-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cu/uYlHz4Z8TBRSE7ymhUT/wA/KLU5AUT0cOU0MP5y05J2+phniotfXUPNowpDsj O3hfhSbQ8g35jwVI3+MS3g== 0000950135-99-001627.txt : 19990331 0000950135-99-001627.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950135-99-001627 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NASHUA CORP CENTRAL INDEX KEY: 0000069680 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 020170100 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05492 FILM NUMBER: 99577784 BUSINESS ADDRESS: STREET 1: 44 FRANKLIN ST STREET 2: PO BOX 2002 CITY: NASHUA STATE: NH ZIP: 03061-2002 BUSINESS PHONE: 6038802323 MAIL ADDRESS: STREET 1: 44 FRANKLIN STREET STREET 2: P O BOX 2002 CITY: NASHUA STATE: NH ZIP: 03061-2002 10-K405 1 NASHUA CORPORATION 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1998 ----------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to ---------------- ------------------ COMMISSION FILE NUMBER 1-5492-1 NASHUA CORPORATION (Exact name of registrant as specified in its Charter) DELAWARE 02-0170100 (State of incorporation) (IRS Employer Identification Number) 44 FRANKLIN STREET PO BOX 2002 NASHUA, NEW HAMPSHIRE 03061-2002 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (603) 880-2323 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ------------------- ---------------------- Common Stock, par value $1.00 New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.(X) Continued 2 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The aggregate market value of voting stock held by non-affiliates of the registrant as of March 22, 1999 was approximately $70,901,614. The number of shares outstanding of the registrant's Common Stock as of March 22, 1999 was 6,084,159 (excluding 853,238 shares held in treasury). DOCUMENTS INCORPORATED BY REFERENCE Parts I and II - Portions of Registrant's Annual Report to Stockholders for the year ended December 31, 1998. Part III - Portions of the Registrant's Proxy Statement dated March 24, 1999 for the Annual Meeting of Stockholders to be held on April 30, 1999. 3 PART I ITEM 1. BUSINESS GENERAL Nashua was incorporated in Massachusetts in 1904 and changed its state of incorporation to Delaware in 1957. The Company has its principal executive offices at 44 Franklin Street, PO Box 2002, Nashua, New Hampshire 03061-2002 (Telephone: (603) 880-2323) and its Internet address is www.nashua.com. References to the "Company" or to "Nashua" refer to Nashua Corporation and its consolidated subsidiaries, unless the context otherwise requires. In the fourth quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("FAS 131"). In accordance with FAS 131, the Company has two reportable segments for financial reporting: (1) Imaging Supplies and (2) Specialty Coated and Label Products. The information for 1997 and 1996 has been restated from the prior years' presentation in order to conform to the 1998 presentation. Consolidated net sales for 1998 from continuing operations were $167.8 million. On April 9, 1998 the Company completed the sale of its Photofinishing Group. The Company received net proceeds of $49.9 million for the net assets of the Photofinishing Group and, after recording taxes of $7.9 million, recorded a gain of $1.1 million. On September 15, 1998, Cerion Technologies Inc. ("Cerion"), a publicly owned company of which the Company owns 37.1 percent of the outstanding common stock, announced its decision to cease operations in the fourth quarter of 1998 and it is currently in the process of liquidation. Accordingly, the Company no longer accounts for its investment in Cerion under the equity method of accounting and has accounted for its interest in Cerion based on the expected net realizable value at an after tax basis, since the third quarter of 1998. During 1998, the Company recognized charges of $4.5 million, net of $2.2 million in taxes, of which a portion related to Nashua's share of Cerion losses and the remainder related to the reduction in the Company's investment in Cerion to its expected net realizable value, net of taxes. Results of operations for Cerion and the Photofinishing Group are reported as discontinued operations for all periods presented in the accompanying consolidated financial statements. The Note entitled "Information About Operations" in the Company's Consolidated Financial Statements, which appears on pages 33 and 34 of the Company's Annual Report to Stockholders, contains financial information concerning Nashua's business segments. MATTERS AFFECTING FUTURE RESULTS: This Form 10-K contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. When used in this report, the words "expects," "believes," "can," "will" or similar expressions are intended to identify such forward-looking statements. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those anticipated. Such risks and uncertainties include, but are not limited to, the Company's future capital needs, stock market conditions, price of the Company's stock, fluctuations in customer demand, intensity of competition from other vendors, timing and acceptance of new product introductions, general economic and industry conditions, delays or difficulties in programs designed to increase sales and return the Company to profitability, the possibility of a final award of material damages in the Cerion securities litigation, risks associated with the failure by the Company and certain third parties to achieve Y2K compliance on a timely basis and other risks detailed herein and in the Company's filings with the Securities and Exchange Commission. The Company assumes no obligation to update the information contained in this Form 10-K. -2- 4 As noted previously, the Company has two segments: (1) Imaging Supplies and (2) Specialty Coated and Label Products. IMAGING SUPPLIES SEGMENT The Imaging Supplies Segment manufactures and sells a variety of consumable products used in the process of producing hard copy images. Nashua's imaging supply product line is comprised of toners, developers, remanufactured laser printer cartridges and copy paper. The Imaging Supplies Segment sales were approximately $58 million for 1998, $67 million for 1997 and $88 million for 1996. Nashua markets its products worldwide under both the Nashua brand and major private labels. Products are sold through a variety of distribution channels. Sales of high-speed toner and developer to government agencies, machine service providers, and print-for-pay type customers are made through both direct and agent sales forces. Nashua aligns itself with strategic partners to market toner and developer to low and mid-speed segments. Laser cartridges and copy paper are sold primarily through an extensive network of dealers and distributors. Nashua's major competitors for toners and developers include Xerox Corporation, Ricoh Corporation and Eastman Kodak Company, each of which sell supplies for use in machines manufactured by it. The Company also competes with other smaller independent manufacturers of toner and developer products. This market segment is competitive, with more sophisticated toner formulas and shorter copier machine life cycles requiring timely product development and marketing. The segment's primary competitor for its remanufactured laser printer cartridges is Canon, Inc. which manufactures new laser printer cartridges principally for sale to large original equipment manufacturers, for resale under their brand names. In addition, there are approximately 4,000 small laser printer cartridge rechargers which provide low volumes to small customers. The Imaging Supplies Segment depends on outside suppliers for most of the raw materials used to produce toners, developers and laser printer cartridges. The segment purchases materials from several suppliers and believes that adequate quantities of supplies are available. The laser printer cartridge product line is dependent on the continued availability of empty cartridges. Products purchased in finished form (including certain toners, developers, papers, and laser printer cartridges) are available from a variety of sources. There are no assurances that the Company's operating results will not be adversely affected, however, by future increases in the cost of raw materials or sourced products. SPECIALTY COATED AND LABEL PRODUCTS SEGMENT Sales for the Specialty Coated and Label Products Segment were approximately $110 million for 1998, $107 million for 1997 and $111 million for 1996. The Specialty Coated and Label Products Segment is made up of two operating divisions, Specialty Coated Products and Label Products. The Specialty Coated and Label Products Segment manufactures and sells: (1) thermal papers to printers and converters; (2) pressure-sensitive labels to merchants and converters; (3) pressure-sensitive laminated papers to label converters; and (4) non-thermal papers, thermosensitive labels, Davac(R) dry-gummed labels, ink jet papers and carbonless papers primarily to merchants, resellers and converters. -3- 5 Thermal papers develop an image upon contact with either a heated stylus or a thermal print head. Thermal papers are used in point of sale printers, airline and package identification systems, gaming and ticketing systems, medical and industrial recording charts and for conversion to labels. Another application for these papers is for use in thermal facsimile machines. Competitors include major integrated companies such as Appleton Papers, Inc., Kanzaki Paper Mfg. Co., Ltd., Jujo Paper Co., Ltd. and Ricoh Corporation, as well as several other manufacturers in the United States, Japan and Europe. Significant uses of pressure-sensitive labels include grocery scale marking, inventory control and address labels. The Specialty Coated and Label Products Segment is a major supplier of labels to the supermarket industry and of labels used in the distribution and manufacture of a wide variety of other products. The label industry is price-sensitive and competitive and includes competitors such as Moore Corporation Ltd., Rittenhouse Paper Company Inc., Hobart Corporation, Avery Dennison Corporation and UARCO, Inc., as well as numerous small regional converters. Pressure-sensitive laminated paper is sold to label converters and to end-user in-house converting departments primarily in the supermarket industry. Laminated paper is a sandwich of two papers. One paper is a carrier strip called a liner upon which is laminated a face sheet. A variety of adhesives bind the face sheet and the liner. Printing is done directly on the face sheet using impact printing devices, thermal activism or a variety of ink deposition techniques. Major competitors in the pressure-sensitive laminated paper industry include: Avery Denison Corporation, Spinnaker Industries Inc., Green Bay Packaging, Inc., Ricoh Corporation and Kanzaki Paper Mfg. Co. The Segment's thermosensitive label papers are coated with an adhesive that is activated when heat is applied. Those products are usually sold through fine paper merchants who, in turn, resell them to printers who convert the papers into labels for use primarily in the pharmaceutical industry. Thermosensitive label papers are also used in the bakery and the meat packaging industries. Davac(R) dry-gummed label paper is a paper which is coated with a moisture-activated adhesive. Davac(R) dry-gummed label paper is sold primarily to fine paper merchants and business forms manufacturers. It is ultimately converted into various types of labels and stamps. Major competitors in the thermosensitive and dry-gummed label industries include Brown-Bridge Company and Ivex Corporation. Wide format ink jet paper is a premium quality heavy weight paper treated with resin and non resin coatings which is sold to merchants and resellers for use in graphic applications, including point-of-sale, signs, posters and presentations. Major competitors in the wide format ink jet industry include Rexam PLC., and Azon Corporation. Carbonless paper is a coated paper used in the production of multi-part business forms which produce multiple copies without carbon paper. The product is sold in sheet form through fine paper merchants and in roll form directly to the printing industry, where it is converted into multi-part business forms. Within the carbonless paper market, Nashua generally competes with large integrated manufacturers including Appleton Papers, Inc., The Mead Corporation and Imation Corporation. The segment depends on outside suppliers for most of the raw materials used to produce labels and label papers, carbonless papers and thermal papers, including paper to be converted and chemicals to be used in producing the various coatings which Nashua applies. The Company purchases materials from several suppliers and believes that adequate quantities of supplies are available. There are no assurances that the Company's operating results would not be adversely affected by future increases in cost of raw materials or sourced products. -4- 6 DEVELOPMENT OF NEW PRODUCTS The Company's success depends in part on its continued ability to develop and market new products. There can be no assurance that the Company will be able to develop and introduce new products in a timely manner or that such products, if developed, will achieve market acceptance. In addition, the Company's growth is dependent on its ability to penetrate new markets and sell through alternative channels of distribution. There can be no assurance that the markets being served by the Company will continue to grow; that existing and new products will meet the requirements of such markets; that the Company's products will achieve customer acceptance in such markets; that competitors will not force prices to an unacceptably low level or take market share from the Company; or that the Company can achieve or maintain profits in its markets. INTELLECTUAL PROPERTY The Company's ability to compete may be affected by its ability to protect its proprietary information, as well as its ability to design products outside the scope of its competitor's intellectual property rights. The Company holds a limited number of U.S. and foreign patents and there can be no assurance that its patents will provide meaningful protection, nor can there be assurance that third parties will not assert infringement claims against the Company or its customers in the future. In the event a third party does assert an infringement claim, the Company may be required to expend significant resources to develop non-infringing alternatives or to obtain licenses in respect to the matters that are subject to the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available on commercially acceptable terms, if at all. In addition, such litigation could be lengthy or costly and could have an adverse material effect on the Company's financial condition or results of operations regardless of the outcome of such litigation. MANUFACTURING OPERATIONS The Company operates manufacturing facilities in Nashua, New Hampshire; Merrimack, New Hampshire; Omaha, Nebraska; and Nogales, Mexico. All of these sites are unionized, except for the Nogales, Mexico plant. There can be no assurance that future operating results will not be adversely affected by labor, political and regulatory risks in Mexico, or changes in labor wage rates or productivity. RESEARCH AND DEVELOPMENT Nashua's research and development efforts have been instrumental in the development of many of the products it markets. The research efforts of each of the Company's operating units are directed primarily toward developing new products and processes and improving product performance, often in collaboration with customers. The Company's research and development efforts support each operating units' patent and product development work focusing primarily on new thermal coating technologies in respect to the Specialty Coated and Label Products Segment and new toner and developer formulations and cartridge design in respect to the Imaging Supplies Segment. Nashua's research and development expenditures were $5.9 million in 1998, $7.7 million in 1997 and $8.9 million in 1996. -5- 7 ENVIRONMENTAL MATTERS The Company (and its competitors) are subject to various environmental laws and regulations. These include the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), the Clean Water Act and other state and local counterparts of these statutes. The Company believes that its operations have been and continue to be operating in compliance in all material respects with applicable environmental laws and regulations. (Violation of these laws and regulations could result in substantial fines and penalties.) Nevertheless, in the past and potentially in the future, the Company has and could receive notices of alleged environmental violations. The Company has endeavored to promptly remedy any such violations upon notification. For the past four years, the Company has spent approximately $1 million per year for compliance with pertinent environmental laws and regulations. In addition, for those sites which the Company has received notification of the need to remediate, the Company has assessed its liability and has established a reserve for estimated costs associated therewith. At December 31, 1998 the reserve for potential environmental liabilities was $1.5 million. Liability of "potentially responsible parties" (PRP) under CERCLA and RCRA, however, is joint and several, and actual remediation expenses at sites where the Company is a PRP may exceed current estimates. The Company believes that based on the facts currently known and the environmental reserve recorded, its remediation expense with respect to those sites and on-going costs of compliance are not likely to have a material adverse effect on its consolidated financial position or results of operations. EMPLOYEES Nashua and its subsidiaries had approximately 725 full-time employees at March 1, 1999. Approximately 432 employees of the Company are members of one of several unions, principally the United Paperworkers International Union. There are three agreements with the United Paperworkers International Union covering a majority of the Company's hourly employees. These agreements generally have a duration of two years and expiration dates in the first quarter of the respective year. FOREIGN OPERATIONS The Company sold its Photofinishing Group on April 9, 1998, and as a result disposed of significant foreign operations as described more fully in the Note to the Company's Consolidated Financial Statements entitled "Business Changes" which has been incorporated by reference into Item 8 of Part 2 of this Report. Accordingly, information regarding long-lived assets by geographic region relating to the Photofinishing Group is reported as discontinued operations in the Note to the Company's Financial Statements entitled "Information About Operations" which appears on pages 33 and 34 of the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1998. -6- 8 ITEM 2. PROPERTIES Nashua's manufacturing facilities are located in the United States and Mexico. Nashua considers its properties to be in good operating condition and suitable for the production of its products. Nashua sold its Photofinishing Group in April 1998. The Photofinishing Group had manufacturing facilities located in the United States, Canada, the United Kingdom and Northern Ireland. The principal manufacturing facilities of the Company are listed by industry segment, location and principal products produced. Except as otherwise noted, each of these facilities is owned by the Company. -7- 9 PRINCIPAL PROPERTIES
TOTAL SQUARE PRINCIPAL LOCATION FOOTAGE PRODUCTS PRODUCED - -------- ------- ------------------ CORPORATE - --------- Nashua, New Hampshire 212,000(1) SPECIALTY COATED AND LABEL SEGMENT - ---------------------------------- Merrimack, New Hampshire 471,000(2) carbonless paper, thermal, non-thermal, thermosensitive and dry-gummed label papers, chemicals Omaha, Nebraska 170,000 pressure-sensitive labels and laminate paper IMAGING SUPPLIES SEGMENT - ------------------------ Nashua, New Hampshire 238,000 dry toners and developers, chemicals Merrimack, New Hampshire 112,000(3) dry toners Nogales, Mexico 55,000(4) re-manufactured laser printer cartridges
(1) Corporate offices occupy approximately 21,000 square feet. Approximately 47,000 square feet is leased to third parties, approximately 15,000 square feet is utilized by the Projection Systems Division, and approximately 129,000 square feet is unoccupied. (2) The Specialty Coated Products Division utilizes approximately 301,000 square feet and the remainder square footage is leased to third parties. (3) The Imaging Supplies Division utilizes approximately 50,000 square feet. Approximately 18,000 square feet is leased to third parties, and the remainder square footage is unoccupied. (4) Leased facility. -8- 10 ITEM 3. LEGAL PROCEEDINGS In April 1994, Ricoh Company, Ltd., Ricoh Electronics, Inc., and Ricoh Corporation (collectively "Ricoh") brought a lawsuit in the United States District Court of New Hampshire ("District Court"), alleging the Company's infringement of the U.S. patents 4,611,730 and 4,878,603 relating to certain toner cartridges for Ricoh copiers. In March 1997, the District Court enjoined Nashua from manufacturing, using or selling its NT-50 and NT-6750 toner cartridges. Sales of these products in 1996 amounted to one percent of Nashua's total sales. The Company disagreed with the District Court's decision and appealed to the United States Court of Appeals for the Federal Circuit ("Court of Appeals"). On February 18, 1999, the Court of Appeals affirmed the March 1997 ruling of the District Court that the Company infringed a patent held by Ricoh. Separately, on September 30, 1998, the District Court issued an order awarding damages in the amount of $7,549,000 related to the Company's sales of NT-50 and NT-6750 toner cartridges through December 3, 1995, additional damages relating to the Company's sales of such products through March 1997, certain of Ricoh's costs relative to the suit, and interest on such damages. The Company disagrees with the District Court's decision on the issue of damages and has appealed the decision to the Court of Appeals. The Company has adequate financial resources to pay the District Court's award of damages should its appeal on damages be unsuccessful. In connection with the damages award, the Company recorded a $15.0 million pretax charge in the third quarter of 1998 and is accruing interest on such award. In addition, in the fourth quarter of 1998, the Company posted a $16.0 million bond and placed $5.0 million in escrow to secure such bond. The $5.0 million is classified as restricted cash in the balance sheet. In August and September 1996, two individual plaintiffs initiated lawsuits in the Circuit Court of Cook County, Illinois against the Company, Cerion, certain directors and officers of Cerion, and the Company's underwriter, on behalf of classes consisting of all persons who purchased the common stock of Cerion between May 24, 1996 and July 9, 1996. These two complaints were consolidated. In March 1997, the same individual plaintiffs joined by a third plaintiff filed a Consolidated Amended Class Action Complaint (the "Consolidated Complaint"). The Consolidated Complaint alleged that, in connection with Cerion's initial public offering, the defendants issued materially false and misleading statements and omitted the disclosure of material facts regarding, in particular, certain significant customer relationships. In October 1997, the Court on motion by the defendants, dismissed the Consolidated Complaint. The plaintiffs filed a Second Amended Consolidated Complaint alleging substantially similar claims as the Consolidated Complaint seeking damages and injunctive relief. On May 6, 1998, the Court, on motion by the defendants, dismissed with prejudice the Second Amended Consolidated Complaint. The plaintiffs have filed an appeal of the Court's ruling. The Company continues to believe that this lawsuit is without merit and plans to vigorously defend itself in this matter on appeal. The Company is involved in certain environmental matters and has been designated by the Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") for certain hazardous waste sites. In addition, the Company has been notified by certain state environmental agencies that some of the Company sites not addressed by the EPA require remedial action. These sites are in various stages of investigation and remediation. Due to the unique physical characteristics of each site, the technology employed, the extended timeframes of each remediation, the interpretation of applicable laws and regulations and the financial viability of other potential participants, the ultimate cost to the Company of remediation for each site is difficult to determine. At December 31, 1998, based on the facts currently known and the Company's prior experience with these matters, the Company has concluded that there is at least a reasonable possibility that site assessment, remediation and monitoring costs will be incurred by the Company with respect to those sites which can be reasonably estimated in the aggregate range of $1.0 million to $1.5 million. This range is based, in part, on an allocation of certain sites' costs which, due to the joint and several nature of the liability, could increase if the other -9- 11 PRPs are unable to bear their allocated share. At December 31, 1998, the Company has accrued $1.5 million which represents, in management's view, the most likely amount within the range stated above. Based on information currently available to the Company, management believes that it is probable that the major responsible parties will fully pay the costs apportioned to them. Management believes that, based on its financial position and the estimated environmental accrual recorded, its remediation expense with respect to those sites is not likely to have a material adverse effect on its consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the present executive officers of the Company for purposes of Section 16 of the Securities Exchange Act, their ages and their positions held with the Company:
NAME AGE POSITION - ---- --- -------- Gerald G. Garbacz 62 Chairman, President and Chief Executive Officer John L. Patenaude 49 Vice President-Finance, Chief Financial Officer and Treasurer Joseph I. Gonzalez-Rivas 43 Vice President/President, Imaging Supplies Division John J. Ireland 47 Vice President/President, Specialty Coated Products Division Eugene P. Pache 48 Vice President/President, Label Products Division Bruce T. Wright 49 Vice President, Human Resources Joseph R. Matson 51 Vice President, Corporate Controller Peter C. Anastos 37 Vice President, General Counsel and Secretary
Mr. Garbacz has been Chairman of the Board of Nashua since June 1996 and President and Chief Executive Officer since January 1996. He was a private investor from 1994 through 1995 and Chairman and Chief Executive Officer of Baker & Taylor Inc. (information distribution) from 1992 to 1994. Mr. Patenaude has been the Vice President-Finance, Chief Financial Officer and Treasurer of Nashua since May 1998. From July 1996 to May 1998, he was Assistant Treasurer and from 1993 to July 1996 he was the Director of Taxes. Mr. Rivas has been a Vice President of Nashua since February 1996, President of the Imaging Supplies Division since April 1998 and General Manager since March 1996. From October 1994 to February 1996, he was President of the Label Group of Engraph Inc. and prior to October 1994, he was President of the Patton Division of Engraph Inc. Mr. Ireland has been a Vice President of Nashua since November 1995, President of the Specialty Coated Products Division since April 1998 and General Manager since April 1994. Prior to 1994, Mr. Ireland held various positions with Raychem Corporation. -10- 12 Mr. Pache has been a Vice President of Nashua since December 1996, President of the Label Products Division since April 1998 and General Manager since December 1995. From April 1994 to December 1995, he was the Vice President/General Manager of Sales and Marketing for the Company's Commercial Products Group. Prior to 1993, Mr. Pache was the Director of Sales, Electronics Division, of Raychem Corporation. Mr. Wright has been Vice President-Human Resources of Nashua since October 1994. Prior to October 1994, he was Vice President of Barry Controls (a division of Applied Power Inc.), a custom manufacturer of vibration and control systems. Mr. Matson has been a Vice President of Nashua since May 1998 and Corporate Controller since July 1988. Mr. Anastos has been Vice President, General Counsel and Secretary of Nashua since May 1998. He was Associate General Counsel from December 1996 to May 1998. From June 1995 to December 1996 he served as Group Counsel and prior to June 1995, Mr. Anastos was Associate Counsel. Executive officers are generally elected to their offices each year by the Board of Directors shortly after the Annual Meeting of Shareholders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK- HOLDER MATTERS None. ITEM 6. SELECTED FINANCIAL DATA The information contained under the heading "Five Year Financial Review" on page 12 of the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1998 is incorporated by reference in this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 13 through 17 of the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1998 is incorporated by reference in this Form 10-K. This information should be read in conjunction with the related consolidated financial statements incorporated by reference under Item 8. YEAR 2000 The Year 2000 ("Y2K") issue is the result of computer programs being written for, or microprocessors using, two digits (rather than four) to define the applicable year. Company computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system failures or miscalculations. The Company is currently working to mitigate the Y2K issue and has established processes for assessing the risks and associated costs. -11- 13 The Company categorizes its Y2K efforts as follows: hardware, software, embedded processors, vendors and customers. Progress in assessing and remediating information technology systems (hardware and software) and non-information technology systems (embedded processors) is being tracked in phases including inventory, identification of non-compliant systems, risk assessment, project plan development, remediation, testing and verification. The Company's Y2K project team has completed the risk assessment phase for all major systems, including hardware, software and embedded processors. Remediation efforts of approximately one-third of the Company's major systems have been completed. The Company expects that the internal remediation work and testing for all systems critical to run the Company's businesses will be completed by July 1999. The Company will use internal and external resources to remediate and test its systems, and to develop contingency plans to mitigate risks associated with the Y2K issue. The Company has initiated communications with significant vendors and customers to coordinate the Y2K issue and is in the process of determining the Company's vulnerability if these companies fail to remediate their Y2K issues. The Company is reviewing responses and expects to complete its analysis early in the second quarter. There can be no guarantee that the systems of other companies will be timely remediated, or that other companies' failure to remediate Y2K issues would not have a material adverse effect on the Company. It is currently estimated that the aggregate cost of the Company's Y2K efforts will be approximately $1.1 million, of which, approximately $.4 million has been spent to date. These costs are being funded through operating cash flows and include the costs of normal system upgrades and replacements for which the timing was accelerated to address the Y2K issue. These amounts do not include any costs associated with the implementation of contingency plans, which are in the process of being developed; nor do they include internal Y2K program costs. The Company does not separately track internal Y2K program costs, these costs are principally the related payroll costs for the management information systems group. The Company has not yet developed a contingency plan for dealing with the operational problems and costs (including loss of revenues) that would be reasonably likely to result from failure by the Company and certain third parties to achieve Y2K compliance on a timely basis. The Company currently plans to complete its analysis of the problems and costs associated with the failure to achieve Y2K compliance and to establish a contingency plan in the event of such a failure by September 30, 1999. The Company presently believes that with remediation, testing and contingency planning, Y2K risks can be mitigated. However, although the Company is not currently aware of any material internal operational or financial Y2K related issues, the Company cannot provide assurances that the computer systems, products, services or other systems upon which the Company depends will be Y2K ready on schedule, that the costs of its Y2K program will not become material or that the Company's contingency plans will be adequate. The Company is currently unable to evaluate accurately the magnitude, if any, of the Y2K related issues arising from the Company's vendors and customers. If any such risks (either with respect to the Company or its vendors or customers) materialize, the Company could experience serious consequences to its business which could have material adverse effects on the Company's financial condition, results of operations and liquidity. The foregoing assessment of the impact of the Y2K problem on the Company is based on management's best estimates as of the date of this Annual Report, which are based on numerous assumptions as to future events. There can be no assurance that these estimates will prove accurate, and actual results could differ materially from those estimated if these assumptions prove inaccurate. -12- 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information contained in the consolidated financial statements, notes to consolidated financial statements, and report of independent accountants on pages 18 through 35 of the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1998 is incorporated by reference in this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section entitled "Nominees for Election as Directors," which appears on pages 1 through 3 of the Company's Proxy Statement dated March 24, 1999, is incorporated by reference in this Form 10-K. See also the section entitled "Executive Officers of the Registrant" appearing in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Compensation of Directors" and "Compensation of Executive Officers," which appear on pages 4 through 6 of the Company's Proxy Statement dated March 24, 1999, is incorporated by reference in this Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The sections entitled "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners," which appear on pages 11 through 14 of the Company's Proxy Statement dated March 24, 1999, are incorporated by reference in this Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. -13- 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: Page (1) FINANCIAL STATEMENTS: Consolidated statements of operations and retained earnings for each of the three years in the period ended December 31, 1998 18* Consolidated balance sheets at December 31, 1998 and December 31, 1997 19* Consolidated statements of cash flows for each of the three years in the period ended December 31, 1998 20* Notes to consolidated financial statements 21-34* Report of independent accountants 35* (2) FINANCIAL STATEMENT SCHEDULE: Report of independent accountants on financial statement schedule 18 Schedule II - Valuation and qualifying accounts for each of the three years in the period ended December 31, 1998 19
The financial statement schedule should be read in conjunction with the financial statements in the 1998 Annual Report to Stockholders. All other schedules have been omitted as they are not applicable, not required, or the information is included in the consolidated financial statements or notes thereto. *Page references are to the 1998 Annual Report to Stockholders. The 1998 Annual Report to Stockholders is not to be deemed filed as part of this Report except for those parts thereof specifically incorporated by reference into this Report. (3) EXHIBITS: 3.01 Composite Certificate of Incorporation of the Company, as amended. Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference. 3.02 By-laws of the Company, as amended. Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference. 4.01 Loan and Security Agreement between the Company and Citizen's Bank New Hampshire dated as of March 28, 1997. Exhibit to the Company's Form 10-Q for the quarterly period ended March 28, 1997 and incorporated herein by reference. 4.02 Revolving Credit Promissory Note between the Company and Citizen's Bank New Hampshire dated as of March 28, 1997. Exhibit to the Company's Form 10-Q for the quarterly period ended March 28, 1997 and incorporated herein by reference. 4.03 First Amendment to Revolving Credit Promissory Note between the Company and Citizen's Bank New Hampshire dated August 17, 1998. Exhibit to the Company's Form 10-Q for the quarterly period ended October 2, 1998, and incorporated herein by reference. -14- 16 4.04 First Amendment to Loan and Security Agreement between the Company and Citizen's Bank New Hampshire dated August 17, 1998. Exhibit to the Company's Form 10-Q for the quarterly period ended October 2, 1998, and incorporated herein by reference. 4.05 Rights Agreement, dated as of July 19, 1996, between the Company and The First National Bank of Boston, as Rights Agent, which includes as Exhibit A the Form of Certificate of Designations, as Exhibit B the Form of Rights Certificate, and as Exhibit C the Summary of Rights to Purchase Preferred Stock. Exhibit to the Company's Form 8-K dated August 28, 1996 and incorporated herein by reference. 4.06 Amendment No. 1 to the Company's Rights Agreement effective as of June 24, 1998. 4.07 Amendment No. 2 to the Company's Rights Agreement effective as of December 15, 1998. 10.01 1987 Stock Option Plan of the Company. Exhibit to the Company's Proxy Statement dated March 24, 1987, and incorporated herein by reference. 10.02 Amendments to the 1987 Stock Option Plan of the Company effective as of April 28, 1989. Exhibit to the Company's Form 10-Q for the quarterly period ended June 30, 1989, and incorporated herein by reference. 10.03 Amendments to the 1987 Stock Option Plan of the Company effective October 24, 1997. Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 10.04 1993 Stock Incentive Plan of the Company. Exhibit to the Company's Proxy Statement dated March 19, 1993, and incorporated herein by reference. 10.05 1996 Stock Incentive Plan of the Company. Exhibit to the Company's Proxy Statement dated May 15, 1996, and incorporated herein by reference. 10.06 Amended 1996 Stock Incentive Plan of the Company effective December 15, 1998. 10.07 Amended 1996 Stock Incentive Plan of the Company effective March 9, 1999. 10.08 Change of Control and Severance Agreement dated as of June 24, 1998 between the Company and Gerald G. Garbacz. Exhibit to the Company's Form 10-Q for the quarterly period ended July 3, 1998 and incorporated herein by reference. 10.09 Change of Control and Severance Agreement dated as of June 24, 1998 between the Company and John L. Patenaude. Exhibit to the Company's Form 10-Q for the quarterly period ended July 3, 1998 and incorporated herein by reference. 10.10 Change of Control and Severance Agreement dated as of June 24, 1998 between the Company and Bruce T. Wright. Exhibit to the Company's Form 10-Q for the quarterly period ended July 3, 1998 and incorporated herein by reference. 10.11 Change of Control and Severance Agreement dated as of June 24, 1998 between the Company and Joseph R. Matson. Exhibit to the Company's Form 10-Q for the quarterly period ended July 3, 1998 and incorporated herein by reference. -15- 17 10.12 Change of Control and Severance Agreement dated as of June 24, 1998 between the Company and Eugene P. Pache. Exhibit to the Company's Form 10-Q for the quarterly period ended July 3, 1998 and incorporated herein by reference. 10.13 Change of Control and Severance Agreement dated as of June 24, 1998 between the Company and Peter C. Anastos. Exhibit to the Company's Form 10-Q for the quarterly period ended July 3, 1998 and incorporated herein by reference. 10.14 Change of Control and Severance Agreement dated as of June 24, 1998 between the Company and Joseph I. Gonzalez-Rivas. Exhibit to the Company's Form 10-Q for the quarterly period ended July 3, 1998 and incorporated herein by reference. 10.15 Change of Control and Severance Agreement dated as of June 24, 1998 between the Company and John J. Ireland. Exhibit to the Company's Form 10-Q for the quarterly period ended July 3, 1998 and incorporated herein by reference. 10.16 Management Incentive Plan of the Company. 10.17 Master Asset Purchase Agreement dated as of March 10, 1998 between the Company and District Photo Inc. Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10.18 U.S. Asset Purchase Agreement dated as of March 10, 1998 between Nashua Photo Inc., Promolink Corporation and District Photo Inc. Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10.19 U.K. Asset Purchase Agreement dated as of March 10, 1998 between Nashua Photo Limited and District Photo Inc. Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10.20 Canada Asset Purchase Agreement dated as of March 10, 1998 between Nashua Photo Limited and District Photo Inc. Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 11.01 Statement regarding Computation of Earnings Per Share and Common Equivalent Share. 13.01 Nashua Corporation 1998 Annual Report to Shareholders, certain portions of which have been incorporated herein by reference. 21.01 Subsidiaries of the Registrant. 23.01 Consent of Independent Accountants. 24.01 Powers of Attorney. (b) Reports on Form 8-K: On January 7, 1999, the Company filed a report on Form 8-K regarding an amendment to the Company's Rights Agreement. -16- 18 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NASHUA CORPORATION Date: March 29, 1999 By /s/ John L. Patenaude -------------- ----------------------------------------- John L. Patenaude Vice President-Finance, Chief Financial Officer and Treasurer
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Gerald G. Garbacz Chairman, President and March 29, 1999 - --------------------------- Chief Executive Officer Gerald G. Garbacz /s/ John L. Patenaude Vice President-Finance, March 29, 1999 - --------------------------- Chief Financial Officer John L. Patenaude and Treasurer /s/ Joseph R. Matson Vice President, Corporate Controller March 29, 1999 - --------------------------- and Chief Accounting Officer Joseph R. Matson Sheldon A. Buckler* Director - --------------------------- Sheldon A. Buckler Charles S. Hoppin* Director - --------------------------- Charles S. Hoppin John M. Kucharski* Director - --------------------------- John M. Kucharski David C. Miller, Jr.* Director - --------------------------- David C. Miller, Jr. Peter J. Murphy* Director - --------------------------- Peter J. Murphy James F. Orr III* Director - --------------------------- James F. Orr III *By /s/ John L. Patenaude March 29, 1999 ---------------------- John L. Patenaude Attorney-In-Fact
-17- 19 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE TO THE BOARD OF DIRECTORS OF NASHUA CORPORATION Our audits of the consolidated financial statements referred to in our report dated February 5, 1999, appearing in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1998 (which report and consolidated financial statements are incorporated by reference in this Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Boston, Massachusetts February 5, 1999 -18- 20 SCHEDULE II NASHUA CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Balance at Previous Balance at Description End of Year Additions Deductions End of Year - ----------- ----------- --------- ---------- ----------- DECEMBER 31, 1998: Allowance for doubtful accounts $ 1,193 $ 176(a) $ (503)(b) $ 866 Valuation allowance on deferred tax assets 328 2,340(e) (28)(c) 2,640 DECEMBER 31, 1997: Allowance for doubtful accounts $ 1,884 $ 79(a) $ (770)(b)(d) $ 1,193 Valuation allowance on deferred tax assets 328 -- -- 328 DECEMBER 31, 1996: Allowance for doubtful accounts $ 2,397 $ 558(a) $(1,071)(b) $ 1,884 Valuation allowance on deferred tax assets 3,300 -- (2,972)(c) 328
(a) Charged to costs and expenses. (b) Accounts deemed uncollectible. (c) Tax assets deemed unrealizable. (d) Includes decreases of $116 due to restatement of discontinued operations. (e) Represents the valuation allowance for foreign tax credits related to discontinued operations. -19- EX-4.06 2 AMENDMENT #1 TO RIGHTS AGREEMENT 1 Exhibit 4.06 AMENDMENT NO. 1 TO RIGHTS AGREEMENT This amendment, dated as of June 24, 1998, amends the Rights Agreement (the "Rights Agreement"), dated as of July 19, 1996, between Nashua Corporation, a Delaware corporation (the "Company"), and The First National Bank of Boston, a national banking association (the "Rights Agent"). Terms defined in the Rights Agreement and not otherwise defined herein are used herein as so defined. WITNESSETH: WHEREAS, on July 19, 1996, the Board of Directors of the Company authorized the issuance of Rights to purchase, on the terms and subject to the provisions of the Rights Agreement, one one-hundredth of a share of the Company's Series B Participating Preferred Stock; WHEREAS, on July 19, 1996, the Board of Directors of the Company authorized and declared a dividend distribution of one Right for every share of Common Stock of the Company outstanding on the Record Date and authorized the issuance of one Right (subject to certain adjustments) for each share of Common Stock of the Company issued between the Record Date and the Distribution Date; WHEREAS, on July 19, 1996, the Company and the Rights Agent entered into the Rights Agreement to set forth the description and terms of the Rights; and WHEREAS, pursuant to Section 27 of the Rights Agreement, the Continuing Directors now desire to amend certain provisions of the Rights Agreement in order to modify certain provisions contained therein; NOW, THEREFORE, the Rights Agreement is hereby amended by deleting "10%" in all places where such term is used and substituting therefor "20%". IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Rights Agreement to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. Attest: NASHUA CORPORATION By /s/ Peter C. Anastos By /s/ Gerald G. Garbacz ------------------------------ ------------------------------ Secretary Gerald G. Garbacz Chairman, President and Chief Executive Officer Attest: THE FIRST NATIONAL BANK OF BOSTON By /s/ James P. Mitchell By /s/ Carol A. Mulvey-Eori ------------------------------ ------------------------------ Carol A. Mulvey-Eori Administration Manager EX-4.07 3 AMENDMENT #2 TO RIGHTS AGREEMENT 1 Exhibit 4.07 AMENDMENT NO. 2 TO RIGHTS AGREEMENT This amendment, dated as of December 15, 1998, amends the Rights Agreement (the "Rights Agreement"), dated as of July 19, 1996, between Nashua Corporation, a Delaware corporation (the "Company"), and The First National Bank of Boston, a national banking association (the "Rights Agent"). Terms defined in the Rights Agreement and not otherwise defined herein are used herein as so defined. WITNESSETH: WHEREAS, on July 19, 1996, the Board of Directors of the Company authorized the issuance of Rights to purchase, on the terms and subject to the provisions of the Rights Agreement, one one-hundredth of a share of the Company's Series B Participating Preferred Stock; WHEREAS, on July 19, 1996, the Board of Directors of the Company authorized and declared a dividend distribution of one Right for every share of Common Stock of the Company outstanding on the Record Date and authorized the issuance of one Right (subject to certain adjustments) for each share of Common Stock of the Company issued between the Record Date and the Distribution Date; WHEREAS, on July 19, 1996, the Company and the Rights Agent entered into the Rights Agreement to set forth the description and terms of the Rights; and WHEREAS, pursuant to Section 27 of the Rights Agreement, the Board of Directors now desire to amend certain provisions of the Rights Agreement in order to modify certain provisions contained therein; NOW, THEREFORE, the Rights Agreement, as amended to date, is hereby further amended as follows: 1. Delete Section 1(i) in its entirety; 2. Delete Section 23 in its entirety and substitute therefor a new Section 23 as follows: "Section 23. REDEMPTION AND TERMINATION. (a) The Board may, at its option, at any time prior to the earlier of (i) the close of business on the tenth Business Day (or such later date as may be determined by the Board pursuant to clause (i) of the first sentence of Section 3(a) with respect to the Distribution Date) following the Stock Acquisition Date (or, if the Stock Acquisition Date shall have occurred prior to the Record Date, the close of business on the tenth Business Day following the Record Date) or (ii) the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $.01 per Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"). The redemption of the Rights by the Board may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. The Company may, at its option, pay the Redemption Price in cash, shares of Common Stock (based on the "current market price," as defined in Section 11(d)(i) hereof, of the Common Stock at the time of redemption) or any other form of consideration, or any combination of any of the foregoing, deemed appropriate by the Board. Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable after the first occurrence of a Section 11(a)(ii) Event until such time as the Company's right of redemption hereunder has expired. 2 - 2 - (b) Immediately upon the action of the Board ordering the redemption of the Rights, evidence of which shall have been filed with the Rights Agent and without any further action and without any notice, the right to exercise the Rights shall terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held. Promptly after the action of the Board ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at each holder's last address as it appears upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the Transfer Agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. (c) Notwithstanding the provisions of Section 23(a) hereof, in the event that a majority of the Board is elected by shareholder action by written consent, or is comprised of persons elected at a meeting of stockholders who were not nominated by the Board in office immediately prior to such meeting, then for a period of one hundred and twenty (120) days following the effectiveness of such election, the Rights shall not be redeemed if such redemption is reasonably likely to have the purpose or effect of allowing any Person to become an Acquiring Person or otherwise facilitating the occurrence of a Triggering Event or a transaction with an Acquiring Person. (d) The Company may, at its option, discharge all of its obligations with respect to the Rights by (i) issuing a press release announcing the manner of redemption of the Rights in accordance with this Agreement and (ii) mailing payment of the Redemption Price to the registered holders of the Rights at their last addresses as they appear on the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the Transfer Agent of the Common Shares, and upon such action, all outstanding Rights and Right Certificates shall be null and void without any further action by the Company." 3. Delete the last sentence of Section 24(a). 4. Delete the proviso at the end of the second sentence of Section 27 and substitute the following: ", provided that, in the event that a majority of the Board is elected by shareholder action by written consent, or is comprised of persons elected at a meeting of stockholders who were not nominated by the Board in office immediately prior to such meeting, then for a period of one hundred twenty (120) days following the effectiveness of such election, no such supplement or amendment shall be effective if such supplement or amendment is reasonably likely to have the purpose or effect of allowing any person to become an Acquiring Person or otherwise facilitating the occurrence of a Triggering Event or a transaction with an Acquiring Person." 3 - 3 - 5. Delete Section 31 in its entirety and substitute the following: "Section 31. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, or unenforceable, including, without limitation, any provision of Section 23(c) or the provision of the second sentence of Section 27 hereof, the remainder of the terms, provisions, covenants, and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated." IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to the Rights Agreement to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. Attest: NASHUA CORPORATION By /s/ Peter C. Anastos By /s/ Gerald G. Garbacz ------------------------------ ------------------------------ Peter C. Anastos, Secretary Gerald G. Garbacz Chairman, President and Chief Executive Officer Attest: THE FIRST NATIONAL BANK OF BOSTON By /s/ James P. Mitchell By /s/ Carol Mulvey-Eori ------------------------------ ------------------------------ James P. Mitchell Carol Mulvey-Eori Senior Account Manager Administration Manager EX-10.6 4 AMENDED 1996 NASHUA CORP STOCK INCENTIVE PLAN 1 Exhibit 10.06 AMENDED 1996 NASHUA CORPORATION STOCK INCENTIVE PLAN 1. NAME OF PLAN The Plan shall be known as the 1996 Nashua Corporation Stock Incentive Plan (the "Plan"). 2. PURPOSE OF THE PLAN The purpose of the Plan is to attract and retain key personnel for positions of substantial responsibility and to provide additional incentive to certain officers, key employees and directors of Nashua Corporation or any Affiliated Corporation to promote the success of the Company. 3. DEFINITIONS As used herein, the following definitions shall apply: (a) "AFFILIATED CORPORATIONS" shall include members of the controlled group of corporations within the meaning of Section 424(e) and 424(f) of the Code. (b) "AWARD" means a grant or award under Section 7, 8 or 10 of the Plan. (c) "COMPANY" and "CORPORATION" means Nashua Corporation. (d) "BOARD" means the Board of Directors of the Company. (e) "COMMON STOCK" means common stock, par value $1.00 per share, of the Company. (f) "CODE" means the Internal Revenue Code of 1986, as amended. (g) "COMMITTEE" means the Executive Salary Committee of the Board, as described in Section 5(a) hereof. (h) "CONTINUOUS EMPLOYMENT" or "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of employment with the Company or with an Affiliated Corporation. (i) "EFFECTIVE DATE" means the date specified in Section 11 hereof. (j) "EMPLOYEE" means any person employed by the Company or an Affiliated Corporation. (k) "FAIR MARKET VALUE" means the closing price listed on the New York Stock Exchange on the date an Option is granted. (l) "INCENTIVE STOCK OPTION" means a stock option grant that is intended to meet the requirements of Section 422 of the Code. 2 - 2 - (m) "NON-STATUTORY STOCK OPTION" means a stock option grant that is not intended to be an Incentive Stock Option. (n) "OPTION" means an Incentive Stock Option or a Non-Statutory Stock Option granted pursuant to this Plan. (o) "OPTIONED STOCK" means the Common Stock purchasable by an Employee or Director of the Corporation pursuant to an Option. (p) "OPTIONEE" means an Employee or Director of the Corporation who receives an Option. (q) "PERFORMANCE BASED RESTRICTED STOCK" means shares of Common Stock contingently granted to an Employee under Section 8 of the Plan. (r) "PLAN" means the 1996 Nashua Corporation Stock Incentive Plan. (s) "SHARE" means one share of the Common Stock. (t) "SUBSIDIARY" means a subsidiary of the Company as defined under Section 424(f) of the Code. 4. SHARES SUBJECT TO THE PLAN Subject to adjustment as provided in Section 11(h), the aggregate number of shares of Common Stock which may be issued pursuant to awards made under the Plan shall not exceed 660,000 shares. Any Shares subject to an Option which for any reason expires or is terminated unexercised as to such Shares and any Shares reacquired by the Company pursuant to forfeiture or a repurchase right hereunder may again be the subject of an Award under the Plan. The Shares subject to Awards under this Plan may, in whole or in part, be either authorized but unissued Shares or issued Shares reacquired by the Company. 5. ADMINISTRATION OF THE PLAN (a) COMPOSITION OF COMMITTEE. The Plan shall be administered by the Executive Salary Committee of the Board of Directors of the Company. Employees who are designated by the Committee shall be eligible to receive Awards under the Plan. All persons designated as members of the Committee shall be "disinterested persons" within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934. (b) POWERS OF THE COMMITTEE. The Committee is authorized (but only to the extent not contrary to the express provisions of the Plan or to resolutions adopted by the Board) (i) to interpret the Plan, (ii) to prescribe, amend and rescind rules and regulations relating to the Plan, (iii) to determine the Employees to whom Awards shall be granted under the Plan, the amount and terms of such Awards and the time when Awards will be granted, and (iv) to make other determinations necessary or advisable for the administration of the Plan, and shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members 3 - 3 - present at any meeting at which a quorum is present shall be deemed the action of the Committee. Officers of the Company are hereby authorized to assist the Committee in the administration of the Plan and to execute instruments evidencing Awards on behalf of the Company and to cause them to be delivered to the Employees. (c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and interpretations of the Committee shall be final and conclusive on all persons affected thereby. 6. ELIGIBILITY Awards may be granted by the Committee only to those officers and key Employees of the Company and of any Affiliated Corporation who are in positions in which their decisions, actions and counsel significantly impact upon the profitability of the Company. Directors who are not otherwise Employees of the Company or an Affiliated Corporation shall be eligible to receive Awards only under Section 10 hereof, and not under other Sections. An Employee who has been granted an Award may, if otherwise eligible, be granted an additional Award or Awards. In no event, however, shall the aggregate number of Shares which may be issued under the Plan to any one individual exceed 150,000, during the term of the Plan subject to adjustment as provided in Section 11(h). For the purpose of calculating such maximum number, an Option shall continue to be treated as outstanding notwithstanding its cancellation or expiration. 7. STOCK OPTIONS (a) GRANT. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine each Employee to whom an Option shall be granted, the number of Shares to be covered by each Option, the option price and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options or to grant Non-Statutory Stock Options, or to grant both types of Options. The terms and conditions of Awards of Incentive Stock Options shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing Section 422. (b) OPTION PRICE. The price per Share at which each Option granted under the Plan may be exercised shall not, as to any particular Option, be less than 100% of the Fair Market Value of a Share at the time the Option is granted. The exercise price at which Options are granted under the Plan may not be reset except for adjustments as provided in Section 11(h). Options that lapse because of employee terminations or other reasons may be replaced with new Awards. (c) RESTRICTIONS ON INCENTIVE STOCK OPTIONS. Incentive Stock Options granted under this Plan shall be designated specifically as such and, for so long as the Code shall so require, shall be subject to the additional restriction that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. If an 4 - 4 - Incentive Stock Option which exceeds the $100,000 limitation of this Section 7(c) is granted, the portion of such Incentive Stock Option which is exercisable for Shares in excess of the $100,000 limitation shall be treated as a Non-Statutory Stock Option pursuant to Section 422(d) of the Code. In the event that such Optionee is eligible to participate in any other stock incentive plans of the Company, its parent, if any, or a Subsidiary which are also intended to comply with the provisions of Section 422 of the Code, such annual limitation shall apply to the aggregate number of Shares for which options may be granted under all such plans. (d) EXERCISE OF OPTION. An Option shall be exercisable at such times and under such conditions as shall be permissible under the terms of the Plan and of the Option granted to an Optionee; however, in no event may any Option granted hereunder be exercisable after expiration of 10 years and one day from the date of such grant. The Committee shall have the power to permit in its discretion, the acceleration of the exercise of an Option, or any portion thereof, under such circumstances and upon such terms as it deems appropriate. An Option may not be exercised for a fractional Share. An Option may be exercised, subject to the provisions hereof relative to its termination and limitations on its exercise, from time to time only by (i) written notice of intent to exercise the Option with respect to a specified number of Shares, and (ii) payment to the Company (contemporaneously with delivery of each such notice), either in cash or, if permitted by the Committee, by the surrender and delivery to the Company of Shares with a fair market value (based on the New York Stock Exchange closing price on the date of payment) equal to or less than the total Option price plus cash for any difference of the amount of the Option price of the number of Shares with respect to which the Option is then being exercised plus any state and federal withholding tax required, as provided under Section 11(a) or by any other means (including without limitation, by delivery of a promissory note of the Optionee payable on such terms as are specified by the Committee) which the Committee determines are consistent with the purpose of the Plan and with applicable laws and regulations (including without limitation, the provisions of Regulation T promulgated by the Federal Reserve Board). Each such notice and payment shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Secretary of the Company at the Company's executive offices. (e) TERMINATION OF EMPLOYMENT. Each Option shall terminate and may no longer be exercised if the Optionee ceases to perform services for the Company or an Affiliated Corporation in accordance with the following: (i) If an Optionee ceases to be an employee of the Company or any Subsidiary other than by reason of death, retirement or disability, absent a determination by the Committee to the contrary, any Options which were exercisable by the Optionee on the date of termination of employment may be exercised any time before their expiration date or within six months after the date of termination, whichever is earlier, but only to the extent that the Options were exercisable when employment ceased. In the event an Optionee fails to exercise an Incentive Stock Option within three months after the date of termination, such Option will be treated as a Non-Statutory Stock Option pursuant to Section 422 of the Code. (ii) In the case of death or disability of the Optionee, Options which were exercisable by the Optionee on the date of employment termination may be 5 - 5 - exercised at any time before their expiration date or within one year after the date of termination, whichever is earlier. (iii) If an Optionee's employment terminates because of retirement, any Options which were exercisable by the Optionee on the date of termination of employment may be exercised any time before their expiration date or within three years after the date of termination, whichever is earlier, but only to the extent that the Options were exercisable when employment ceased absent a determination by the Committee to the contrary at the time any such Options were granted or prior to their expiration date, as provided hereunder. Notwithstanding the foregoing, in the event an Optionee fails to exercise an Incentive Stock Option within three months after the date of his or her retirement, such Option will be treated as a Non-Statutory Stock Option. 8. PERFORMANCE BASED RESTRICTED STOCK (a) All shares of Performance Based Restricted Stock granted hereunder (including any shares received in respect of the Performance Based Restricted Stock as a result of stock dividends, stock splits or any other forms of recapitalization) shall be subject to the following restrictions: (1) No shares of Performance Based Restricted Stock or any interest therein shall be transferred or disposed of either voluntarily or involuntarily, directly or indirectly, by sale, gift, pledge or otherwise, unless such shares of Performance Based Restricted Stock shall have then been released from such restrictions on transfer, and any attempted transfer or disposition of shares of Performance Based Restricted Stock while they are restricted shall be null and void and of no effect. (2) The restrictions imposed under Paragraph (a)(1) above upon shares of Performance Based Restricted Stock shall terminate within times determined by the Committee only upon the attainment of performance conditions such as earnings, share price or other targets set by the Committee at time of grant. (b) If such performance conditions are not met by dates set by the Committee at time of Award, all of the Performance Based Restricted Stock subject to restrictions under said grant at such dates, together with accumulated dividends thereon, shall be forfeited and revert to the Company. (c) Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Shares of Performance Based Restricted Stock shall be granted, the number of Shares of Performance Based Restricted Stock to be granted to each Employee, and the other terms and conditions of such Awards. 6 - 6 - (d) Shares of Performance Based Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as herein provided, during the restricted period. Certificates issued in respect of shares of Performance Based Restricted Stock shall be registered in the name of the Employee and deposited by such Employee, together with a stock power endorsed in blank, with the Company. At the expiration of the restricted period, the Company shall deliver such certificates to the Employee or the Employee's legal representative. (e) Unless otherwise determined by the Committee at or after grant, if an Employee's employment terminates for any reason, the Performance Based Restricted Stock which is unvested or subject to restriction shall thereupon be forfeited. (f) Subject to adjustment as provided in Section 11(h), Awards of Performance Based Restricted Stock may not exceed an aggregate of 150,000 shares under this Plan. Any shares reacquired by the Company pursuant to a forfeiture of Performance Based Restricted Stock may again be the subject of an Award of Performance Based Restricted Stock under the Plan. 9. CHANGE IN CONTROL The Committee may provide that certain or all Options granted under Section 7 of the Plan shall become exercisable in full and that any time limitation (but not performance condition) applicable to any Performance Based Restricted Stock shall lapse, in the event of a Change in Control of the Corporation (as hereinafter defined). Options granted under Section 10 shall become exercisable in full for the aggregate number of Shares covered thereby in the event of a Change in Control of the Corporation. For purposes of this Plan, a "Change in Control of the Corporation" means any of the following events: (i) The acquisition, other than from the Corporation, by any person (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Corporation Voting Securities"), provided, however, that any acquisition by (i) the Corporation or any of its subsidiaries, or any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its subsidiaries or (ii) any corporation with respect to which, following such acquisition, more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Corporation Voting Securities immediately prior to such acquisition in substantially the same proportion 7 - 7 - as their ownership, immediately prior to such acquisition, of the Outstanding Corporation Common Stock and Corporation Voting Securities, as the case may be, shall not constitute a Change in Control of the Corporation; or (ii) Individuals who, as of June 14, 1996, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to June 14, 1996 whose election or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Corporation (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) Approval by the shareholders of the Corporation of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Corporation Common Stock and Corporation Voting Securities immediately prior to such Business Combination do not, following such Business Combination, beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Corporation Voting Securities, as the case may be; or (iv) (A) a complete liquidation or dissolution of the Corporation or a (B) sale or other disposition of all or substantially all of the assets of the Corporation other than to a corporation with respect to which, following such sale or disposition, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Corporation Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Outstanding Corporation Common Stock and Corporation Voting Securities, as the case may be, immediately prior to such sale or disposition. 10. NON-EMPLOYEE DIRECTOR OPTIONS AND STOCK AWARDS Notwithstanding any of the other provisions of the Plan to the contrary, the provisions of this Section 8 - 8 - 10 shall only apply to a non-employee member of the Board. The other provisions of the Plan shall apply to grants of Options under this Section 10 to the extent not inconsistent with the provisions of this Section. (a) Each non-employee member of the Board shall receive Non-Statutory Stock Options in accordance with the provisions of this Section 10. (i) Recipients of Options under this Section 10 shall enter into a stock option agreement with the Corporation, which agreement shall set forth, among other things, the exercise price of the Option, the term of the Option and provisions regarding exercisability of the Option granted thereunder. The Options shall be exercisable only by the recipient or the recipient's estate. (ii) On the Effective Date and the date after each succeeding annual stockholders meeting of the Corporation each non-employee member of the Board shall be granted a Non-Statutory Stock Option to purchase 1,000 shares of Common Stock subject to adjustment as provided in Section 11(h). The Option Price per share of Common Stock purchasable under such Options shall be equal to the Fair Market Value of the Common Stock on the date of grant subject to adjustment as provided in Section 11(h). Such Option shall remain exercisable by the Optionee or the Optionee's estate until the earliest of 10 years and one day from the date of grant, or one year after the last day of any directorship with the Corporation. Such Options shall become exercisable on the day before the annual stockholders meeting following the date of grant, providing the recipient is then a director, by payment in full in cash or in Shares of Common Stock having a fair market value (based on the New York Stock Exchange closing price on the date of payment) equal to the Option Price or in a combination of cash and such Shares. (b) Each non-employee member of the Board shall receive Shares in lieu of annual cash compensation as follows: On the Effective Date and the date after each succeeding annual stockholders meeting of the Corporation each non-employee member of the Board shall be granted a number of (unrestricted) Shares determined by dividing the amount of the annual cash retainer authorized for directors (currently $15,000) by the closing price listed on the New York Stock Exchange on such date without taking into account fractional shares. Non-employee members of the Board who become members of the Board between annual stockholders meetings shall be granted a number of (unrestricted) Shares determined by dividing the amount of annual cash retainer (as prorated for periods less than one year) by the closing price listed on the New York Stock Exchange on such date without taking into account fractional shares. 9 - 9 - Additional annual cash compensation payable to a non-employee member of the Board elected by the Board to additional offices such as Chairman or Lead Director may be paid in cash on the date of his or her election or reelection (the "Payment Date") to such office, or any such member of the Board may elect (a "Share Election") to be granted a number of (unrestricted) Shares determined by dividing the amount of such additional annual cash compensation by the closing price listed on the New York Stock Exchange on such date without taking into account fractional shares. To receive Shares in lieu of additional annual compensation, a non-employee member of the Board must make a Share Election at least six months prior to the Payment Date. Any reversal of a Share Election (the "Share Election Reversal") will not be effective until a period of at least 6 months from the date of such Share Election Reversal. 11. GENERAL PROVISIONS (a) WITHHOLDING. The Employer's obligation to deliver Shares upon exercise of an Option shall be subject to the Optionee's satisfaction of all applicable federal, state, and local income and employment tax withholding obligations. The Employer shall have the right to deduct from all amounts paid to an Employee in cash (whether under this plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. The Committee may, at or after grant, permit a participant to satisfy such tax withholding requirements by delivery to the Company of shares of Common Stock owned by the participant, including Shares retained from the Award creating the tax obligation having a value equal to the amount required to be withheld. The value of Shares to be withheld or delivered shall be based on the Company's determination of the fair market value of a Share on the date the amount of tax to be withheld is to be determined. (b) NONTRANSFERABILITY. No Award shall be assignable or transferable, and no right or interest of any participant shall be subject to any lien, obligation or liability of the participant, except by will, the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by Section 414 of the Code, and each Option shall be exercisable during the Optionee's lifetime only by the Optionee. (c) NO RIGHT TO EMPLOYMENT. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a participant the right to be retained in the employ of the Company. Further, the Company expressly reserves the right at any time to dismiss a participant without any liability under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (d) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award, no Optionee shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Performance Based Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Optionee shall not be entitled to the rights of a stockholder in respect of such Performance Based Restricted Stock. 10 - 10 - (e) CONSTRUCTION OF THE PLAN. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of New Hampshire. (f) EFFECTIVE DATE. Subject to the approval of the stockholders of the Company within one year thereof, the Plan shall be effective on June 14, 1996. Although Options and Awards may be granted prior to such stockholder approval, no Option or Award may be exercised until such approval is obtained. No Options or Awards may be granted under the Plan after June 13, 2006 (g) AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board of Directors at any time may terminate, and at any time from time to time, and in any respect, may amend or modify, the Plan provided: (a) that no such termination or amendment shall adversely affect or impair any then outstanding Option or Award without the consent of the holder of such Option or Award; (b) no such amendment shall be made to Section 10 more frequently than once in any six-month period, unless an amendment is required in order to comport with the requirements of the Code or Rule 16(b)-3 of the Exchange Act; and (c) that any such amendment which: (i) increases the maximum number of Shares subject to this Plan; (ii) changes the class of persons eligible to participate in this Plan; or (iii) materially increases the benefits accruing to executive officers and directors of the Company under this Plan shall be subject to approval by the shareholders of the Company within one year from the effective date of such amendment and shall be null and void if such approval is not obtained. (h) ADJUSTMENTS AND ASSUMPTIONS. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Company, the Committee shall make such appropriate adjustments in the number and kind of shares authorized by the Plan, in the number and kind of shares covered by the Awards granted, and in the purchase price of outstanding Options. In the event of any merger, consolidation or other reorganization in which the Company is not the surviving or continuing corporation, all Awards granted hereunder and outstanding on the date of such event shall be assumed by the surviving or continuing corporation with appropriate adjustment as to the number and kind of Shares and purchase price of the Shares. 11 - 11 - (i) PROVISION FOR FOREIGN PARTICIPANTS. The Committee may, without amending the Plan, modify Awards or Options granted to participants who are foreign nationals or employed outside the United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters. (j) IMPACT ON OTHER BENEFITS. The value of any Award (either on its grant date, vesting date or exercise date) shall not be includable as compensation or earnings for purposes of any other benefit plan of the Company. As Amended 12/15/98 EX-10.7 5 AMENDED 1996 NASHUA CORP STOCK INCENTIVE PLAN 1 Exhibit 10.07 AMENDED 1996 NASHUA CORPORATION STOCK INCENTIVE PLAN 1. NAME OF PLAN The Plan shall be known as the 1996 Nashua Corporation Stock Incentive Plan (the "Plan"). 2. PURPOSE OF THE PLAN The purpose of the Plan is to attract and retain key personnel for positions of substantial responsibility and to provide additional incentive to certain officers, key employees and directors of Nashua Corporation or any Affiliated Corporation to promote the success of the Company. 3. DEFINITIONS As used herein, the following definitions shall apply: (a) "AFFILIATED CORPORATIONS" shall include members of the controlled group of corporations within the meaning of Section 424(e) and 424(f) of the Code. (b) "AWARD" means a grant or award under Section 7, 8 or 10 of the Plan. (c) "COMPANY" and "CORPORATION" means Nashua Corporation. (d) "BOARD" means the Board of Directors of the Company. (e) "COMMON STOCK" means common stock, par value $1.00 per share, of the Company. (f) "CODE" means the Internal Revenue Code of 1986, as amended. (g) "COMMITTEE" means the Executive Salary Committee of the Board, as described in Section 5(a) hereof. (h) "CONTINUOUS EMPLOYMENT" or "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of employment with the Company or with an Affiliated Corporation. (i) "EFFECTIVE DATE" means the date specified in Section 11 hereof. (j) "EMPLOYEE" means any person employed by the Company or an Affiliated Corporation. (k) "FAIR MARKET VALUE" means the closing price listed on the New York Stock Exchange on the date an Option is granted. (l) "INCENTIVE STOCK OPTION" means a stock option grant that is intended to meet the requirements of Section 422 of the Code. 2 - 2 - (m) "NON-STATUTORY STOCK OPTION" means a stock option grant that is not intended to be an Incentive Stock Option. (n) "OPTION" means an Incentive Stock Option or a Non-Statutory Stock Option granted pursuant to this Plan. (o) "OPTIONED STOCK" means the Common Stock purchasable by an Employee or Director of the Corporation pursuant to an Option. (p) "OPTIONEE" means an Employee or Director of the Corporation who receives an Option. (q) "PERFORMANCE BASED RESTRICTED STOCK" means shares of Common Stock contingently granted to an Employee under Section 8 of the Plan. (r) "PLAN" means the 1996 Nashua Corporation Stock Incentive Plan. (s) "SHARE" means one share of the Common Stock. (t) "SUBSIDIARY" means a subsidiary of the Company as defined under Section 424(f) of the Code. 4. SHARES SUBJECT TO THE PLAN Subject to adjustment as provided in Section 11(h), the aggregate number of shares of Common Stock which may be issued pursuant to awards made under the Plan shall not exceed 660,000 shares. Any Shares subject to an Option which for any reason expires or is terminated unexercised as to such Shares and any Shares reacquired by the Company pursuant to forfeiture or a repurchase right hereunder may again be the subject of an Award under the Plan. The Shares subject to Awards under this Plan may, in whole or in part, be either authorized but unissued Shares or issued Shares reacquired by the Company. 5. ADMINISTRATION OF THE PLAN (a) COMPOSITION OF COMMITTEE. The Plan shall be administered by the Executive Salary Committee of the Board of Directors of the Company. Employees who are designated by the Committee shall be eligible to receive Awards under the Plan. All persons designated as members of the Committee shall be "disinterested persons" within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934. (b) POWERS OF THE COMMITTEE. The Committee is authorized (but only to the extent not contrary to the express provisions of the Plan or to resolutions adopted by the Board) (i) to interpret the Plan, (ii) to prescribe, amend and rescind rules and regulations relating to the Plan, (iii) to determine the Employees to whom Awards shall be granted under the Plan, the amount and terms of such Awards and the time when Awards will be granted, and (iv) to make other determinations necessary or advisable for the administration of the Plan, and shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members 3 - 3 - present at any meeting at which a quorum is present shall be deemed the action of the Committee. Officers of the Company are hereby authorized to assist the Committee in the administration of the Plan and to execute instruments evidencing Awards on behalf of the Company and to cause them to be delivered to the Employees. (c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and interpretations of the Committee shall be final and conclusive on all persons affected thereby. 6. ELIGIBILITY Awards may be granted by the Committee only to those officers and key Employees of the Company and of any Affiliated Corporation who are in positions in which their decisions, actions and counsel significantly impact upon the profitability of the Company. Directors who are not otherwise Employees of the Company or an Affiliated Corporation shall be eligible to receive Awards only under Section 10 hereof, and not under other Sections. An Employee who has been granted an Award may, if otherwise eligible, be granted an additional Award or Awards. In no event, however, shall the aggregate number of Shares which may be issued under the Plan to any one individual exceed 150,000, during the term of the Plan subject to adjustment as provided in Section 11(h). For the purpose of calculating such maximum number, an Option shall continue to be treated as outstanding notwithstanding its cancellation or expiration. 7. STOCK OPTIONS (a) GRANT. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine each Employee to whom an Option shall be granted, the number of Shares to be covered by each Option, the option price and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options or to grant Non-Statutory Stock Options, or to grant both types of Options. The terms and conditions of Awards of Incentive Stock Options shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing Section 422. (b) OPTION PRICE. The price per Share at which each Option granted under the Plan may be exercised shall not, as to any particular Option, be less than 100% of the Fair Market Value of a Share at the time the Option is granted. The exercise price at which Options are granted under the Plan may not be reset except for adjustments as provided in Section 11(h). Options that lapse because of employee terminations or other reasons may be replaced with new Awards. (c) RESTRICTIONS ON INCENTIVE STOCK OPTIONS. Incentive Stock Options granted under this Plan shall be designated specifically as such and, for so long as the Code shall so require, shall be subject to the additional restriction that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. If an 4 - 4 - Incentive Stock Option which exceeds the $100,000 limitation of this Section 7(c) is granted, the portion of such Incentive Stock Option which is exercisable for Shares in excess of the $100,000 limitation shall be treated as a Non-Statutory Stock Option pursuant to Section 422(d) of the Code. In the event that such Optionee is eligible to participate in any other stock incentive plans of the Company, its parent, if any, or a Subsidiary which are also intended to comply with the provisions of Section 422 of the Code, such annual limitation shall apply to the aggregate number of Shares for which options may be granted under all such plans. (d) EXERCISE OF OPTION. An Option shall be exercisable at such times and under such conditions as shall be permissible under the terms of the Plan and of the Option granted to an Optionee; however, in no event may any Option granted hereunder be exercisable after expiration of 10 years and one day from the date of such grant. The Committee shall have the power to permit in its discretion, the acceleration of the exercise of an Option, or any portion thereof, under such circumstances and upon such terms as it deems appropriate. An Option may not be exercised for a fractional Share. An Option may be exercised, subject to the provisions hereof relative to its termination and limitations on its exercise, from time to time only by (i) written notice of intent to exercise the Option with respect to a specified number of Shares, and (ii) payment to the Company (contemporaneously with delivery of each such notice), either in cash or, if permitted by the Committee, by the surrender and delivery to the Company of Shares with a fair market value (based on the New York Stock Exchange closing price on the date of payment) equal to or less than the total Option price plus cash for any difference of the amount of the Option price of the number of Shares with respect to which the Option is then being exercised plus any state and federal withholding tax required, as provided under Section 11(a) or by any other means (including without limitation, by delivery of a promissory note of the Optionee payable on such terms as are specified by the Committee) which the Committee determines are consistent with the purpose of the Plan and with applicable laws and regulations (including without limitation, the provisions of Regulation T promulgated by the Federal Reserve Board). Each such notice and payment shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Secretary of the Company at the Company's executive offices. (e) TERMINATION OF EMPLOYMENT. Each Option shall terminate and may no longer be exercised if the Optionee ceases to perform services for the Company or an Affiliated Corporation in accordance with the following: (i) If an Optionee ceases to be an employee of the Company or any Subsidiary other than by reason of death, retirement or disability, absent a determination by the Committee to the contrary, any Options which were exercisable by the Optionee on the date of termination of employment may be exercised any time before their expiration date or within six months after the date of termination, whichever is earlier, but only to the extent that the Options were exercisable when employment ceased. In the event an Optionee fails to exercise an Incentive Stock Option within three months after the date of termination, such Option will be treated as a Non-Statutory Stock Option pursuant to Section 422 of the Code. (ii) In the case of death or disability of the Optionee, Options which were exercisable by the Optionee on the date of employment termination may be 5 - 5 - exercised at any time before their expiration date or within one year after the date of termination, whichever is earlier. (iii) If an Optionee's employment terminates because of retirement, any Options which were exercisable by the Optionee on the date of termination of employment may be exercised any time before their expiration date or within three years after the date of termination, whichever is earlier, but only to the extent that the Options were exercisable when employment ceased absent a determination by the Committee to the contrary at the time any such Options were granted or prior to their expiration date, as provided hereunder. Notwithstanding the foregoing, in the event an Optionee fails to exercise an Incentive Stock Option within three months after the date of his or her retirement, such Option will be treated as a Non-Statutory Stock Option. 8. PERFORMANCE BASED RESTRICTED STOCK (a) All shares of Performance Based Restricted Stock granted hereunder (including any shares received in respect of the Performance Based Restricted Stock as a result of stock dividends, stock splits or any other forms of recapitalization) shall be subject to the following restrictions: (1) No shares of Performance Based Restricted Stock or any interest therein shall be transferred or disposed of either voluntarily or involuntarily, directly or indirectly, by sale, gift, pledge or otherwise, unless such shares of Performance Based Restricted Stock shall have then been released from such restrictions on transfer, and any attempted transfer or disposition of shares of Performance Based Restricted Stock while they are restricted shall be null and void and of no effect. (2) The restrictions imposed under Paragraph (a)(1) above upon shares of Performance Based Restricted Stock shall terminate within times determined by the Committee only upon the attainment of performance conditions such as earnings, share price or other targets set by the Committee at time of grant. (b) If such performance conditions are not met by dates set by the Committee at time of Award, all of the Performance Based Restricted Stock subject to restrictions under said grant at such dates, together with accumulated dividends thereon, shall be forfeited and revert to the Company. (c) Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Shares of Performance Based Restricted Stock shall be granted, the number of Shares of Performance Based Restricted Stock to be granted to each Employee, and the other terms and conditions of such Awards. 6 - 6 - (d) Shares of Performance Based Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as herein provided, during the restricted period. Certificates issued in respect of shares of Performance Based Restricted Stock shall be registered in the name of the Employee and deposited by such Employee, together with a stock power endorsed in blank, with the Company. At the expiration of the restricted period, the Company shall deliver such certificates to the Employee or the Employee's legal representative. (e) Unless otherwise determined by the Committee at or after grant, if an Employee's employment terminates for any reason, the Performance Based Restricted Stock which is unvested or subject to restriction shall thereupon be forfeited. (f) Subject to adjustment as provided in Section 11(h), Awards of Performance Based Restricted Stock may not exceed an aggregate of 150,000 shares under this Plan. Any shares reacquired by the Company pursuant to a forfeiture of Performance Based Restricted Stock may again be the subject of an Award of Performance Based Restricted Stock under the Plan. 9. CHANGE IN CONTROL The Committee may provide that certain or all Options granted under Section 7 of the Plan shall become exercisable in full and that any time limitation (but not performance condition) applicable to any Performance Based Restricted Stock shall lapse, in the event of a Change in Control of the Corporation (as hereinafter defined). Options granted under Section 10 shall become exercisable in full for the aggregate number of Shares covered thereby in the event of a Change in Control of the Corporation. For purposes of this Plan, a "Change in Control of the Corporation" means any of the following events: (i) The acquisition, other than from the Corporation, by any person (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Corporation Voting Securities"), provided, however, that any acquisition by (i) the Corporation or any of its subsidiaries, or any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its subsidiaries or (ii) any corporation with respect to which, following such acquisition, more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Corporation Voting Securities immediately prior to such acquisition in substantially the same proportion 7 - 7 - as their ownership, immediately prior to such acquisition, of the Outstanding Corporation Common Stock and Corporation Voting Securities, as the case may be, shall not constitute a Change in Control of the Corporation; or (ii) Individuals who, as of June 14, 1996, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to June 14, 1996 whose election or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Corporation (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) Approval by the shareholders of the Corporation of a reorgani- zation, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Corporation Common Stock and Corporation Voting Securities immediately prior to such Business Combination do not, following such Business Combination, beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Corporation Voting Securities, as the case may be; or (iv) (A) a complete liquidation or dissolution of the Corporation or a (B) sale or other disposition of all or substantially all of the assets of the Corporation other than to a corporation with respect to which, following such sale or disposition, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Corporation Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Outstanding Corporation Common Stock and Corporation Voting Securities, as the case may be, immediately prior to such sale or disposition. 10. NON-EMPLOYEE DIRECTOR OPTIONS AND STOCK AWARDS Notwithstanding any of the other provisions of the Plan to the contrary, the provisions of this Section 8 - 8 - 10 shall only apply to a non-employee member of the Board. The other provisions of the Plan shall apply to grants of Options under this Section 10 to the extent not inconsistent with the provisions of this Section. (a) Each non-employee member of the Board shall receive Non-Statutory Stock Options in accordance with the provisions of this Section 10. (i) Recipients of Options under this Section 10 shall enter into a stock option agreement with the Corporation, which agreement shall set forth, among other things, the exercise price of the Option, the term of the Option and provisions regarding exercisability of the Option granted thereunder. The Options shall be exercisable only by the recipient or the recipient's estate. (ii) On the Effective Date and the date after each succeeding annual stockholders meeting of the Corporation each non-employee member of the Board shall be granted a Non-Statutory Stock Option to purchase 1,000 shares of Common Stock subject to adjustment as provided in Section 11(h). The Option Price per share of Common Stock purchasable under such Options shall be equal to the Fair Market Value of the Common Stock on the date of grant subject to adjustment as provided in Section 11(h). Such Option shall remain exercisable by the Optionee or the Optionee's estate until the earliest of 10 years and one day from the date of grant, or one year after the last day of any directorship with the Corporation. Such Options shall become exercisable on the day before the annual stockholders meeting following the date of grant, providing the recipient is then a director, by payment in full in cash or in Shares of Common Stock having a fair market value (based on the New York Stock Exchange closing price on the date of payment) equal to the Option Price or in a combination of cash and such Shares. (b) Each non-employee member of the Board shall receive Shares in lieu of annual cash compensation as follows: On the Effective Date and the date after each succeeding annual stockholders meeting of the Corporation each non-employee member of the Board shall be granted a number of (unrestricted) Shares determined by dividing the amount of the annual cash retainer authorized for directors (currently $15,000) by the closing price listed on the New York Stock Exchange on such date without taking into account fractional shares. Non-employee members of the Board who become members of the Board between annual stockholders meetings shall be granted a number of (unrestricted) Shares determined by dividing the amount of annual cash retainer (as prorated for periods less than one year) by the closing price listed on the New York Stock Exchange on such date without taking into account fractional shares. 9 - 9 - Additional annual cash compensation payable to a non-employee member of the Board elected by the Board to additional offices such as Chairman or Lead Director may be paid in cash on the date of his or her election or reelection (the "Payment Date") to such office, or any such member of the Board may elect (a "Share Election") to be granted a number of (unrestricted) Shares determined by dividing the amount of such additional annual cash compensation by the closing price listed on the New York Stock Exchange on such date without taking into account fractional shares. To receive Shares in lieu of additional annual compensation, a non-employee member of the Board must make a Share Election at least six months prior to the Payment Date. Any reversal of a Share Election (the "Share Election Reversal") will not be effective until a period of at least 6 months from the date of such Share Election Reversal. 11. GENERAL PROVISIONS (a) WITHHOLDING. Each participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such participant no later than the date of the event creating the tax liability. Participants may, to the extent then permitted under applicable law, satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their fair market value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a participant. (b) NONTRANSFERABILITY. Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the participant, shall be exercisable only by the participant. References to a participant, to the extent relevant in the context, shall include references to authorized transferees. (c) NO RIGHT TO EMPLOYMENT. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a participant the right to be retained in the employ of the Company. Further, the Company expressly reserves the right at any time to dismiss a participant without any liability under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (d) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award, no Optionee shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Performance Based Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Optionee shall not be entitled to the rights of a stockholder in respect of such Performance Based Restricted Stock. 10 - 10 - (e) CONSTRUCTION OF THE PLAN. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of New Hampshire. (f) EFFECTIVE DATE. Subject to the approval of the stockholders of the Company within one year thereof, the Plan shall be effective on June 14, 1996. Although Options and Awards may be granted prior to such stockholder approval, no Option or Award may be exercised until such approval is obtained. No Options or Awards may be granted under the Plan after June 13, 2006 (g) AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board of Directors at any time may terminate, and at any time from time to time, and in any respect, may amend or modify, the Plan provided: (a) that no such termination or amendment shall adversely affect or impair any then outstanding Option or Award without the consent of the holder of such Option or Award; (b) no such amendment shall be made to Section 10 more frequently than once in any six-month period, unless an amendment is required in order to comport with the requirements of the Code or Rule 16(b)-3 of the Exchange Act; and (c) that any such amendment which: (i) increases the maximum number of Shares subject to this Plan; (ii) changes the class of persons eligible to participate in this Plan; or (iii) materially increases the benefits accruing to executive officers and directors of the Company under this Plan shall be subject to approval by the shareholders of the Company within one year from the effective date of such amendment and shall be null and void if such approval is not obtained. (h) ADJUSTMENTS AND ASSUMPTIONS. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Company, the Committee shall make such appropriate adjustments in the number and kind of shares authorized by the Plan, in the number and kind of shares covered by the Awards granted, and in the purchase price of outstanding Options. In the event of any merger, consolidation or other reorganization in which the Company is not the surviving or continuing corporation, all Awards granted hereunder and outstanding on the date of such event shall be assumed by the surviving or continuing corporation with appropriate adjustment as to the number and kind of Shares and purchase price of the Shares. 11 - 11 - (i) PROVISION FOR FOREIGN PARTICIPANTS. The Committee may, without amending the Plan, modify Awards or Options granted to participants who are foreign nationals or employed outside the United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters. (j) IMPACT ON OTHER BENEFITS. The value of any Award (either on its grant date, vesting date or exercise date) shall not be includable as compensation or earnings for purposes of any other benefit plan of the Company. As Amended 3/9/99 EX-10.16 6 MANAGEMENT INCENTIVE PLAN 1 EXHIBIT 10.16 NASHUA MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT MARCH 1999 2 MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT PURPOSE The purpose of Nashua Corporation's Management Incentive Plan ("Plan") is: 1. To link senior management cash compensation to the financial performance of the organization. 2. To motivate and reinforce the following behaviors among senior managers: * Effective goal-setting tied to key strategic priorities, * Accountability for goal achievement. 3. To provide a means for making awards that qualify for the performance-based compensation exception described at Section 162(m) of the Internal Revenue Code (the "Code"). PLAN OPERATION The Management Incentive Plan provides cash incentive payments based upon achievement of corporate and/or divisional financial performance goals and achievement of personal goals by Plan Participants, as described below. 1. Salary Administration For positions covered by the Management Incentive Plan, salary levels are established such that, when combined with target incentive opportunities (expressed as a percent of base salary), target total cash compensation is both competitive with comparable companies and equitable within the internal organization. The following definitions apply: BASE SALARY The annualized regular cash compensation of a Participant, excluding incentive payments, company contributions to employee benefit plans, relocation, or other compensation not designated as salary. The base salary is the basis for regular paychecks. Page 1 Rev. 3/99 3 MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT 1. Salary Administration (continued) TARGET INCENTIVE That amount (described as a percentage of a Participant's base salary) that will be paid as an incentive if the target financial performance goals and personal goals are fully (100%) achieved. TARGET TOTAL CASH COMPENSATION The assigned compensation level for each Participant, based on market data and internal equity considerations. Comprised of base salary and target incentive amount. Target Incentive opportunities range from 10% to 50% of base salary for Participants depending, in part, upon the management level and unit size of the participants. 2. Weighting of Goals Each year specific weighting among corporate and division financial objectives and strategic and personal objectives will be established based on the business objectives for the year. Page 2 Rev. 3/99 4 MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT 3. Financial Performance Goals Prior to the beginning of the Plan Year, financial performance goals are developed by Senior Management and reviewed by the Compensation and Leadership Committee of the Board of Directors. Financial performance may be defined using any of the standard financial metrics (e.g., Sales, Income, Cash Flow), and will be determined each year. Two levels of financial performance are defined each year, as follows: TARGET The budgeted financial goal which represents a realistically attainable level of corporate or divisional financial performance for the year. THRESHOLD A level of achievement against the budgeted financial goal, set below target and representing the minimum level of performance which is required in order to pay the financial-based portion of an employee's incentive. 4. Personal Goals Each Plan participant is assigned a limited number (i.e., 2 - 3) of objective pre-established Personal Goals which are typically based upon the strategic plans for the business. These personal goals are compensable under the Plan. As with financial performance goals, a threshold level of personal goal achievement is established each year, below which no payout for each personal objective will be made. For example, if the threshold for a manager's personal objective achievement is 80%, the manager will receive no payout related to that goal if she achieves only 50% of that objective. 5. Plan Funding The budgeted incentive pool equals the sum of the Target Incentives of all eligible Participants company-wide. The pool is funded each year depending upon the financial and personal goal performance of the Plan participants, and upon the threshold levels set for that year. Page 3 Rev. 3/99 5 MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT 6. Distributions to Participants The component of incentive payment tied to financial goals is paid out in direct relationship to the financial performance if the business unit achieves its threshold. Payout for above-target financial performance is not capped. The personal goals payout component is paid in relation to the proportion of personal goal achievement if the Participant's actual results for the plan year meet the personal goal threshold. The payout for the personal goals component of the incentive is capped at 100%. Page 4 Rev. 3/99 6 MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT 7. Timing Payments from the Plan will be made as soon as practicable after the end of the Plan Year, but no later than April 1 of the following year. Incentive payments are made in a single lump-sum payment and are subject to applicable withholding and other taxes as prescribed by local law. PARTICIPATION Plan Participants are senior managers and other key employees whose responsibilities and accomplishments can be directly tied to significant short-term business goals. In order to be eligible for an incentive payment, a participant must have been employed in a Plan-eligible position(s) for at least six consecutive months of the Plan Year. For a participant who serves in a Plan-eligible position(s) for less than a full year, the incentive payment may be pro-rated based on the number of months, including partial months, the individual was a participant during the Plan Year. In all cases, the Incentive Compensation Committee (the CEO, the Chief Financial Officer, and the Vice President of Human Resources) reserves the authority to exercise its discretion in determining incentive payments. However, the following guidelines have been provided as a starting point for making decisions regarding incentive eligibility in cases of new hires, employment terminations, periods of disability or leave, and transfers into, out of, and between Plan-eligible positions during the Plan Year. 1. New Hires and Transfers into Eligible Positions when Employee Serves at Least Six Consecutive Months in the Position A non-participant hired, transferred, promoted, or re-assigned into an eligible position during the Plan Year will be considered for an Incentive Payment on a pro-rated basis, provided that the employee is employed for at least six consecutive months of the Plan Year. 2. New Hires into Eligible Positions when Employee Serves Less Than Six Consecutive Months in the Position When offers are made to candidates for Plan-eligible positions, and the employee will serve in the position for less than six consecutive months in the current Plan Year, the offer may include a guaranteed cash compensation Page 5 Rev. 3/99 7 MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT amount in addition to the base salary, to compensate for the missed opportunity in the first (partial) year. This amount should be no more than the target incentive for which the employee would have been eligible in that year, pro-rated by the number of months employed; and is to be paid at the same time incentives are paid in the following year. The employee will be integrated into the Plan in the full Plan Year following his/her hire date. 3. Transfers into Ineligible Positions An employee transferred from an eligible position into a non-eligible position may be considered for a pro-rated incentive payment, provided that the employee has served at least six months in an eligible position(s) during the Plan Year. Any incentive payment will be based on the base salary while the employee was a Plan participant. In these cases, an adjustment to base salary may be required in order to achieve the appropriate salary level for the new (non-Plan) position. (For example, the base salary may be increased to reach a reasonable market-based pay rate if there is no longer the possibility of an incentive payment.) When the adjustment required is a positive one, it may be made retroactively in cases where the transfer occurs before the employee reaches the six-month minimum service required for an incentive payment. 4. Transfers from One Plan-Eligible Position to Another In the event that a participant transfers from one incentive eligible position to another before the completion of the Plan Year, an assessment will be made to determine the relative impact of goal achievement in each position on the final incentive payment. Typically, the participant will be paid a pro-rated share of the incentive payment amount for each position. However, the Incentive Compensation Committee has discretion to determine otherwise if the duration of service in either of the Plan-eligible positions is considered too short a period in which to achieve results against the stated goals. In either event, the participant's incentive payment will reflect the full twelve months of participation. In the case of a current Participant moving from one Target Incentive level to another, an adjustment to base salary may be required in order to achieve the appropriate Target Total Cash Compensation level. Page 6 Rev. 3/99 8 MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT 5. Terminations All Incentive Payments under the Plan will be forfeited for participants whose employment is terminated for any reason other than normal or early retirement under the provisions of the Company's retirement plan, death or disability during the Plan Year, unless determined otherwise by the Incentive Compensation Committee. If a Plan participant is employed on the last day of the Plan Year, but terminates employment prior to the date of the incentive payment, the Incentive Compensation Committee shall retain discretion over whether a payment is made to that participant. 6. Disability, Leaves of Absence, and Sabbaticals Even if an employee meets the requirement of six or more consecutive months in a Plan-eligible position, the employee must have rendered services for a minimum of three consecutive months in any Plan Year when attendance is interrupted by a period of disability, a leave of absence, or a sabbatical in order for any incentive to be paid (including that amount based on corporate and division/geography results). If the employee meets the requirement of three consecutive months of rendering services, the incentive payment would typically be pro-rated based on the number of months in the Plan Year that the employee was present and fully performing the job. Assessment of performance against personal goals will be based on the amount of time the employee was actually rendering services. 7. Pro-rating For a participant who serves in a Plan-eligible position(s) for less than a full year, the pro rata share of the incentive payment shall equal the number of months, including partial months, the individual was rendering services in a Plan-eligible position during the Plan Year divided by twelve, times the Incentive Payment amount (based on results achieved). EFFECT ON TAXES Payments made under this Plan will be included in total wages in the year paid, and are thus considered taxable income in that year. Page 7 Rev. 3/99 9 MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT EFFECT ON BENEFITS Regular Management Incentive Plan payments are included in covered wages for purposes of the 401(k) and pension plans. TERMS AND CONDITIONS 1. The Plan shall be approved by the Board of Directors and administered by the Incentive Compensation Committee (the "Committee"). The Committee shall have authority, consistent with the Plan, to establish Plan periods during which awards may be established and earned under the Plan, to determine the size and terms of the awards to be made to each Plan Participant, to determine the time when awards will be made, to prescribe the form of payment for awards under the Plan, to adopt, amend and rescind rules and regulations for the administration of the Plan and for its own acts and proceedings, and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan. All decisions, determinations and interpretations of the Committee shall be binding upon all parties concerned. The terms of an award, once fixed, shall preclude future Committee discretion with respect to the amount or timing of payments of the award, except that (i) no payment of an award shall be made unless and until the Committee certifies in writing that the performance goals specified in the award have been satisfied; (ii) the Committee may retain the discretion to reduce payments; (iii) the Committee may permit the deferral of payments that have been earned under an award provided such deferral is consistent with Section 162 of the Code and (iv) the Committee may retain such other discretion as is consistent with the qualification of the award under Section 162(m). 2. Corporate Performance results are determined at the end of the fiscal year when audited data is available. Adjustments may be made in order to minimize the potential distortion of performance measurements resulting from major unplanned/uncontrollable events, such as a major unbudgeted acquisition, non-operating gains or losses or extraordinary operating items, or other events or conditions during the year affecting financial performance, so long as such adjustments are made without the involvement of the CEO, and are in conformity with Section 162(m) of the Internal Revenue Code. Such adjustments may be made when it is judged that the Corporation would have been unable to anticipate said event(s) during the corporate goal setting process. 3. The Management Incentive Plan does not, directly or indirectly, create in any employee or class of employees any right with respect to continuation Page 8 Rev. 3/99 10 MANAGEMENT INCENTIVE PLAN PLAN DOCUMENT of employment by the Company, and it shall not be deemed to interfere in any way with the Company's right to terminate, or otherwise modify, an employee's employment at any time. No employee shall have a right to be selected as a Participant for any year nor, having been selected a Participant in the Plan for one year, to be a Participant in any other year. Neither the Plan nor any award thereunder shall be an element of damages in any claim based upon discharge in violation of a contract unless the contract in question shall be in writing and shall make specific reference to this section and this sentence, overriding the same; nor shall this Plan or any rights thereto be regarded as an element of damages for wrongful discharge in any other context except to the extent that rights shall have accrued hereunder as of the date of discharge. 4. The provisions of the Plan and the grant of any incentive payment shall inure to the benefit of all successors of each Participant, including without limitation such Participant's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Participant. 5. The Plan may be amended or terminated at any time, and shall continue in effect until so terminated; provided however that no amendment or termination of the Plan shall adversely affect any right of any Plan Participant with respect to any incentive payment theretofore made without such Plan Participant's written consent. 6. The Plan shall be effective with respect to the Plan Year beginning January 1, 1998. 7. This Plan and all determinations made and actions taken hereunder shall be construed in accordance with the laws of the State of New Hampshire. Page 9 Rev. 3/99 EX-11.1 7 COMPUTATION OF EARNINGS 1 EXHIBIT 11.01 NASHUA CORPORATION COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (In thousands, except per share data)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 --------- --------- --------- Income (loss) from continuing operations $ (7,229) $ (6,190) $ (7,290) Income (loss) from discontinued operations, net of taxes (6,687) (2,632) 460 Gain on disposition of stock of discontinued operations, net of taxes -- -- 19,386 Gain on public stock offering of discontinued operations, net of taxes -- -- 4,461 Gain on sale of discontinued operation, net of taxes 1,052 -- 8,434 --------------------------------------------- Income (loss) before extraordinary loss (12,864) (8,822) 25,451 Extraordinary loss on extinguishment of debt, net of tax benefit -- -- (1,257) --------------------------------------------- Net income (loss) $(12,864) $ (8,822) $ 24,194 ============================================= Shares: Weighted average common shares outstanding during the period 6,320 6,385 6,376 Common equivalent shares -- -- -- --------------------------------------------- 6,320 6,385 6,376 ============================================= Earnings (loss) per common share: Income (loss) from continuing operations $ (1.15) $ (.97) $ (1.14) Income (loss) from discontinued operations (1.06) (.41) .07 Gain on public stock offering, disposition of stock and disposal of discontinued operations .17 -- 5.06 --------------------------------------------- Income (loss) before extraordinary loss (2.04) (1.38) 3.99 Extraordinary loss on extinguishment of debt -- -- (.20) --------------------------------------------- Net income (loss) $ (2.04) $ (1.38) $ 3.79 =============================================
EX-13 8 PORTION OF 1998 ANNUAL REPORT 1 EXHIBIT 13 NASHUA CORPORATION AND SUBSIDIARIES FIVE YEAR FINANCIAL REVIEW
(In thousands, except per share data, number of employees and percentages) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- Operations Net sales $167,831 $173,202 $199,039 $245,534 $264,431 Gross margin percentage 24.3% 23.1% 20.6% 14.3% 17.8% Selling, distribution and administrative expenses as a percentage of sales 20.3% 22.3% 21.7% 16.3% 17.9% Loss before interest expense and taxes as a percentage of sales (1) (6.9)% (5.9)% (4.5)% (12.0)% (4.2)% Loss before taxes as a percentage of sales (1) (7.1)% (5.9)% (5.8)% (14.3)% (5.2)% Loss as a percentage of sales (1) (4.3)% (3.6)% (3.7)% (10.0)% (3.2)% Effective tax rate (39.5)% (39.9)% (36.4)% (30.1)% (38.7)% Loss before income taxes(1) $(11,950) $(10,300) $(11,464) $(34,998) $(13,625) Loss after taxes(1) (7,229) (6,190) (7,290) (24,479) (8,353) Income (loss) from discontinued operations (6,687) (2,632) 460 9,748 10,500 Gain on public stock offering, disposition of stock, and disposal of discontinued operation 1,052 - 32,281 - - Extraordinary loss - - (1,257) - - Net income (loss) (12,864) (8,822) 24,194 (14,731) 2,147 Earning (loss) per common share Continuing operations(1) $ (1.15) $ (.97) $ (1.14) $ (3.84) $ (1.31) Discontinued operations (1.06) (.41) .07 1.53 1.65 Gain on public stock offering, disposition of stock, and disposal of discontinued operation .17 - 5.06 - - Extraordinary loss - - (.20) - - Net income (loss) (2.04) (1.38) 3.79 (2.31) .34 Financial Position Working capital $ 45,874 $ 18,892 $ 21,173 $ 31,787 $ 46,789 Total assets 134,095 146,762 176,689 231,372 227,825 Long-term debt 1,064 3,489 2,044 68,350 49,166 Total debt 1,575 4,000 2,855 68,850 49,816 Total capital employed 76,802 99,022 104,772 143,725 142,512 Total debt as a percentage of capital employed 2.1% 4.0% 2.7% 47.9% 35.0% Shareholders' equity $ 75,227 $ 95,022 $101,917 $ 74,875 $ 92,696 Shareholders' equity per common share 12.59 14.76 15.90 11.75 14.55 Other Selected Data Investment in plant and equipment $ 6,702 $ 4,418 $ 5,877 $ 9,044 $ 11,306 Depreciation and amortization 6,846 7,554 9,045 9,772 8,088 Dividends per common share - - - .54 .72 Return on average shareholders' equity (15.1)% (9.0)% 27.4% (17.6)% 2.3% Common stock price range: High $ 17 1/2 $ 14 3/4 $ 19 5/8 $ 21 $ 30 3/4 Low 11 9/16 9 1/2 9 1/8 12 1/4 19 3/4 Year-end closing price 13 5/16 11 5/8 12 13 5/8 20 1/2 Number of employees 725 2,041 2,398 3,447 3,054 Average common shares 6,320 6,385 6,376 6,374 6,360 See Business Changes Note to Consolidated Financial Statement for a description of certain matters relevant to this data. (1) Income (loss) is from continuing operations and includes restructuring and other unusual charges/(income) of $13.8 million for 1998 (8.2% of sales), $4.3 million for 1997 (2.5% of sales), $(1.7) million for 1996 (0.9% of sales), $16.2 million for 1995 (6.6% of sales), and $2.6 million for 1994 (1.0% of sales).
12 2 NASHUA CORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CORPORATE MATTERS On April 9, 1998, the Company completed the sale of its Photofinishing Group. The Company received net proceeds of $49.9 million for the net assets of the Photofinishing Group and, after recording taxes of $7.9 million, recorded a gain of $1.1 million. On September 15, 1998, Cerion Technologies Inc. ("Cerion"), a publicly owned company of which the Company owns 37.1 percent of the outstanding common stock, announced its decision to cease operations in the fourth quarter of 1998 and is currently in the process of liquidation. Accordingly, the Company no longer accounts for its investment in Cerion under the equity method of accounting and has accounted for its interest in Cerion based on the expected net realizable value at an after tax basis, since the third quarter of 1998. At December 31, 1998, the Company valued its investment in Cerion at $.8 million. For the year ended December 31, 1998, the Company recognized a $4.5 million charge, net of $2.2 million in taxes, of which a portion related to Nashua's share of Cerion losses and the remainder related to the reduction in the Company's investment in Cerion to its net realizable value, net of taxes. Results of operations for Cerion and the Photofinishing Group are reported as discontinued operations for all periods presented in the accompanying consolidated financial statements. RESULTS OF CONTINUING OPERATIONS - 1998 COMPARED TO 1997 Net sales from continuing operations for 1998 were $167.8 million, a 3 percent decrease compared to 1997. The sales decline was primarily due to lower volume for toner and developer and paper products in the Imaging Supplies Division which more than offset year over year sales increases in both the Label Products and Specialty Coated Products Divisions. The Specialty Coated Products Division reported increased sales, primarily due to higher volume of thermal paper products. Increased sales in the Label Products Division were mainly due to higher volume in roll stock products partially offset by decreased prices in other product lines. The Company recorded a net loss from continuing operations of $7.2 million in 1998, compared to a net loss from continuing operations of $6.2 million in 1997. The 1998 results included restructuring and other unusual charges of $13.8 million. The 1997 results included restructuring and other unusual charges of $4.3 million. The Company's pretax operating results, before restructuring and other unusual charges, improved from a loss of $6.0 million in 1997 to a pretax income of $1.9 million in 1998 due to improved profitability in the Imaging Supplies and the Specialty Coated and Label Products segments of $1.7 million each, a $3.7 million decrease in Corporate expenses, including interest, and a decrease in Projection Systems development expenses of $.8 million. The increase in operating income resulted from higher margins related to new products in the Imaging Supplies and Specialty Coated Products Divisions and significant cost reductions in the manufacturing and procurement processes of the Label Products Division. Corporate expenses decreased in 1998 compared to 1997 primarily due to personnel reductions and increased interest income from the investment of cash generated by the sale of the Company's Photofinishing Group. The restructuring and unusual charges for 1998 included an unusual charge of $15.0 million related to damages awarded to Ricoh Corporation in a patent infringement lawsuit, as more fully detailed in both the Liquidity, Capital Resources and Financial Condition subsection of this Management Discussion and Analysis section and the Commitments and Contingencies Note to the Consolidated Financial Statements, partially offset by unusual income of $1.2 million related to an insurance settlement for environmental matters. The restructuring activities provided for in the balance at December 31, 1997 were substantially completed at December 31, 1998 and amounts incurred did not change materially from the reserve balance of $3.0 million at December 31, 1997. The balance at December 31, 1998 for severance related to workforce reductions consisted primarily of amounts payable to employees who had already left the Company. Details of the charges related to continuing operations and the activity recorded during 1998 were as follows:
Balance Current Current Balance Dec. 31, Year Year Dec. 31, (In thousands) 1997 Provision Charges 1998 - --------------------------------------------------------------------------------------------------------------- 1998 Activity: Provisions for severance related to workforce reductions $1,913 $ - $1,441 $472 Provisions for assets to be sold or discarded 750 - 750 - Other 365 - 216 149 --------------------------------------- Total $3,028 $ - $2,407 $621 =======================================
13 3 Selling and distribution expenses were relatively unchanged from the prior year. Research and development expenses decreased by 23 percent from the prior year primarily due to a reduction in Projection Systems development expenses. Administrative expenses decreased by 27 percent due to the impact of restructuring activities over the past twelve months. The effective tax rate for continuing operations was a benefit of 39.5 percent in 1998, compared to a benefit of 39.9 percent in 1997. The tax benefits in 1998 and 1997 were greater than the U.S. statutory rate primarily due to state and local income tax benefits. RESULTS OF CONTINUING OPERATIONS - 1997 COMPARED TO 1996 Net sales from continuing operations for 1997 were $173.2 million, a 13 percent decrease compared to 1996. Excluding the net sales related to the liquid toner and the organic photoconductor drum product lines, which the Company exited during 1997, sales decreased 8 percent. Sales declines in the Imaging Supplies Division and Specialty Coated Products Division were partially offset by higher sales in the Label Products Division. The sales decrease was primarily due to lower volumes and pricing in the toner and developer, laser cartridge and paper product lines of the Imaging Supplies Division and in the carbonless and facsimile paper product lines of the Specialty Coated Products Division. Higher sales in the Label Products Division resulted from increased volume of higher margin products. In 1997, the Company recorded a net loss from continuing operations of $6.2 million, compared to a net loss from continuing operations of $7.3 million in 1996. The 1997 results included restructuring and other unusual charges of $4.3 million. The 1996 results included restructuring and other unusual income of $1.7 million. The Company's pretax operating results before restructuring and other unusual charges improved from a loss of $13.2 million in 1996 to a loss of $6.0 million in 1997 due to improved profitability in the Imaging Supplies and Specialty Coated and Label Products segments of $1.8 million and $2.7 million, respectively; improved profitability in the Projection Systems business of $.3 million; and a $2.4 million decrease in Corporate expenses, including interest. The increase in operating income resulted from improved productivity and a reduction in manufacturing and operating expenses, partially offset by a reduction in sales volumes within the Imaging Supplies Division. Corporate expenses decreased in 1997 compared to 1996, primarily due to $2.3 million lower net interest expense and reduced incentive compensation expense. The restructuring and other unusual charges of $4.3 million in 1997 included charges in the fourth quarter of $.6 million related to restructuring the Corporate organization, a charge in the third quarter of $.9 million related to the sale of excess real estate in Nashua, NH, and a second quarter charge of $2.8 million for costs associated with restructuring certain distribution channels and aligning the workforce with levels of demand in the Imaging Supplies Division. Details of the charges related to continuing operations and the activity recorded during 1997 were as follows:
Balance Current Current Balance Dec. 31, Year Year Dec. 31, (In thousands) 1996 Provision Charges 1997 - ------------------------------------------------------------------------------------------------------------------------------ 1997 Activity: Provisions for severance related to workforce reductions $ 475 $2,604 $1,166 $1,913 Provisions for assets to be sold or discarded 1,178 1,650 2,078 750 Other 841 - 476 365 ---------------------------------------------- Total $2,494 $4,254 $3,720 $3,028 ==============================================
The 1997 provision for workforce reductions included amounts for salary and benefit continuation for 116 employees as part of the Imaging Supplies Division and Corporate reorganizations. The restructuring activities provided for in the balance at December 31, 1996 were substantially completed in 1997. Amounts incurred did not change materially from the reserve balance of $2.5 million at December 31, 1996. Administrative expenses were relatively unchanged from the prior year. Selling and distribution expenses decreased by 11 percent from 1996 as lower sales volume in the Imaging Supplies Division resulted in lower distribution costs and lower sales commissions and bonuses. Research and development expenses decreased by 13 percent from the prior year primarily due to reductions in spending in all divisions. The effective tax rate for continuing operations was a benefit of 39.9 percent in 1997 compared to a benefit of 36.4 percent in 1996. The tax benefits in 1997 and 1996 were greater than the U.S. statutory rate primarily due to state and local income tax benefits. EFFECT OF INFLATION AND CHANGING PRICES The Company believes that results of operations as reported in its historical cost financial statements reasonably match current costs, except for depreciation, with revenues generated in the period. Depreciation expense based on the current costs of plant and equipment would be significantly higher than depreciation expense reported in the historical financial statements; however, such expense would not affect cash provided by operating activities. 14 4 LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION Working capital increased $27.0 million from December 31, 1997, primarily from net proceeds generated by the sale of the Company's Photofinishing Group, partially offset by an accrual of $15.0 million related to a damages award in the patent infringement lawsuit brought against the Company by Ricoh Corporation, as more fully detailed below. The Company used $10.1 million to repurchase 651,674 shares of the Company's common stock in open market transactions during 1998 pursuant to the Company's open market stock repurchase program of up to one million shares of the Company's common stock, as detailed in the Shareholders' Equity Note to the Consolidated Financial Statements. In addition, the Company expects that a portion of the proceeds will be reinvested in its continuing businesses. At December 31, 1998, the total debt as a percentage of equity decreased to 2.1 percent from 4.2 percent at December 31, 1997. The Company suspended its quarterly dividend in 1995 and intends to review this decision when the Company's financial performance would make such reconsideration appropriate. The Company relies primarily on cash provided by operating activities to fund its normal additions to plant and equipment. Investments in plant and equipment in 1998 were approximately $6.7 million. During 1997, the Company negotiated a new $18.0 million secured line of credit, of which $5.0 million is available exclusively for letters of credit. The agreement contains certain financial covenants with respect to consolidated tangible net worth, liquidity and other ratios. On August 17, 1998, the agreement was amended decreasing the amount of available funds under the secured line of credit from $18.0 million to $8.0 million and amending the consolidated tangible net worth covenant from $70.0 million to $60.0 million. Borrowings under this facility are collateralized by a security interest in the Company's receivables and inventory. Interest on amounts outstanding under the secured line of credit is payable at either 2 percent above the LIBOR rate, which was 5 percent at December 31, 1998, or at the Wall Street Journal prime rate, which was 7.75% at December 31, 1998, as elected by the Company. The maturity of this line of credit is April 30, 1999. Without prior consent of the lenders, the agreement does not allow the payment of dividends and restricts, among other things, the incurrence of additional debt, guarantees, lease arrangements or sale of certain assets. As of December 31, 1998, the Company was in compliance with the covenants of the agreement. There were no borrowings outstanding under this secured line of credit at December 31, 1998. At December 31, 1997, borrowings of $2.0 million were outstanding under this secured line of credit. On December 26, 1996, the Company entered into a note agreement under which the Company borrowed $2.6 million. The note is being paid back in sixty equal monthly payments which began in January of 1997. The note bears interest per annum equal to 2.5 percent above the LIBOR rate which was 5 percent at December 31, 1998. The note is collateralized by a security interest in certain equipment. At December 31, 1998 and 1997, borrowings of $1.6 million and $2.0 million, respectively, were outstanding under this note agreement. At December 31, 1998, the Company had $5.2 million and $.2 million of net operating loss carryforward benefits and tax credit carryforwards, respectively, which are primarily available to offset certain future domestic taxable earnings. The net operating loss carryforward benefits expire as follows: $1.0 million in 1999; $2.4 million in 2000; and $1.8 million thereafter. The tax credit carryforwards all expire after 2000. Management believes that the Company will generate sufficient future taxable income to realize deferred tax assets prior to the expiration of any net operating loss carryforwards or tax credit carryforwards and that realization of the net deferred tax assets is more likely than not. On December 11, 1998, the Internal Revenue Service ("IRS") issued the Company a Notice of Proposed Adjustment in the amount of $4.6 million principally in connection with the tax years 1992 and 1993 relating to the accounting treatment of certain items as they pertain to the restructuring effort undertaken by the Company during 1994. The Company disagreed with the position taken by the IRS and filed a formal protest of the proposed adjustment on January 12, 1999. In management's opinion, the ultimate disposition of this matter will not have a material adverse effect on the financial position or results of operations of the Company. On March 31, 1998, the New Hampshire Department of Revenue ("DOR") issued a notice of deficiency in connection with an examination of the Company's corporate income tax returns for the years 1989 through 1992 in the amount of $4.4 million, including interest. The deficiency principally relates to the tax treatment of the sale of the Company's International Office Systems business in 1990. A petition for reconsideration was filed with an appeals officer on May 26, 1998. The Company disagrees with the DOR and will continue to defend its position. In management's opinion, the ultimate disposition of this matter will not have a material adverse effect on the financial position or results of operations of the Company. In April 1994, Ricoh Company, Ltd., Ricoh Electronics, Inc., and Ricoh Corporation (collectively "Ricoh") brought a lawsuit in the United States District Court of New Hampshire ("District Court"), alleging the Company's infringement of the U.S. patents 4,611,730 and 4,878,603 relating to certain toner cartridges for Ricoh copiers. In March 1997, the District Court enjoined Nashua from manufacturing, using or selling its NT-50 and NT-6750 toner cartridges. Sales of these products in 1996 amounted to one percent of Nashua's total sales. The Company disagreed with the District Court's decision and appealed to the United States Court of Appeals for the Federal Circuit ("Court of Appeals"). On February 18, 1999, the Court of Appeals affirmed the March 1997 ruling of the District Court that the Company infringed a patent held by Ricoh. Separately, on September 30, 1998, the District Court issued an order awarding damages in the amount of $7,549,000 related to the Company's sales of NT-50 and NT-6750 toner cartridges through December 3, 1995, additional damages relating to the Company's sales of such products through March 1997, certain of Ricoh's costs relative to the suit, and interest on such 15 5 damages. The Company disagrees with the District Court's decision on the issue of damages and has appealed the decision to the Court of Appeals. The Company has adequate financial resources to pay the District Court's award of damages should its appeal on damages be unsuccessful. In connection with the damages award, the Company recorded a $15.0 million pretax charge in the third quarter of 1998 and is accruing interest on such award. In addition, in the fourth quarter of 1998, the Company posted a $16.0 million bond and placed $5.0 million in escrow to secure such bond. The $5.0 million is classified as restricted cash in the balance sheet. In August and September 1996, two individual plaintiffs initiated lawsuits in the Circuit Court of Cook County, Illinois against the Company, Cerion, certain directors and officers of Cerion, and the Company's underwriter, on behalf of classes consisting of all persons who purchased the common stock of Cerion between May 24, 1996 and July 9, 1996. These two complaints were consolidated. In March 1997, the same individual plaintiffs joined by a third plaintiff filed a Consolidated Amended Class Action Complaint (the "Consolidated Complaint"). The Consolidated Complaint alleged that, in connection with Cerion's initial public offering, the defendants issued materially false and misleading statements and omitted the disclosure of material facts regarding, in particular, certain significant customer relationships. In October 1997, the Court on motion by the defendants, dismissed the Consolidated Complaint. The plaintiffs filed a Second Amended Consolidated Complaint alleging substantially similar claims as the Consolidated Complaint seeking damages and injunctive relief. On May 6, 1998, the Court, on motion by the defendants, dismissed with prejudice the Second Amended Consolidated Complaint. The plaintiffs have filed an appeal of the Court's ruling. The Company continues to believe that this lawsuit is without merit and plans to vigorously defend itself in this matter on appeal. The Company is involved in certain environmental matters and has been designated by the Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") for certain hazardous waste sites. In addition, the Company has been notified by certain state environmental agencies that some of the Company sites not addressed by the EPA require remedial action. These sites are in various stages of investigation and remediation. Due to the unique physical characteristics of each site, the technology employed, the extended timeframes of each remediation, the interpretation of applicable laws and regulations and the financial viability of other potential participants, the ultimate cost to the Company of remediation for each site is difficult to determine. At December 31, 1998, based on the facts currently known and the Company's prior experience with these matters, the Company has concluded that there is at least a reasonable possibility that site assessment, remediation and monitoring costs will be incurred by the Company with respect to those sites which can be reasonably estimated in the aggregate range of $1.0 million to $1.5 million. This range is based, in part, on an allocation of certain sites' costs which, due to the joint and several nature of the liability, could increase if the other PRPs are unable to bear their allocated share. At December 31, 1998, the Company has accrued $1.5 million which represents, in management's view, the most likely amount within the range stated above. Based on information currently available to the Company, management believes that it is probable that the major responsible parties will fully pay the costs apportioned to them. Management believes that, based on its financial position and the estimated environmental accrual recorded, its remediation expense with respect to those sites is not likely to have a material adverse effect on its consolidated financial position or results of operations. During the fourth quarter of 1998, the Company recorded charges of $2.3 million, net of taxes related to discontinued operations. The net charges included net income of $1.0 million from an insurance settlement related to environmental matters, offset by net charges of $3.3 million, which included: additional valuation reserves of $.3 million for the Company's investment in Cerion; $.1 million related to potential environmental exposures; and $2.9 million for tax exposures, including $2.3 million for the establishment of a tax valuation reserve for foreign tax credits. YEAR 2000 ISSUE The Year 2000 ("Y2K") issue is the result of computer programs being written for, or microprocessors using, two digits (rather than four) to define the applicable year. Company computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system failures or miscalculations. The Company is currently working to mitigate the Y2K issue and has established processes for assessing the risks and associated costs. The Company categorizes its Y2K efforts as follows: hardware, software, embedded processors, vendors and customers. Progress in assessing and remediating information technology systems (hardware and software) and non-information technology systems (embedded processors) is being tracked in phases including inventory, identification of non-compliant systems, risk assessment, project plan development, remediation, testing and verification. The Company's Y2K project team has completed the risk assessment phase for all major systems, including hardware, software and embedded processors. Remediation efforts of approximately one-third of the Company's major systems have been completed. The Company expects that the internal remediation work and testing for all systems critical to run the Company's businesses will be completed by July 1999. The Company will use internal and external resources to remediate and test its systems, and to develop contingency plans to mitigate risks associated with the Y2K issue. 16 6 The Company has initiated communications with significant vendors and customers to coordinate the Y2K issue and is in the process of determining the Company's vulnerability if these companies fail to remediate their Y2K issues. The Company is reviewing responses and expects to complete its analysis early in the second quarter. There can be no guarantee that the systems of other companies will be timely remediated, or that other companies' failure to remediate Y2K issues would not have a material adverse effect on the Company. It is currently estimated that the aggregate cost of the Company's Y2K efforts will be approximately $1.1 million, of which, approximately $.4 million has been spent to date. These costs are being funded through operating cash flows and include the costs of normal system upgrades and replacements for which the timing was accelerated to address the Y2K issue. These amounts do not include any costs associated with the implementation of contingency plans, which are in the process of being developed; nor do they include internal Y2K program costs. The Company does not separately track internal Y2K program costs. These costs are principally the related payroll costs for the management information systems group. The Company has not yet developed a contingency plan for dealing with the operational problems and costs (including loss of revenues) that would be reasonably likely to result from failure by the Company and certain third parties to achieve Y2K compliance on a timely basis. The Company currently plans to complete its analysis of the problems and costs associated with the failure to achieve Y2K compliance and to establish a contingency plan in the event of such a failure by September 30, 1999. The Company presently believes that with remediation, testing and contingency planning, Y2K risks can be mitigated. However, although the Company is not currently aware of any material internal operational or financial Y2K related issues, the Company cannot provide assurances that the computer systems, products, services or other systems upon which the Company depends will be Y2K ready on schedule, that the costs of its Y2K program will not become material or that the Company's contingency plans will be adequate. The Company is currently unable to evaluate accurately the magnitude, if any, of the Y2K related issues arising from the Company's vendors and customers. If any such risks (either with respect to the Company or its vendors or customers) materialize, the Company could experience serious consequences to its business which could have material adverse effects on the Company's financial condition, results of operations and liquidity. The foregoing assessment of the impact of the Y2K problem on the Company is based on management's best estimates as of the date of this Annual Report, which are based on numerous assumptions as to future events. There can be no assurance that these estimates will prove accurate, and actual results could differ materially from those estimated if these assumptions prove inaccurate. MATTERS AFFECTING FUTURE RESULTS This Annual Report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. When used in this Annual Report, the words "expects," "anticipates," "believes," "can," "will" or similar expressions are intended to identify such forward-looking statements. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those anticipated. Such risks and uncertainties include, but are not limited to, the Company's future capital needs, stock market conditions, price of the Company's stock, fluctuations in customer demand, intensity of competition from other vendors, timing and acceptance of new product introductions, general economic and industry conditions, delays or difficulties in programs designed to increase sales and return the Company to profitability, the possibility of a final award of material damages in the Cerion securities litigation, risks associated with the failure by the Company and certain third parties to achieve Y2K compliance on a timely basis and other risks detailed in the Company's filings with the Securities and Exchange Commission. The Company assumes no obligation to update the information contained in this Annual Report. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement is effective for years beginning after June 15, 1999. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position. 17 7 NASHUA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year Ended December 31, -------------------------------------- (In thousands, except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Net sales $167,831 $173,202 $199,039 Cost of products sold 127,089 133,175 157,986 Selling, distribution and administrative expenses 34,119 38,557 43,275 Research and development expense 5,938 7,749 8,889 Restructuring and other unusual charges (income) 13,825 4,254 (1,733) Interest expense 377 129 2,604 Interest income (1,567) (362) (518) -------------------------------------- Total costs and expenses 179,781 183,502 210,503 -------------------------------------- Loss from continuing operations before income taxes (11,950) (10,300) (11,464) Income tax benefit (4,721) (4,110) (4,174) -------------------------------------- Loss from continuing operations (7,229) (6,190) (7,290) Income (loss) from discontinued operations, net of taxes (6,687) (2,632) 460 Gain on disposition of stock of discontinued operation, net of taxes - - 19,386 Gain on public stock offering of discontinued operation, net of taxes - - 4,461 Gain on disposal of discontinued operation, net of taxes 1,052 - 8,434 -------------------------------------- Income (loss) before extraordinary loss (12,864) (8,822) 25,451 Extraordinary loss on extinguishment of debt, net of taxes - - (1,257) -------------------------------------- Net income (loss) (12,864) (8,822) 24,194 Retained earnings, beginning of period 76,935 85,757 61,563 Dividends - - - -------------------------------------- Retained earnings, end of period $ 64,071 $ 76,935 $ 85,757 ====================================== Earnings per share Loss from continuing operations per common share $ (1.15) $ (.97) $ (1.14) Income (loss) from discontinued operations per common share (1.06) (.41) .07 Gain on public stock offering, disposition of stock and disposal of discontinued operation .17 - 5.06 Extraordinary loss on extinguishment of debt - - (.20) -------------------------------------- Net income (loss) per common share $ (2.04) $ (1.38) $ 3.79 ====================================== Loss from continuing operations per common share assuming dilution $ (1.15) $ (.97) $ (1.14) Income (loss) from discontinued operations per common share assuming dilution (1.06) (.41) .07 Gain on public stock offering, disposition of stock and disposal of discontinued operation .17 - 5.06 Extraordinary loss on extinguishment of debt - - (.20) -------------------------------------- Net income (loss) per common share assuming dilution $ (2.04) $ (1.38) $ 3.79 ======================================
The accompanying notes are an integral part of the consolidated financial statements. 18 8 NASHUA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31, ------------------ (In thousands, except share data) 1998 1997 - --------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 31,965 $ 3,736 Restricted cash 5,000 - Accounts receivable 18,232 14,915 Inventories Materials and supplies 6,326 6,196 Work in process 2,503 3,650 Finished goods 5,847 4,791 ---------------------- 14,676 14,637 Other current assets 13,474 12,362 Net current assets of discontinued operations - 120 ---------------------- 83,347 45,770 ---------------------- Plant and equipment Land 836 789 Buildings and improvements 26,388 27,371 Machinery and equipment 43,354 50,654 Construction in progress 2,479 2,206 ---------------------- 73,057 81,020 Accumulated depreciation (33,727) (40,605) ---------------------- 39,330 40,415 Other assets 10,662 11,859 Net non-current assets of discontinued operations 756 48,718 ---------------------- Total assets $134,095 $146,762 ====================== Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt $ 511 $ 511 Accounts payable 9,028 12,595 Accrued expenses 27,934 13,772 ---------------------- 37,473 26,878 ---------------------- Long-term debt 1,064 3,489 Other long-term liabilities 20,331 21,373 Shareholders' equity Preferred stock, par value $1.00: 2,000,000 shares authorized and unissued - - Common stock, par value $1.00: authorized 40,000,000 shares; issued 6,938,397 shares in 1998 and 6,715,495 shares in 1997 6,938 6,716 Additional capital 15,057 12,129 Retained earnings 64,071 76,935 Treasury stock, at cost (10,839) (758) ---------------------- 75,227 95,022 ---------------------- Total liabilities and shareholders' equity $134,095 $146,762 ======================
The accompanying notes are an integral part of the consolidated financial statements. 19 9 NASHUA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, -------------------------------------- (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities of Continuing Operations Net income (loss) $(12,864) $ (8,822) $ 24,194 Adjustments to reconcile net income (loss) to cash provided by (used in) continuing operating activities: Depreciation and amortization 6,846 7,554 9,045 Deferred income taxes (4,721) (4,110) (4,174) Stock issued for director compensation 89 91 73 Write-down of long-lived assets to net realizable value - 990 Loss on sale of excess real estate 900 - (Income) loss from discontinued operations 6,687 2,632 (460) Gain on disposal of discontinued operation (1,052) - (8,434) Gain on disposition of stock of discontinued operation - - (19,386) Gain on public stock offering of discontinued operation - - (4,461) Extraordinary loss on extinguishment of debt - - 1,257 Change in operating assets and liabilities, net of effects from acquisition and disposal of businesses: Restricted cash (5,000) - - Accounts receivable (3,317) 1,045 1,344 Inventories (39) (370) 2,785 Other assets 4,354 (1,481) 4,528 Accounts payable (3,567) (4,624) 2,214 Accrued expenses 14,162 (4,375) (6,322) Other long-term liabilities (449) (61) 643 -------------------------------------- Cash provided by (used in) operating activities 1,129 (11,621) 3,836 Cash Flows from Investing Activities of Continuing Operations Investment in plant and equipment (6,702) (4,418) (5,877) Proceeds from sale of plant and equipment 166 825 - -------------------------------------- Cash used in investing activities (6,536) (3,593) (5,877) Cash Flows from Financing Activities of Continuing Operations Proceeds from borrowings - 2,000 3,434 Repayment of borrowings (2,425) (855) (69,429) Proceeds and tax benefits from shares issued under stock option plans 3,061 - - Extinguishment of debt - - (952) Purchase of treasury stock (10,081) (1) (6) -------------------------------------- Cash provided by (used in) financing activities (9,445) 1,144 (66,953) Proceeds from sale of discontinued operations 49,858 - 35,174 Proceeds from repayment of notes of discontinued operation - - 11,142 Proceeds from sale of stock of discontinued operation, net - - 33,080 Cash applied to activities of discontinued operations (6,781) (2,174) 817 Effect of exchange rate changes on cash 4 (38) 409 -------------------------------------- Increase (decrease) in cash and cash equivalents 28,229 (16,282) 11,628 Cash and cash equivalents at beginning of year 3,736 20,018 8,390 -------------------------------------- Cash and cash equivalents at end of year $ 31,965 $ 3,736 $ 20,018 ====================================== Interest paid $ 220 $ 92 $ 3,387 ====================================== Income tax payments net of refunds $ 4,664 $ 2,428 $ 4,476 ======================================
The accompanying notes are an integral part of the consolidated financial statements. 20 10 NASHUA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation: The accompanying consolidated financial statements include the accounts of Nashua Corporation and its wholly-owned subsidiaries ("the Company"). Revenue Recognition: Sales are recognized at the time the goods are shipped or when title passes. Sale of Stock by a Subsidiary: The Company recognizes gains and losses on its subsidiary's direct sale of shares of stock in which the selling price of the subsidiary's shares is greater than or less than the Company's carrying value. Use of Estimates: The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management estimates relate to allowances for obsolete inventory and uncollectible receivables, environmental obligations, postretirement and other employee benefits, valuation allowances for deferred tax assets, future cash flows associated with assets, and useful lives for depreciation and amortization. Actual results could differ from those estimates. Cash Equivalents: The Company considers all highly liquid investment instruments purchased with a remaining maturity of three months or less to be cash equivalents. At December 31, 1998, the Company held cash equivalents of $30.5 million consisting of various money market instruments carried at cost, which approximated market. The Company held no cash equivalents at December 31, 1997. Restricted Cash: Restricted cash represents $5.0 million placed in escrow to secure a bond related to the patent infringement judgement against the Company. Accounts Receivable: The consolidated balance is net of allowance for doubtful accounts of $.9 million at December 31, 1998 and $1.2 million at December 31, 1997. Inventories: Inventories are carried at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method for approximately 74 percent and 61 percent of the inventories at December 31, 1998 and 1997, respectively, and by the last-in, first-out ("LIFO") method for the balance. Had the FIFO method been used to cost all inventories, the inventory balances would have been approximately $2.1 million and $2.8 million higher at December 31, 1998 and 1997, respectively. Plant and Equipment: Plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred, while additions, renewals and betterments of plant and equipment are capitalized. Items which are fully depreciated, sold, retired or otherwise disposed of, together with the related accumulated depreciation, are removed from the accounts and, where applicable, the related gain or loss is recognized. For financial reporting purposes, depreciation is computed using the straight-line method over the following estimated useful lives of the assets: - -------------------------------------------------------------------------------- Buildings and improvements 5 - 40 years Machinery and equipment 2 - 20 years The Company reviews the value of its plant and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Research and Development: Research and development costs are expensed as incurred. Stock Compensation: The Company's employee stock option plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company follows disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." 21 11 Income Taxes: Prepaid or deferred income taxes result principally from the use of different methods of depreciation and amortization for income tax and financial reporting purposes, the recognition of expenses for financial reporting purposes in years different from those in which the expenses are deductible for income tax purposes and the recognition of the tax benefit of net operating losses and other tax credits. Foreign Currency Translation: The functional currency of the Company's foreign subsidiaries is the local currency. Accordingly, assets and liabilities of these subsidiaries have been translated using exchange rates prevailing at the appropriate balance sheet date and income statement items have been translated using average monthly exchange rates. Financial Instruments: The Company enters into foreign exchange contracts as hedges against exposure to fluctuations in exchange rates associated with certain transactions denominated in foreign currencies. Market value gains or losses on these contracts are included in the results of operations and generally offset gains or losses on the related transactions. The Company may selectively enter into interest rate swap agreements to reduce the impact of interest rate changes on its floating rate debt. The notional amounts of such agreements are used to measure carrying value (interest to be paid or received) and do not represent the amount of exposure to loss. The Company does not hold or issue derivative financial instruments for trading purposes. Concentrations of Credit Risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade receivables and financial instruments used in hedging activities. The Company places its temporary cash investments with high credit quality financial institutions and in high quality liquid investments and, by policy, limits the amount of credit exposure with any one financial institution. Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company's customer base, thus spreading the trade credit risk. The Company performs ongoing credit evaluations of its customers' financial condition and maintains allowances for potential credit losses. The Company generally does not require collateral or other security to support customer receivables. The counterparties to the agreements relating to the Company's foreign exchange commitments consist of a number of high credit quality financial institutions. The Company does not believe that there is significant risk of nonperformance by these counterparties. Environmental Expenditures: Environmental expenditures relating to ongoing operations are expensed when incurred unless the expenditures extend the life, increase the capacity or improve the safety or efficiency of the property; mitigate or prevent environmental contamination that has yet to occur and improve the property compared with its original condition; or are incurred for property held for sale. Expenditures relating to site assessment, remediation and monitoring are accrued and expensed when the costs are both probable and the amount can be reasonably estimated. Estimates are based on in-house or third-party studies considering current technologies, remediation alternatives and current environmental standards. In addition, if there are other participants and the liability is joint and several, the financial stability of the other participants is considered in determining the Company's accrual. Insurance and other recoveries relating to these expenditures are recorded separately once recovery is probable. Segment and Related Information: In the fourth quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information," which changes the way the Company reports information about its operating segments. The information for 1997 and 1996 has been restated from the prior year's presentation in order to conform to the 1998 presentation. Postretirement Benefits: In 1998, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes the disclosure requirements for pensions and other postretirement benefits. The information for 1997 and 1996 has been restated from the prior year's presentation in order to conform to the 1998 presentation. Fair Value of Financial Instruments: The recorded amounts for cash and cash equivalents, other current assets, accounts receivable and accounts payable and other current liabilities approximate fair value due to the short-term nature of these financial instruments. The fair values of amounts outstanding under the Company's debt instruments approximates their book values in all material respects due to the variable nature of the interest rate provisions associated with such instruments. Earnings per Common and Common Equivalent Share: Earnings per common and common equivalent share are computed based on the total of the weighted average number of common shares and, when applicable, the weighted average number of common equivalent shares outstanding during the period presented. 22 12 Reclassification: Certain amounts from the prior year have been reclassified to conform to the present year presentation. BUSINESS CHANGES Discontinued Operations: During the second quarter of 1996, the Company and Cerion Technologies Inc. ("Cerion"), completed the initial public offering of common stock of Cerion at a price of $13.00 per share. A total of 4,416,000 shares were sold, of which 1,615,000 were sold by Cerion and 2,801,000 were sold by the Company. The Company received net proceeds of $33.1 million and recorded a $32.0 million pretax gain on its sale of Cerion shares and a $7.3 million pretax gain from the Company's interest in the shares sold by Cerion. As a result of the sale, the Company's ownership of Cerion was reduced to 37.1 percent, and accordingly, the Company adopted the equity method of accounting for its investment in Cerion common stock. On September 15, 1998, Cerion announced its decision to cease operations in the fourth quarter of 1998 and is currently in the process of liquidation. Accordingly, the Company no longer accounts for its investment in Cerion under the equity method of accounting and has accounted for its interest in Cerion based on the expected net realizable value at an after tax basis, since the third quarter of 1998. At December 31, 1998, the Company valued its investment in Cerion at $.8 million. For the year ended December 31, 1998, the Company recognized a $4.5 million charge, net of $2.2 million in taxes, of which a portion related to Nashua's share of Cerion losses and the remainder related to the reduction in the Company's investment in Cerion to its net realizable value, net of taxes. During the second quarter of 1996, the Company recorded a $7.0 million charge in the mainland European photofinishing business to write-down the value of its goodwill. During the fourth quarter of 1996, the Company completed the sale of its mainland European photofinishing business. The Company received proceeds of approximately $7.0 million and recorded a net pretax loss of $1.7 million. On April 9, 1998, the Company completed the sale of the remainder of its Photofinishing Group. The Company received net proceeds of $49.9 million for the net assets of the businesses and after recording taxes of $7.9 million, recorded a gain of $1.1 million. During the fourth quarter of 1998, the Company recorded charges of $2.3 million, net of taxes related to discontinued operations. The net charges included net income of $1.0 million from an insurance settlement related to environmental matters, offset by net charges of $3.3 million, which included: additional valuation reserves of $.3 million for the Company's investment in Cerion; $.1 million related to potential environmental exposures; and $2.9 million for tax exposures, including $2.3 million for the establishment of a tax valuation reserve for foreign tax credits. During the second quarter of 1996, the Company sold its Tape Products Division for approximately $28.0 million and, as a result, recorded an after-tax gain of $8.4 million. Results of operations for Cerion, the Photofinishing Group and the Tape Products Division are reported as discontinued operations for all periods presented. The Photofinishing Group and Cerion's results for 1998, 1997 and 1996, as well as the Tape Products Division results for 1996 are summarized as follows:
(In millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Net sales $21.6 $143.5 $214.3 Income (loss) before income taxes (6.5) (2.8) 1.7 Income taxes (benefit) .2 (.2) 1.2 -------------------------------------- Income (loss) from discontinued operations $(6.7) $ (2.6) $ .5 ======================================
The net assets of the discontinued operations in the December 31, 1998 and December 31, 1997 consolidated balance sheets include:
(In thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Accounts receivable $ - $ 2,874 Inventories - 2,846 Accounts payable - (6,028) Accrued payroll and other expenses - (5,449) Other, net - 5,877 ------------------------ Net current assets of discontinued operations $ - $ 120 ======================== Plant and equipment $ - $13,420 Long-term liabilities - (863) Investment in unconsolidated affiliate 756 7,524 Other, net - 28,637 ------------------------ Net non-current assets of discontinued operations $756 $48,718 ========================
23 13 Restructuring and Other Unusual Charges: The restructuring and other unusual charges for 1998 included an unusual charge of $15.0 million related to damages awarded to Ricoh Corporation in a patent infringement lawsuit, partially offset by unusual income of $1.2 million related to an insurance settlement for environmental matters. The restructuring activities provided for in the balance at December 31, 1997 were substantially completed at December 31, 1998 and amounts incurred did not change materially from the reserve balance of $3.0 million at December 31, 1997. The balance at December 31, 1998 for severance related to workforce reductions consisted primarily of amounts payable to employees who had already left the Company. Details of the charges related to continuing operations and the activity recorded during 1998 were as follows:
Balance Current Current Balance Dec. 31, Year Year Dec. 31, (In thousands) 1997 Provision Charges 1998 - --------------------------------------------------------------------------------------------------------------------- 1998 Activity: Provisions for severance related to workforce reductions $1,913 $ - $1,441 $472 Provisions for assets to be sold or discarded 750 - 750 - Other 365 - 216 149 ------------------------------------------------ Total $3,028 $ - $2,407 $621 ================================================
The restructuring and other unusual charges from continuing operations of $4.3 million in 1997 included charges in the fourth quarter of $.6 million related to restructuring corporate activities, a charge in the third quarter of $.9 million related to the sale of excess real estate in Nashua, NH and a second quarter charge of $2.8 million for costs associated with restructuring certain distribution channels and aligning the workforce with levels of demand in the Imaging Supplies Division. Details of the charges related to continuing operations and the activity recorded during 1997 were as follows:
Balance Balance Dec. 31, 1997 1997 Dec. 31, (In thousands) 1996 Provision Charges 1997 - ------------------------------------------------------------------------------------------------------------------------- 1997 Activity: Provisions for severance related to workforce reductions $ 475 $2,604 $1,166 $1,913 Provisions for assets to be sold or discarded 1,178 1,650 2,078 750 Other 841 - 476 365 ---------------------------------------------------- Total $2,494 $4,254 $3,720 $3,028 ====================================================
The 1997 provision for workforce reductions included amounts for salary and benefit continuation for 116 employees as part of the Imaging Supplies Division and Corporate reorganizations. The restructuring activities provided for in the balance at December 31, 1996 were substantially completed in 1997. Amounts incurred did not change materially from the reserve balance of $2.5 million at December 31, 1996. Net restructuring and other unusual income of $1.7 million in 1996 included charges of $1.1 million for the cost of divesting the organic photoconductor drum product line, $1.4 million for functional realignments in Corporate, offset by income of $4.2 million associated with reassessment in 1996 of certain charges recorded in 1995 for product and channel rationalizations in the Imaging Supplies Division. INDEBTEDNESS During 1997, the Company negotiated a new $18.0 million secured line of credit, of which $5.0 million is available exclusively for letters of credit. The agreement contains certain financial covenants with respect to consolidated tangible net worth, liquidity and other ratios. On August 17, 1998, the agreement was amended decreasing the amount of available funds under the secured line of credit from $18.0 million to $8.0 million and amending the consolidated tangible net worth covenant from $70.0 million to $60.0 million. Borrowings under this facility are collateralized by a security interest in the Company's receivables and inventory. Interest on amounts outstanding under the secured line of credit is payable at either 2 percent above the LIBOR rate, which was 5 percent at December 31, 1998, or at the Wall Street Journal prime rate, which was 7.75% at December 31, 1998, as elected by the Company. The maturity of this line of credit is April 30, 1999. Without prior consent of the lenders, the agreement does not allow the payment of dividends and restricts, among other things, the incurrence of additional debt, guarantees, lease arrangements or sale of certain assets. As of December 31, 1998, the Company was in compliance with the covenants of the agreement. There were no borrowings outstanding under this secured line of credit at December 31, 1998. At December 31, 1997, borrowings of $2.0 million were outstanding under this secured line of credit. 24 14 On December 26, 1996, the Company entered into a note agreement under which the Company borrowed $2.6 million. The note is being paid back in sixty equal monthly payments which began in January of 1997. The note bears interest per annum equal to 2.5 percent above the LIBOR rate which was 5 percent at December 31, 1998. The note is collateralized by a security interest in certain equipment. At December 31, 1998 and 1997, borrowings of $1.6 million and $2.0 million, respectively, were outstanding under this note agreement. INCOME TAXES The domestic and foreign components of loss from continuing operations before income taxes are as follows:
(In thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Domestic $(11,873) $ (8,665) $(10,675) Foreign (77) (1,635) (789) ------------------------------------ Consolidated $(11,950) $(10,300) $(11,464) ====================================
Income tax benefit charged to continuing operations consists of the following:
(In thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Current: United States $ - $ - $ - State and local - - - ------------------------------------ Total current - - - Deferred: United States (3,824) (2,919) (3,080) Foreign (18) (502) (260) State and local (879) (689) (834) ------------------------------------ Total deferred (4,721) (4,110) (4,174) ------------------------------------ Income tax benefit $(4,721) $(4,110) $(4,174) ====================================
Deferred tax liabilities (assets) from continuing operations are comprised of the following:
(In thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------- Depreciation $ 2,680 $ 3,033 Other 2,461 2,238 ---------------------- Gross deferred tax liabilities 5,141 5,271 ---------------------- Restructuring - (4,418) Legal reserve (6,473) - Pension and postretirement benefits (8,320) (8,718) Loss and credit carryforwards (5,203) (8,100) Workers compensation accrual (507) (474) Inventory reserve (1,828) (2,247) Bad debt reserve (505) (338) Other (4,827) (3,085) ---------------------- Gross deferred tax asset (27,663) (27,380) Deferred tax assets valuation allowance 300 300 ---------------------- $(22,222) $(21,809) ======================
25 15 Reconciliations between income taxes from continuing operations computed using the United States statutory income tax rate and the Company's effective tax rate are as follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- United States statutory rate (benefit) (35.0)% (35.0)% (35.0)% State and local income taxes, net of federal tax benefit (4.8) (4.3) (4.7) Tax asset valuation - 1.5 2.1 Rate difference - foreign subsidiaries - .7 .1 Other, net .3 (2.8) 1.1 ----------------------------------- Effective tax rate (benefit) (39.5)% (39.9)% (36.4)% ===================================
At December 31, 1998, $12.7 million and $10.0 million of net tax assets were included in "Other Current Assets" and "Other Assets," respectively. At December 31, 1997, $11.6 million and $11.9 million of net tax assets were included in "Other Current Assets" and "Other Assets," respectively. At December 31, 1998, the Company had $5.2 million and $.2 million of net operating loss carryforward benefits and tax credit carryforwards, respectively, which are primarily available to offset certain future domestic taxable earnings. The net operating loss carryforward benefits expire as follows: $1.0 million in 1999; $2.4 million in 2000; and $1.8 million thereafter. The tax credit carryforwards all expire after 2000. Management believes that the Company will generate sufficient future taxable income to realize deferred tax assets prior to the expiration of any net operating loss carryforwards or tax credit carryforwards and that realization of the net deferred tax assets is more likely than not. During 1997, the Company settled the dispute in connection with interest assessed as part of the 1990 and 1991 tax settlement. In December 1998, the Internal Revenue Service ("IRS") completed an examination of the Company's corporate income tax returns for the years 1992 through 1994. As a result of the IRS' findings, the Company agreed to and paid additional taxes of $.3 million in January 1999 in connection with adjustments mainly related to the tax treatment of research and experimentation costs. On December 11, 1998, the Internal Revenue Service ("IRS") issued the Company a Notice of Proposed Adjustment in the amount of $4.6 million principally in connection with the tax years 1992 and 1993 relating to the accounting treatment of certain items as they pertain to the restructuring effort undertaken by the Company during 1994. The Company disagreed with the position taken by the IRS and filed a formal protest of the proposed adjustment on January 12, 1999. In management's opinion, the ultimate disposition of this matter will not have a material adverse effect on the financial position or results of operations of the Company. On March 31, 1998, the New Hampshire Department of Revenue ("DOR") issued a notice of deficiency in connection with an examination of the Company's corporate income tax returns for the years 1989 through 1992 in the amount of $4.4 million, including interest. The deficiency principally relates to the tax treatment of the sale of the Company's International Office Systems business in 1990. A petition for reconsideration was filed with an appeals officer on May 26, 1998. The Company disagrees with the DOR and will continue to defend its position. In management's opinion, the ultimate disposition of this matter will not have a material adverse effect on the financial position or results of operations of the Company. Shareholders' Equity On July 19, 1996, the Company's Board of Directors adopted a Shareholder Rights Plan ("the Plan"), in which preferred stock purchase rights ("Rights") were distributed on September 2, 1996 to holders of record on August 15, 1996 ("Record Date") as a dividend at the rate of one Right for each share of the Company's common stock outstanding as of the close of business on the Record Date. These Rights replaced the rights outstanding under the Company's August 22, 1986 Rights Agreement, which expired on September 2, 1996. Rights will also attach to shares of common stock issued after the Record Date. On June 24, 1998, the Company's Board of Directors amended the plan increasing from 10 to 20 percent the beneficial ownership and tender offer threshold at which the Rights would detach from the Company's common stock and become exercisable as described below. Each Right will entitle the holders of common stock of the Company to purchase one one-hundredth of a share of Series B Junior Participating Preferred Stock of the Company ("Series B Stock") at an exercise price of $75.00 (subject to adjustment). Each share of Series B Stock would entitle its holder to a quarterly dividend of $1.00 per share, an aggregate dividend of 100 times any dividend declared on common stock and, in the event of liquidation of the Company, each such share would entitle its holder to a payment of $1.00 plus 100 times the payment made per share of common stock. Initially, the Rights will be attached to all certificates representing outstanding shares of common stock. The Rights will detach and become exercisable only after a person or group acquires beneficial ownership of 20 percent or more of the common stock of the Company or announces a tender or exchange offer that would result in such person or group owning 20 percent or more of the common stock of the Company. 26 16 After a person becomes the beneficial owner of 20 percent or more of the shares of common stock of the Company, except pursuant to a tender or exchange offer for all shares at a fair price as determined by the outside Board members, each Right not owned by the 20 percent or more shareholder will enable its holder to purchase that number of shares of the Company's common stock which equals the exercise price of the Right divided by one-half of the current market price of such common stock at the date of the occurrence of the event ("Triggering Event"). After the occurrence of a Triggering Event, the Company's Board of Directors may, at their option, exchange one share of common stock or one one-hundredth of a share of Series B Stock for each Right (other than Rights held by the 20 percent or more shareholder). In addition, if the Company is involved in a merger or other business combination transaction with another person or group in which it is not the surviving corporation or in connection with which its common stock is changed or converted, or it sells or transfers 50 percent or more of its assets or earning power to another person, each Right that has not previously been exercised will entitle its holder (other than the 20 percent or more shareholder) to purchase that number of shares of common stock of such other person which equals the exercise price of the Right divided by one-half of the current market price of such common stock at the date of the occurrence of the event. The Company will generally be entitled to redeem the Rights at $.01 per Right at any time until the 10th day following public announcement that a 20 percent stock position has been acquired and in certain other circumstances. The Rights will expire on September 2, 2006, unless earlier redeemed or exchanged. In 1989, the Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock (the "1989 Repurchase Program"). As of December 31, 1998, the Company had purchased 435,679 shares under this authorization. In 1998, the Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock and terminated the 1989 Repurchase Program. As of December 31, 1998, the Company had purchased 651,654 shares under this authorization. The following summarizes the changes in selected shareholders' equity accounts for each of the three years in the period ended December 31, 1998:
Common Stock Cumulative Treasury Stock --------------------- Additional Translation -------------------- (In thousands, except share data) Shares Par Value Capital Adjustment Shares Cost - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 6,502,570 $6,503 $12,178 $(4,618) (23,620) $ (751) Stock issued for Director compensation 4,685 4 69 -- -- -- Translation adjustments and gains and losses from certain inter-company balances -- -- -- 2,781 -- -- Restricted stock issuances 145,000 145 1,873 -- -- -- Deferred compensation -- -- (1,951) -- -- -- Restricted stock forfeiture (5,000) (5) (62) -- -- -- Purchase of treasury shares -- -- -- -- (410) (6) ------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1996 6,647,255 $6,647 $12,107 $(1,837) (24,030) $ (757) Stock issued for Director compensation 7,740 8 82 -- -- -- Translation adjustments and gains and losses from certain inter-company balances -- -- -- (1,445) -- -- Restricted stock issuances 85,500 86 1,077 -- -- -- Deferred compensation -- -- (1,162) -- -- -- Restricted stock forfeiture (25,000) (25) (275) -- -- -- Deferred compensation forfeiture -- -- 300 -- -- -- Purchase of treasury shares -- -- -- -- (34) (1) Discontinuance of photofinishing segment -- -- -- 3,282 -- -- ------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1997 6,715,495 $6,716 $12,129 $ -- (24,064) $ (758) Stock issued for Director compensation 5,802 5 84 -- -- -- Stock options exercised and related tax benefit 236,600 237 2,828 -- -- -- Restricted stock issuances 105,000 105 1,568 -- -- -- Deferred compensation -- -- (1,673) -- -- -- Restricted stock forfeiture and conversion (124,500) (125) (1,518) -- -- -- Deferred compensation forfeiture -- -- 1,639 -- -- -- Purchase of treasury shares -- -- -- -- (651,674) (10,081) ------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1998 6,938,397 $6,938 $15,057 $ -- (675,738) $(10,839)
27 17 STOCK OPTION AND STOCK AWARD PLANS The Company has three stock compensation plans at December 31, 1998: the 1987 Stock Option Plan ("1987 Plan"), the 1993 Stock Incentive Plan ("1993 Plan"), and the 1996 Stock Incentive Plan ("1996 Plan"). Awards may no longer be granted under the 1987 Plan and the 1993 Plan. Awards under the 1996 Plan are made at the discretion of the Leadership and Compensation Committee of the Board of Directors (the "Committee"). Under the 1987 Plan, nonqualified stock options and incentive stock options have been awarded and become exercisable either (a) 50 percent on the first anniversary of grant and the remainder on the second anniversary of grant, (b) 100 percent at six months from the date of grant, (c) 100 percent at one year from the date of grant, or (d) otherwise as determined by the Committee. Certain options may become exercisable immediately in the event of a change of control as defined under this plan. Nonqualified stock options expire 10 years and one day from the date of grant, and incentive stock options expire 10 years from the date of grant. Nonstatutory stock options, incentive stock options and shares of performance based restricted stock have been awarded under the 1993 Plan and may be awarded under the 1996 Plan. At December 31, 1998, an additional 44,623 shares may be awarded under the 1996 Plan. Stock options under both plans generally become exercisable either (a) 50 percent on the first anniversary of grant and the remainder on the second anniversary of grant, (b) 100 percent at one year from the date of grant, or (c) otherwise as determined by the Committee. Certain options may become exercisable immediately in the event of a change in control as defined under these plans. Nonstatutory stock options under both plans expire 10 years and one day from the date of grant, and incentive stock options expire 10 years from the date of grant. Performance based restricted stock awards under both plans have been granted to certain key executives and are earned only if the closing price of the Company's common stock meets specific target prices for certain defined periods of time or if significant performance based events are achieved. During 1998, the Company granted 105,000 shares of performance based restricted stock under the 1996 Plan. Restrictions on such shares lapse either (i) in equal amounts when the average closing price of the Company's common stock reaches $18 and $20 for a consecutive 10 trading day period; (ii) in equal amounts when the average closing price of the Company's common stock reaches $19 and $21 for a consecutive 10 trading day period; (iii) in equal amounts when the average closing price of the Company's common stock reaches $21 and $23 for a consecutive 10 trading day period; or (iv) 100% upon the occurrence of certain significant performance based events. Shares issued under the plans are initially recorded at their fair market value on the date of grant with a corresponding charge to additional capital representing the unearned portion of the award. Shares of performance based restricted stock are forfeited if the specified average closing prices of the Company's common stock are not met within five years of grant, the executive leaves the Company or if the said significant performance based events do not take place within the specified time period. In the event of a change in control, as defined in the 1987 Plan, certain option holders may, with respect to stock option agreements which so provide, have a limited right with respect to options under the plans to elect to surrender the options and receive cash or shares equal in value to the difference between the option price and the larger of either the highest reported price per share on the New York Stock Exchange during the sixty-day period before the change in control or, if the change in control is the result of certain defined transactions, the highest price per share paid in such defined transactions. A summary of the status of the Company's fixed stock option plans as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below:
1998 1997 1996 -------------------- ------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------------------------- Outstanding beginning of year 853,920 $14.75 469,714 $18.12 505,909 $22.88 Granted 64,500 15.60 465,500 12.33 150,000 11.86 Exercised (233,100) 12.37 - - - - Forfeited - non-vested (34,500) 11.63 (33,950) 13.65 (35,775) 17.39 Forfeited - exercisable (103,450) 17.83 (42,060) 24.86 (147,520) 28.22 Expired - - (5,284) 28.75 (2,900) 19.38 ----------------------------------------------------------------------- Outstanding end of year 547,370 $15.47 853,920 $14.75 469,714 $18.12 Options exercisable at end of year 446,120 $15.83 402,420 $17.66 251,214 $22.04 Weighted average fair value of options granted during the year (exercise price equals market price) $ 6.60 $ 5.11 $ 4.88
28 18 The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------- ----------------------------- Weighted Range of Number Average Weighted Number Weighted Exercise Outstanding Remaining Average Exercisable Average Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price - ------------------------------------------------------------------------------------------------------- $9.63 - $12.75 313,650 9.1 years $11.98 272,400 $12.11 13.38 - 19.75 172,650 5.1 years 17.15 112,650 17.85 22.63 - 27.00 33,870 6.0 years 25.74 33,870 25.74 28.13 - 34.63 27,200 2.6 years 32.35 27,200 32.35 - ------------------------------------------------------------------------------------------------------- $9.63 - $34.63 547,370 7.6 years $15.47 446,120 $15.83
The number and weighted average fair value per share of restricted stock granted during 1998, 1997 and 1996 are as follows:
1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Restricted Stock: Number of shares 105,000 85,500 145,000 Weighted average fair value per restricted share $ 9.66 $ 5.56 $ 2.06 Weighted average share price at grant date $ 15.93 $13.59 $ 13.91
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation." The Company continues to measure compensation cost using the intrinsic value based method of accounting prescribed by APB Opinion 25. If the Company had elected to recognize compensation cost based on the fair value of the options and restricted stock granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below:
(In thousands, except per share amounts) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Net income (loss) - as reported $(12,864) $ (8,822) $24,194 Net income (loss) - pro forma $(14,266) $(10,674) $23,433 Earnings (loss) per common share - as reported $ (2.04) $ (1.38) $ 3.79 Earnings (loss) per common share assuming dilution - as reported $ (2.04) $ (1.38) $ 3.79 Earnings (loss) per share - pro forma $ (2.26) $ (1.67) $ 3.68 Earnings (loss) per share - pro forma assuming dilution $ (2.26) $ (1.67) $ 3.68
29 19 The assumptions and methods used in estimating the fair value at the grant date of options and restricted shares granted are listed below:
Grant Year -------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Volatility of share price: Options 37.0% 33.0% 31.0% Restricted stock 12.0% 11.0% 6.0% Dividend yield: Options - - - Restricted stock - - - Interest rate: Options 4.8% 6.3% 6.2% Restricted stock 4.8% 5.9% 5.6% Expected life of options 5.5 years 5.3 years 5.6 years Valuation methodology: Options Black-Scholes Option Pricing Model Restricted stock Binomial Pricing Model
Because the determination of the fair value of all options granted includes vesting periods over several years and additional option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effects of reported net income for future periods. EARNINGS PER SHARE Since the effect of stock options of 57,103 shares in 1998, 49,542 shares in 1997, and 25,811 shares in 1996 would be antidilutive to loss per share computations, Basic EPS and Diluted EPS are identical for the years ended December 31, 1998, 1997 and 1996. The computations of EPS for 1998, 1997 and 1996 include shares (denominator) of 6,319,775, 6,384,566 and 6,376,277, respectively. Performance based restricted stock of 286,000, 305,500 and 245,000 shares for the years ended December 31, 1998, 1997 and 1996, respectively, were not included in the above computations. Such shares may be issued in the future subject to the occurrence of certain events as described in the "Stock Option and Stock Award Plans" note. COMMITMENTS AND CONTINGENCIES Rent expense for office equipment, facilities and vehicles was $1.0 million, $.8 million and $1.0 million for 1998, 1997 and 1996, respectively. The Company also received rental income on subleased facilities of $.2 million for the years ended December 31, 1998 and 1997, and $0 for the year ended December 31, 1996. At December 31, 1998, the Company was committed, under non-cancelable operating leases, to minimum annual rentals as follows: 1999 - $.6 million; 2000 - $.4 million; 2001 - $.3 million; 2002 - $.3 million; 2003 - $.2 million; thereafter - - $.3 million. Minimum annual rentals have not been reduced for future minimum rentals under non-cancelable subleases aggregating $.8 million. At December 31, 1998, the Company had no obligations under standby letters of credit. In April 1994, Ricoh Company, Ltd., Ricoh Electronics, Inc., and Ricoh Corporation (collectively "Ricoh") brought a lawsuit in the United States District Court of New Hampshire ("District Court"), alleging the Company's infringement of the U.S. patents 4,611,730 and 4,878,603 relating to certain toner cartridges for Ricoh copiers. In March 1997, the District Court enjoined Nashua from manufacturing, using or selling its NT-50 and NT-6750 toner cartridges. Sales of these products in 1996 amounted to one percent of Nashua's total sales. The Company disagreed with the District Court's decision and appealed to the United States Court of Appeals for the Federal Circuit ("Court of Appeals"). On February 18, 1999, the Court of Appeals affirmed the March 1997 ruling of the District Court that the Company infringed a patent held by Ricoh. Separately, on September 30, 1998, the District Court issued an order awarding damages in the amount of $7,549,000 related to the Company's sales of NT-50 and NT-6750 toner cartridges through December 3, 1995, additional damages relating to the Company's sales of such products through March 1997, certain of Ricoh's costs relative to the suit, and interest on such damages. The Company disagrees with the District Court's decision on the issue of damages and has appealed the decision to the Court of Appeals. The Company has adequate financial resources to pay the District Court's award of damages should its appeal on damages be unsuccessful. In connection with the damages award, the Company recorded a $15.0 million pretax charge in the third quarter of 1998 and is accruing interest on such award. In addition, in the fourth quarter of 1998, the Company posted a $16.0 million bond and placed $5.0 million in escrow to secure such bond. The $5.0 million is classified as restricted cash in the balance sheet. 30 20 In August and September 1996, two individual plaintiffs initiated lawsuits in the Circuit Court of Cook County, Illinois against the Company, Cerion, certain directors and officers of Cerion, and the Company's underwriter, on behalf of classes consisting of all persons who purchased the common stock of Cerion between May 24, 1996 and July 9, 1996. These two complaints were consolidated. In March 1997, the same individual plaintiffs joined by a third plaintiff filed a Consolidated Amended Class Action Complaint (the "Consolidated Complaint"). The Consolidated Complaint alleged that, in connection with Cerion's initial public offering, the defendants issued materially false and misleading statements and omitted the disclosure of material facts regarding, in particular, certain significant customer relationships. In October 1997, the Court, on motion by the defendants, dismissed the Consolidated Complaint. The plaintiffs filed a Second Amended Consolidated Complaint alleging substantially similar claims as the Consolidated Complaint seeking damages and injunctive relief. On May 6, 1998, the Court, on motion by the defendants, dismissed with prejudice the Second Amended Consolidated Complaint. The plaintiffs have filed an appeal of the Court's ruling. The Company continues to believe that this lawsuit is without merit and plans to vigorously defend itself in this matter on appeal. The Company is involved in certain environmental matters and has been designated by the Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") for certain hazardous waste sites. In addition, the Company has been notified by certain state environmental agencies that some of the Company sites not addressed by the EPA require remedial action. These sites are in various stages of investigation and remediation. Due to the unique physical characteristics of each site, the technology employed, the extended timeframes of each remediation, the interpretation of applicable laws and regulations and the financial viability of other potential participants, the ultimate cost to the Company of remediation for each site is difficult to determine. At December 31, 1998, based on the facts currently known and the Company's prior experience with these matters, the Company has concluded that there is at least a reasonable possibility that site assessment, remediation and monitoring costs will be incurred by the Company with respect to those sites which can be reasonably estimated in the aggregate range of $1.0 million to $1.5 million. This range is based, in part, on an allocation of certain sites' costs which, due to the joint and several nature of the liability, could increase if the other PRPs are unable to bear their allocated share. At December 31, 1998, the Company has accrued $1.5 million which represents, in management's view, the most likely amount within the range stated above. Based on information currently available to the Company, management believes that it is probable that the major responsible parties will fully pay the costs apportioned to them. Management believes that, based on its financial position and the estimated environmental accrual recorded, its remediation expense with respect to those sites is not likely to have a material adverse effect on its consolidated financial position or results of operations. POSTRETIREMENT BENEFITS In 1998, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes the disclosure requirements for pensions and other postretirement benefits. Prior years' information has been restated to conform with the requirements of this statement. Pension Plans: The Company and its subsidiaries have several pension plans which cover substantially all of its regular full-time employees. Benefits under these plans are generally based on years of service and the levels of compensation during those years. The Company's policy is to fund amounts deductible for income tax purposes. Assets of the plans are invested in common stocks, fixed-income securities and interest-bearing cash equivalent instruments. Retiree Health Care and Other Benefits: The Company also provides certain health care and other benefits to eligible retired employees and their spouses. Salaried participants generally become eligible for retiree health care benefits after reaching age 60 with ten years of service. Benefits, eligibility and cost-sharing provisions for hourly employees vary by location or bargaining unit. Generally, the medical plans are fully insured managed care plans. In 1993, the postretirement benefit plan was changed to share the cost of benefits with all retirees, resulting in an unrecognized benefit which is being amortized over the future service period of the active employees. 31 21
Pension Benefits Postretirement Benefits ----------------------- ------------------------ (In thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year $116,671 $108,805 $ 8,527 $ 8,219 Service cost 1,470 1,669 54 59 Interest cost 8,289 8,219 532 606 Amendments 188 - - - Actuarial (gain)/loss 8,204 6,171 (764) 358 Benefits paid (9,466) (8,193) (651) (715) ------------------------------------------------- Benefit obligation at end of year $125,356 $116,671 $ 7,698 $ 8,527 ================================================= Change in plan assets Fair value of plan assets at beginning of year $125,011 $115,619 $ - $ - Actual return on plan assets 13,924 15,621 - - Employer contribution - 1,705 - - Benefits paid (9,209) (7,934) - - ------------------------------------------------- Fair value of plan assets at end of year $129,726 $125,011 $ - $ - ================================================= Funded status $ 4,370 $ 8,340 $ (7,698) $ (8,527) Unrecognized net actuarial (gain)/loss (17,717) (22,945) (2,869) (2,285) Unrecognized prior service cost 3,749 4,478 (656) (758) Unrecognized net transition asset 221 528 - - ------------------------------------------------- Net amount recognized $ (9,377) $ (9,599) $(11,223) $(11,570) ================================================= The amount recognized in the consolidated balance sheet consists of the following: Accrued benefit liability $ (9,377) $ (9,599) $(11,223) $(11,570) Additional minimum liability (382) (335) - - Intangible asset 382 335 - - ------------------------------------------------- Net amount recognized $ (9,377) $ (9,599) $(11,223) $(11,570) =================================================
Pension Benefits Postretirement Benefits -------------------------- ----------------------- 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Weighted-average assumptions as of December 31 Discount rate 6.75% 7.25% 7.75% 6.75% 7.25% 7.75% Expected return on plan assets 9.70% 9.70% 9.70% 9.70% 9.70% 9.70% Average rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
For measurement purposes, a 5.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999 and thereafter. 32 22 Net periodic pension and postretirement benefit costs from continuing operations for the plans, exclusive of enhanced early retirement and curtailment costs, includes the following components:
Pension Benefits Postretirement Benefits ------------------------------- ------------------------- (In thousands) 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 1,470 $1,669 $2,360 $ 54 $ 59 $ 81 Interest cost 8,288 8,219 7,997 532 606 620 Expected return on plan assets (10,712) (9,834) (9,150) - - - Amortization of prior service cost 605 633 610 (56) (59) (269) Recognized net actuarial (gain) (53) (145) - (136) (118) (101) Amortization of transition obligation 161 189 199 - - - -------------------------------------------------------------- Net periodic benefit cost $ (241) $ 731 $2,016 $394 $488 $331 ==============================================================
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $3.1 million, $3.0 million, and $0, respectively, as of December 31, 1998 and $2.9 million, $2.8 million, and $0, respectively, as of December 31, 1997. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage (In thousands) Point Increase Point Decrease - ---------------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 14 $ (12) Effect on accumulated postretirement benefit obligation $107 $(100)
The Company recognized curtailment expenses of $.3 million relating to the sale of the photofinishing businesses in 1998, and $.3 million relating to the Tape Products Division sale in 1996. Approximately $9.8 million and $9.9 million of the accrued pension cost and $10.6 million and $10.8 million of the accrued postretirement benefits for 1998 and 1997, respectively, are included in "Other long-term liabilities" in the accompanying consolidated balance sheet. Intangible pension assets of $.4 million and of $.3 million for 1998 and 1997, respectively, are included in "Other assets" in the accompanying consolidated balance sheet. Additionally, approximately $.6 million and $.8 million of the accrued postretirement benefits for 1998 and 1997, respectively, are included in "Accrued expenses" in the accompanying consolidated balance sheet. The Company is in the process of liquidating a pension plan related primarily to the UK photofinishing business sold in 1998. At December 31, 1998, the projected benefit obligation and accumulated benefit obligation under the plan were $9.3 million and the fair value of plan assets was $11.4 million. INFORMATION ABOUT OPERATIONS During the fourth quarter of 1998, the Company adopted FAS 131. Prior year segment information has been restated to present the Company's two reportable segments - (1) Imaging Supplies and (2) Specialty Coated and Label Products. The Imaging Supplies segment produces and sells copier and laser printer supplies (primarily toner, developer, remanufactured cartridges, and the distribution of paper) to distributors, original equipment manufacturers, and end users. The Specialty Coated and Label Products segment manufactures specialty coated paper and label products. These include various converted paper products sold primarily to domestic converters and re-sellers, end users and private label distributors. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies Note to the Consolidated Financial Statements. Segment data does not include restructuring and other unusual items, and does not allocate all corporate costs and assets to the divisions. The Company evaluates the performance of its segments and allocates resources to them based on pretax income before restructuring and other unusual items. Sales between business segments are insignificant. Intrasegment sales between geographic areas are generally priced at the lowest price offered to unaffiliated customers. The Company's reportable segments are strategic business units grouped by product class. They are managed separately because each business requires different technology and marketing strategies. Due to similarities between the Label Products and Specialty Coated Product Divisions, they have been aggregated and reported as one reportable segment (Specialty Coated and Label Products). 33 23 The table below presents information about reported segments for the years ending December 31:
Net Sales From Pretax Income (Loss) From Continuing Operations Continuing Operations Identifiable Assets -------------------------- ------------------------- ------------------------ (In millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ By Reportable Segment Imaging Supplies $ 57.5 $ 66.5 $ 88.3 $ (2.0) $ (3.6) $ (5.4) $ 21.2 $ 22.9 $ 23.8 Specialty Coated and Label Products 110.2 106.6 110.6 9.3 7.6 4.9 47.0 43.7 43.0 Reconciling items: Other (1) .1 .1 .1 (.6) (1.5) (1.8) 1.0 .6 .6 Corporate expenses and assets - - - (4.9) (8.5) (10.9) 64.1 30.8 26.4 Restructuring and other unusual items - - - (13.8) (4.3) 1.7 - - - Discontinued operations - - - - - - .8 48.8 82.9 ----------------------------------------------------------------------------------------- Consolidated $167.8 $173.2 $199.0 $(12.0) $(10.3) $(11.5) $134.1 $146.8 $176.7 =========================================================================================
(1) Includes activity from operations which falls below the quantitative thresholds for a reportable segment. Capital expenditures and depreciation and amortization by reportable segment are set forth below for the years ended December 31:
Capital Expenditures Depreciation & Amortization ------------------------ --------------------------- (In millions) 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Imaging Supplies $1.1 $ .8 $4.1 $2.1 $2.3 $3.1 Specialty Coated and Label Products 5.4 3.2 1.1 3.7 3.7 3.8 Reconciling Items: Other (1) - - .1 .2 .2 .2 Corporate .2 .4 .6 .8 1.4 1.9 -------------------------------------------------------- Consolidated $6.7 $4.4 $5.9 $6.8 $7.6 $9.0 ========================================================
(1) Includes activity from operations which falls below the quantitative thresholds for a reportable segment. The following is information by geographic area as of and for the years ended December 31:
Net Sales From Continuing Operations Long-Lived Assets -------------------------- ------------------------ (In millions) 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ By Geographic Area United States $167.5 $172.4 $198.5 $39.6 $39.9 $46.1 Europe .3 .8 .5 .4 .5 .5 Reconciling Items: Discontinued operations - - - .8 48.7 49.2 --------------------------------------------------------- Consolidated $167.8 $173.2 $199.0 $40.8 $89.1 $95.8 =========================================================
COMMON STOCK INFORMATION (UNAUDITED) The Company's stock is traded on the New York Stock Exchange. At December 31, 1998, there were 1,275 record holders of the Company's common stock. 34 24 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF NASHUA CORPORATION: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and retained earnings and of cash flows present fairly, in all material respects, the financial position of Nashua Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Boston, Massachusetts February 5, 1999 35 25
OFFICERS Gerald G. Garbacz Bruce T. Wright Joseph I. Gonzalez-Rivas Chairman, President and Vice President Vice President/President, Chief Executive Officer Human Resources Imaging Supplies Division Peter C. Anastos Joseph R. Matson John J. Ireland Vice President, General Vice President, Vice President/President, Counsel and Secretary Corporate Controller Specialty Coated Products Division John L. Patenaude Suzanne L. Ansara Gene P. Pache Vice President-Finance, Assistant Secretary Vice President/President, Chief Financial Officer Label Products Division and Treasurer DIRECTORS Sheldon A. Buckler John M. Kucharski James F. Orr III Chairman Chairman Chairman, President and Commonwealth Energy System EG&G, Inc. Chief Executive Officer (Technical and Scientific UNUM Corporation Gerald G. Garbacz Products and Services) (Insurance) Chairman, President and Chief Executive Officer David C. Miller, Jr. Peter J. Murphy Nashua Corporation President and Chief President and Chief Executive Officer Executive Officer Charles S. Hoppin ParEx Inc. Parlex Corporation Senior Counsel (Investment Company) (Electrical Components) Davis Polk & Wardwell (Law Firm) COMMITTEES AUDIT/FINANCE AND LEADERSHIP AND INVESTMENT COMMITTEE COMPENSATION COMMITTEE GOVERNANCE COMMITTEE John M. Kucharski, Chairman James F. Orr III, Chairman Sheldon A. Buckler, Chairman Sheldon A. Buckler John M. Kucharski Charles S. Hoppin Charles S. Hoppin David C. Miller, Jr. David C. Miller, Jr. Peter J. Murphy Peter J. Murphy James F. Orr III
36 EX-21.01 9 SUBSIDIARIES 1 EXHIBIT 21.01 SUBSIDIARIES OF THE REGISTRANT Nashua Corporation, or one of its wholly-owned subsidiaries, owns beneficially, directly or indirectly, all of the capital stock in the following subsidiaries: Jurisdiction of Domestic Incorporation - -------- --------------- Nashua Belmont Limited (2) Delaware Nashua International, Inc. (1) Delaware Nashua Photo European Investments, Inc. (2) Delaware Nashua Photo Inc. (1) Delaware Nashua Photo International Investments, Inc. (2) Delaware Nashua P.R., Inc. (1) Delaware Jurisdiction of Foreign Incorporation - ------- --------------- Nashua FSC Limited (1) Jamaica Nashua Photo B.V. (2) Netherlands Nashua Photo Limited (2) Canada Nashua Imaging Supplies (UK) Limited England Nashua Photo S.N.C.(3) France Postal Film Services (Country-Wide) Limited (4) England All of the above listed subsidiaries are included in Nashua's consolidated financial statements. (1) Stock held by Nashua Corporation (2) Stock held by Nashua Photo Inc. (3) Stock held 50% by Nashua Photo European Investments, Inc. and 50% by Nashua Photo International Investments, Inc. (4) Stock held by Nashua Imaging Supplies (UK) Limited EX-23.01 10 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 2-88669, No. 33-1 3995, No. 33-67940, No. 33-72438 and No. 333-06025) of Nashua Corporation of our report dated February 5, 1999, appearing on page 35 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears in this Form 10-K. Boston, Massachusetts March 29, 1999 EX-24.01 11 POWER OF ATTORNEY 1 EXHIBIT 24.01 Commission File No. 1-5492-1 POWER OF ATTORNEY Know All Men By These Presents, that each person whose signature appears below constitutes and appoints John L. Patenaude and Peter C. Anastos and each of them, as true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign Nashua Corporation's Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. SIGNATURE TITLE DATE - --------- ----- ---- /s/ Sheldon A. Buckler Director March 21, 1999 - ------------------------------ Sheldon A. Buckler /s/ Charles S. Hoppin Director March 19, 1999 - ------------------------------ Charles S. Hoppin /s/ John M. Kucharski Director March 24, 1999 - ------------------------------ John M. Kucharski /s/ David C. Miller, Jr. Director March 19, 1999 - ------------------------------ David C. Miller, Jr. /s/ Peter J. Murphy Director March 24, 1999 - ------------------------------ Peter J. Murphy /s/ James F. Orr III Director March 23, 1999 - ------------------------------ James F. Orr III EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1.0 36,965 0 19,098 (866) 14,676 83,347 73,057 (33,727) 134,095 37,473 0 0 0 6,938 68,289 134,095 167,831 167,831 127,089 165,780 13,825 176 (1,190) (11,950) (4,721) (7,229) (5,635) 0 0 (12,864) (2.04) (2.04)
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