines has sole voting power but no dispositive power, except in limited circumstances.

 

(12) 

The amount shown for Mr. Malvaso includes 1,042 shares of time-vested restricted stock and presently exercisable options to purchase 924 shares.

 

(13) 

The amount shown for Mr. Mazurkiewicz includes 1,042 shares of time-vested restricted stock, presently exercisable options to purchase 5,924 shares.

 

(14) 

Mr. Platt forfeited all of his outstanding equity awards upon his resignation on January 9, 2013.

 

(15) 

The amount shown for Mr. Smith includes 2,197 shares of time-vested restricted stock and 9,430 shares of performance-vested restricted stock (assuming maximum achievement of performance criteria), and presently exercisable options to purchase 9,822 shares.

 

(16) 

See footnotes 5 through 15 to this table. The amount shown includes 16,309 shares of time-vested restricted stock, 42,742 shares of performance-vested restricted stock (assuming maximum achievement of performance criteria), presently exercisable options to purchase 61,798 shares, and 8,076 shares allocated to the executive officers under the Employee Stock Ownership Plan, as to which the executive officers may exercise voting power, but not dispositive power, except in limited circumstances.

 

51


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act, requires our Directors and officers to file with the Securities and Exchange Commission reports of ownership and changes in ownership of our common stock. Based solely on the written representations of our Directors and officers and copies of the reports that they have filed with the Securities and Exchange Commission, we believe that during fiscal year 2013 all of our Directors and officers timely complied with the filing requirements of Section 16(a).

STOCKHOLDER PROPOSALS FOR 2014 ANNUAL MEETING

Proposals Submitted for Inclusion in Our Proxy Materials

We will include in our proxy materials for our 2014 annual meeting of stockholders any stockholder proposals that comply with Rule 14a-8 under the Exchange Act. Among other things, Rule 14a-8 requires that we receive such proposals no later than 120 days prior to the one-year anniversary of this proxy statement, or February 17, 2014. If the proposal is in compliance with all of the requirements set forth in Rule 14a-8 under the Exchange Act, and, if the proposal pertains to the election of Directors, the criteria described under the heading “Nominating and Corporate Governance Committee,” we will include the stockholder proposal in our proxy statement and place it on the form of proxy issued for the 2014 annual meeting. Stockholder proposals submitted for inclusion in our proxy materials should be mailed to the following address: Graham Corporation, Attention: Corporate Secretary, 20 Florence Avenue, Batavia, New York 14020.

Proposals Not Submitted for Inclusion in Our Proxy Materials

Pursuant to our amended and restated bylaws, stockholder proposals that are not submitted for inclusion in our proxy materials pursuant to Rule 14a-8 under the Exchange Act as described above, may be brought before the 2014 annual meeting of stockholders if we receive such proposals no earlier than 150 days and no later than 120 days prior to the one-year anniversary of the date of the mailing of materials for our 2013 annual meeting. Thus, for the 2013 annual meeting of stockholders, we must receive stockholder proposals that are not submitted for inclusion in our proxy materials between January 18, 2014 and February 17, 2014. We will not permit stockholder proposals that do not comply with the foregoing notice requirement to be brought before the 2014 annual meeting of stockholders. Stockholder proposals that are not submitted for inclusion in our proxy statement pursuant to Rule 14a-8 should be mailed to the following address: Graham Corporation, Attention: Corporate Secretary, 20 Florence Avenue, Batavia, New York 14020.

 

52


OTHER MATTERS

Our Board of Directors does not know of any other matters that may be presented for action at the 2013 annual meeting. Should any other matters come before the annual meeting, however, the persons named in the enclosed proxy will have discretionary authority to vote all proxies with respect to such matters in accordance with their judgment.

 

BY ORDER OF THE BOARD OF DIRECTORS

LOGO

James R. Lines

President and Chief Executive Officer

Dated: June 17, 2013

 

53


 

LOGO

 

Using a black ink pen, mark your votes with an X as shown in this example. Please do not write outside the designated areas.  

x

 

 

 

LOGO

q PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.  q

 

LOGO

 

 A 

  Proposals — The Board of Directors recommends a vote FOR all the nominees listed and FOR Proposals 2 and 3.
        +

1. Election of Directors:

   01 - Jerald D. Bidlack to serve until 2016    02 - James J. Malvaso to serve until 2016   
¨     Mark here to vote FOR all nominees   ¨     Mark here to WITHHOLD vote from all nominees   ¨    

For All EXCEPT - To withhold authority to vote for any nominee(s), write the name(s) of such nominee(s) below.

 

 
         

 

 

 

     For    Against    Abstain         For    Against    Abstain

2.   To approve, on an advisory basis, the compensation of the Company’s named executive officers.

   ¨    ¨    ¨   

3.         To ratify the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2014.

   ¨    ¨    ¨

4.   In their discretion, to vote upon all other matters as may be properly brought before the meeting.

            This proxy, when properly executed, will be voted as directed by the undersigned stockholder. If no direction is made, this proxy will be voted: (1) FOR the two director nominees; (2) FOR the approval of the compensation of the Company’s named executive officers; and (3) FOR the ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2014.

 

 B    Non-Voting Items          
Change of Address — Please print your new address below.     Comments — Please print your comments below.    Meeting Attendance   
              

Mark the box to the right if you plan to attend the Annual Meeting.

 

   ¨

 

 C    Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below

NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such.

 

Date (mm/dd/yyyy) — Please print date below.     Signature 1 — Please keep signature within the box.     Signature 2 — Please keep signature within the box.
         /        /                     

 

 

n   +

 


 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on July 25, 2013:

The proxy statement and annual report to stockholders are available at: www.graham-mfg.com/proxy.

For directions on how to attend the annual meeting and vote in person, please review the “Proxy Cards and

Voting” and “Revocability of Proxies” sections of the proxy statement that accompanies this proxy.

 

q PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q

 

LOGO

 

 

LOGO

 

 

PROXY 2013 — GRAHAM CORPORATION

 

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY AND

EACH MATTER TO BE VOTED ON AT THE ANNUAL MEETING HAS BEEN PROPOSED BY THE

BOARD OF DIRECTORS OF THE COMPANY.

The undersigned hereby appoints Jerald D. Bidlack and James R. Lines, or either of them, each with power of substitution, as proxies to attend the Annual Meeting of Stockholders of Graham Corporation to be held at the Hilton Garden Inn, Buffalo Airport, 4201 Genesee Street, Buffalo, New York 14225, on July 25, 2013 at 11:00 a.m., Eastern Time, and any adjournment thereof, and to vote in accordance with the following instructions the number of shares the undersigned would be entitled to vote if personally present at such meeting:

THE BOARD OF DIRECTORS RECOMMENDS A VOTE: (1) FOR THE TWO DIRECTOR NOMINEES; (2) FOR THE APPROVAL OF THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS; AND (3) FOR THE RATIFICATION OF THE SELECTION OF DELOITTE & TOUCHE LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING MARCH 31, 2014.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT WILL BE VOTED “FOR” THE TWO DIRECTOR NOMINEES AND “FOR” PROPOSALS 2 AND 3.

(Continued and to be marked, dated and signed, on the other side)


[GRAHAM LETTERHEAD]

GRAHAM CORPORATION EMPLOYEE BENEFITS COMMITTEE

June 17, 2013

Dear Plan Accountholder:

The Employee Stock Ownership Plan of Graham Corporation (the “ESOP”) has a related trust (the “ESOP Trust”) which owns common stock of Graham Corporation (“Graham”). GreatBanc Trust Company, as trustee of the ESOP, is a stockholder of Graham and may vote on matters presented for stockholder action at Graham’s 2013 Annual Meeting of Stockholders scheduled to be held on July 25, 2013, or at any adjournment of the meeting (the “Annual Meeting”).

The ESOP Trust provides that in casting its vote at the Annual Meeting, the ESOP trustee is to follow directions given by Graham’s Employee Benefits Committee (the “Committee”). The Committee in turn follows instructions provided by participants, former participants and beneficiaries of deceased former participants with respect to the Graham common stock allocated to their accounts in the ESOP as of June 7, 2013.

The records for the ESOP indicate that you are among the individuals who may give voting instructions. You may give your instructions by completing and signing the enclosed Confidential Voting Instruction Card (the “Instruction Card”) and returning it in the envelope provided to the Burke Group Inc., which maintains the records for the ESOP. The Instruction Card allows you to give instructions for each matter expected to be presented for stockholder action at the Annual Meeting. The Committee expects the Burke Group Inc. to tabulate the instructions given on a confidential basis and to provide the Committee with only the final results of the tabulation. The final results will be used in directing the ESOP trustee.

The voting of the common stock held by the ESOP Trust is subject to legal requirements under the Employee Retirement Income Security Act of 1974, as amended. The Committee, in consultation with its legal advisors, considers these requirements in establishing voting instruction procedures and directing the ESOP trustee how to vote. The remainder of this letter describes the voting procedures that the Committee expects to follow for the Annual Meeting.

How your voting instructions count depends on whether it was anticipated that the matter being voted upon would be presented for stockholder action at the Annual Meeting; if you had an interest in the ESOP Trust on the record date for the Annual Meeting; and how large your interest was, as follows:

Anticipated Proposals

In general, the ESOP trustee will be directed to vote the number of shares of Graham common stock (if any) held by the ESOP Trust and allocated as of June 7, 2013 to your individual account under the ESOP according to the instructions specified on the reverse side of the Instruction Card. The Instruction Card shows the number of shares of Graham common stock allocated to your individual account under the ESOP Trust as of June 7, 2013. If you do not return the Instruction Card by July 18, 2013, the ESOP trustee will be directed to vote the shares allocated to your account in accordance with the percentage of shares voted FOR, AGAINST, ABSTAIN, or WITHHOLD, as the case may be, with respect to shares allocated to the accounts of others in the ESOP.


Unanticipated Proposals

It is possible, although unlikely, that proposals other than those specified on the Instruction Card will be presented for stockholder action at the Annual Meeting. If this should happen, the ESOP trustee will be instructed to vote upon such matters in its discretion, or to cause such matters to be voted upon in the discretion of the individuals named in any proxies executed by it.

Your interest in the ESOP Trust offers you the opportunity to participate in decisions that affect Graham’s future, and we encourage you to take advantage of such opportunity. To help you decide how to complete the Instruction Card, enclosed is a copy of the Notice of Annual Meeting and Proxy Statement and a copy of the Annual Report that are being furnished to all holders of Graham common stock in connection with the Annual Meeting. Please complete, sign and return your Instruction Card today. Your instructions are important regardless of the size of your interest in the ESOP Trust.

If you have questions regarding the terms of the ESOP, or how to complete the Instruction Card, please call Jeffrey F. Glajch, Vice President - Finance & Administration and Chief Financial Officer at (585) 343-2216.

 

Sincerely,

THE EMPLOYEE BENEFITS COMMITTEE OF

GRAHAM CORPORATION

Enclosures


GRAHAM CORPORATION

CONFIDENTIAL VOTING INSTRUCTION CARD

This Instruction is solicited by the Employee Benefits Committee of Graham Corporation

as a named fiduciary for the

EMPLOYEE STOCK OWNERSHIP PLAN OF GRAHAM CORPORATION (the “Plan”)

for the Annual Meeting of Stockholders to be held on July 25, 2013

The undersigned Participant, Former Participant or Beneficiary of a deceased Former Participant in the Plan (the “Instructor”) hereby provides the voting instructions hereinafter specified to the Employee Benefits Committee of Graham Corporation (the “Committee”), which instructions shall be taken into account in directing the Trustee of the Plan to vote, in person, by limited or general power of attorney, or by proxy, the shares and fractional shares of common stock (the “Shares”) of Graham Corporation (the “Corporation”) which are held by the Trustee of the Plan, in its capacity as Trustee, as of June 7, 2013 (the “Record Date”) at the Annual Meeting of Stockholders of the Corporation (the “Annual Meeting”) to be held at the Hilton Garden Inn, Buffalo Airport, 4201 Genesee Street, Buffalo, New York 14225, on July 25, 2013 at 11:00 a.m., Eastern Time, or at any adjournment thereof.

As to the nominees and proposals listed on the reverse side hereof and as more particularly described in the accompanying letter from the Committee dated June 17, 2013, the Committee will give voting directions to the Trustee of the Plan. Such directions will reflect the voting instructions provided by the Instructor on this Confidential Voting Instruction Card, in the manner described in such letter from the Committee.

As to other matters which may properly come before the Annual Meeting, the Trustee will be instructed to vote upon such matters in its discretion, or cause such matters to be voted upon in the discretion of the individuals named in any proxies executed by it.

The instructions set forth on the reverse side hereof will be taken into account as described above in directing the Trustee of the Plan how to vote the Shares of the Corporation held by it as of the Record Date in its capacity as Trustee, provided this card is received by the Burke Group Inc. by July 18, 2013.

Please mark, sign and date this voting instruction card on the reverse side and return it in the enclosed envelope.


If this Confidential Voting Instruction Card is signed but no direction is given, it will be deemed to instruct votes “FOR” the election of the two director nominees and “FOR” proposals 2 and 3.

 

ESOP COMMON (as of 6/7/13)

   PLEASE MARK YOUR CHOICE LIKE THIS x IN BLUE OR BLACK INK.

 

The Board of Directors recommends a vote “FOR” the election of the two director nominees and “FOR” Proposals 2 and 3.
     
1.    Election of Directors for a three-year term   3.   Ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2014.
        FOR    WITHHOLD      
     Jerald D. Bidlack    ¨    ¨     FOR    AGAINST    ABSTAIN
     James J. Malvaso    ¨    ¨     ¨    ¨    ¨
     
                                  
     
2.    To approve, on an advisory basis, the compensation of the Company’s named executive officers.   4.   In its discretion, the Trustee is authorized to vote upon such other business as may properly come before the Annual Meeting or any adjournment thereof.
     
     FOR    AGAINST    ABSTAIN      
    

¨

 

   ¨    ¨             
   
                             

 

        
             The undersigned hereby instructs the Committee to direct the
         Trustee of the Plan to vote in accordance with the voting instructions indicated above and hereby acknowledges receipt of the letter from the Committee dated June 17, 2013, the Notice of Annual Meeting of Stockholders of Graham Corporation and Proxy Statement for the Annual Meeting dated June 17, 2013.
              
         Date  

 

   

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on July 25, 2013:

 

The proxy statement and annual report to stockholders are available at: www.graham-mfg.com/proxy

     Signature  

 

        

 

Signature

 

 

        

 

Please sign exactly as your name appears on this voting instruction card. Each owner of shares held jointly must sign this voting instruction card. If signing as attorney, executor, administrator, trustee or guardian, please include your full title. Corporate proxies must be signed by an authorized officer.