-----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, PbgZlEMfOz3QTPAqxNvoR/Alq8jR9OYGy7Rpp9E5lIjBWhLaiy1yYNRjerExIOg9 j9HuXfwkt+S5lHLhJldvVg== 0000950135-96-001791.txt : 19960425 0000950135-96-001791.hdr.sgml : 19960425 ACCESSION NUMBER: 0000950135-96-001791 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960424 SROS: NYSE 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/A SEC ACT: SEC FILE NUMBER: 001-05492 FILM NUMBER: 96550128 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/A 1 NASHUA CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A Amendment No. 1 to Form 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 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) (I.R.S. Employer Identification Number) 44 Franklin Street P.O. Box 2002 Nashua, New Hampshire 03061-2002 - ---------------------------------- --------------------------------------- (Address of principal (Zip Code) executive offices) 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 15, 1996 was approximately $68,464,003. The number of shares outstanding of the registrant's Common Stock as of March 15, 1996 was 6,598,940 (excluding 23,630 shares held in treasury). DOCUMENTS INCORPORATED BY REFERENCE None 3 PART I Explanatory Note: This Amendment No. 1 amends only those items in the annual report on Form 10-K of Nashua Corporation filed with the Securities and Exchange Commission on April 1, 1996 set forth below. ITEM 1. BUSINESS GENERAL Nashua Corporation conducts business in three segments: Commercial Products, Photofinishing and Cerion Technologies (formerly Precision Technologies). The consolidated sales for 1995 were $452.2 million. Foreign sales and export sales from the United States totaled $138.8 million and represented 30.7 percent of the Company's total sales in fiscal 1995. 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, P.O. Box 2002, Nashua, New Hampshire 03061-2002 (Telephone: (603) 880-2323). References to the "Company" or to "Nashua" refer to Nashua Corporation and its consolidated subsidiaries, unless the context otherwise requires. On January 13, 1995, the Company acquired certain photofinishing operations from Nexus Photo Ltd. The acquisition includes mail-order photofinishing operations in France, Belgium, the Netherlands and Spain, and a wholesale film-processing business in Northern Ireland. The total purchase price was approximately $27.6 million. Approximately $20.7 million of the purchase price was provided under the $75 million revolving credit agreement dated January 5, 1995. The Company recorded restructuring and other unusual charges of $16.2 million in 1995, which included $14.3 million related to the Commercial Products Group, primarily for business unit and functional realignments, product and channel rationalizations, inventory write-downs related to the remanufactured cartridge operation, and cost reduction initiatives. The remainder of the 1995 charges resulted primarily from changes in the Company's executive management during the year, including severance and other personnel related costs. The 1995 restructuring and other unusual charges include charges of $8.2 million and $8 million in the third and fourth quarters, respectively. On March 21, 1996, Cerion Technologies filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of 3,840,000 shares of common stock. Of the total, 1,615,000 shares are being offered by Cerion and 2,225,000 shares are being offered by Nashua as the selling stockholder. If the offering is completed as presently structured, it is estimated that the Company will continue to own 45 percent of Cerion's outstanding stock (37 percent if the underwriters of the offering exercise their over-allotment option in full). In that event, Nashua will account for its investment in Cerion under the equity method. Cerion Technologies, based in Champaign, Illinois, is an independent supplier of aluminum substrates for the computer disk drive industry. All or most of the proceeds anticipated to be generated from the sale of shares offered by Nashua will be used to prepay a portion of the Company's debt. The Company's revolving credit facility and senior note agreement require maintenance of certain restrictive financial covenants related to interest and fixed charge coverage, tangible net worth, leverage and additional debt. Since September 29, 1995, the Company has not been in compliance with the interest and fixed charge coverage portions of these agreements. Since the initial date of technical default, the lenders have provided the Company with a forbearance during which time the parties have been negotiating amendments to the lending agreements in order to allow the Company to remain in compliance. As part of the interim agreement with its lenders, interest payable on amounts outstanding under the Revolving Credit Agreement were adjusted to the agent bank's prime rate (Reference Rate) plus .5 percent. On March 27, 1996, the Company reached agreement with its lenders on the terms of amendments to existing lending agreements which will supersede the terms and conditions of the existing $75 million revolving credit facility and the Company's senior note agreement. Under the provisions agreed to with lenders, the revolving credit facility will be replaced with a bank facility (the "Bank Facility"). Advances under the Bank Facility will be made pursuant to both a term loan arrangement and a revolving credit facility with an initial aggregate credit availability of up to $66 million. 4 Of the total revolving credit balance outstanding on the facility closing date, $48 million will initially be designated as outstanding under the term loan portion of the Bank Facility with the remainder designated as outstanding under the revolving credit facility. The revolving credit portion of the Bank Facility will provide for initial credit availability equal to the lesser of $18 million or a defined percentage of eligible accounts receivable and inventory. The agreement also will provide for up to $5 million of the revolving credit facility to be available for the issuance of letters of credit. The revolving credit portion of the Bank Facility will expire on December 31, 1997. The terms of the Bank Facility and revised senior note will require certain mandatory prepayments and, with respect to the Bank Facility, contain provisions for certain facility commitment reductions, tied to the sale or issuance by the Company of equity securities or the sale or disposition of assets. According to the provisions of the term loan and senior note agreements, one-half of the amount outstanding on October 1, 1996 and December 31, 1996, respectively, will become due and payable in four equal quarterly installments commencing in January 1997. All remaining amounts outstanding are due on December 31, 1997. Prepayments will also be required beginning in January 1997, based on Excess Cash Flows, as defined in the agreement. During December 1995, the Company announced its intention to sell its Tape Products Division, due to the continuing realignment of its Commercial Products Group. The Tape Products Division manufactures a variety of masking and duct tapes, and has substantially different customers, markets, distribution channels and cost structure than the remaining Commercial Products businesses. The proceeds to be generated from the sale will be used to prepay a portion of the Company's debt. The Note entitled "Information About Operations" to the Company's Consolidated Financial Statements, which appears on page 38 of this Form 10-K, contains financial information concerning Nashua's business segments. COMMERCIAL PRODUCTS GROUP In the fourth quarter of 1995, the Company announced the realignment of the Commercial Products Group into three distinct divisions: Imaging Supplies, Specialty Coated Products and Label Products. The realignment was designed to better focus Nashua's businesses around traditional core markets and become more responsive to the needs of its customers. The Commercial Products Group manufactures and sells office and industrial imaging supplies. IMAGING SUPPLIES The Imaging Supplies Division manufactures and sells a variety of consumable products used in the process of reproducing and transferring readable images. Nashua's imaging supplies are comprised of toners, developers, remanufactured laser printer cartridges, facsimile paper and copy paper. The Imaging Supplies Division sales were approximately $137 million for 1995, $143 million for 1994 and $153 million for 1993. -3- 5 The Division markets its toners, developers, facsimile paper, copy paper and remanufactured laser printer cartridges to its national and government accounts through a network of approximately 150 dealers located throughout the United States. These dealers also purchase Nashua's imaging supplies for resale directly to end-users. The Company also sells certain of these products through its own sales force to office supply distributors, and to original equipment manufacturers and private label distributors. The Division's competitors for toners and developers include Xerox Corporation, Canon, Inc., Ricoh Corporation and Eastman Kodak Company, which sell supplies for use in machines manufactured by them. 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 Division's primary competitor for its remanufactured laser printer cartridges is Canon, Inc. which manufactures both new and remanufactured laser printer cartridges principally for sale to large original equipment manufacturers, including Hewlett Packard Company, for resale under their brand names. In addition, there are several thousand small laser printer cartridge rechargers who provide low volumes to small customers. In 1995, in order to reduce manufacturing costs and maintain competitive pricing, the Company relocated its remanufactured laser printer cartridge production from Exeter, New Hampshire to Nogales, Mexico. SPECIALTY COATED PRODUCTS The Specialty Coated Products Division manufactures and sells thermal and non-thermal, thermosensitive label, Davac[RegisteredTrademark] dry-gummed label and carbonless papers. Specialty Coated Products Division sales were approximately $54 million for 1995, $62 million for 1994 and $60 million for 1993. Thermal papers develop an image upon contact with either a heated stylus or a thermal print head. A major application for these papers is for use in thermal facsimile machines. This application is expected to be adversely affected in the future by the increased use of plain paper facsimile machines. Thermal papers are also 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. The Division's 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 Japan and Europe. The Division's thermosensitive label papers are coated with an adhesive that is activated when heat is applied. These products are usually sold through fine paper merchants who, in turn, resell these products to printers who convert the papers into labels for use primarily in the pharmaceutical industry. The Division's thermosensitive label papers are also used in the bakery industry and the meat packaging industry. Davac[RegisteredTrademark] dry-gummed label paper is a paper which is coated with a moisture-activated adhesive. Davac[RegisteredTrademark] 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. Competitors in the thermosensitive and dry-gummed label industries include Brown-Bridge Company (a division of Spinnaker Industries, Inc.) and Ivex 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 -4- 6 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 3M. LABEL PRODUCTS The Label Division sells pressure sensitive labels through distributors and directly to end-users. Significant uses of labels include grocery scale marking, inventory control and address labels. The Label Division is a major supplier of labels to the supermarket industry and labels for use in the distribution and manufacture of products. The label industry is price sensitive and competitive, and includes competitors such as Moore, Rittenhouse, Hobart, Avery Dennison Corporation and Uarco, Inc. plus numerous small regional converters. A majority of the pressure-sensitive, thermal and non-thermal roll stock used by the Label Division is manufactured by Nashua's Specialty Coated Products Division. Label Division sales were approximately $54 million for 1995, $54 million for 1994 and $52 million for 1993. DEVELOPMENT OF NEW PRODUCTS Success of the Commercial Products Group 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 Group'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 Commercial Products Group will continue to grow; that existing and new products will meet the requirements of such markets; that the Group'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 Commercial Products Group; or that the Group can achieve or maintain profits in these markets. SUPPLIES AND MATERIALS The Commercial Products Group depends on outside suppliers for most of the raw materials used to produce toners and developers, labels and label papers, carbonless papers and thermal papers, including paper to be converted and chemicals to be used in producing the various coatings Nashua applies. The Group purchases these materials from several suppliers and believes that adequate supplies are available. Products purchased in finished form (including certain toners, developers and papers) are readily available from a variety of sources. There are no assurances that the Group's operating results will not be adversely affected, however, by future increases in cost of raw materials or sourced products. MANUFACTURING OPERATIONS The Commercial Products Group operates manufacturing facilities in Nashua, New Hampshire; Merrimack, New Hampshire; Omaha, Nebraska; and Nogales, Mexico. All of these sites are union-based, 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. PHOTOFINISHING Nashua traditionally has provided mail-order photofinishing services to amateur photographers under the tradenames York Photo Labs in the United States, Truprint and York Photo Labs in the United Kingdom and Scot Foto and York Photo in Canada. Nashua develops and prints films received by mail at its processing facilities in the United States, the United Kingdom and Canada, and also sells film, cameras and associated products to its base of customers. Nashua is the market leader in the mail-order photofinishing business in all three countries. -5- 7 The January 1995 acquisition of certain Continental European and Northern Ireland photofinishing operations has allowed the Company to leverage its existing marketing, processing and system capabilities to expand into the mail-order photofinishing markets in France, Belgium, the Netherlands and Spain, and the wholesale market in Northern Ireland and the Irish Republic. Nashua continues to operate the businesses under the tradenames Maxicolor and Trifica in France, Belgium and the Netherlands, Labopost in Spain and Belmont in Northern Ireland and the Irish Republic. In both the mail-order and wholesale businesses, demand is generally strongest during the third quarter due to increased picture taking by amateur photographers during the summer months. COMPETITORS The Company's major mail-order photofinishing competitors include District Photo, Inc., Mystic Color Labs Inc. and Seattle Film Works, Inc. in the United States, Grunwick Processing Laboratories Limited in the United Kingdom, Chas. Abel Photo Services, Ltd. in Canada, Spector Photo Group N.V. and Fotolabo S.A. in France and Colorado in the Netherlands, as well as numerous other national, regional and local processors in countries in which the Company operates. The proliferation of mini-labs, discount stores and mass merchandisers offering reduced price processing could adversely impact the mail-order segment of the photofinishing market, as well as increasing competitiveness within the mail-order segment which has typically relied on its lower prices as a competitive advantage over retail services. REGULATION The Company's direct mail operations are subject to regulation by the national and local government agencies with jurisdiction over the areas in which they operate. In general, these regulations govern the manner in which orders may be solicited, the form and content of advertisements, information which must be provided to prospective customers, the time within which orders must be filled, obligations to customers if orders are not shipped within a specified period of time and the time within which refunds must be paid if the ordered merchandise is unavailable or if it is returned. From time to time the Photofinishing businesses have modified their methods of doing business and marketing operations in response to inquiries and requests from regulatory authorities. To date, such changes have not had an adverse effect on the businesses. However, there can be no assurance that future regulatory requirements or actions will not have an adverse effect on the Photofinishing businesses' marketing programs or operations. TECHNOLOGICAL ADVANCEMENT Although the Photofinishing businesses are continually developing new marketing programs and developing new production techniques, there can be no assurance that the businesses will be able to anticipate technological advances within the photography industry. For example, the newly announced Advanced Photo System and digital imaging systems are currently being developed within the industry. To the extent the industry was to move toward these new technologies and the Photofinishing business was unable to adapt to these changes, the Photofinishing businesses' results of operations and financial condition could be materially adversely affected. MATERIALS AND SUPPLIERS The principal supplies and materials used by Nashua's Photofinishing business include color print paper, photo developing chemicals and color print films, all of which are available from several manufacturers. Sales of the Photofinishing businesses' products and services on a direct-to-consumer mail-order basis are largely dependent on national postal services for receipt of orders and delivery of processed film or other products. Any significant changes in the operations or rates of these postal services or extended interruptions in postal deliveries could have an adverse effect on the Photofinishing operations. -6- 8 CERION TECHNOLOGIES (FORMERLY PRECISION TECHNOLOGIES) Cerion Technologies, based in Champaign, Illinois, manufactures and markets precision-machined aluminum disk substrates that are used in the production of magnetic thin-film disks for hard disk drives of portable and desktop computers. Cerion Technologies depends on a small number of customers. Cerion Technologies' 1995 aluminum disk substrate sales were to four customers of which two represented approximately 47 percent and 42 percent of its sales. Cerion does not have any long-term purchase commitments from those customers. Cerion Technologies also produces organic photoconductor drum substrates for laser printer cartridges and photocopiers. On March 21, 1996, Cerion Technologies filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of 3,840,000 shares of common stock. Of the total, 1,615,000 shares are being offered by Cerion and 2,225,000 shares are being offered by Nashua as the selling stockholder. If the offering is completed as presently structured, it is estimated that the Company will continue to own 45 percent of Cerion's outstanding stock (37 percent if the underwriters of the offering exercise their over-allotment option in full). In that event, Nashua will account for its investment in Cerion under the equity method. All or most of the proceeds anticipated to be generated from the sale of shares offered by Nashua will be used to repay a portion of the Company's debt. COMPETITION Cerion's primary competitor is Kobe Precision, Inc., a division of Kobe Steel, Ltd. Also, several of the hard disk drive manufacturers currently produce aluminum disk substrates internally for their own use, and Cerion believes that a majority of its market currently is supplied by such vertically integrated manufacturers. Moreover, these companies could make their products available for distribution into the market as direct competitors of Cerion. Any of these changes would reduce the already small number of current and potential customers for Cerion's products and increase competition for the remaining market. There can be no assurance that Cerion will be able to continue to compete successfully with existing or new competitors. SUPPLIERS Cerion relies on Alcoa Memory Products, Inc., a subsidiary of Aluminum Company of America, Incorporated ("Alcoa"), as its sole supplier of the aluminum blanks used by it for producing aluminum disk substrates. It also relies on a sole supplier for the aluminum drum blanks used for its OPC drum substrates, and on a limited number of suppliers for certain materials used in its aluminum disk and OPC drum substrate manufacturing processes, including etching chemicals and coolants. Cerion does not have any long-term supply contracts with Alcoa or any of its other major suppliers. Changing suppliers for certain materials would be expensive and require long lead times. For certain materials, a change in supplier could result in Cerion being required to re-qualify its products with certain of its customers. Any significant limitations on the supply of raw materials could disrupt, limit or halt Cerion's production of aluminum disk substrates or OPC drum substrates and could have a material adverse effect on Cerion's business, operating results and financial condition. TECHNOLOGICAL ADVANCEMENT Although Cerion is continually developing new products and production techniques, there can be no assurance that Cerion will be able to anticipate technological advances or shifts and compete effectively against competitors' new products. For example, certain glass and ceramic substrates currently are being sold in the 65mm thin-film disk market. If these materials were to become more prevalent, and Cerion were unable to produce glass and ceramic substrates, Cerion's business, results of operations and financial condition could be materially adversely affected. -7- 9 RESEARCH AND DEVELOPMENT Nashua's research and development efforts have been instrumental in the development of many of the products it markets. Nashua's research and development expenditures were $9.2 million in 1995, $9.1 million in 1994 and $7.0 million in 1993. 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 the 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 three 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, 1995 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 liquidity, consolidated financial position or results of operations. EMPLOYEES Nashua and its subsidiaries had approximately 3,234 full-time employees at March 1, 1996. Approximately 550 employees of Nashua's Commercial Products segment are members of one of several unions, principally the United Paperworkers International Union. There are two agreements with the United Paperworkers International Union covering a majority of the Commercial Products hourly employees. These agreements generally have a duration of two years and expiration dates in the first quarter of the year. FOREIGN OPERATIONS During 1995, Nashua had Photofinishing subsidiaries in Canada, the United Kingdom, Ireland, France and the Netherlands. Nashua had export sales of approximately $36.4 million in 1995, $33.1 million in 1994 and $38.6 million in 1993. Nashua includes revenues and other financial data from its foreign operations in its business segment reporting according to the nature of the product sold. The Note to the Company's Consolidated Financial Statements entitled "Information About Operations," which appears on page 38 of this Form 10-K, contains -8- 10 additional information regarding Nashua's foreign operations during the last three years, including identifiable assets, net sales and income (loss) from continuing operations by geographic area. Nashua's international sales are subject to risks that generally do not affect businesses operating wholly within a single country. These include political risks associated with doing business in foreign countries, exchange control and import limitations which may impede the free movement of goods and funds from one country to another and currency exchange rate risks. Nashua's foreign businesses generally are adversely affected as the United States dollar strengthens against the foreign currencies of the countries in which it does business. From time-to-time Nashua enters into various foreign exchange contracts to mitigate the risk of foreign currency fluctuations with respect to foreign currency denominated transactions. EXECUTIVE OFFICERS OF NASHUA The information regarding the Executive Officers of Nashua is incorporated herein by reference to Item 10 under the heading "Executive Officers of the Registrant." -9- 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF CONTINUING OPERATIONS - 1995 COMPARED TO 1994 Net sales of $452.2 million increased 8 percent from 1994, primarily the result of the Company's acquisition of photofinishing businesses in Europe and Ireland in the first quarter of 1995 and increased volume in Cerion Technologies, partially offset by a decline in sales in the Commercial Products Group. The Company recorded a net loss from continuing operations of $15.5 million, including restructuring and other unusual pretax charges of $16.2 million and a valuation allowance of $3.3 million against tax assets due to the probability that such assets will not be realized. This compared to net income from continuing operations of $2.2 million in 1994, including pretax restructuring and other unusual charges of $2.6 million. The Company's pretax results before restructuring and other unusual charges decreased from income of $6.6 million in 1994 to a loss of $3.9 million in 1995 due to lower operating income in the Photofinishing Group, increased operating losses in the Commercial Products Group, increased spending in Microsharp, and increased interest expense, partially offset by an increase in operating income in Cerion Technologies. During December 1995, the Company announced its intention to sell the Tape Products Division due to the continuing realignment of the Company's Commercial Products Group. The Tape Products Division manufactures a variety of masking and duct tapes, and has substantially different customers, markets, distribution channels and cost structure than the remaining Commercial Products businesses. The results of the Tape Products Division are reported as discontinued operations. The total restructuring and other unusual charges of $16.2 million in 1995 included $14.3 million related to the Commercial Products Group, primarily for business unit and functional realignments, product and channel rationalizations, inventory write-downs related to the remanufactured cartridge operation, and cost reduction initiatives. The remainder of the 1995 charges resulted primarily from changes in the Company's executive management during the year, including severance and other personnel related costs. The 1995 restructuring and other unusual charges include charges of $8.2 million and $8 million in the third and fourth quarters, respectively. Details of the charges related to continuing operations and the activity recorded during 1995 are as follows:
Balance Balance Dec. 31, Current Year Current Year Dec. 31, (In thousands) 1994 Provision Charges 1995 -------- ------------ ------------ -------- Provisions for severance related to workforce reductions $1,550 $ 3,000 $ 1,950 $2,600 Provisions related to other personnel costs 150 850 850 150 Provisions for assets to be sold or discarded 1,250 8,800 10,050 -- Other -- 3,550 1,500 2,050 ------ ------- ------- ------ Total $2,950 $16,200 $14,350 $4,800 ====== ======= ======= ======
The current year provision for workforce reductions includes amounts for salary and benefit continuation for approximately 110 employees as part of the Commercial Products reorganization and product rationalization. The current year provision for assets to be sold or discarded includes approximately $5.6 million related to cartridge inventory write-downs, as well as other asset write-downs resulting from product and channel -13- 12 rationalization within Commercial Products. The cartridge inventory charges relate primarily to excess empty cartridges received in 1995 under rebate programs and contractual obligations, most of which have been terminated. At December 31, 1995, approximately 30 employee terminations provided for had occurred, with the remaining separations scheduled to be completed in 1996. All charges, excluding asset write-downs, are principally cash in nature and are expected to be funded from operations. All restructuring activities provided for in the balance at December 31, 1994 were completed in 1995. Amounts incurred did not change materially from the reserve balance of $3 million. Management anticipates all 1995 actions will be completed by the end of 1996 and estimates annualized savings in personnel and operating costs of approximately $5 million. Net sales for the Commercial Products Group decreased $14 million, or 5 percent, driven by lower volumes across several product lines, somewhat offset by higher selling prices. Volume declines were experienced in facsimile, carbonless and copy papers, label rollstock, toner, diskettes and office catalog supplies. Volumes increased in remanufactured laser printer cartridges and converted label products. Selling price increases across most of the paper-based product lines reduced the unfavorable impact of volume declines. The operating loss before restructuring and other unusual charges increased $4.7 million compared to 1994, primarily due to the lower volumes, partially offset by lower selling and administrative expenses. Selling price increases were offset by higher raw material costs. During the last half of 1995, the Company initiated a number of actions to reverse the sales and operating income declines experienced in the Commercial Products Group in 1995, including changes in executive management, establishing market-oriented business units and streamlining the workforce. Management intends to continue to focus on the tasks of implementing these actions in 1996. Net sales in the Photofinishing Group increased $33.8 million, or 23 percent, from the prior year due to the acquisition of European and Irish photofinishing operations in the first quarter of 1995. To a lesser extent, sales increased from higher selling prices in the U.S. and U.K. as well as from the impact of a weaker U.S. dollar. These favorable impacts were offset by lower volumes in the U.S., U.K. and Canada resulting from continued competitive pressure. Operating income declined $9.2 million from the prior year, resulting from lower volume in the U.S. and Canada, as well as higher marketing costs in the U.S. and U.K. Higher marketing costs in the U.S. resulted from increased postal rates, higher mailer costs and increased circulation volumes. U.K. marketing costs increased due to investments in new and redesigned brand launches as well as an increase in the cost of mailers. Sales for Cerion Technologies increased $13.5 million to $27.5 million in 1995, and operating income increased to $6 million in 1995 from a loss of $.2 million in 1994. The improvements are due to continued strong demand for aluminum substrates, improved product mix and manufacturing efficiencies associated with the increases in volume. Administrative expenses increased 23 percent as the result of the photofinishing businesses acquired in 1995, partially offset by efficiencies resulting from the restructuring actions taken in 1994. Selling and distribution expenses as a percent of sales increased 13 percent due to the 1995 photofinishing acquisition. Research and development expenses were substantially unchanged year to year. The effective tax rate for continuing operations was a benefit of 23.2 percent in 1995 compared to a charge of 45.2 percent in 1994. The tax benefit was less than the U.S. statutory rate primarily due to the establishment of a valuation allowance against long-term tax assets and the unfavorable impact of non-deductible goodwill amortization. -14- 13 On March 21, 1996, Cerion Technologies filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of 3,840,000 shares of common stock. Of the total, 1,615,000 shares are being offered by Cerion and 2,225,000 shares are being offered by Nashua as the selling stockholder. If the offering is completed as presently structured, it is estimated that the Company will continue to own 45 percent of Cerion's outstanding stock (37 percent if the underwriters of the offering exercise their over-allotment option in full). In that event, Nashua will account for its investment in Cerion under the equity method. As of March 1, 1996, Cerion distributed a dividend to Nashua in the form of a Promissory Note (the "Note") payable to Nashua in the principal sum of $10 million. The Note bears interest at the rate of 7.32 percent per annum from March 1, 1996 to September 30, 1996. Thereafter, until February 28, 1998, when the full amount of the Note becomes due, interest will accrue at a rate equal to prime plus 2.5 percent per annum. If the Note is paid in full on or before May 31, 1996, the lesser of $.2 million or all interest accrued as of the date of payment will be forgiven. Thereafter, the amount of prepayment discount on the Note will decline each month through August 31, 1996. Any prepayment made by Cerion will be without penalty but, after August 31, 1996, will not have the benefit of any prepayment discount. Until such time as Cerion is no longer a wholly-owned subsidiary of Nashua Corporation, the intercompany note will be eliminated in the Company's consolidated financial statements. Cerion Technologies, based in Champaign, Illinois, is an independent supplier of aluminum substrates for the computer disk drive industry. All or most of the proceeds anticipated to be generated from the sale of shares offered by Nashua will be used to prepay a portion of the Company's debt. RESULTS OF CONTINUING OPERATIONS - 1994 COMPARED TO 1993 Net sales of $418.9 million declined slightly from 1993. The Company generated after-tax income from continuing operations of $2.2 million which included pretax restructuring and other unusual charges of $2.6 million. This compared to after-tax income from continuing operations of $.3 million in 1993 which included pretax restructuring and other unusual charges of $11.8 million. Net sales for the year decreased in the Commercial Products Group and in the Photofinishing Group, and were substantially unchanged for Cerion Technologies. Pretax income from continuing operations, excluding restructuring charges, was $6.6 million compared to $12.4 million in 1993, primarily due to the decline in operating income in the Commercial Products Group and expenses related to the development of the new Microsharp business. In 1994, the Company created the Commercial Products Group by combining the former Office Supplies and Coated Products Groups. The objective of this reorganization was to improve service levels, leverage selling capabilities and reduce costs by offering the full breadth of Nashua products to all customers. In connection with these changes, the Company's office supplies catalog business was merged with existing sales and marketing operations of the new Commercial Products Group. In addition, the Company spent approximately $1 million in 1994 on professional fees associated with the development of customer interface systems. Net sales for the Commercial Products Group decreased $5.3 million, or 2 percent, to $259.5 million, due to reduced diskette and remanufactured laser printer cartridge volume partially offset by volume gains for thermal labels, heat seal and copy paper. Operating income before restructuring and other unusual charges compared unfavorably to 1993 by $3.3 million, primarily due to extremely competitive toner pricing, a shift to lower margin toners, lower remanufactured laser printer cartridge volume, and significantly higher raw material prices across many product lines. Selling price increases only partially offset the impact of higher raw material costs. Net sales in the Photofinishing Group decreased $3.3 million, approximately 2 percent, to $145.4 million. Continued competitive pressure resulted in lower volume in the U.S. compared to the prior year, partially offset by higher volume in the U.K. operation. In addition, U.S. sales in 1994 were depressed by lower prices in the first quarter compared to the comparable period of the prior year, partially offset by improvements in price throughout the year, especially the fourth quarter. While volume and pricing pressures adversely impacted gross margin, operating income, excluding restructuring charges, was substantially unchanged year over year due to lower administrative costs. Cerion Technologies transitioned in 1994 from a captive supplier of substrates to an independent supplier. Net sales were substantially unchanged year to year at $14 million. Operating income declined $.8 million to a loss of $.2 million, primarily due to manufacturing changeover costs and market introduction costs associated with new products being offered to an expanded customer base. Administrative expenses decreased approximately 8 percent, primarily as a result of efficiencies resulting from the restructuring actions taken in 1994. Selling and distribution expenses as a percentage of sales were essentially unchanged. Research and development expenses increased $2.1 million to $9.1 million as a result of the Company's investment in Microsharp display technology and new product development for the Commercial Products Group. -15- 14 In the fourth quarter of 1993, the Company recorded restructuring and other unusual charges totaling $48.5 million. Approximately $36.7 million of this amount related to management's decision to sell or otherwise liquidate the thin-film disk, oxide disk and diskette manufacturing operations of the Computer Products Group. The 1993 charge also included approximately $11.8 million related to the integration and streamlining of the operations of the Commercial Products Group, including workforce reductions, as well as consolidation of facilities and the write-down of certain assets. As part of the restructuring plan, the Company offered certain of its employees an early retirement program and recorded an additional pretax charge in the first quarter of 1994 of $5.7 million, of which $2.6 million related to the Company's continuing operations and $3.1 million related to discontinued operations. During the second quarter of 1994, the Company sold substantially all of its Computer Products businesses for total cash proceeds of $11.1 million, subordinated notes of $4.9 million and future royalty payments based on sales of the oxide disk and head-disk-assembly operations. In addition, the Company received cash proceeds of approximately $2 million based on the 1994 operating results of the thin-film disk operation. The amounts received were not materially different from the estimates included in the 1993 charge. As a result of the sale of these businesses, the related results of operations were reclassified as discontinued operations. The details of the Company's 1993 restructuring and other unusual charges related to continuing operations and the activity recorded during 1994 are as follows:
Balance Balance Dec. 31, 1994 1994 Dec. 31, (In thousands) 1993 Provision Charges 1994 -------- --------- ------- -------- Provisions related to workforce reductions: Severance costs $ 3,850 $ 700 $ 3,000 $1,550 Pension and OPEB costs 900 2,600 3,500 -- Provisions related to other personnel costs 1,100 -- 950 150 Provisions for assets to be sold or discarded 5,100 (1,100) 2,750 1,250 Other 850 400 1,250 -- ------- ------- ------- ------ Total $11,800 $ 2,600 $11,450 $2,950 ======= ======= ======= ======
The 1993 restructuring and other unusual charges included provisions for salary and benefit continuation costs for approximately 170 employees. The 1994 provision represented a revision in the Company's original estimate of severance costs primarily as a result of approximately 20 additional employee terminations from the Company's Commercial Products Group rather than from discontinued operations. As of December 31, 1994, substantially all planned employee reductions had taken place, and the remaining accrual represented payments made to these former employees in the first half of 1995. Pension and OPEB costs recorded in 1993 relate to curtailment charges recognized in connection with the planned workforce reductions. The provision recognized in 1994 was recorded in connection with the Company's early retirement program based upon the actual number of employee acceptances. Provisions for other personnel costs relate primarily to relocation costs. The provisions for assets to be sold or discarded included a charge of approximately $1.8 million to write-down certain corporate and manufacturing facilities to their estimated net realizable value, as well as the costs associated with holding certain vacated portions of these facilities during the period until the property can be sold or otherwise disposed. During 1994, the Company commissioned an appraisal of its corporate and manufacturing facilities, and as a result of the appraisal, revised upward its estimate of proceeds to be realized upon disposal. Other than as described above, there were no material changes during the year to the Company's original estimate of the costs associated with the restructuring actions. -16- 15 The effective tax rate for continuing operations was 45.2 percent compared to 56 percent in 1993. The effective tax rate is higher than the U.S. statutory rate in 1994 primarily due to the impact of non-deductible goodwill. 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. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION Working capital decreased approximately $15 million in 1995, primarily due to increases in accrued restructuring and other unusual charges, decreased inventories and receivables in the Commercial Products Group and tax payments related to discontinued operations, offset by increased receivables in Cerion Technologies. At year-end, the ratio of total debt to equity increased to 92 percent from 54 percent at December 31, 1994. The Company suspended its quarterly dividend in the fourth quarter and intends to review the 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 1995 were approximately $13 million. In January 1995, the Company replaced its existing $40 million revolving credit facility with a similar $75 million facility. This new agreement provided $20.7 million of the $27.6 million purchase price for the photofinishing businesses acquired on January 13, 1995. Borrowings of $53 million were outstanding under this facility at December 31, 1995, compared with $33 million outstanding under the previous facility at December 31, 1994. In addition, the Company has $15 million outstanding at December 31, 1995 under a senior note agreement with an insurance company. The Company's revolving credit facility and senior note agreement require maintenance of certain restrictive financial covenants related to interest and fixed charge coverage, tangible net worth, leverage and additional debt. Since September 29, 1995, the Company has not been in compliance with the interest and fixed charge coverage portions of these agreements. Since the initial date of technical default, the lenders have provided the Company with a forbearance during which time the parties have been negotiating amendments to the lending agreements in order to allow the Company to remain in compliance. As part of the interim agreement with its lenders, interest payable on amounts outstanding under the revolving credit facility were adjusted to the agent bank's prime rate (Reference Rate) plus .5 percent. The weighted average rate in effect at December 31, 1995 for borrowings under the revolving credit facility was 8 percent per annum. See additional discussion in the Subsequent Events note. On March 27, 1996, the Company reached agreement with its lenders on the terms of amendments to existing lending agreements which will supersede the terms and conditions of the $75 million revolving credit facility and the Company's senior note agreement. Under the provisions agreed to with the lenders, the revolving credit facility will be replaced with a bank facility (the "Bank Facility"). Advances under the Bank Facility will be made pursuant to both a term loan arrangement and a revolving credit facility with an initial aggregate credit availability of up to $66 million. Interest on amounts outstanding under both the term loan and -17- 16 revolving credit portion of the agreement will be payable at the Reference Rate plus .5 percent. The revised senior note will be at a rate of 11.85 percent per annum. Of the total revolving credit balance outstanding on the facility closing date, $48 million initially will be designated as outstanding under the term loan portion of the Bank Facility with the remainder designated as outstanding under the revolving credit facility. The revolving credit portion of the Bank Facility will provide for initial credit availability equal to the lesser of $18 million or a defined percentage of eligible accounts receivable and inventory. The agreement will also provide for up to $5 million of the revolving credit facility to be available for the issuance of letters of credit. The revolving credit portion of the Bank Facility will expire on December 31, 1997. The terms of the Bank Facility and revised senior note will require certain mandatory prepayments and, with respect to the Bank Facility, contain provisions for certain facility commitment reductions, tied to the sale or issuance by the Company of equity securities or the sale or disposition of assets. According to the provisions of the term loan and the senior note, one-half of the amounts outstanding on October 1, 1996 and December 31, 1996, respectively, will become due and payable in four equal quarterly installments commencing in January 1997. All remaining amounts outstanding will be due on December 31, 1997. Prepayments also will be required beginning in January 1997, based on Excess Cash Flows, as defined in the agreement. All or most of the proceeds to be generated from the sale of the Company's Tape Products Division and the sale of certain equity shares in Cerion Technologies will be used to prepay a portion of the Company's debt. The Bank Facility will require a commitment fee of .5 percent per annum on unused amounts, as well as a 2 percent per annum fee on letters of credit issued under the facility. In addition, the Bank Facility and revised senior note agreement will provide for contingent fees to be paid if the actual level of prepayments made in 1996 are below certain specified levels. Borrowings under the Bank Facility and revised senior note will be collateralized by a security interest in the Company's receivables and inventory, assets of the domestic and certain foreign subsidiaries and the stock of certain foreign subsidiaries. Subject to shareholder approval and certain circumstances, additional collateral may be required. The agreements will contain certain financial covenants with respect to tangible net worth, capital expenditures, cash flows and the ratio of cash flows to fixed charges. In addition, the agreements will not allow the payment of dividends and will restrict, among other things, the incurrence of additional debt, guarantees, lease arrangements or sale of certain assets. The Company had $36.5 million of deferred tax assets, net of a valuation allowance of $3.3 million, and $5.3 million of deferred tax liabilities at December 31, 1995. The deferred tax assets include $21.5 million of loss and tax credit carryforward benefits which expire as follows: $2.8 million in 1996; $.2 million in 1997; $.1 million in 1998; $.5 million in 1999; $3 million in 2000; and $14.9 million thereafter. These carryforwards relate primarily to the U.S. and will require a minimum of approximately $60 million in cumulative U.S. taxable income prior to the carryforwards' expiration in order to be fully utilized. The remainder of the deferred tax assets pertain to net deductible temporary differences between financial and taxable bases of assets and liabilities such as accruals not yet paid or reserves not yet deductible for tax purposes. In the past, taxable income has generally been higher than income for financial reporting purposes. The Company expects this relationship to continue in the future. The Company had $4.2 million of tax receivables at December 31, 1995, generated primarily from the carryback of the 1994 tax loss of approximately $29.5 million. -18- 17 In April 1994, Ricoh Company, Ltd. and Ricoh Corporation ("Ricoh") filed a Complaint with the United States District Court, District of New Hampshire, alleging Nashua's infringement of U.S. patents 4,611,730 and 4,878,603 relating to certain toner cartridges for Ricoh copiers. The Complaint seeks damages and injunctive relief. The products involved constitute an insignificant amount of Nashua's sales. The Company believes it has substantial defenses and intends to defend the action vigorously. During 1994, the Internal Revenue Service (IRS) completed an examination of the Company's corporate income tax returns for the years 1988 through 1991. As a result of the IRS' findings, the Company agreed to and paid additional taxes and interest of $7.8 million in January 1995 in connection with adjustments related mainly to the tax treatment of certain items associated with the 1990 sale of the International Office Systems business. On January 13, 1995, the IRS issued a Notice of Deficiency in the amount of $8.7 million in connection with the tax years 1990 and 1991. The tax deficiency relates to the tax treatment of income recognized in connection with the 1990 sale of the International Office Systems business. The major issues relate to foreign tax credits, foreign earnings and profits computation, and the treatment of the disposition of preferred stock of a foreign subsidiary. The Company disagrees with the position taken by the IRS and filed a formal protest of the deficiency on February 9, 1995. 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. 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 the 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 received and could receive notices of alleged environmental violations. The Company has endeavored to promptly remedy any such violations upon notification. For the past three years, the Company has spent approximately $1 million per year in order to keep its operations in 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 accrued what it considers to be the most likely amount within the estimated range of remediation costs. At December 31, 1995, the accrual for potential environmental liability 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 accrual 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 liquidity, consolidated financial position or results of operations. Based upon projected future cash flows from operating activities, the sale of certain assets, as well as credit availability under the revised lending agreements, the Company believes that it has the liquidity and capital resources needed to meet its future financial commitments. -19- 18 ITEM 8. CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year Ended December 31, 1995 1994 1993 --------- --------- --------- (In thousands, except per share data) Net sales $ 452,196 $ 418,903 $ 427,601 --------- --------- --------- Cost of products sold 336,037 314,559 318,278 Selling, distribution and administrative expenses 105,977 86,719 88,101 Research and development expense 9,238 9,128 6,992 Restructuring and other unusual charges 16,247 2,600 11,800 Interest expense 5,532 2,451 2,179 Interest income (686) (585) (314) --------- --------- --------- Total costs and expenses 472,345 414,872 427,036 Income (loss) from continuing operations before income taxes (20,149) 4,031 565 Income taxes (benefit) (4,679) 1,821 315 --------- --------- --------- Income (loss) from continuing operations (15,470) 2,210 250 --------- --------- --------- Income (loss) from discontinued operations, net of tax 739 (63) (19,419) --------- --------- --------- Net income (loss) (14,731) 2,147 (19,169) --------- --------- --------- Retained earnings, beginning of year 79,744 82,166 105,880 Dividends (3,450) (4,569) (4,545) --------- --------- --------- Retained earnings, end of year $ 61,563 $ 79,744 $ 82,166 ========= ========= ========= Earnings (loss) per common and common equivalent share: Income (loss) from continuing operations $ (2.43) $ .35 $ .04 Income (loss) from discontinued operations .12 (.01) (3.06) --------- --------- --------- Net income (loss) $ (2.31) $ .34 $ (3.02) ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -20- 19 CONSOLIDATED BALANCE SHEET
December 31, (In thousands, except share data) 1995 1994 --------- --------- ASSETS Current Assets Cash and cash equivalents $ 8,390 $ 10,219 Accounts receivable 29,579 40,811 Inventories Materials and supplies 10,318 15,713 Work in process 2,835 4,942 Finished goods 8,870 13,506 --------- --------- 22,023 34,161 Other current assets 31,785 22,971 Net current assets of discontinued operations 7,415 -- --------- --------- 99,192 108,162 Plant and Equipment Land 1,377 1,441 Buildings and improvements 37,739 36,638 Machinery and equipment 85,305 84,827 Construction in progress 3,237 6,684 --------- --------- 127,658 129,590 Accumulated depreciation (57,601) (58,733) --------- --------- 70,057 70,857 Other Assets 55,481 48,806 Net Non-Current Assets of Discontinued Operations 6,642 -- --------- --------- Total Assets $ 231,372 $ 227,825 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes and loans payable $ -- $ 200 Current maturities of long-term debt 500 450 Accounts payable 26,858 27,374 Accrued expenses 33,385 22,107 Income taxes payable 6,662 11,242 --------- --------- 67,405 61,373 Long-Term Debt Borrowings under revolving credit agreement 53,000 33,000 Senior notes 15,000 15,000 Other long-term debt 350 1,166 --------- --------- 68,350 49,166 Other Long-Term Liabilities 20,742 24,590 --------- --------- 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 6,502,570 shares in 1995 and 6,396,570 shares in 1994 6,503 6,397 Additional capital 12,178 12,270 Retained earnings 61,563 79,744 Cumulative translation adjustment (4,618) (4,928) Treasury stock, at cost (751) (787) --------- --------- 74,875 92,696 Commitments and Contingencies Total Liabilities and Shareholders' Equity $ 231,372 $ 227,825 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -21- 20 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, (In thousands) 1995 1994 1993 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS: Net income (loss) $(14,731) $ 2,147 $(19,169) Adjustments to reconcile net income (loss) to cash provided by (used in) continuing operating activities: Depreciation and amortization 17,400 14,146 14,061 Deferred income taxes (6,387) (1,497) (3,790) Write-down of fixed assets to net realizable value 1,629 -- 2,000 (Income) loss from discontinued operations (739) 63 19,419 Change in operating assets and liabilities, net of effects from acquisition and disposal of businesses: Accounts receivable 9,345 (5,957) 3,769 Inventories 9,602 (5,760) 869 Other assets 5,900 (3,957) 6,192 Accounts payable (3,257) 59 (1,345) Accrued expenses 7,856 (13,446) 11,020 Other long-term liabilities (3,848) 2,144 (1,289) Income taxes payable 1,738 9,029 (149) -------- -------- -------- Cash provided by (used in) operating activities 24,508 (3,029) 31,588 CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS Investment in plant and equipment (13,163) (15,937) (14,489) Acquisition of business (27,596) -- (4,286) -------- -------- -------- Cash used in investing activities (40,759) (15,937) (18,775) CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS Proceeds from borrowings 32,800 52,900 9,900 Repayment of borrowings (13,766) (28,826) (15,223) Dividends paid (3,450) (4,569) (4,545) Proceeds and tax benefits from shares issued under stock option plans 14 1,081 122 Purchase and reissuance of treasury stock 36 (2) 14 -------- -------- -------- Cash provided by (used in) financing activities 15,634 20,584 (9,732) Proceeds from sale of discontinued operations 6,950 11,115 -- Cash applied to activities of discontinued operations (8,173) (8,612) (9,345) Effect of exchange rate changes on cash 11 215 (65) -------- -------- -------- Increase (decrease) in cash and cash equivalents (1,829) 4,336 (6,329) Cash and cash equivalents at beginning of year 10,219 5,883 12,212 -------- -------- -------- Cash and cash equivalents at end of year $ 8,390 $ 10,219 $ 5,883 ======== ======== ======== Interest paid $ 7,565 $ 2,457 $ 2,051 ======== ======== ======== Income taxes paid $ 9,054 $ 1,171 $ 5,355 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. -22- 21 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 subsidiaries (the Company), all of which are wholly-owned. REVENUE RECOGNITION: Sales are recognized at the time the goods are shipped or when title passes. 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, post-employment, post-retirement 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 maturity of three months or less to be cash equivalents. At December 31, 1995 and 1994, the Company held $4.3 million and $5.9 million, respectively, of various money market instruments carried at cost, which approximated market. ACCOUNTS RECEIVABLE: The consolidated balance is net of allowance for doubtful accounts of $2.4 million at December 31, 1995 and $2.6 million at December 31, 1994, respectively. INVENTORIES: Inventories are carried at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method for approximately 77 percent and 80 percent of the inventories at December 31, 1995 and 1994, 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 $3.4 million and $2.7 million higher at December 31, 1995 and 1994, respectively. ADVERTISING COSTS: The Company defers certain costs related to direct-response advertising of its products. Such costs are amortized over periods that correspond to the estimated revenue stream of the individual advertising program which is generally less than one year. Total deferred costs at December 31, 1995 and 1994 were $6.4 million and $4.9 million, respectively. The total amounts charged to expense for 1995, 1994 and 1993 were $41.3 million, $25 million and $25.9 million, respectively. RESEARCH AND DEVELOPMENT: Research and development costs are expensed as incurred. 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 3-20 years
-23- 22 During 1993, the Company recorded charges of $21.2 million related to the write-down of fixed assets in connection with discontinued operations. See the Business Changes note. GOODWILL: Included in "Other Assets" is the excess of cost over the fair value of identifiable net assets acquired (goodwill), which is being amortized on a straight-line basis over periods ranging from 5 to 20 years. Goodwill amounted to $32.6 million and $14.5 million at December 31, 1995 and 1994, respectively, which is net of accumulated amortization of $7.9 million and $5.2 million, respectively. See the Business Changes note. The Company periodically reviews the value of its goodwill to determine if an impairment has occurred. The Company measures the potential impairment of recorded goodwill by comparing the undiscounted value of expected future operating cash flows to the related net capital investment. Based on its review, the Company does not believe that an impairment of its goodwill has occurred. 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. 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 also utilizes forward sales contracts to hedge market price exposure on anticipated sales of silver alloy, a by-product of its photofinishing process. The terms of the Company's forward contracts are generally less than one year. Gains and losses on these contracts are deferred and recognized as adjustments of carrying amounts when the hedged transaction occurs. Deferred gains or losses at December 31, 1995 are not significant. 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. In 1995, the Company entered into a three-year $10 million interest rate swap whereby the Company pays interest at a fixed rate of 5.68 percent and receives interest at the three-month LIBOR rate which was 5.94 percent at December 31, 1995. Net interest payable or receivable is determined on a quarterly basis, and the net interest amounts during 1995 were insignificant. The fair value of the interest rate swap agreement, which was not significant, approximated its carrying value at December 31, 1995. 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. -24- 23 The Company places its temporary cash investments with high credit quality financial institutions 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 on-going 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 and interest rate instruments 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 on-going 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. 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. OTHER RECENT PRONOUNCEMENTS: In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 121 and 123 are effective for fiscal years beginning after December 15, 1995. The Company will implement these statements as required. The future adoption of SFAS 121 is not expected to have a material effect on the Company's consolidated financial position or results of operations. The Company anticipates adopting SFAS 123 using the pro forma disclosure method described in the pronouncement. BUSINESS CHANGES Acquisitions On January 13, 1995, the Company acquired certain photofinishing operations from Nexus Photo Ltd. The acquisition included mail-order photofinishing operations in France, Belgium, the Netherlands and Spain, and a wholesale film-processing business in Northern Ireland. The total purchase price was $27.6 million. The acquisition was accounted for as a purchase business combination and resulted in the recording of approximately $22 million of related intangible assets. The operating results of this business subsequent to the date of acquisition are included in the Company's Consolidated Statement of Operations. -25- 24 The unaudited combined condensed pro forma results listed below reflect purchase price accounting adjustments assuming the acquisition occurred at the beginning of 1994.
Year Ended Dec. 31, (In thousands, except per share data) 1994 -------- Net sales $462,101 ======== Income from continuing operations $ 3,090 ======== Earnings per common and common equivalent share $ .49 ========
DISCONTINUED OPERATIONS During December 1995, the Company announced its intention to sell the Tape Products Division due to the continuing realignment of the Company's Commercial Products Group. The Tape Products Division manufactures a variety of masking and duct tapes, and has substantially different customers, markets, distribution channels and cost structure than the remaining Commercial Products businesses. The results of the Tape Products Division are reported as discontinued operations in the accompanying Consolidated Statements of Operations. The Company does not expect to incur a loss on the disposal of this division. In the fourth quarter of 1993, the Company recorded restructuring and other unusual charges totaling $48.5 million. Approximately $36.7 million of this amount related to management's decision to sell or otherwise liquidate the thin-film, oxide and diskette manufacturing operations of the Computer Products Group. During the second quarter of 1994, the Company sold substantially all of its Computer Products businesses for total cash proceeds of $11.1 million, subordinated notes of $4.9 million and future royalty payments based on sales of the oxide disk and head-disk-assembly operations. In addition, the Company received cash proceeds of $2 million based on the 1994 operating results of the thin-film disk operation. The amounts received were not materially different from the estimates included in the 1993 charge. As a result of the sale of these businesses, the related results of operations are reported as discontinued operations in the accompanying Consolidated Statements of Operations. During the first quarter of 1994, the Company offered its employees an early retirement program, and recorded an additional pretax charge of $3.1 million to discontinued operations related to the program in the accompanying Consolidated Statements of Operations. The results of operations of the thin-film disk, oxide disk and head-disk-assembly operations, as well as the Tape Products Division are summarized as follows:
Year Ended --------------------------------------- Dec. 31, Dec. 31, Dec. 31, (In thousands) 1995 1994 1993 ------- -------- --------- Net sales $58,444 $ 78,911 $ 140,941 Income (loss) before income taxes 1,239 157 (31,966) Income tax expense (benefit) 500 220 (10,035) ------- -------- --------- Income (loss) from discontinued operations $ 739 $ (63) $ (21,931) ======= ======== =========
-26- 25 In April 1990, the Company sold the international portion of its Office Systems and Supplies Group to Gestetner Holdings PLC (Gestetner). Under the terms of the Purchase Agreement, Gestetner raised certain objections to the purchase price totaling $15.3 million, excluding interest, which were submitted to arbitration. In January 1994, the arbitrator issued a final ruling which resulted in a total payment by Nashua of $1.8 million, including interest, to Gestetner. Resolution of the purchase price allowed the Company to recognize an after-tax gain from discontinued operations of $2.5 million in 1993. RESTRUCTURING AND OTHER UNUSUAL CHARGES The total restructuring and other unusual charges of $16.2 million in 1995 included $14.3 million related to the Commercial Products Group, primarily for business unit and functional realignments, product and channel rationalizations, inventory write-downs related to the remanufactured cartridge operation, and cost reduction initiatives. The remainder of the 1995 charges resulted primarily from changes in the Company's executive management during the year, including severance and other personnel related costs. The 1995 restructuring and other unusual charges include charges of $8.2 million and $8 million in the third and fourth quarters, respectively. Details of the charges related to continuing operations and the activity recorded during 1995 are as follows:
Balance Balance Dec. 31, Current Year Current Year Dec. 31, (In thousands) 1994 Provision Charges 1995 -------- ------------ ------------ -------- 1995 Activity Provisions for severance related to workforce reductions $1,550 $ 3,000 $ 1,950 $2,600 Provisions related to other personnel costs 150 850 850 150 Provisions for assets to be sold or discarded 1,250 8,800 10,050 -- Other -- 3,550 1,500 2,050 ------ ------- ------- ------ Total $2,950 $16,200 $14,350 $4,800 ====== ======= ======= ======
The provision for workforce reductions includes amounts for salary and benefit continuation for approximately 110 employees as part of the Commercial Products reorganization and product rationalization. The provision for assets to be sold or discarded includes approximately $5.6 million related to cartridge inventory write-downs, as well as other asset write-downs resulting from product and channel rationalization within Commercial Products. The cartridge inventory charges relate primarily to excess empty cartridges received in 1995 under rebate programs and contractual obligations, most of which have been terminated. At December 31, 1995, approximately 30 employee terminations provided for had occurred, with the remaining separations scheduled to be completed in 1996. All charges, excluding asset write-downs, are principally cash in nature and are expected to be funded from operations. All restructuring activities provided for in the balance at December 31, 1994 were completed in 1995. Amounts incurred did not change materially from the reserve balance of $3 million. Management anticipates all 1995 actions will be completed by the end of 1996 and result in annualized savings in personnel and operating costs of approximately $5 million. -27- 26 During the fourth quarter of 1993, the Company recorded a charge of approximately $11.8 million related to the integration and streamlining of the operations of the Commercial Products Group, including workforce reductions, consolidation of facilities and the write-down of certain assets. The details of the Company's charge related to continuing operations and the activity recorded in 1994 are as follows:
Balance Balance Dec. 31, Current Year Current Year Dec. 31, (In thousands) 1993 Provision Charges 1994 ------- ------------ ------------ -------- 1994 Activity Provisions related to workforce reductions: Severance $ 3,850 $ 700 $ 3,000 $1,550 Pension and OPEB costs 900 2,600 3,500 -- Provisions related to other personnel costs 1,100 -- 950 150 Provisions for assets to be sold or discarded 5,100 (1,100) 2,750 1,250 Other 850 400 1,250 -- ------- ------- ------- ------ Total $11,800 $ 2,600 $11,450 $2,950 ======= ======= ======= ======
The 1993 restructuring and other unusual charges included provisions for salary and benefit continuation costs for approximately 170 employees. The 1994 provision represented a revision in the Company's original estimate of severance costs primarily as a result of approximately 20 additional terminations from the Company's Commercial Products Group rather than from discontinued operations. As of December 31, 1995, all employee reductions related to these actions had been completed. Pension and OPEB reserves at December 31, 1993 relate to curtailment charges recognized in connection with the planned workforce reductions. The provision recognized in 1994 was recorded in connection with the Company's early retirement program based upon the actual number of employee acceptances. Provisions for other personnel costs relate primarily to relocation costs. The provision for assets to be sold or discarded included a charge of $1.8 million to write-down certain corporate and manufacturing facilities to their estimated net realizable value, as well as the costs associated with holding certain vacated portions of these facilities during the period until the property can be sold, or otherwise disposed. During 1994, the Company commissioned an appraisal of its corporate and manufacturing facilities, and as a result of the appraisal revised upward its estimate of proceeds to be realized upon disposal. Other than as described above, there were no material changes to the Company's original estimate of the costs associated with the restructuring actions. INDEBTEDNESS On January 5, 1995, the Company replaced its existing $40 million revolving credit facility with a similar $75 million revolving credit facility. The facility is scheduled to expire on December 31, 1997, unless otherwise extended. Interest on amounts outstanding is payable at either LIBOR plus .75 percent to 1.125 percent, based on amounts outstanding, or at the Reference Rate at the Company's election, or, if amounts outstanding are borrowed under competitive bid, interest is payable at the quoted rate. The agreement requires the Company to pay an annual commitment fee of .3125 percent on the unused portion of the facility and .25 percent on any loans advanced under competitive bids. Borrowings of $53 million were outstanding under this facility at December 31, 1995, compared with $33 million outstanding under the previous facility at December 31, 1994. -28- 27 On September 13, 1991, the Company entered into a senior note agreement, as amended, with an insurance company under which the Company borrowed $20 million at a fixed rate of 9.17 percent. In connection with the Company's renegotiation of its revolving credit facility, the interest rate applicable to the senior notes was increased to 9.67 percent as of January 1, 1995. Mandatory payments of $2.5 million were made in 1993 and 1994. The remaining balance of the notes will become due beginning in 1997 with the final payment due in 2001. The Company's revolving credit facility and senior note agreement require maintenance of certain restrictive financial covenants related to interest and fixed charge coverage, tangible net worth, leverage and additional debt. Since September 29, 1995, the Company has not been in compliance with the interest and fixed charge coverage portions of these agreements. Since the initial date of technical default, the lenders have provided the Company with a forbearance during which time the parties have been negotiating amendments to the lending agreements in order to allow the Company to remain in compliance. As part of the interim agreement with its lenders, interest payable on amounts outstanding were adjusted to the Reference Rate plus .5 percent. The weighted average rate in effect at December 31, 1995 for borrowings under the revolving credit facility was 8 percent per annum. See additional discussion in the Subsequent Events note. The fair value of the Company's total debt approximated its recorded amount at December 31, 1995 and 1994, respectively. The fair value is based on management's estimate of current rates available to the Company for similar debt with the same remaining maturity. The combined aggregate amount of minimum principal payments due subsequent to December 31, 1995 for all long-term indebtedness is $.5 million in 1996 and $68.4 million in 1997. These minimum principal payments have been adjusted to reflect the terms of the Company's revised lending agreements. See the Subsequent Events note. INCOME TAXES The domestic and foreign components of income (loss) from continuing operations before income taxes and cumulative effect of accounting principle changes are as follows:
(In thousands) 1995 1994 1993 -------- ------- ------- Domestic $(22,766) $(1,775) $(6,015) Foreign 2,617 5,806 6,580 -------- ------- ------- Consolidated $(20,149) $ 4,031 $ 565 ======== ======= =======
Income tax expense (benefit) charged to continuing operations consists of the following:
(In thousands) 1995 1994 1993 ------- ------- ------- Current: United States $ -- $ -- $ 1,608 Foreign 1,708 3,303 2,640 State and local -- 15 82 ------- ------- ------- Total current 1,708 3,318 4,330 Deferred: United States (6,703) (612) (3,873) Foreign 316 (885) 83 ------- ------- ------- Total deferred (6,387) (1,497) (3,790) ------- ------- ------- Changes in statutory rates -- -- (225) Income tax expense $(4,679) $ 1,821 $ 315 ======= ======= =======
-29- 28 Deferred tax liabilities (assets) are comprised of the following:
December 31, (In thousands) 1995 1994 -------- -------- Depreciation $ 3,859 $ 4,393 Other 1,478 -- -------- -------- Gross deferred tax liabilities 5,337 4,393 -------- -------- Restructuring (1,886) (1,033) Pension and postretirement benefits (9,386) (11,505) Loss and credit carryforwards (21,478) (10,675) Workers compensation accrual (1,343) (1,372) Inventory reserve (2,673) (875) Bad debt reserve (1,086) (1,261) Other (1,997) (1,460) -------- -------- Gross deferred tax assets (39,849) (28,181) Deferred tax assets valuation allowance 3,300 -- -------- -------- $(31,212) $(23,788) ======== ========
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:
1995 1994 1993 ---- ---- ---- United States statutory rate (benefit) (35.0)% 35.0% 35.0% Goodwill 1.5 8.2 88.2 Dividend income -- -- 41.2 State and local income taxes, net of federal tax benefit (5.6) .2 (41.4) Tax asset valuation reserve 16.4 -- -- Foreign tax credits (1.6) -- -- Rate revaluation -- -- (52.4) Rate difference-foreign subsidiaries (.3) (3.1) (20.7) Other, net 1.4 4.9 6.1 ----- ----- ----- Effective tax rate (benefit) (23.2)% 45.2% 56.0% ===== ===== =====
At December 31, 1995, $19.3 million and $11.9 million of net tax assets were included in "Other Current Assets" and "Other Assets," respectively. At December 31, 1994, $6.3 million and $17.5 million of tax assets were included in "Other Current Assets" and "Other Assets," respectively. At December 31, 1995, the Company had $14.8 million and $6.7 million of net operating loss carryforward benefits and tax credit carryforwards, respectively, which are primarily limited to offset certain future domestic taxable earnings. The net operating loss carryforward benefits expire as follows: $.5 million in 1999; $2.6 million in 2000; and $11.7 million thereafter. The tax credit carryforwards expire as follows: $2.8 million in 1996; $.2 million in 1997; $.1 million in 1998; $.4 million in 2000; and $3.2 million thereafter. These amounts are reflected gross of a tax asset valuation reserve in the amount of $3.3 million due to the probability that certain of these assets will not be realized. -30- 29 During 1994, the Internal Revenue Service (IRS) completed an examination of the Company's corporate income tax returns for the years 1988 through 1991. As a result of the IRS' findings, the Company agreed to and paid additional taxes and interest of $7.8 million in January 1995 in connection with adjustments related mainly to the tax treatment of certain items associated with the 1990 sale of the International Office Systems business. On January 13, 1995, the IRS issued a Notice of Deficiency in the amount of $8.7 million in connection with the tax years 1990 and 1991. The tax deficiency relates to the tax treatment of income recognized in connection with the 1990 sale of the International Office Systems business. The major issues relate to foreign tax credits, foreign earnings and profits computation, and the treatment of the disposition of preferred stock of a foreign subsidiary. The Company disagrees with the position taken by the IRS and filed a formal protest of the deficiency on February 9, 1995. 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. It is management's intention to reinvest undistributed earnings of foreign subsidiaries which aggregate approximately $25 million, based on exchange rates at December 31, 1995. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were lent to the Company or if the Company should sell its stock in the subsidiaries. It is not practicable to estimate the amount of additional tax that might be payable on undistributed foreign earnings. SHAREHOLDERS' EQUITY The Company is authorized to issue up to 200,000 shares of Series A Participating Preferred Stock in connection with its Rights Agreement under which holders of the Company's common stock received a dividend of one preferred stock purchase right for each outstanding share of common stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth share of the Company's Series A Participating Preferred Stock, at a price of $90.00. The Rights do not detach or become exercisable until the tenth business day following the public announcement that a person has acquired, or obtained the right to acquire, 10 percent or more of the outstanding common stock of the Company, or the commencement of a tender or exchange offer which would result in the acquisition of beneficial ownership of 10 percent or more of the Company's common stock. The Rights Agreement provides that if any person or group were to acquire 10 percent or more of the Company's common stock, then shareholders other than the acquiring person would be entitled to purchase, at the Rights' then-current exercise price, a number of additional Company shares having a market value of twice the Rights' exercise price, unless the acquiring person purchases at least 85 percent of Nashua's common stock in a cash tender offer for all shares. The Company's Board of Directors may, at their option, exchange one Company share of common stock for each Right (other than the Rights held by the acquiring person) if the acquiring person has acquired more than 10 percent but less than 50 percent of the Company's common stock. The Rights Agreement further provides that, upon the occurrence of certain events including transactions in which the Company is acquired and certain self-dealing transactions with the Company by an acquirer, each Right entitles the holder thereof (other than the acquirer) to purchase shares of capital stock of either the Company or of the acquirer having a value equal to twice the then-current exercise price of the Rights. At any time prior to a person's acquiring beneficial ownership of 10 percent or more of the Company's common stock, the Continuing Directors, by a two-thirds vote, may authorize the Company to redeem the Rights at any time at a redemption price of five cents per Right. The Rights will expire on September 2, 1996, unless earlier redeemed by the Company. In addition to the Rights attaching to the common stock outstanding, Rights will be issued with each common share that is issued prior to the time the Rights become exercisable or expire. -31- 30 In 1989, the Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock. As of December 31, 1995, the Company had purchased approximately 435,000 shares under this program. The following summarizes the changes in selected shareholders' equity accounts for each of the three years in the period ended December 31, 1995:
Common Stock Cumulative Par Additional Translation Treasury Stock Shares Value Capital Adjustment Shares Cost --------- ------ ---------- ----------- ------ ---- BALANCE, DECEMBER 31, 1992 6,333,690 $6,334 $ 11,130 $(5,393) (25,000) $(799) Stock options exercised and related tax benefit 6,740 6 116 -- -- -- Translation adjustments and gains and losses from certain inter-company balances -- -- -- (451) -- -- Purchase of treasury shares -- -- -- -- (120) (3) Reissuance of treasury shares -- -- -- -- 530 17 --------- ------ -------- ------- ------- ----- BALANCE, DECEMBER 31, 1993 6,340,430 6,340 11,246 (5,844) (24,590) (785) Stock options exercised and related tax benefit 56,140 57 1,024 -- -- -- Translation adjustments and gains and losses from certain inter-company balances -- -- -- 916 -- -- Purchase of treasury shares -- -- -- -- (60) (2) --------- ------ -------- ------- ------- ----- BALANCE, DECEMBER 31, 1994 6,396,570 6,397 12,270 (4,928) (24,650) (787) Stock options exercised and related tax benefit 1,000 1 13 -- -- -- Translation adjustments and gains and losses from certain inter-company balances -- -- -- (310) -- -- Restricted stock issuances 105,000 105 1,299 -- -- -- Deferred compensation -- -- (1,404) -- -- -- Reissuance of treasury shares -- -- -- -- 240 36 --------- ------ -------- ------- ------- ----- BALANCE, DECEMBER 31, 1995 6,502,570 $6,503 $ 12,178 $(4,618) (24,410) $(751) ========= ====== ======== ======= ======= =====
STOCK OPTION AND STOCK AWARD PLANS The Company has three stock compensation plans at December 31, 1995: the 1980 Stock Award Plan (1980 plan), the 1987 Stock Option Plan (1987 plan) and the 1993 Stock Incentive Plan (1993 plan). Awards can no longer be granted under the 1980 plan. Awards under the 1987 plan and the 1993 plan are made at the discretion of the Executive Salary Committee of the Board of Directors. Stock options awarded under the 1980 plan which are outstanding at December 31, 1995, are currently exercisable and expire on the tenth anniversary of the date of grant. -32- 31 Under the 1987 plan, nonqualified stock options and incentive stock options may be awarded. Stock options under the 1987 plan 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 Executive Salary Committee of the Board of Directors. 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. Under the 1993 plan, non-statutory stock options, incentive stock options and shares of restricted stock may be awarded. Stock options under the 1993 plan 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 Executive Salary Committee of the Board of Directors. Non-statutory 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. Restricted stock awards under the 1993 plan are 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. During 1995, the Company granted 105,000 shares of restricted stock. Restrictions on such shares lapse in equal amounts when the average closing price of Nashua's common stock reaches $20, $25 and $30, respectively, for a consecutive 30 trading day period. Shares issued under the plan are initially recorded at their fair market value on the date of grant with a corresponding charge to additional paid in capital representing the unearned portion of the award. Shares of restricted stock are forfeited if the specified average closing prices of the Company's common stock are not met within five years of grant. In the event of a change of control, as defined in the 1987 plan and the 1993 plan, the option holder 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. Because the exercise price of all stock options awarded under these plans has been equal to the quoted market price of the Company's common stock at date of grant, or because the conditions upon which restrictions on stock awards would lapse have not been met, no compensation expense has been recorded. -33- 32 A summary of the status of the Company's stock options, under incentive plans follows:
Outstanding Option Price Exercisable Options Per Share Options ----------- ------------ ----------- December 31, 1992 395,390 $11.81-38.38 357,990 Options granted 113,800 25.75-30.25 -- Options that became exercisable -- 25.50-34.63 25,350 Options exercised (6,740) 11.81-25.50 (6,740) Options lapsed and cancelled (6,380) 25.75-34.63 (2,900) -------- ------------- -------- December 31, 1993 496,070 $11.81-38.38 373,700 Options granted 103,950 22.63-29.50 -- Options that became exercisable -- 25.75-28.13 62,406 Options exercised (56,140) 11.81-28.13 (56,140) Options lapsed and cancelled (158,046) 25.75-38.38 (151,981) -------- ------------- -------- December 31, 1994 385,834 $13.75-34.63 227,985 Options granted 298,500 12.75-19.75 -- Options that became exercisable -- 22.63-30.25 101,124 Options exercised (1,000) 13.75 (1,000) Options lapsed and cancelled (177,425) 12.75-34.63 (88,650) -------- ------------- -------- December 31, 1995 505,909 $12.75-34.63 239,459 ======== ============= ========
COMMITMENTS AND CONTINGENCIES Rent expense for office equipment, facilities and vehicles was $2.5 million, $2.1 million and $1.8 million for 1995, 1994 and 1993, respectively. At December 31, 1995, the Company was committed, under non-cancelable operating leases, to minimum annual rentals as follows: 1996 - $2.1 million; 1997 - $1.8 million; 1998 - $1.1 million; 1999 - $1.1 million; 2000 - $1.0 million; thereafter - $8.5 million. At December 31, 1995, the Company was obligated under approximately $5.6 million in standby letters of credit. In April 1994, Ricoh Company, Ltd. and Ricoh Corporation ("Ricoh") filed a Complaint with the United States District Court, District of New Hampshire, alleging Nashua's infringement of U.S. patents 4,611,730 and 4,878,603 relating to certain toner cartridges for Ricoh copiers. The Complaint seeks damages and injunctive relief. The products involved constitute an insignificant amount of Nashua's sales. The Company believes it has substantial defenses and intends to defend the action vigorously. 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, 1995, 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 $1.5 million to $1.7 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 PRP's are unable to bear their allocated share. At December 31, 1995, 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. -34- 33 POSTRETIREMENT BENEFITS 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 interest-bearing cash equivalent instruments, fixed-income securities and common stocks. Net periodic pension cost from continuing operations for the plans, exclusive of enhanced early retirement and curtailment pension costs, includes the following components:
(In thousands) 1995 1994 1993 -------- ------- -------- Service cost-benefits earned during the period $ 2,490 $ 2,771 $ 2,884 Interest cost on projected benefit obligation 8,581 7,916 7,196 Actual return on plan assets (23,622) 1,826 (17,554) Net amortization and deferral 15,281 (9,491) 10,839 -------- ------- -------- Net periodic pension cost $ 2,730 $ 3,022 $ 3,365 ======== ======= ========
In February 1994, the Company offered certain of its United States employee groups an enhanced early retirement pension benefit. The cost of the enhanced pension benefit was $4.2 million, $2.2 million of which was attributable to discontinued operations. In 1993, the Company recognized a curtailment expense of $1.2 million, approximately $.6 million of which related to discontinued operations. The following sets forth the funded status of the plans and the amounts recognized in the Company's consolidated balance sheet at December 31, 1995:
Accumulated Benefit Obligation ---------------------- Less Than Exceeds (In thousands) Assets Assets --------- -------- Actuarial present value of: Vested benefit obligation $ 49,661 $ 68,399 -------- -------- Accumulated benefit obligation $ 49,855 $ 68,557 -------- -------- Projected benefit obligation $ 50,284 $ 70,696 -------- -------- Market value of plan assets $ 54,511 $ 62,583 -------- -------- Plan assets in excess of (less than) projected benefit obligation $ 4,227 $ (8,113) Unrecognized transition (asset) obligation (1,929) 2,025 Unrecognized prior service costs 1,322 4,297 Unrecognized net gain (2,140) (7,368) Additional liability -- (617) -------- -------- Prepaid (accrued) pension cost $ 1,480 $ (9,776) ======== ========
-35- 34 The following sets forth the funded status of the plans and the amounts recognized in the Company's consolidated balance sheet at December 31, 1994:
Accumulated Benefit Obligation (In thousands) Less Than Exceeds Assets Assets --------- -------- Actuarial present value of: Vested benefit obligation $41,052 $58,035 ------- ------- Accumulated benefit obligation $41,863 $58,158 ------- ------- Projected benefit obligation $42,189 $62,046 ------- ------- Market value of plan assets $47,117 $53,137 ------- ------- Plan assets in excess of (less than) projected benefit obligation $ 4,928 $(8,909) Unrecognized transition (asset) obligation (2,196) 2,363 Unrecognized prior service costs 1,452 5,568 Unrecognized net gain (1,390) (7,731) Additional liability -- (143) ------- ------- Prepaid (accrued) pension cost $ 2,794 $(8,852) ======= =======
During 1994, the Company updated the definition of average annual compensation, the effect of which increased the unrecognized prior service liability by $1.8 million. Approximately $4.2 million and $7.5 million of the accrued pension cost for 1995 and 1994, respectively, are included in "Other Long-Term Liabilities" in the accompanying consolidated balance sheet. The significant actuarial assumptions used for the plans' valuations were:
1995 1994 ---- ---- Weighted-average discount rate 7.4% 8.2% Expected long-term rate of return on plan assets 9.7% 9.7% Rate of increase in future compensation levels 5.1% 5.0%
RETIREE HEALTH CARE AND OTHER BENEFITS: The Company provides certain health care and other benefits to eligible retired employees and 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 pay a stated percentage of most medical expenses, reduced for any deductibles and payments made by government programs and other group coverage. 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. -36- 35 The following table sets forth the funded status of the plans, reconciled to the accrued postretirement benefit cost recognized in the Company's balance sheet:
(In thousands) 1995 1994 -------- -------- Accumulated postretirement benefit obligation: Retirees $ 7,143 $ 7,264 Fully eligible active plan participants 1,483 1,668 Other active participants 1,815 2,453 -------- -------- Market value of plan assets -- -- Accumulated postretirement benefit obligation in excess of plan assets (10,441) (11,385) Unrecognized prior service benefit (4,589) (5,221) Unrecognized net (gain) loss (2,208) (1,232) -------- -------- Accrued postretirement benefit cost $(17,238) $(17,838) ======== ========
Approximately $16.5 million and $17.1 million of accrued postretirement benefits for 1995 and 1994, respectively, are included in "Other Long-Term Liabilities" in the accompanying consolidated balance sheet. Net periodic postretirement benefit cost of continuing operations, exclusive of enhanced early retirement and curtailment costs, included the following components:
(In thousands) 1995 1994 1993 ----- ----- ----- Service cost of benefits earned $ 85 $ 133 $ 162 Interest cost on accumulated postretirement benefit obligation 768 942 791 Amortization of prior service benefit (724) (554) (554) ----- ----- ----- Net periodic postretirement benefit cost $ 129 $ 521 $ 399 ===== ===== =====
As part of the 1994 early retirement program, the Company offered certain of its United States employee groups an enhanced early retirement health care benefit. The cost of the enhanced health care benefit was $1.5 million, $.9 million of which was attributable to discontinued operations. At December 31, 1994, the postretirement benefit plans were amended to transfer the cost of health supplemental benefit payments to the Company's pension plan. In 1993, the Company recognized a curtailment expense of $.8 million, approximately half of which related to discontinued operations, in connection with its decision to dispose of certain operations and reduce personnel in the remaining businesses. For measurement purposes, a 6 percent annual rate of increase in the per capita claims cost of medical benefits was assumed for the various plans in 1995. This rate was assumed to decrease gradually to 5 percent in 1999 and remain at that level thereafter. The discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent. If the future health care cost trend rate were increased 1 percent, the accumulated postretirement benefit obligation as of December 31, 1995 would have increased by 2 percent. The effect of this assumed change on the aggregate of service and interest cost for 1995 would have been an increase of 3 percent. -37- 36 INFORMATION ABOUT OPERATIONS The Company conducts business in three segments: Commercial Products, Photofinishing and Cerion Technologies. In 1994, the Company combined its Coated Products and Office Supplies business segments to form Commercial Products. Commercial Products produces and sells facsimile and thermal papers, pressure-sensitive labels, specialty papers, and copier and laser printer supplies primarily to domestic resellers, original equipment manufacturers and private label distributors. Photofinishing provides photofinishing services to amateur photographers through mail-order in North America and Western Europe, as well as through retail establishments in Ireland. Cerion Technologies manufactures precision metallic parts primarily for the domestic computer industry. Net sales, operating income and identifiable assets of the Company's three business segments and the geographic areas in which they operate are set forth below:
Net Sales From Income (loss) From Continuing Operations Continuing Operations Identifiable Assets (In millions) 1995 1994 1993 1995(a) 1994(b) 1993(c) 1995 1994 1993 ------ ------ ------ ------ ------ ------ ------ ------ ------ BY BUSINESS Commercial Products $245.5 $259.5 $264.8 $(20.4) $ (4.0) $ (1.6) $ 84.3 $105.2 $ 91.3 Photofinishing 179.2 145.4 148.7 7.2 16.4 15.9 83.5 58.1 47.6 Cerion Technologies 27.5 14.0 14.1 6.0 (.2) .6 12.4 7.4 4.3 Corporate expenses, including interest and assets -- -- -- (12.9) (8.2) (14.3) 37.1 40.8 33.4 Discontinued Operations -- -- -- -- -- -- 14.1 16.3 42.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ Consolidated $452.2 $418.9 $427.6 $(20.1) $ 4.0 $ .6 $231.4 $227.8 $219.1 ====== ====== ====== ====== ====== ====== ====== ====== ====== BY GEOGRAPHIC AREA United States $349.8 $357.5 $366.3 $(11.2) $ 6.3 $ 4.4 $112.6 $133.8 $110.5 Europe 95.5 53.6 52.3 3.0 5.0 8.6 62.5 33.3 26.7 Other 6.9 7.8 9.0 1.0 .9 1.9 5.1 3.6 6.0 Eliminations, corporate expenses, including interest and assets -- -- -- (12.9) (8.2) (14.3) 37.1 40.8 33.4 Discontinued Operations -- -- -- -- -- -- 14.1 16.3 42.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ Consolidated $452.2 $418.9 $427.6 $(20.1) $ 4.0 $ .6 $231.4 $227.8 $219.1 ====== ====== ====== ====== ====== ====== ====== ====== ======
Sales between business segments are insignificant. Intrasegment sales between geographic areas are generally priced at the lowest price offered to unaffiliated customers. (a) Includes restructuring and other unusual charges of $14.3 million and $1.9 million for Commercial Products and Corporate, respectively. (b) Includes restructuring and other unusual charges of $2.6 million for Commercial Products Group. (c) Includes restructuring and other unusual charges of $3.5 million, $.8 million and $7.5 million for Commercial Products, Photofinishing and Corporate, respectively. Capital expenditures and depreciation and amortization by business segment are set forth below:
Depreciation and Capital Expenditures Amortization 1995 1994 1993 1995 1994 1993 ----- ----- ----- ----- ----- ----- Commercial Products $ 8.6 $11.1 $ 9.8 $ 8.3 $ 7.9 $ 7.5 Photofinishing 2.5 3.8 2.9 8.3 5.4 5.9 Cerion Technologies 2.1 1.0 1.8 .8 .8 .7 ----- ----- ----- ----- ----- ----- Consolidated $13.2 $15.9 $14.5 $17.4 $14.1 $14.1 ===== ===== ===== ===== ===== =====
-38- 37 SUBSEQUENT EVENTS On March 21, 1996, Cerion Technologies filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of 3,840,000 shares of common stock. Of the total, 1,615,000 shares are being offered by Cerion and 2,225,000 shares are being offered by Nashua as the selling stockholder. If the offering is completed as presently structured, it is estimated that the Company will continue to own 45 percent of Cerion's outstanding stock (37 percent if the underwriters of the offering exercise their over-allotment option in full). In that event, Nashua will account for its investment in Cerion under the equity method. As of March 1, 1996, Cerion distributed a dividend to Nashua in the form of a Promissory Note (the "Note") payable to Nashua in the principal sum of $10 million. The Note bears interest at the rate of 7.32 percent per annum from March 1, 1996 to September 30, 1996. Thereafter, until February 28, 1998, when the full amount of the Note becomes due, interest will accrue at a rate equal to prime plus 2.5 percent per annum. If the Note is paid in full on or before May 31, 1996, the lesser of $.2 million or all interest accrued as of the date of payment will be forgiven. Thereafter, the amount of prepayment discount on the Note will decline each month through August 31, 1996. Any prepayment made by Cerion will be without penalty but, after August 31, 1996, will not have the benefit of any prepayment discount. Until such time as Cerion is no longer a wholly-owned subsidiary of Nashua Corporation, the intercompany note will be eliminated in the Company's consolidated financial statements. Cerion Technologies, based in Champaign, Illinois, is an independent supplier of aluminum substrates for the computer disk drive industry. All or most of the proceeds anticipated to be generated from the sale of shares offered by Nashua will be used to prepay a portion of the Company's debt. On March 27, 1996, the Company reached agreement with its lenders on the terms of amendments to existing lending agreements which will supersede the terms and conditions of the $75 million revolving credit facility and the Company's senior note agreement. Under the provisions agreed to with the lenders, the revolving credit facility will be replaced with a bank facility (the "Bank Facility"). Advances under the Bank Facility will be made pursuant to both a term loan arrangement and a revolving credit facility with an initial aggregate credit availability of up to $66 million. Interest on amounts outstanding under both the term loan and revolving credit portion of the agreement will be payable at the prime rate plus .5 percent. The revised senior note will be at a rate of 11.85 percent per annum. Of the total revolving credit balance outstanding on the facility closing date, $48 million initially will be designated as outstanding under the term loan portion of the Bank Facility with the remainder designated as outstanding under the revolving credit facility. The revolving credit portion of the Bank Facility will provide for initial credit availability equal to the lesser of $18 million or a defined percentage of eligible accounts receivable and inventory. The agreement also will provide for up to $5 million of the revolving credit facility to be available for the issuance of letters of credit. The revolving credit portion of the Bank Facility will expire on December 31, 1997. The terms of the Bank Facility and revised senior note will require certain mandatory prepayments and, with respect to the Bank Facility, contain provisions for certain facility commitment reductions, tied to the sale or issuance by the Company of equity securities or the sale or disposition of assets. According to the provisions of the term loan and the senior note, one-half of the amount outstanding on October 1, 1996 and December 31, 1996, respectively, will become due and payable in four equal quarterly installments commencing in January 1997. All remaining amounts outstanding will be due on December 31, 1997. Prepayments also will be required beginning in January 1997, based on Excess Cash Flows, as defined in the agreement. The Bank Facility will require a commitment fee of .5 percent per annum on unused amounts, as well as a 2 percent per annum fee on letters of credit issued under the facility. In addition, the Bank Facility and revised senior note agreement will provide for contingent fees to be paid if the actual level of prepayments made in 1996 are below certain specified levels. Borrowings under the Bank Facility and revised senior note will be collateralized by a security interest in the Company's receivables and inventory, assets of the domestic and certain foreign subsidiaries and the stock of certain foreign subsidiaries. Subject to shareholder approval and certain circumstances, additional collateral may be required. The agreements will contain certain financial covenants with respect to tangible net worth, capital expenditures, cash flows and the ratio of cash flows to fixed charges. In addition, the agreements will not allow the payment of dividends and will restrict, among other things, the incurrence of additional debt, guarantees, lease arrangements or sale of certain assets. -39- 38 QUARTERLY OPERATING RESULTS AND COMMON STOCK INFORMATION (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- 1995 Net sales $ 109.6 $ 122.2 $ 121.7 $ 98.7 $ 452.2 Gross profit 26.9 33.3 33.3 22.7 116.2 Income (loss) from continuing operations(1) .1 1.5 (7.3) (9.7) (15.4) Income from discontinued operations -- .4 -- .3 .7 Net income (loss)(1) .1 1.9 (7.3) (9.4) (14.7) Earnings (loss) per common and common equivalent share: Continuing operations(1) .01 .23 (1.14) (1.53) (2.43) Discontinued operations -- .06 -- .06 .12 Net income (loss)(1) .01 .29 (1.14) (1.47) (2.31) Dividends .18 .18 .18 -- .54 Market price: High 21 20 19-1/4 16-7/8 21 Low 18-1/2 18-5/8 14-3/4 12-1/4 12-1/4 1994 Net sales $ 98.0 $ 107.0 $ 113.3 $ 100.6 $ 418.9 Gross profit 22.8 28.5 30.5 22.5 104.3 Income (loss) from continuing operations(2) (1.8) 2.1 1.9 -- 2.2 Income (loss) from discontinued operations (1.7) .8 .5 .3 (.1) Net income (loss)(2) (3.5) 2.9 2.4 .3 2.1 Earnings (loss) per common and common equivalent share: Continuing operations(2) (.27) .34 .29 (.01) .35 Discontinued operations (.27) .12 .08 .06 (.01) Net income (loss)(2) (.54) .46 .37 .05 .34 Dividends .18 .18 .18 .18 .72 Market price: High 30 3/4 27 3/8 29 1/4 23 1/8 30 3/4 Low 26 1/4 24 3/8 22 7/8 19 3/4 19 3/4 (1) The third quarter includes restructuring and other unusual charges of $8.2 million and a valuation allowance of $3.3 million against tax assets due to the probability that such assets will not be realized. The fourth quarter includes restructuring and other unusual charges of $8 million. (2) The first quarter includes restructuring and other unusual charges of $2.6 million.
The Company's stock is traded on the New York Stock Exchange. At December 31, 1995, there were 1,542 record holders of Nashua's common stock. -40- 39 Report of Independent Accountants To the Board of Directors and Shareholders of Nashua Corporation In our opinion, the accompanying financial statements listed in the index appearing under Item 14 (a) (1) present fairly, in all material respects, the financial position of Nashua Corporation and its subsidiaries at December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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. Price Waterhouse LLP Boston, Massachusetts February 5, 1996, except as to the Subsequent Events note, which is as of March 27, 1996 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS OF THE REGISTRANT The directors are elected annually by the stockholders and hold office until successors are elected and qualified or until death, resignation or removal. The business experience for each director of Nashua for the last five years and the year he first became a director of Nashua and their ages are as follows:
DIRECTOR NAME AGE SINCE BUSINESS EXPERIENCE ---- --- ----- ------------------- Joseph A. Baute 68 1984 Mr. Baute has been the Chairman of Nashua Corporation since April 28, 1995 and was President and Chief Executive Officer from November 10, 1995 to January 2, 1996. He was Chairman and Chief Executive Officer of Markem Corporation (information application systems) from prior to 1991 until his retirement in 1993. He is also a Director of Houghton-Mifflin Company, State Street Bank & Trust Company and Infosoft International. Sheldon A. Buckler(a)(c) 64 1994 Dr. Buckler has been Chairman of the Board of Commonwealth Energy System since May 1995. He was Vice Chairman of the Board of Polaroid Corporation from prior to 1991 until his retirement in 1994. He is also a Director of ASECO Corporation, PARLEX Corporation and Spectrum Information Technologies, Inc. Richard E. Carter(b) 67 1978 Private investor. Thomas W. Eagar(d) 46 1993 Professor Eagar has been Professor of Materials Engineering at the Massachusetts Institute of Technology (MIT) since prior to 1991 and POSCO Professor of Materials Engineering since 1993. He has also been Head of the Department of Materials Science and Engineering at MIT since January 1995. Gerald G. Garbacz 59 1996 Mr. Garbacz has been President and Chief Executive Officer of Nashua Corporation since January 2, 1996. He was a private investor from 1994 through 1995. He was Chairman and Chief Executive Officer of Baker & Taylor Inc. (information distribution) from 1992 to 1994 and Executive Vice President of W.R. Grace & Co. from prior to 1991 to 1992. He is also a Director of Handy & Harman Inc. Charles S. Hoppin(a)(c)(d) 64 l979 Mr. Hoppin has been a partner in the law firm of Davis Polk & Wardwell since prior to l991. John M. Kucharski(a)(b) 60 1988 Mr. Kucharski has been the Chairman, Chief Executive Officer and President of EG&G, Inc. (technical and scientific products and services) since prior to l991. He is also a Director of New England Electric System, Eagle Industry Co., Ltd. and State Street Boston Corporation. James F. Orr III (b)(d) 53 l989 Mr. Orr has been the Chairman, Chief Executive Officer and President of UNUM Corporation (insurance) since prior to l991.
-41- 40 - ------------------- (a) Member of the Audit Committee of Nashua's Board of Directors. (b) Member of the Executive Salary Committee of Nashua's Board of Directors. (c) Member of the Nominating Committee of Nashua's Board of Directors. (d) Member of the Pension Plan Review Committee of Nashua's Board of Directors. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the present executive officers of the Company for Section 16 of the Securities and Exchange Act purposes, their ages and their positions held with the Company: -42- 41
NAME AGE POSITION - ---- --- -------- Gerald G. Garbacz 59 President and Chief Executive Officer Daniel M. Junius 43 Vice President-Finance, Chief Financial Officer and Treasurer Robin J.T. Clabburn 59 Vice President and Chief Technical Officer Bruce T. Wright 46 Vice President Charles E. Turnbull 43 Vice President John R. Mapley 64 Vice President David A. Peterson 56 Vice President
Mr. Garbacz has been President and Chief Executive Officer of Nashua since January 1996. He was a private investor from 1994 through 1995. He was Chairman and Chief Executive Officer of Baker & Taylor Inc. (information distribution) from 1992 to 1994 and Executive Vice President of W.R. Grace & Co. from prior to 1991 to 1992. He is also a Director of Handy & Harman Inc. Mr. Junius has been Vice President-Finance, Chief Financial Officer and Treasurer since November 1995. He was Vice President-Finance and Treasurer from September 1995 to November 1995. From prior to 1991 through August 1995, he was Treasurer of Nashua. Mr. Clabburn has been Vice President and Chief Technical Officer since October 1995. He worked as a consultant for Nashua from March 1994 to October 1995. From 1990 to March 1994 he was Chief Executive Officer for several development stage companies at Cookson Group PLC, a manufacturer of specialty material, chemical and precious metals. Mr. Wright has been Vice President since October 1994. From 1993 to October 1994, he was Vice President of Barry Controls, a custom manufacturer of vibration and control systems. From 1990 to 1993 he was a Senior Group Personnel Manager at Digital Equipment Corporation. Mr. Turnbull has been Vice President since August 1995. From 1994 to July 1995, he was President of Polyken Technologies (a Division of Tyco International Ltd.), a manufacturer of tapes and industrial adhesives. He was a Vice President/General Manager of Avery Dennison Corporation's Marketing Films Division, a manufacturer of self-adhesive PVC films, from 1991 to 1993. Mr. Peterson has been Vice President since November 1995. He was General Manager of Cerion Technologies (Precision Technologies) from April 1992 to January 1996. From 1990 to April 1992 he held various operating positions within the former Nashua Computer Products Division. Executive officers are generally elected to their offices each year by the Board of Directors shortly after the Annual Meeting of Shareholders. -43- 42 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934 and Rule 12b-15 of the rules promulgated thereunder, the registrant has duly caused this amendment to the Company's annual report on Form 10-K originally filed with the Securities and Exchange Commission on April 1, 1996 to be signed on its behalf by the undersigned, thereunto duly authorized. NASHUA CORPORATION Date: April 23, 1996 By /s/ Daniel M. Junius --------------------------------- Daniel M. Junius Vice President-Finance, Chief Financial Officer and Treasurer -55- -----END PRIVACY-ENHANCED MESSAGE-----