Annual Report (Form 10-K), fiscal year 1994

ITEM 1. - BUSINESS
The Standard Register Company began operations in 1912 in Dayton, Ohio. Throughout its history, its primary business has been the design, manufacture, and sale of business forms. However, to meet the needs of today's business environment, the Company provides a wide range of products and services that facilitate the recording, storage and communication of business transactions and information. The Company believes that it is the second largest in the highly competitive U.S. forms industry, which includes approximately 500 companies. Key differentiating factors within the industry include quality, level of service, and price.
The variety of forms currently produced and sold is extensive, ranging from commodity type stock continuous forms to complex custom forms designed to meet the specific needs of individual customers. The Company emphasizes high value-added business forms that satisfy the customer's desire to simplify paperwork and thus improve efficiency. Standard Register also manufactures, sells, and services a variety of financial, bar coding and document processing equipment. Other printed products and services include personalized mail promotional materials and pressure sensitive labels.
The Company's products including business forms, other printed products and equipment are marketed by direct selling and service organizations operating from offices located in principal cities throughout the United States. Forms are produced at thirty five plants located throughout the United States and are shipped directly to the customer or stored in warehouses for subsequent on- demand delivery. The management of forms inventories to provide timely, cost-effective delivery is a major element of customer service.
The Company purchases raw paper in a wide variety of weights, grades, and colors from various paper mills in the United States and Canada. Carbonless paper, inks, carbon, and printing supplies are available nationally and purchased from leading vendors. Continuing efforts are made to assure adequate supplies to meet present and future sales objectives. The Company fills its needs by ordering from suppliers of long-standing relationship.
The Company had engineering and research expense during 1993 of $7,754,000 compared to $7,803,000 in 1992 and $7,854,000 for 1991. These costs relate to the development of new products and to the improvement of existing products and services. These efforts are entirely company sponsored and involve approximately eighty-seven professional employees. The Company had no expenditures during the last three years for customer sponsored research relating to the development of new products, services, or techniques or the improvement of existing products, services, or techniques.
In 1993, the Company continued its STANFAST manufacturing operations in eighteen print centers located nationwide. These print centers are devoted to the manufacture and sale of business forms for customers requiring relatively small quantities on a quick turnaround basis.
Expenditures for property, plant and equipment totaled $31,076,000 in 1993, compared to $22,697,000 and $28,039,000 in 1992 and 1991, respectively.
No significant changes occurred in the types of products, manufacture, or method of distribution during the past fiscal year nor does the Company intend to change its method of doing business in the near future. Other items of information which may be pertinent to an understanding of the Company and its business are as follows:
1.) No material patents, trademarks, licenses, franchises, or concessions are held which have a significant effect upon the business.
2.) No material portion of the Company's business could be considered seasonal.
3.) The Company believes its working capital is sufficient for its current operations. The current ratio has been maintained at 3.9 to 1 at the end of the last three fiscal years. Total debt, including long-term and current maturities, was 6.7% of equity at year-end 1993, compared to 9.2% and 12.7% for years-end 1992 and 1991, respectively. At year-end 1992, cash and cash equivalents exceeded current and long-term debt by approximately $54,977,000. These relationships demonstrate the soundness of the Company's financial position.
4.) No material segment of the Company's business is dependent upon a single or a few customers. No single customer accounts for 10% or more of total revenue.
5.) The Company's backlog of custom printing orders at January 2, 1994 was $51,897,000 compared to $42,670,000 and $43,702,000 at January 3, 1993 and December 29, 1991, respectively. All orders were expected to be filled within the ensuing fiscal year.
6.) The Company has no significant exposure with regard to the renegotiation or termination of government contracts.
7.) Expenditures made by the Company in order to comply with federal, state, or local provisions of environmental protection have not had a material effect upon the Company's capital expenditures, earnings, or competitive position.
8.) At January 2, 1994, the Company had 5,769 employees compared to 5,724 and 5,852 at January 3, 1993 and December 29, 1991, respectively.
9.) Substantially all of the Company's products and services facilitate the recording, storage and communication of business transactions and information.
10.) The Company has no foreign operations and no material portion of the Company's sales or net income is derived from sales to foreign customers. The Company does offer technical assistance to foreign business forms manufacturers and receives royalties for these services. Royalties from these foreign associates are approximately .1% of total revenue.
ITEM 2



ITEM 2 - PROPERTIES
The principal production plants of the Company are located in the following cities:
Dayton, Ohio, 677,000 sq. ft., printing and equipment products production plants and corporate headquarters Newark, Ohio, 234,000 sq. ft., promotional printing plant Shelbyville, Indiana, 61,000 sq. ft., printing plant Middlebury, Vermont, 113,000 sq. ft., printing plant York, Pennsylvania, 214,000 sq. ft., printing plant and warehouse Fayetteville, Arkansas, 146,000 sq. ft., printing plant Porterville, California, 126,000 sq. ft., printing plant Cincinnati, Ohio, 52,000 sq. ft., pressure sensitive label production plant Murfreesboro, Tennessee, 82,000 sq. ft., printing plant Terre Haute, Indiana, 54,000 sq. ft., pressure sensitive label production plant Salisbury, Maryland, 114,000 sq. ft., printing plant Rocky Mount, Virginia, 105,000 sq. ft., printing plant Kirksville, Missouri, 191,000 sq. ft., printing plant and warehouse Tampa, Florida, 38,000 sq. ft., pressure sensitive label production plant
All plants are owned by the Company except for the Tampa location.
STANFAST print centers are generally much smaller than the preceding plants and are in eighteen other locations nationwide. STANFAST also operates an imprint center in Tolland, Connecticut, a plastic card embossing plant in Rochester, New York and a printing plant in Phoenix, Arizona. STANFAST generally leases its plants.
ITEM 3

ITEM 3 - LEGAL PROCEEDINGS
(a) No material claims or litigation are pending against the Company.
(b) The Company is named as a potentially responsible party by the U.S. Environmental Protection Agency or received a similar designation by state environmental authorities in several situations. None of these matters have reached the stage where liabilities have been assessed against the Company. The Company has evaluated each of these matters and believes that none of them individually, nor all of them in the aggregate, would give rise to a material charge to earnings or a material amount of capital expenditures even if the Company is required to make payments within the range of its current estimates of those potential liabilities. This assessment does not take into account the ability of the Company to recover on existing insurance policies or from other parties which the Company believes would be held as joint and several obligors under any such liabilities. However, since these matters are in various stages of process by the relevant environmental authorities, future developments could alter these conclusions. However, management does not now believe that there is a likelihood of a material adverse effect on the financial condition of the Company in these circumstances.
ITEM 4

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of the fiscal year.
PART II
ITEM 5

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The common stock $1.00 par value of the Registrant is traded in the over-the counter market and is quoted on the NASDAQ National Market System. The range of quotations as supplied by NASDAQ stock market and dividends paid per share on such securities for each quarterly period during the two most recent fiscal years are presented below.
(b) Approximate number of security holders of the Company's common stock as of February 25, 1994 - 3,408 excluding individual holders whose shares are held by nominees. There are also 17 holders of Class A stock.
(c) Dividend policy - The Company expects to continue paying cash dividends in the future, however, the amounts paid will be dependent upon earnings and the future financial condition of the Company. No events have occurred which would indicate a curtailment of the payment of dividends.
ITEM 7


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1 9 9 3
1993 completed the third year of operations since the Company announced its restructuring plan late in 1990. Many of the characteristics of the forms industry remain little changed since that time, including excess productive capacity, the slowing sales growth of some traditional business forms, and a very price competitive marketplace. Against this backdrop, the Company has produced three consecutive years of improving operating results, culminating in 1993's record profit performance. Net income for 1993 was $42.2 million or $1.47 per share, a 7% increase compared to the $39.4 million and $1.37 operating result reported for 1992.
Revenue increased 2.4%, a combination of 1.2% fewer shipment units and 3.6% higher average selling prices, excess industry capacity notwithstanding. Fundamental product mix changes were evident in 1993. Traditional business form products, including custom continuous, unit set, and stock forms declined about 5% and now represent approximately 45% of total revenue. The most significant drop within the traditional forms category was in low value added, low margin stock forms which declined 26% and now represent only 4% of total revenue. Emerging growth products such as cut sheet, Stanfast, Imprint, labels, and distribution services represent about one third of revenue and recorded a 15% increase. Rounding out the remaining major product categories, forms related equipment rose 4% and promotional direct mail increased 15%.
The percentage gross margin improved for the third consecutive year, rising to 37.4% compared to 36.6%, 35.5%, and 35.2% for years 1992 through 1990, respectively. This trend reflects the generally improving product mix, actions to reduce excess capacity, and the higher average selling prices mentioned earlier. Paper prices, taken as a whole, averaged about the same in 1993 as in 1992, but have shown some weakness early in 1994. Paper companies are anxious to repair their depressed margins and are expected to increase prices when supply and demand conditions permit. The Company would attempt to recover any paper price increases by raising the price of its business forms.
Operating expenses continue to be well controlled. Selling and administrative expenses dropped in relation to revenue for the third consecutive year, reflecting improved productivity. Engineering and research expenses have been maintained at their targeted 1.1% of revenue. Among other expense categories, depreciation and amortization has edged higher in relation to revenue, but this has been offset by reductions in interest expense as a result of lower debt balances and falling interest rates. Overall, operating expenses dropped to 27.7% of revenue compared to last year's 27.9% and 1991's 28.1%. This, coupled with the improved gross margins, pushed the pretax profit margin to 9.7% vs. 8.8% and 7.4% in the preceding two years. Pretax profit dollars were up 14% in 1993 vs. 1992.
The effective income tax rate in 1993 was 39.9%, 3.6 percentage points above the 1992 rate. This increase reflects the one percent rise in the Federal rate, higher state and local tax rates, and the absence of favorable investment tax credit amortization. The higher tax rate reduced earnings per share in 1993 by $.09 and halved the 14% pretax growth to 7% after taxes.
The AMS Division, a provider of materials management software to hospitals, recorded a loss in 1993 equivalent to $.11 per share as a result of major investments to improve management depth, standardize business practices, improve customer service, and release upgraded application software. The results also reflected nonrecurring charges for bad debt and other adjustments unrelated to 1993 operations. Management expects AMS to return to profitable quarterly performance during the second half of 1994.
The financial condition remained strong. Cash and cash equivalents ended 1993 at $79.0 million, $55.0 million higher than the $24.0 million ending balance of total debt. This $55.0 "net cash" balance is identical to that at the end of 1992. Shareholders' equity increased $22.7 million to $361.0 million. Net working capital was $243.6 million with current assets 3.9 times current liabilities.
Cash flow from operating activities was $48.1 million compared to $74.5 million in 1992. This $26.4 million unfavorable swing is primarily the result of higher current accounts receivable that accompanied the increased revenue and a rise in inventories to service an expanded third party equipment maintenance program. The average collection period for accounts receivable improved from 50 days in 1992 to 49 days in 1993.
Capital expenditures in 1993 totalled $31.1 million, $8.4 million higher than 1992 spending. Excluding any acquisitions, 1994 capital expenditures should increase 10-15% above the 1993 level, primarily related to capacity increases, new product introductions and programs to improve productivity.
The Company expects to finance its 1994 operating and financial requirements from present cash reserves and internally generated funds.
1 9 9 2
Net income from operations was $39.4 million, a 20% increase over the $32.7 million recorded for 1991. Per share operating net income was a record $1.37; the comparable 1991 result was $1.14.
During 1992, the Company adopted Financial Accounting Standards 106 and 109 which set forth new accounting rules for reporting post-retirement health care costs and deferred income taxes respectively. The net cumulative effect of these two accounting changes was a one-time charge to net income of $13.4 million, or $.47 per share, which has been segregated on the statement of income as a non-operating item. These accounting changes are described in greater detail in Notes 5 and 7.
Total revenue was $705.2 million, representing a 1.7% increase over the $693.7 million result for 1991. Revenue from shipments of custom business forms and labels, comprising approximately 73% of revenue, grew 4.2% on the strength of higher net selling prices, excess industry productive capacity notwithstanding; unit volume was down approximately 2%. Non-custom business forms, commonly referred to as stock forms, declined sharply -- continuing a pattern established over the past several years. These low-margin, commodity type forms now represent less than six percent of total revenue. Printed material sold to promotional direct mail users declined 6.2%, reflecting the residual effects of the higher third class postage rates and temporarily lower customer spending on advertising and promotion. Incoming orders for promotional direct mail printing recovered during the year, however, and year-end production backlogs were well above prior year levels. Installations of equipment products and systems were up 19.2%, bolstered in part by customers' expectations of an improving economy; related supplies and maintenance services were up modestly. Finally, revenue from the installation and support of hospital materials management systems, comprising about one percent of total revenue, rose 9.8%.
The percentage gross margin improved from 35.5% in 1991 to 36.6% in 1992, primarily as a result of the stronger business forms pricing mentioned earlier. The 1992 cost of products sold included a one-time $3.0 million charge for the first quarter 1993 closing of the Bedford, Pennsylvania stock forms plant. This action is expected to save approximately $2.0 million annually, improving production efficiency at other sites that will continue to produce
Paper suppliers have announced an approximate 16% increase in the cost of white bond papers, effective February 15, 1993; other papers are expected to rise by lesser amounts. The Company has announced a forms price increase and expects to recover the higher papers costs.
Operating expenses including research, selling, administration, and depreciation increased 1.2%, reflecting the Company's continued emphasis on cost control. Interest expense declined 29.5% as a result of lower outstanding debt and lower interest rates.
The financial condition remained exceptionally strong. Cash flow from operations rose 5.8% to $74.5 million, producing a $24.5 million increase in cash and cash equivalents after satisfying $22.7 million in capital expenditures, $17.2 million in dividend payments, and $10.8 million in long-term debt payments. The latter included a $4.0 million prepayment of 8-1/4% debt. At year-end, cash and cash equivalents were $86.2 million compared to $31.2 million in total debt. Shareholders' equity increased $9.0 million to $338.3 million after allowing for the $13.4 million in dividend payments. The Company expects to finance its near term operating and financing needs from internally generated funds and current cash reserves.
The recently released Financial Accounting Statement No. 112 requires companies to accrue for expected post-employment costs other than pensions and health care. Adoption of this new statement will not have a material effect on the Company's financial condition or results of operations.
1 9 9 1
Net income for 1991 was $32.7 million or $1.14 per share, compared to $21.8 million and $.74 per share in 1990. The 1990 result included a $14 million charge to pretax earnings for restructuring actions described in the 1990 section below. Excluding this charge, 1990 net income would have been $31.1 million or $1.05 per share.
Total revenue declined 3.2% from $716.4 million in 1990 to $693.7 million in 1991. Business forms sales were down 3.3%, reflecting a 4.3% drop in unit shipments offset by very modest gains in pricing. Forms pricing was held down by a combination of recessionary demand, industry-wide overcapacity, and generally declining paper prices. Communicolor's revenue increased 1% as the market for promotional direct mail experienced relatively weak demand brought about by the recession and a 27% increase in third- class postal rates, which temporarily reduced customers' advertising budgets. The Business Equipment and Systems Division reported relatively flat volume in its service and consumables segments, but sold less new equipment as customers deferred their purchase of discretionary capital items; overall. Business Equipment and Systems Division sales were down 8%. Advanced medical Systems' (AMS) sales of materials management software and related systems to hospitals increased 52%.
The increase in profits occurred, despite the revenue decline as a result of significant reductions in operating costs. Selling, administrative, engineering, and production costs were down compared to the prior year, both in absolute dollars and in relation to revenue. The restructuring program met its cost saving objective, establishing a lower expense base for 1991 and beyond. Raw material paper costs were also lower during 1991, as the recession reduced demand for paper products, including forms bond. An improving 1992 economy may put upward pressure on paper prices, however. Interest expense declined as a result of debt repayment and lower interest rates. Pretax profit as a percent of revenue improved from 6.6% in 1990, excluding the restructuring charge to 7.4% in 1991.
Cash flow from operations, was $70.4 million, a 40.3% increase over 1990, sufficient to finance $28 million in capital expenditures, $16.1 million in dividends, $6.8 million in debt repayment, and provide a $20.3 million increase in cash and short- term investments. At year-end, cash and investments totalled $61.7 million, compared to $42 million in long-term debt including current maturities, and current assets were 3.9 times the level of current liabilities. The Company expects to meet its near-term operating and financing needs from existing cash sources and internally-generated funds.
ITEM 9



ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
There are no family relationships among any of the officers; however, William P. Sherman, Vice-President and retired director is related to James L. Sherman, retired director and Charles F. Sherman, director. Officers are elected at the annual meeting of the Board of Directors, which is held immediately after the annual meeting of shareholders, for a term of office covering one year. William P. Sherman and James L. Sherman retired as directors on February 17, 1994. Roy W. Begley, Jr. and John A. Sherman II were appointed by the Board in February to fill their vacancies.
Effective January 1, 1994, Peter S. Redding was appointed Executive Vice-President and Chief Operating Officer. Mr. Redding, who was serving as Executive Vice-President and General Manager of the Forms Division, is now responsible for the operations of all of Standard Register's five divisions - Forms, Business Equipment and Systems, Communicolor, International Operations and Advanced Medical Systems.
Also effective on January 1, 1994, Craig J. Brown was appointed to the position of Vice President of Finance, Treasurer and Chief Financial Officer. In addition to his corporate financial responsibilities, Mr. Brown will also direct the operations of the Advanced Medical Systems Division. Mr. Brown joined Standard Register in 1975 and has held a number of financial management positions including his most recent - Vice President of Finance and Treasurer.
Items 11, 12 and 13 are incorporated by reference from the Company's Proxy Statement for the 1994 Annual Meeting of shareholders.
PART IV
Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the information is not applicable.
(a)(3) Exhibits:
See Index on Page 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Standard Register Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 18, 1994.
THE STANDARD REGISTER COMPANY
By: /S/ J. K. DARRAGH --------------------------- J. K. Darragh, President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The Standard Register Company and in the capacities indicated on March 18, 1994:
Signatures Title
/S/ P. H. Granzow Chairman of the Board and Director - ------------------ P. H. Granzow
/S/ C. J. Brown Vice-President - Finance and - ------------------ Treasurer (Chief Financial Officer) C. J. Brown
P. H. Granzow, pursuant to power of attorneys which are being filed with this Annual Report on Form 10-K, has signed below on March 18, 1994 as attorney-in-fact for the following directors of the Registrant:
R. R. Burchenal J. J. Schiff, Jr. F. D. Clarke III C. F. Sherman J. K. Darragh J. L. Sherman M. C. Nushawg W. P. Sherman P. S. Redding
/S/ P. H. Granzow -------------------------- P. H. Granzow
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders The Standard Register Company Dayton, Ohio
We have audited the accompanying consolidated balance sheet of The Standard Register Company and subsidiary as of January 2, 1994 and January 3, 1993 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended January 2, 1994. Our audits also included the financial statement schedules listed in Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based upon our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Standard Register Company and subsidiary as of January 2, 1994 and January 3, 1993, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 1994, in conformity with generally accepted accounting principles. Also in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Notes 5 and 7 to the consolidated financial statements, in 1992 the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109, and changed its method of accounting for postretirement benefits other than pensions from the cash to the accrual method to conform with Statement of Financial Accounting Standards No. 106.
BATTELLE & BATTELLE Certified Public Accountants
3400 S. Dixie Drive Dayton, Ohio 45439 January 28, 1994
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes. THE STANDARD REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company operates in a single industry segment - providing products and services that facilitate the recording, storage and communication of business transactions and information. The accounting policies that affect the more significant elements of the consolidated financial statements are summarized below.
CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.
FISCAL YEAR - The Company's fiscal year ends on the Sunday nearest to December 31. The fiscal year ended January 2, 1994 had 52 weeks; the fiscal year ended January 3, 1993 had 53 weeks; the fiscal year ended December 29, 1991 had 52 weeks.
CASH EQUIVALENTS - The Company classifies as cash equivalents all highly liquid investments, primarily composed of repurchase agreements, municipal notes and bond funds, which are convertible to a known amount of cash and carry an insignificant risk of change in value.
INVENTORIES - Inventories are valued at the lower of cost or market. All inventory costs are determined by the last-in, first-out method (LIFO). Printed finished products include forms stored for future shipment and invoicing to customers.
PLANT AND EQUIPMENT - Land, buildings and equipment, including significant improvements to existing facilities, are valued at cost. Maintenance and repairs are expensed as incurred.
DEPRECIATION - For financial statement purposes, depreciation is computed by the straight-line method at rates adequate to recover the costs of the applicable assets over their expected useful lives. For income tax purposes, depreciation is computed by accelerated methods.
INCOME TAXES - In 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Prior to 1992, the provision for income taxes was based on income and expense included in the consolidated statement of income.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - In 1992, the Company adopted Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions". Prior to 1992, the cost of providing these benefits to retired employees was recognized as a charge to income as the health care claims were received, the prevalent practice prior to enactment of SFAS 106.
REVENUE RECOGNITION - The Company generally recognizes product and related services revenue at the time of shipment. Under contractual arrangements with some customers, custom forms which are stored for future delivery are recognized as revenue when manufacturing is complete and the order is invoiced. Revenue from equipment service contracts is recognized ratably over the term of the contract.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE - Income per share is calculated using the average number of shares outstanding during the year.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or market determined by the last-in, first-out (LIFO) method. If the first- in, first-out method had been used, these inventories would have been $22,836,000 higher at January 2, 1994 and $22,380,000 higher at January 3, 1993.
During 1992 and 1991, inventory quantities were reduced, which resulted in a liquidation of LIFO layers carried at lower costs. The effect of these liquidations increased net income by $1,763,000 or $.06 per share in 1992 and $2,249,000 or $.08 per share in 1991.
When equipment is retired or has been fully depreciated, its cost and the related accumulated depreciation are eliminated from the respective accounts. Gains or losses arising from the dispositions are reported as income or expense.
NOTE 4 - PENSION PLANS
The Company has qualified defined benefit plans covering substantially all of its employees. The benefits are based on years of service and the employee's compensation at the time of retirement, or years of service and a benefit multiplier. The Company funds its pension plans based on allowable federal income tax deductions. Contributions are intended to provide not only for benefits attributed to service to date but also for benefits expected to be earned in the future. In addition, the Company has non-qualified plans which provide benefits in addition to those provided in the qualified plan.
Pension fund assets are invested in a broadly diversified portfolio consisting primarily of publicly-traded common stocks and fixed income securities.
NOTE 5 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care benefits for eligible employees who retired prior to July 1, 1992. In 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits Other than Pensions". This statement requires the accrual method of accounting for postretirement health care benefits over the employees' period of employment based upon actuarially determined costs. Previously, the Company expensed claims as incurred, the prevalent practice prior to enactment of SFAS 106.
In fiscal 1992, the Company elected to immediately recognize the $24,510,000 pretax postretirement benefit obligation existing at December 30, 1991, as a cumulative effect of an accounting change. This equates to $14,850,000 or $.52 per share on an after tax basis. The Company continues to pay for retiree benefit costs as claims are incurred. The amount included in expense for 1991 under the previous accounting method was $1,642,000. Under the new accounting method retirees' health claims for 1993 and 1992 amounted to $2,069,000 and $1,892,000, respectively.
The accumulated benefit obligation was determined using the unit credit method and an assumed discount rate of 8.5%. The assumed current health care cost trend rate is 11.5% in 1993 and gradually decreases to 6.5% in the year 2014.
The effect of a one percent increase or decrease in the health care cost trend rates used would result in a $243,000 increase or decrease in the service and interest components of expense for 1993 ($390,000 for 1992) and a $2,858,000 increase or decrease in the postretirement benefit obligation at January 2, 1994 ($3,090,000 at January 3, 1993).
The aggregate principal payments for the five fiscal years subsequent to January 2, 1994, are as follows: 1994 - $6,471; 1995 - $6,475; 1996 - $6,471; 1997 - None; 1998 - None.
In 1992, the Company retroactively changed its method of accounting for income taxes as a result of adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recorded a credit of $1,488,000 or $.05 per share which represents the net decrease in the net deferred tax liabilities as of that date. This amount was reported in the consolidated statement of income as a cumulative effect of an accounting change.
NOTE 8 - CAPITALIZATION
The Company has two classes of capital stock issued and outstanding, Common and Class A. These are equal in all respects except voting rights and restrictions on ownership of the Class A. Each of the 23,946,710 shares of Common outstanding has one vote, while each of the 4,725,000 shares of Class A is entitled to five votes. Class A stock is convertible into Common stock on a share-for-share basis at which time ownership restrictions are eliminated.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Purchase commitments for capital improvements aggregated $2,134,000 at January 2, 1994. Also, the Company has purchase commitments for equipment for resale of $3,593,000 at January 2, 1994. In addition, the Company has entered into several agreements with suppliers to purchase specified minimum quantities of raw materials through 1994.
The Company is obligated under several leases expiring at various dates. Annual expense under these leases was $17,747,000 in 1993, $16,746,000 in 1992, and $17,048,000 in 1991.
In the opinion of management, no litigation or claims, including proceedings under governmental laws and regulations related to environmental matters, are pending against the Company which will have an adverse material effect on its financial condition.
NOTE 11 - CONCENTRATION OF CREDIT RISK
The Company's concentration of credit risk is limited due to the large number of primarily domestic customers who are geographically dispersed. As disclosed on the balance sheet, the Company maintains an allowance for doubtful accounts to cover estimated credit losses.
SCHEDULE I
SCHEDULE V
SCHEDULE VI
CHEDULE VIII
SCHEDULE X
INDEX TO EXHIBITS
3. Amended Articles of Incorporation of the Company, Filed as Exhibit 4 to the Company's Registration Statement No. 33-8687.
10. Material contracts.
10.1 The Standard Register Company Key Employees Incentive Plan. Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders held on April 26, 1976.
10.2 The Standard Register Company Stock Incentive Plan. Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders held on April 19, 1978.
10.3 The Standard Register Company Non-Qualified Retirement Plan filed herewith.
10.4 The Standard Register Company Officers' Supplemental Non-Qualified Retirement Plan filed herewith.
10.5 The Standard Register Company Amended and Restated Stock Incentive Plan filed herewith.
11. Computation of Earnings Per Share.
17.1 Letter of James L. Sherman resigning from Board of Directors.
17.2 Letter of William P. Sherman resigning from Board of Directors.
24. Power of Attorney of R. R. Burchenal, F. D. Clark III, J. K. Darragh, M. C. Nushawg, P. S. Redding, J. J. Schiff, Jr., C. F. Sherman, J. L. Sherman and W. P. Sherman.