ITEM 1. BUSINESS
GENERAL
Nu-kote Holding, Inc. (the "Company" or "Registrant"), through its wholly owned subsidiaries, is a manufacturer and distributor of impact and non-impact imaging supplies for office and home printing devices. The Registrant acquired International Communication Materials, Inc. ("ICMI") in February 1992 (the "ICMI Acquisition"), Future Graphics, Inc. ("Future Graphics") in February 1993 (the "Future Graphics Acquisition"), and the worldwide hardcopy supplies business (the "Pelikan Hardcopy Division") of Pelikan Holding AG of Zug, Switzerland ("Pelikan") in February 1995 (the "Pelikan Acquisition"). ICMI is an independent manufacturer of toner for non-impact printers and copiers and Future Graphics is a remanufacturer of laser printer cartridges. Both are located in the United States. In December 1997, the Company disposed of the Future Graphics cartridge components division. The Company's Pelikan Hardcopy Division is both a European and U.S. manufacturer of supplies for impact and non-impact printers.
The Registrant's operations involve a single industry segment--the manufacture and distribution of typewriter and printer ribbons, thermal fax ribbons, cartridges and toners for laser printers, facsimile machines and copiers, cartridges and ink for ink jet printers, specialty papers, calculator ink rollers, and carbon paper. For financial information relating to foreign and domestic operations, see Note 15 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."
The Registrant's principal executive offices are located at 200 Beasley Drive, Franklin, Tennessee 37064, telephone number (615) 794-9000. All references herein to the "Company" or "Registrant" include the Company and its subsidiaries, unless the context otherwise requires.
PRODUCTS
The Registrant manufactures and/or distributes over 1,500 products in more than 3,000 different packaging configurations through its North American operations and over 1,700 products in more than 4,800 different packaging configurations through its European operations. Additionally, the Registrant introduced nine new products into the North American market and twenty-three new products into the European market in fiscal 1998, all of which were non- impact supplies. The Registrant discontinued selling approximately 1,300 packaging configurations in the U.S. and 2,200 in Europe in fiscal 1998. There is significant overlap between the North America and European product lines and many of the 1,500 products manufactured and/or distributed in North America are the same as the 1,700 products manufactured and distributed in Europe. The Registrant's products are used in over 30,000 different models of impact and non-impact printing mechanisms. Impact printer products include printer, typewriter, point of sale and calculator ribbons, calculator and cash register ink rollers, and other supplies for use in impact printing mechanisms. The Registrant is a manufacturer and distributor of magnetic ink character recognition ("MICR") ribbons for check encoding printers. The Registrant's non-impact printing products include monochrome and color toner for laser printers, copiers, and plain paper facsimile machines, supplies for ink jet printers and facsimile machines, and remanufactured cartridges for laser printers. In addition, the Registrant manufactures and distributes thermal wax products for bar code and facsimile machines, and specialty papers and films for use in ink jet printers.
Finished products are currently sold both at the retail level under the Nu- kote and Pelikan brand names and to original equipment manufacturers ("OEMs") of printing equipment. OEM products are manufactured to the OEMs specifications and sold both with the original hardware and in the aftermarket. The Registrant also sells intermediate products such as rolls of coated film and containers of bulk laser and copier toner.
The Registrant also manufactures and distributes a variety of compatible ink jet cartridges for use in Canon and Epson and HP ink jet printers, as well as a line of HP compatible cartridge refill kits designed for the home or small business user, and provides a cartridge remanufacturing service similar to the one employed for remanufactured laser toner cartridges.
MARKETS AND DISTRIBUTION
The Registrant currently sells its products directly to wholesale, retail and manufacturing markets under the Nu-kote(R), Pelikan(R), and ICMI(R) brand names, and also to OEMs and distributors for resale under their brand names or private labels. Nu-kote(R) and Pelikan(R) branded products are distributed through major office supply marketing channels, including wholesale distributors, office products dealers, direct mail catalogs, office supply "superstores", information processing specialists, value added resellers and mass market retailers. ICMI(R) brand laser toners are marketed to distributors serving the laser cartridge remanufacturing market. Nu-kote(R) and Pelikan(R) brand products are compatible with substantially all impact printing devices currently in use and the Registrant's laser products are compatible with over 90% of the low to mid-range laser printers now on the market. OEM products are manufactured to the OEMs specifications and sold both with the original hardware and in the aftermarket. The Registrant sells its products subject to limited warranties. Historically, product liability and warranty claims have been immaterial.
The market for supplies for typewriters and other impact printers has been declining in recent years and is expected to continue to decline as non-impact printing devices become more popular and replace many of the impact printers now in service. During fiscal 1998, the Registrant experienced a decline of approximately 6.5% in its sales from impact products. While the Registrant expects the market for supplies for typewriters and other impact printers to continue to decline as a whole, the Registrant believes there will continue to be an important market for its ribbon products for the foreseeable future. The selling prices for the Registrant's impact products have come under pressure as competitors have reduced prices in an attempt to preserve their portion of a declining market.
MATERIALS
The principal raw materials used in the production of the Registrant's impact and non-impact products are polymer film and fabric, packaging materials, polypropylene pellets, wax, carbon and ink. These materials generally are readily available. The Registrant has not historically experienced difficulties obtaining an adequate supply of raw materials from outside sources and does not currently anticipate that it will experience any such shortage in the foreseeable future. The Registrant obtains certain materials from single suppliers, but believes that such supplies could be obtained from alternative sources if required without creating any material shortage for the Registrant.
To a large extent, the Registrant relies on its ability to obtain used laser printer cartridges and ink jet heads for remanufacturing. While used cartridges and ink jet heads are currently readily available, potential entry into the markets for such products by OEMs could adversely affect the Registrants ability to obtain used cartridges or ink jet heads for remanufacturing.
CUSTOMERS
No one customer accounted for more than 10% of the Registrant's sales in fiscal 1998. Backlogs were $29.4 million and $23.3 million as of March 31, 1998 and March 31, 1997, respectively, and are anticipated to be satisfied within the succeeding fiscal year.
BUSINESS STRATEGY
The Registrant intends to maintain its current market position in the impact and non-impact printer supplies market by continuing to capitalize on its quality reputation, research and development capabilities, customer service and marketing innovations, as well as its ability to offer wholesalers, catalog merchandisers and retailers a complete line of impact and non-impact printing supplies ("one-stop shopping"). Although the Registrant expects the ribbon market to continue to decline as a whole, it believes that the large base of existing typewriters and impact printers in North America and Europe and the demand for basic printing and imaging products will result in continuation of an important market for impact supplies for the foreseeable future.
COMPETITION
The printing supplies market is extremely competitive. In both the impact and non-impact markets, the Registrant's biggest competitors are the OEMs, most of which are substantially larger and have greater financial resources than the Registrant. In the impact supplies business, some OEMs manufacture their own ribbon products. Other OEMs buy ribbons from outside suppliers. In addition, there are currently over 100 independent ribbon manufacturers in the United States and over 200 worldwide, ranging from small local producers to national and international companies.
OEMs currently dominate the market for the majority of toner products and ink jet supplies. However, the market for compatible toner supplies is still developing, and there are currently several independent competitors in this market. The willingness of OEMs to offer ink jet products at very low prices, and the possibility of substantial price reductions by one or more OEMs, could have a material adverse effect on the portion of the Registrant's business affected thereby. The remanufactured laser printer cartridge market and the cartridge remanufacturing and refilling market have historically consisted of numerous small independent producers. Recently, however, various OEMs have entered these markets resulting in a significant increase in competition.
TRADEMARK, PATENTS AND LICENSES
The NU-KOTE trademark is registered in the United States and 28 foreign countries and is subject to pending application in one other country. Other significant trademarks of the Registrant are subject to U.S. and foreign applications and registrations. The ICMI trademark is also registered in the United States as well as being registered or the subject of pending applications in several other countries. The Registrant also holds over 80 registered trademarks related to the Pelikan Hardcopy Division, nine of which are in the U.S. The Registrant considers the NU-KOTE, ICMI, and Pelikan Hardcopy Division trademarks material to its business. As of March 31, 1998, the Registrant held over 60 patents in the United States and approximately 400 patents in various foreign jurisdictions. In addition, the Registrant has more than 30 U.S. and 90 foreign patent applications pending. All of such patents and applications are for product or production methods. The Registrant considers these patents to be material to its business.
The Registrant has obtained licenses to use certain intellectual property rights of other companies, including an exclusive, fifty-year, royalty-free, fully paid-up, worldwide license, directly and through its subsidiaries, to use the "PELIKAN" name or trademark and Pelikan BIRD LOGO, and the registrations and applications therefor, in the hardcopy supplies business subject to certain terms and conditions. The Registrant considers the Pelikan trademark to be material to its business. In June 1998, the Registrant received a letter from Pelikan GmbH purporting to terminate this license based upon the alleged misuse of the trademark by one of Registrant's distributors that is located in Dubai (United Arab Emiretes). The distributor is alleged to have improperly used the trademark in connection with an invitation to an exhibit, one trade show in 1997 and a newspaper report. Although the Registrant and the licensor have previously discussed alleged defaults under the license, the Registrant believes that, to the extent there were any breaches under the license, they were addressed. The Registrant also holds a license to use certain IBM patents in various countries. In return for such IBM patent rights, the Registrant must disclose, and upon payment of a royalty, license its technological developments related to such patents to IBM.
RESEARCH AND DEVELOPMENT
The Registrant incurred $6.6 million, $9.6 million, and $9.6 million in research and development costs in fiscal years 1998, 1997, and 1996, respectively. These costs are primarily related to non-impact product research conducted by the Registrant's European subsidiaries. The Registrant expects to incur approximately $6.2 million in fiscal 1999 in research and development activities.
ENVIRONMENTAL AND REGULATORY MATTERS
The Registrant is subject to regulation at the federal, state and local levels, as well as outside of the U.S., including, in particular, regulations relating to environmental matters. Such regulations are often complex and
are subject to change. The Registrant is required to obtain permits from a number of governmental agencies in order to conduct various aspects of its business. Such permits are subject to modification and revocation, which could impair the Registrant's ability to conduct its business in the manner and at the places it is presently conducted. Regulatory or legislative changes may cause future increases in the Registrant's operating costs or otherwise affect its operations.
In connection with the acquisition by the Registrant in 1986 of the Worldwide Office Supplies Division and the International Business Forms Division (the "Unisys Divisions") of Unisys Corporation ("Unisys"), Unisys agreed to indemnify the Registrant for liabilities resulting from or arising out of any environmental conditions existing on or before January 16, 1987 at the Registrant's Rochester, New York facility and at facilities located in Macedon, New York and Bardstown, Kentucky, which have been sold by the Registrant. The New York Department of Environmental Conservation ("DEC"), with respect to the Rochester and Macedon facilities, and the Kentucky Environmental Protection Agency, with respect to the Bardstown facility, have alleged that environmental contamination exists at such sites. The Registrant has been advised that Unisys is cooperating with these state environmental agencies in connection with the testing for and investigation of contamination and, with respect to the Rochester and Bardstown sites, is implementing measures to complete remediation. The Registrant has been informed that Unisys is undertaking three years of groundwater monitoring at the Macedon facility pursuant to a consent order with the DEC, to demonstrate that the site requires no further remediation or monitoring. As a result of the indemnification from Unisys, in the opinion of the Registrant's management, the ultimate cost to resolve these environmental matters will not have a material adverse effect on the Registrant's financial position, results of future operations or liquidity.
In connection with the Pelikan Acquisition, Pelikan agreed to indemnify the Registrant for all losses, liabilities and costs resulting from or arising out of environmental conditions existing on or prior to the closing on February 24, 1995 at the facilities acquired from Pelikan, such as Registrant's Derry, Pennsylvania and Franklin, Tennessee facilities. With respect to certain potential pre-closing environmental liabilities and costs identified on a schedule agreed to by the Registrant and Pelikan, Pelikan's liability is limited to $2.5 million, which is collateralized by a letter of credit. Pelikan's liability for all other pre-closing environmental liabilities and costs is unlimited in amount but expired on the third anniversary of the closing, except as to the certain claims that were asserted by the Registrant before the 30th day following the third anniversary of the closing. Registrant has undertaken limited environmental investigations at Registrant's Derry, Pennsylvania and Franklin, Tennessee facilities due to reports of certain environmentally suspect activities having taken place pre-closing at those facilities. The investigation of the environmental condition of the soil at the Derry facility detected material contamination. The investigation of the environmental condition of the soil and groundwater at the Franklin facility also detected material contamination at this site as well as at certain European facilities. Registrant has notified Pelikan of the existence of the detected material contamination.
With regard to the Derry facility, the Registrant has requested the Pennsylvania Department of Environmental Protection ("PA-DEP") determine the minimum further investigation and remediation required to bring this facility into compliance with Pennsylvania law and to allow the Registrant to receive a release from further liability under Pennsylvania law. After completion of the forthcoming phase of site characterization activities to be conducted with the concurrence of PA-DEP, the Registrant expects to enter into an administrative agreement for the remaining investigation and remediation at this facility.
With regard to the Franklin facility, the Registrant has agreed upon the terms of administrative Consent Order and Agreement, Index No. 94-511, with the Tennessee Department of Environment and Conservation("T-DEC") to facilitate the investigation, removal and remediation of the hazardous substances, and to reimburse the T-DEC for certain costs incurred by T-DEC at or in connection with the Franklin facility. The Registrant expects to enter into the administrative Consent Order and Agreement with T-DEC within the next 30 days.
With regard to the Derry and Franklin facilities, the Registrant has not been able to estimate the potential cleanup costs with any degree of certainty. The Registrant, nevertheless, has obtained and notified Pelikan of very preliminary cost estimates for the cleanup associated with these facilities. Based on the indemnification
obligation of Pelikan, environmental surveys conducted by environmental consultants in connection with the Pelikan Acquisition, and the notice of the existence of environmental contamination given by the Company prior to the 30th day following the third anniversary of the closing, management of the Registrant nevertheless does not believe that any environmental costs incurred in connection with the environmental matters identified on the pre-closing schedule or during the limited environmental investigations of Registrant's Derry and Franklin facilities will have a material impact on the Registrant's financial condition, results of operations or liquidity.
Management of the Registrant believes that changes in the Pelikan Hardcopy Division's facilities and operations to comply with current environmental discharge and emission regulations will mainly result in costs to acquire tangible property which the Registrant expects to depreciate over at least a ten-year period. Therefore, management of the Registrant does not expect expenses associated with compliance by the Pelikan Hardcopy Division with current environmental regulations to have a material impact on future recurring operating costs. A number of raw materials used to manufacture toners and inks in the Pelikan Hardcopy Division's products are subject to frequent scientific and regulatory reevaluation to determine the potential environmental hazards, and may be subjected to changing regulations. Management of the Registrant does not believe that in Europe any increases in net operating costs associated with compliance with future environmental regulations can be passed on to most present European customers without a material impact on future earnings. Management believes that in the U.S., it is also unlikely that it will be able to pass on to such customers future increases, if any, in environmental compliance costs.
Federal, state and local and foreign agencies regulate the disposal, handling and storage of waste, and air and water discharges from the Registrant's facilities. Based on current regulations and the condition of its facilities, the Registrant does not currently anticipate a material amount of environmental capital expenditures in excess of the amounts for which the Company is indemnified by third parties.
The Registrant employs an environmental compliance officer who is charged with formulating policies for the Registrant's facilities to promote compliance with environmental laws. The Registrant has taken measures to improve monitoring of the Registrant's emissions to the environment at the Rochester and Macedon facilities, including the implementation of a chemical usage tracking system (which generates incoming solvent inventory and usage data) and a mass balance method for calculating total emissions. In addition, Registrant has had an environmental consultant conduct a regulatory environmental compliance audit of Registrant's Franklin, Tennessee, Connellsville, Pennsylvania, Derry, Pennsylvania and Chatsworth, California facilities. These measures help the Registrant to comply with its reporting and record keeping obligations under applicable environmental laws.
The foregoing "Environmental and Regulatory Matters" section and Note 12 of "Notes to Consolidated Financial Statements", insofar as they relate to such matters, contain various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"), which represent the Registrant's expectations or beliefs concerning future events, including statements regarding estimates of the Company's liabilities associated with identified environmental matters and the likelihood that any liability in excess of expected indemnification payments and reserves for such matters will not materially affect the Company's financial position or results of future operations or liquidity. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements, including, without limitation, the following: (i) the actual nature and extent of contamination, if any, which exists at the Company's facilities, (ii) the remedial action selected by the company or required by governmental agencies, (iii) the cleanup level required, (iv) changes in regulatory requirements, (v) the ability of other responsible parties, if any to pay their respective shares of remediation costs and meet their indemnification obligations, and (vi) whether any insurance recoveries are available or realized. Results actually achieved thus may differ materially from expected results included in these and any other forward looking statements contained herein.
EMPLOYEES
The Registrant employs approximately 2,300 persons worldwide. Except for approximately 90 employees who are covered by a collective bargaining agreement with the United Steel Workers at the Registrant's Connellsville, Pennsylvania facility, none of the Registrant's other North American employees are represented by a labor union. Approximately 300 of the Registrant's Turriff (Scottland), Greif (Germany) and MIT (Sweden) employees are also governed by various union agreements. The Registrant considers its employee relations to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Registrant, their positions and offices and, as of June 22, 1998, their ages and years of service with the Registrant (and its predecessors) are set forth below.
Mr. Donnellan has been President, Chief Executive Officer and Chief Operating Officer of the Company since December 1997. Mr. Donnellan is also President of Glass & Associates, Inc., a management-consulting firm, engaged by the Company to provide interim management services. He has been an associate of Glass & Associates, Inc. since 1990. Prior to that, Mr. Donnellan held various executive positions with both international and domestic companies in the areas of marketing, operations, engineering and finance.
Mr. Ligon has been General Manager, North American Operations since January 1998. Mr. Ligon has been an associate of Glass & Associates, Inc. since 1997, a management consulting firm, engaged by the Company to provide interim management services. Prior to that, he was President of PAL Health Technologies from 1994 to 1997 and Vice President of Operations of Morton Metalcraft Co. from 1990 to 1994.
Mr. Larsen has been Senior Vice President and General Counsel of the Registrant since June 1995 and has also been Secretary of the Company since March 1998. Prior to joining Nu-kote, Mr. Larsen was Vice President, General Counsel and Secretary of Harris Adacom Corporation for five years.
Mr. Theodore has been Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary since March 1998. He joined the Registrant in June 1994 to serve as controller of the North American Operations. Prior to joining the Registrant, Mr. Theodore was a manager at Coopers & Lybrand L.L.P. and worked in the business assurance group where he specialized in mergers and acquisitions. Mr. Theodore is a Certified Public Accountant.
CERTAIN SIGNIFICANT EMPLOYEES
The following individuals are not Executive Officers of the Registrant, but have significant management roles.
Mr. Paffhausen has been Managing Director of the Registrant's European Operations since the Pelikan Acquisition in February 1995. He joined Pelikan in 1977 and served in positions of increasing responsibility in research and development, engineering, production and operations, including three years as the General Manager of Pelikan Scotland (formerly Caribonum) and two and one- half years as Director of Pelikan's U.S. Operations in Franklin, Tennessee. Mr. Paffhausen was appointed Managing Director of the Pelikan Hardcopy Division in January 1994. From January 1994 until the Pelikan Acquisition he also served as Chief Director of Operations of Pelikan for the worldwide Pelikan organization.
Mr. Baiocchi has been Vice President, Nu-kote International, Inc. since January 1987. Mr. Baiocchi joined Burroughs Corporation (now Unisys) in October 1978 and has held a number of executive positions in manufacturing, product management, sales and marketing and business planning.
Mr. Elliott has been Vice President, Product Development, Nu-kote International, Inc. since September 1996. He joined Burroughs Corporation (now Unisys) in the United Kingdom in 1978 and has served in positions of increasing responsibility primarily in sales and product management functions, within Europe and the U.S. From April 1994 to September 1996, he served as Vice President, Business Development and Director, Product Management--North American Supplies Group from 1993.
ITEM 2.
ITEM 2. PROPERTIES
The Registrant has fee or leasehold interests in each of the facilities listed below:
- - -------- (1) Lease expires 2001 (2) Lease expires 2000 (3) Sold June 15, 1998 (4) Month to month lease (5) Lease expires 2002 (6) Lease expires 2004 (7) Lease expires in 3 increments in 2010, 2015, and 2019
In addition, the Registrant maintains sales offices in various locations throughout the United States and Europe.
The Registrant believes its facilities are in good operating condition, suitable for their intended purposes and provide sufficient production capacity for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On May 19, 1995, ICMI filed a declaratory judgement action against Ricoh Company, Ltd. and Ricoh Corporation (collectively, "Ricoh") in the United States District Court for the Western District of Pennsylvania seeking a determination by the court that the current design of one of its toner cartridges does not infringe one of Ricoh's patents. In August of 1995, Ricoh filed a motion for preliminary injunction to enjoin the sale of the cartridge. Following a hearing on Ricoh's motion for preliminary injunction held on August 19, 1995, the Court denied Ricoh's motion, finding in part that the evidence indicated ICMI's current toner cartridge did not infringe Ricoh's patent. In September 1995, ICMI filed a motion for summary judgment as to the noninfringement of the Ricoh patent by ICMI's current toner cartridge. This case was settled and dismissed by joint stipulation by the parties in late 1997.
On September 19, 1994, Hewlett-Packard Company, a California corporation ("HP"), filed a lawsuit against Nu-kote International in the United States District Court for the Northern District of California seeking, among other things, to have the Court enjoin Nu-kote International and its affiliates from infringing its patents and from using HP's trademarks in a manner likely to cause confusion or mistake, or to deceive, and from making any false and misleading statements regarding Nu-kote International replacement ink jet cartridges and kits, and, also seeks compensatory punitive and treble damages, court costs and attorney's fees. Nu-kote International has filed an answer to the lawsuit denying HP's allegations and asserting twelve affirmative defenses that include, among others, that HP's patents are invalid, unenforceable or not infringed by Nu-kote International, that HP has defrauded the U.S. Patent and Trademark Office and trademark misuse. Nu-kote International has also asserted seven counterclaims against HP including counterclaims for false, deceptive and misleading statements in violation of the Lanham Act, patent invalidity and unenforceablility, violations of the Sherman and Clayton Antitrust Acts for monopolization and attempted monopolization, illegal conduct in restraint of trade and illegal tying arrangements, and has requested a declaration that Nu-kote International has not infringed any valid patent of HP. Nu-kote seeks damages and an injunction for acts in restraint of trade, false advertising, trade liable, defamation and unfair competition. In April 1997, Nu-kote International filed a Motion for Preliminary Injunction seeking to enjoin HP from producing and selling its bottom ink filler cartridges. On July 11, 1997, the Court granted in part and denied in part Nu- kote's Motion for Preliminary Injunction.
The court held oral arguments regarding the complaint in June 1998 and a ruling is expected during the summer or early fall of 1998. On September 25, 1997, Nu-kote International filed a motion for Summary Judgment with regard to ten of HP's patents. On May 5, 1998, the Special Master appointed by the Court granted Nu-kote International's motion and recommended that 10 of HP's asserted patents be ruled not infringed. HP has appealed the decision to the District Court. On January 21, 1998 HP filed a Third Amended Complaint. That Complaint adds a new claim against Nu-kote International for federal trademark dilution. This claim is similar to the California claims for trademark dilution and injury to business reputation that HP already alleged. The Court has scheduled a claim construction hearing to construe the claims of the patents-in-suit. The parties will exchange claim construction charts in May through August of 1998 and a hearing is scheduled for September 18, 1998. The parties have been and continue to be engaged in a court ordered mediation process in an effort to settle this litigation.
On April 3, 1995, Canon, Inc., a Japan corporation, and its U.S. affiliates, Canon Computer Systems, Inc. and Canon USA, Inc. (collectively "Canon"), filed a lawsuit against Nu-kote International in the United States District Court for the Central District of California seeking, among other things, to have the Court enjoin Nu-kote International and its affiliates from infringing its patents and from making false designations of origin or false descriptions regarding Nu-kote International's cartridges and kits, and, also seeks compensatory, punitive and treble damages, court costs and attorney's fees. Nu-kote International has filed an answer asserting twelve affirmative defenses to the claims alleged in Canon's complaint. These include, among others, defenses that Canon's patents are invalid, unenforcable and/or not infringed by Nu-kote International, that Canon has defrauded the U.S. Patent and Trademark office and trademark misuse. Additionally, Nu-kote International has alleged counterclaims which include claims of monopolization and attempted monopolization of the aftermarket for replacement cartridges for Canon printers. Nu-kote International is also seeking declaratory relief asking the Court to find that it has not infringed any valid claim of Canon's right in the six patents in the suits, cancellation
of Canon's patents because of fraud on the U.S. Patent and Trademark Office, damages and an injunction for intentional interference with business relations, trade liable, disparagement of goods, defamation and unfair competition. In July 1996 Canon filed a second and related lawsuit, alleging infringement of its 5,509,140 utility patent (the "140" patent).
The Court granted Canon's motion for summary judgement on validity and infringement on the 140 patent. Trial of the other patent claims is currently scheduled to commence in September 1998. Nu-kote International believes the current designs of its Canon compatible ink jet cartridges do not infringe any Canon patent and is vigorously defending its position.
Seiko Epson Corporation, a Japan corporation, and its U.S. affiliate, Epson America Inc. (collectively "Epson"), filed a lawsuit against the Registrant, Nu-kote International and Pelikan Productions, A.G. in the U.S. District Court for the Central District of California. Epson seeks to have the court enjoin Nu-kote International and its affiliates from selling replacement Epson compatible ink jet cartridges and from using Epson's registered trademarks in a manner likely to cause confusion or mistake, or to deceive, and from making any false and misleading representations regarding replacement Epson compatible ink jet cartridges, and, also seeks compensatory and treble damages, court costs and attorney's fees. Nu-kote International and Pelikan have filed answers that assert nine affirmative defenses to the claims alleged in Epson's complaint. These include, among others, that Epson's patents are invalid, unenforceable and are not infringed and trademark misuse. Nu-kote International and Pelikan also allege various counterclaims against Epson, including claims for monopolization and attempted monopolization of the aftermarket for certain replacement cartridges and violation of the Lanham Act. Additionally, Nu-kote International seeks damages and an injunction for false advertising, trade libel, disparagement of goods, defamation, and unfair competition.
Although Nu-kote was enjoined by the District Court from engaging in certain activities, on March 5, 1997, the District Court held that four of Epson's patents-in-suit were unenforceable. On August 11, 1997, the District Court held one of Epson's design patents invalid and also ordered Nu-kote International and Pelikan to pay Epson $1,050,849 in damages and $31,413 in attorney's fees as a result of a contempt citation. Nu-kote International and Pelikan appealed the contempt citation to the Federal Circuit, and the finding of contempt and the payment of damages and attorney's fees has been stayed pending the appeal of the contempt citation. On the same day, the District Court held invalid Epson's design patent 351,190. By order dated August 11, 1997, the District Court granted Epson's Motion for Preliminary Injunction with regard to the manufacturing of ink cartridges and other products that infringe claims of Epson's 5,488,401 utility patent. The District Court issued a second contempt citation against Nu-kote International and Pelikan on August 12, 1997, ordering Nu-kote International and Pelikan to pay to Epson its lost profits and attorney's fees. This contempt order was grounded on alleged violations of the preliminary injunction order with regard to Epson's 351,190 patent (which patent, as noted above, was held invalid). Nu-kote International and Pelikan have appealed this contempt order to the Federal Circuit. There remain in the lawsuit Epson's 5,488,401 utility patent and its 365,596 design patent. On October 15, 1997, Epson filed a separate action against Nu-kote International and Pelikan alleging infringement of Epson's 5,156,470 and 5,156,472 utility patents. Nu-kote International and Pelikan filed motions to dismiss and stay the proceedings, and the District Court granted a motion to dismiss Pelikan as a defendant. The District Court consolidated the two cases into one action on January 12, 1998. No trial date has been set for the consolidated action. Nu-kote International believes the allegations set forth in Epson's complaint are without merit and intends to defend the consolidated lawsuit vigorously.
On May 9, 1997, Daniel M. Kerrane filed suit against the Company in Texas State District Court in Dallas County, Texas. Mr. Kerrane alleges he and the Company entered a Supplemental Employment Agreement in February 1994 (the "Agreement") which was to become operative upon a "Change in Control" as defined by the Agreement. He alleged the Company breached the agreement by substantially diminishing his responsibilities with the Company. Mr. Kerrane originally sought an amount in excess of $8,000,000. This case was settled on May 6, 1998 with the Company agreeing to pay Mr. Kerrane approximately $213,000 over a period of six months and release claims against Mr. Kerrane totaling $315,000.
On June 10, 1997, Financial Business Information System, Ltd., a South African corporation, filed suit against Nu-kote International and the Registrant in U.S. District Court for the Northern District of Texas. The
plaintiff alleged that it was the exclusive distributor of Nu-kote products in South Africa, but that Nu-kote breached the terms of its distributorship agreement. This case was settled and dismissed by the District Court in May 1998 with the Company agreeing to pay the plaintiff $75,000 on the date of the settlement and to pay the plaintiff $4,166 a month for twelve months and a balloon payment of $54,178 on May 1, 1999.
On January 23, 1998, a lawsuit was filed against the Company and certain of its officers and directors in the District Court for the Northern District of Texas, seeking class action status on behalf of purchasers of the Company's common stock between July 2, 1995 and May 29, 1997. The complaint alleges that the defendants violated Sections 10(b) and 20 of the Securities Exchange Act of 1934 (including Rule 10b-5) based upon purported misstatements and/or omissions of material facts. Among other things, the plaintiff alleges that misstatements and omissions by defendants relating to (1) the Company's acquisition of Pelikan; (2) the transition from sales of impact products to non-impact products, and (3) prospects for strong earnings per share growth resulted in an inflation of the price of the Company's common stock. The plaintiff seeks, on behalf of the purported class, an unspecified amount of compensatory damages and reimbursement for fees and expenses. The Company denies the allegations and intends to defend the lawsuit vigorously.
On March 10, 1998, Spectra, Inc. ("Spectra") of Hanover, New Hampshire, filed a complaint against the Company and Modular Ink Technology Stockholm, AB ("MIT"), an indirect subsidiary of the Company, in the U.S. District Court for the District of New Hampshire. In this action, Case No. 98-CV-130-JD, Spectra accused the Company and MIT of infringing Spectra's U.S. Patent No. 4,825,227 (the 227 patent), which was issued on April 25, 1989. The complaint specifically alleged that claims 10 and 11 of the 227 patent were infringed by products identified as PiezoJet(TM) 64 and PiezoJet(TM) 128. On April 28, 1998, the Company filed a motion to dismiss the New Hampshire action against it for lack of personal jurisdiction. At that time, MIT had not been served with the complaint and a summons. Also on April 28, 1998, Nu-kote International, Inc. ("International") and MIT filed an action against Spectra in U.S. District Court for the District of Delaware. In this action, Civil Acton No. 98-213-JJF, International and MIT seek a declaratory judgment that the 227 patent is invalid and not infringed, and asserts state law claims for tortious interference with prospective contractual relations and common law unfair competition. On June 11, 1998, Spectra amended its pleadings in the New Hampshire action to add International as a defendant and dismiss the Company from the suit. Thus far, the amended complaint has not been served on either International or MIT, but the Company is no longer a defendant in the New Hampshire action. Also on May 22, 1998, Spectra filed a motion to dismiss the Delaware action or transfer it to the District of New Hampshire. International and MIT opposed the motion to dismiss or transfer, which is still pending. International and MIT intend to file a motion to transfer the New Hampshire action to Delaware in part on the ground that the Delaware action was the first-filed action that brought together the proper parties to the dispute. They also intend to proceed with substantive discovery of Spectra. International and MIT have and will assert various defenses. At the same time, however, they are proceeding with negotiations intended to settle the dispute.
In addition, the Registrant is involved in various routine legal matters.
In the opinion of management, all matters discussed above are covered by insurance or are without merit or the disposition is not anticipated to have a material effect on the Registrant's financial position; however, one or more of these matters could have a material effect on future quarterly or annual results of operations or cash flows when resolved.
The foregoing "Legal Proceedings" section and Note 12 of "Notes to Consolidated Financial Statements", insofar as it relates to pending litigation matters, contain various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act), which represent the Registrant's expectations or beliefs concerning the possible outcome of the various litigation matters described herein. The Registrant cautions that the actual outcome of such matters could be affected by a number of factors, including, without limitation, judicial interpretations of applicable laws, rules and regulations, the uncertainties and risks inherent in any litigation, particularly a jury trial, the nature and extent of any counter claims, and the scope and collectability of insurance coverage. A decision in any of the foregoing lawsuits that is adverse to the Company could have an adverse effect on the Company's business and financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the Company during the fourth quarter of fiscal 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has received notification of its delisting by the NASDAQ National Market System as of June 12, 1998. Prior to its delisting, the Common Stock was quoted on the NASDAQ National Market System under the symbol "NKOT". The following table sets forth the high and low reported sales prices for the Common Stock as quoted on the NASDAQ National Market System for the periods indicated.
The last reported sales price per share of the Common Stock as quoted on the NASDAQ National Market System on June 22, 1998 was 7/16. As of the date hereof, the Registrant had 21,775,302 shares of Common Stock outstanding.
The Registrant has never declared or paid any cash dividends on its Common Stock and has no current plans to pay cash dividends on the Common Stock. The payment of any future cash dividends will be determined by the Board of Directors in light of conditions then existing, including the Registrant's earnings, financial condition and capital requirements, restrictions in financing agreements, business conditions and other factors.
The Registrant is a holding company and thus its ability to pay cash dividends on its Common Stock depends on the Registrant's subsidiaries ability to pay dividends to the Registrant. The Registrant's credit agreement restricts the payment of dividends.
As of June 22, 1998, the Registrant had in excess of 3,000 stockholders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the Registrant on a consolidated basis. The statement of operations data for the fiscal years ended, and the balance sheet data as of March 31, 1998, 1997, 1996, 1995, 1994 were derived from the Consolidated Financial Statements of the Registrant.
- - -------- (1) The Registrant's financial statements for the years ended March 31, 1998, 1997, 1996, and 1995 reflect the Pelikan Acquisition, which occurred on February 24, 1995. (2) Includes a $5,488 and $8,039 charge associated with increased inventory excess and obsolescence provisions in North America in fiscal 1998 and 1997, respectively, and $7,724 of costs associated with the startup of manufacturing of the Company's MIT piezoelectric ink jet printhead in fiscal 1997. (3) Includes a $650 charge for inventory spoilage resulting from the installation of new equipment coupled with severe winter weather and a $775 charge resulting from the revision of estimated future workers' compensation costs. (4) Includes a $1,000 non-recurring pre-tax and after-tax charge associated with the Registrant's secondary offering completed in May 1993. (5) Represents extraordinary loss from early extinguishment of indebtedness in fiscal 1998 and 1995. (6) Per share information has also been restated to reflect the adoption of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share".
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TRENDS
During the current and preceding three fiscal years, there have been significant consolidations in the office supplies distribution industry. As a result of such consolidations, the purchasing power of the Company's customer base has increased significantly, which compounded with intense price competition, has resulted in significantly lower margins across all product lines. In response to these developments, the Company is continuing to aggressively pursue cost reduction initiatives, and organizing itself into product focused business units that can provide the value added savings demanded by larger customers.
North American sales of non-impact products have declined significantly due to the lack of consumer acceptance of certain inkjet supplies, intense competition and certain operational problems encountered during the Company's restructuring efforts. The Company's European non-impact sales remained relatively flat in fiscal 1998. Although, the Company believes it can remedy its operational problems, the lack of consumer acceptance of inkjet products for certain printers is expected to significantly limit any growth opportunities for this product line. The Company also expects to see increased competition in laser cartridges as large OEMs enter the replacement laser cartridge market.
Worldwide sales of impact products continue to decline as non-impact printing devices become more popular and replace impact printers now in service.
The Company expects to continue to reduce costs through reductions in overall inventory and infrastructure related thereto and by implementing supply chain management initiatives such as order scheduling and freight and inventory management. The Company has organized itself into product focused operating units which is expected to result in better quality, cost control and overall service to the customer.
The following table sets forth certain historical data from the Company's Statement of Operations for the fiscal years ended March 31, 1998, 1997, and 1996 and the percentage change in such data from year to year. The data for the historical year-end periods is derived from the Consolidated Financial Statements of the Company.
The following table sets forth certain data from the Company's Statement of Operations for fiscal years ended March 31, 1998, 1997, and 1996 expressed as a percentage of net sales:
The following table sets forth certain historical revenue data for the fiscal years ended March 31, 1998 and 1997 and the dollar and percentage changes in such data from year to year.
FISCAL 1998 COMPARED TO FISCAL 1997
Net revenue for fiscal 1998 was $295.7 million, a decline of $46.6 million (13.6%) over fiscal 1997. Worldwide sales of non-impact supplies accounted for approximately 58.0% of total sales for fiscal 1998 compared to 57.3% of total sales in fiscal 1997.
The North American non-impact sales decline of $17.5 million resulted from a $6.5 million, or 26.3%, decrease in inkjet sales due to lack of sell-through of certain of the Company's products introduced in fiscal year 1997 and fiscal year 1998. Toner sales in North America declined $8.4 million, or 25.1%, as compared to fiscal 1997. North American toner sales were adversely impacted by quality issues and poor delivery performance resulting from the relocation of certain of the manufacturing operations from its toner facility in Connellsville,
Pennsylvania to the Company's facility in Nogales, Mexico. During the fourth quarter of fiscal year 1998 and subsequent to the year then ended, the Company relocated all of its toner related production in Nogales, Mexico back to its toner facility in Connellsville, Pennsylvania. Other non-impact revenues decreased a net $2.6 million due to the sale of its components division in December 1997.
The European non-impact sales decline of $7.2 million resulted from a $2.9 million decline in inkjet, primarily in the "Easy-Click" product line. Compatable inkjet products were up slightly over fiscal year 1997. Approximately $7.9 million of the decline was due to exchange rate fluctuations. MIT printhead and ink sales increased by $5.4 million in fiscal year 1998. The remaining decline of $1.8 million resulted from the Company's French Forms division.
Worldwide sales of impact supplies accounted for approximately 42.0% of total sales in fiscal 1998, compared to 42.7% of total sales in fiscal 1997.
Impact sales declined $7.2 million (9.8%) in North America and $14.9 million (21.6%) in Europe between fiscal 1997 and fiscal 1998. Approximately $6.0 million of the decline in Europe was due to exchange rate fluctuations. The decrease is directly related to the shift to non-impact printing devices that are slowly rendering impact printing devices obsolete for many applications. The overall 10.9% decline in impact products for the market outperformed the overall industry decline in impact products which is estimated to have declined 15%.
Cost of sales were $255.3 million (86.3% of net sales) for fiscal 1998, compared to $285.1 million (83.3% of net sales) in fiscal 1997. Included in cost of sales for fiscal 1998 were $5.5 million (1.9% of net sales) of expenses associated with increased inventory excess and obsolescence reserves in North America. Such charges were caused by poor inventory management and the introduction of unprofitable low volume products in prior years that were subsequently discontinued in fiscal year 1998. The Company has implemented certain controls over the forecasting and purchasing of inventory, as well as controls over the introduction of new products in North America. In addition, gross margin in North America was adversely impacted during the current fiscal year by $6.7 million (2.3% of net sales), associated with increased customer allowances, due to competition and price pressures in the market place. Pricing pressures are expected to continue across all product lines in North America and Europe.
For fiscal 1998, research and development expenses amounted to $6.6 million, (2.2% of net sales), compared to $9.6 million (2.8% of net sales) in fiscal 1997. Approximately $2.2 million, or 73%, of the decline in this expense category occurred in Europe where the Company has implemented an expense reduction program to maintain research and development expenses at approximately 2.0% of net sales.
Selling, general and administrative expenses were $59.7 million for fiscal 1998, compared to $66.6 million in the previous year. The reduction in these expenses resulted primarily from the Company's implementation of worldwide expense reduction programs, which included significant reductions in headcount.
Restructuring expenses amounted to $3.3 million in the current fiscal year. These expenses related primarily to: (1) closure of the Dallas, Texas headquarters; (2) centralization of sales and distribution into Franklin, Tennessee; and (3) closing one toner facility and consolidating toner manufacturing into Connellsville, Pennsylvania.
Interest expense for fiscal 1998 was $15.5 million, compared to $8.4 million for the previous year. The increase is the result of higher outstanding borrowings, higher interest rates and the amortization of bank fees related to the July 31, 1997 refinancing of indebtedness with its lender.
For fiscal 1998, the Company received minimum tax benefits from its losses because of an increase in its tax valuation allowance of approximately $14.2 million against certain deferred tax assets, particularly its net operating loss carryforwards. Pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") the Company will recognize an income tax benefit when the deferred tax assets are actually realized or at such time as it is determined that realization of the deferred tax assets is more likely than not. The Company reported an income tax benefit of $0.3 million in fiscal 1998 and an income tax expense of $5.2 million in the previous year.
For fiscal 1998, the Company recognized a net loss of $52.4 million, compared to a net loss of $49.7 million in fiscal 1997. The greater net loss is directly attributable to: (1) a $46.6 million decrease in sales and a 3.0% increase in cost of goods sold as a percentage of sales; (2) the recognition of an extraordinary charge resulting from the early extinguishment of debt of $2.6 million; (3) higher interest expense of $7.0 million; and (4) a $4.1 million loss on the sale of division of the Company. The increase in net loss was offset by a $6.8 million reduction in selling, general and administrative costs, $3.0 million reduction in research and development costs and $11.8 million decline in restructuring costs.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 were $342.3 million, a decline of $81.8 million (19.3%) over fiscal 1996. For fiscal year 1997, sales by North American entities were $173.1 million, a decline of $30.9 million, or 15.1%, as compared to sales in the previous year. Sales by European entities declined approximately $49.9 million, or 23.1%, as compared to the previous year and were $165.9 million. Sales of impact products in North America declined by 30% during the fiscal year. Sales of toner products also declined but the decline in sales of these products was offset by increases in sales of ink jet and laser products. Approximately $14.4 million of the decline in net sales in Europe was due to exchange rate fluctuations. An additional $14.9 million of the decline in net sales in Europe was the result of the Company's decision to reduce unit sales prices in the first quarter of fiscal 1997, which did not result in increased sales. The balance of the decline in sales in Europe was due to a decline in sales of impact products.
Worldwide sales of non-impact supplies accounted for 57.3% of total worldwide sales for fiscal year 1997, as compared to 52.0% of total worldwide sales for fiscal year 1996. Sales of non-impact products as a percentage of worldwide sales increased largely because sales of impact products declined by $57.4 million (28.2%).
In North America, sales of non-impact supplies amounted to $99.3 million in fiscal year 1997 and 1996 and represented 57.3% and 48.9%, respectively, of total North American sales. As a percentage of total North American sales, the percentage of non-impact sales increased because sales of impact products declined by $30.9 million (29.5%). For the year, sales of toner products in North America declined nearly 33% as compared to sales in fiscal year 1996, due in large part to: (1) the Company's decision to reduce sales of recharger toners in non-profitable markets; (2) delays in introduction of certain new products due to patent infringement issues; and (3) quality issues resulting from the consolidation of toner formulas at its two North America toner facilities. Sales of the Company's other non-impact products, namely ink jet cartridges, laser printer cartridges, components for laser printers and thermal products, grew over 30% during fiscal 1997.
Sales of non-impact supplies in Europe were $96.8 million for fiscal 1997, compared to $121.2 million in fiscal 1996, and represented 58.3% of total European sales for fiscal 1997. Approximately $7.5 million of the decline in sales of non-impact products in Europe was due to exchange rate fluctuations. An additional $7.7 million of the decline resulted from unit sales price reductions initiated in the first quarter of fiscal 1997, which did not result in increased sales. The balance of the decrease, $9.1 million, resulted from a decline in sales of laser cartridges and components.
Cost of sales were $285.1 million (83.3% of net sales) in fiscal 1997, compared to $295.0 million (69.6% of net sales) in fiscal 1996. Included in cost of sales for the year ended March 31, 1997 were the following significant charges: (1) a $8.0 million (2.3% of net sales) charge associated with inventory write-offs and increased excess and obsolescence reserves in North America; and (2) $7.7 million (2.2% of net sales) of costs associated with the startup of manufacturing of the Company's MIT piezoelectric ink jet printhead. In addition, gross margin was adversely impacted during the year by: (1) a revenue decline of $14.9 million (4.4% of net sales) resulting from the reduction in unit selling prices in Europe noted above; and (2) $9.8 million (2.9% of net sales) associated with increased customer allowances and rebates. Lastly, gross margin was also impacted by the decline in net sales of impact and toner products in North America and the related effect on absorption of manufacturing overhead costs.
During fiscal 1997 the Company attempted to reduce its worldwide manufacturing costs for impact products and labor intensive non-impact products by accelerating the migration of the manufacturing of such products to its lower labor cost facilities in Mexico and China. The Company also began monitoring inventory levels more closely and evaluating inventory management systems and procedures in an effort to mitigate the effects of future write- offs of inventories and to maximize the conversion of excess inventories into cash.
Research and development expenses were $9.6 million, substantially the same as in fiscal 1996.
Selling, general and administrative expenses were $66.6 million (19.5% of net sales) for fiscal 1997, a reduction of $11.5 million, compared to $78.1 million (18.4% of net sales) for fiscal year 1996. Approximately $3.4 million of the reduction was due to exchange rate fluctuations with the balance resulting from the implementation of expense reduction programs in Europe.
Restructuring expenses amounted to $15.1 million in fiscal 1997, compared to $13.8 million in the previous year. For fiscal 1997 these costs related primarily to: (1) consolidation of impact product production into Scotland, Mexico and China; (2) centralization of distribution into primarily Franklin, Tennessee and Duren, Germany; (3) transition of European sales forces from a predominantly fixed-cost basis to a sales force with commission-based agents; and (4) closing of one toner facility and consolidation of toner manufacturing into Connellsville, Pennsylvania and Monchaltorf, Switzerland.
Interest expense was $8.4 million in fiscal 1997, compared to $7.4 million for the fiscal 1996. The increase is a result of larger outstanding borrowings.
At March 31, 1997 the Company has a tax valuation allowance of $30.7 million against certain deferred tax assets pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the provisions of SFAS 109, the Company will recognize an income tax benefit to the extent of $23.7 million when the deferred tax assets are actually realized or at such time as it is determined that realization of the deferred tax assets is more likely than not. The Company reported income tax expense of $7.6 million in fiscal 1996.
For fiscal 1997, the Company recognized a net loss of $49.7 million compared to net income of $13.1 million for fiscal 1996. The decrease in net income is directly attributable to the decrease in sales and the increased cost of goods sold as a percentage of sales combined with the restructuring charges and income tax valuation allowances discussed above.
FISCAL 1996 COMPARED TO FISCAL 1995
The comparison between fiscal 1996 and fiscal 1995 was significantly affected by the Pelikan Acquisition, which occurred on February 25, 1995.
Net sales from continuing operations for fiscal 1996 were $424.1 million, an increase of $230.5 million (119.1%) over fiscal 1995. The inclusion of the Pelikan Hardcopy Division operations in fiscal 1996 accounted for substantially all of this increase. For the year, sales by North American entities amounted to $204.0 million and sales by European entities were $215.7 million. Worldwide sales of non-impact supplies were $220.5 million, an increase of $137.5 million, or 165.7%, over the prior year. Sales of non- impact products represented 51.9% of total fiscal 1996 sales versus 43.0% of fiscal 1995 sales. Sales of impact supplies almost doubled in fiscal 1996 and amounted to $203.6 million.
Cost of sales were $295.0 million (69.6% of net sales) in fiscal 1996 compared to $142.9 million (73.8%) in fiscal 1995. The improvement in gross margins was due to the inclusion in the current year period of the results of the Pelikan Hardcopy Division' European operations, which operate at higher gross margins. Selling, general and administrative expenses were $78.1 million (18.4% of net sales) for fiscal 1996 compared to $29.4 million (15.2% of net sales) in fiscal 1995. Research and development expenses amounted to $9.6 million in fiscal 1996 compared to $1.8 million in fiscal 1995. The increase in both of these expense categories was directly attributable to the inclusion of the results of the Pelikan Hardcopy Division operations.
Restructuring expenses, which were incurred as a result of the Pelikan Acquisition and includes the elimination of redundant facilities and the consolidation of operations, amounted to $13.8 million and $28.4 million in fiscal 1996 and 1995, respectively. The total cumulative restructuring charge incurred by the Company related to the merger of certain of its North American operations with those of Pelikan amounted to $29.3 million and included, among other things: (1) closure of the Company's Bardstown, Kentucky manufacturing, distribution and administrative facility and merger of its operations into the Pelikan Franklin, Tennessee facility; (2) consolidation of ICMI with the Pelikan Derry, Pennsylvania facility; (3) termination of a contract ribbon manufacturing arrangement and merger of these operations into the Pelikan Franklin, Tennessee facility; and (4) consolidation of administrative and sales personnel. The total cumulative restructuring charge incurred by the Company related to the merger of its European operations with those of Pelikan amounted to $11.4 million and included: (1) costs associated with the closure of the Company's Deeside, Wales manufacturing facility and merger of its operations into the Pelikan Scotland facility; and (2) redundancy costs associated with the down-sizing of the German production facility.
In fiscal 1996, the Company revised its estimates with respect to the aforementioned restructuring plan. The changes in the Company's estimates resulted in increases in the amounts required for severance and facility maintenance of $0.5 million in each case and decreases in amounts required for lease cancellations and contract cancellations of $0.6 million and $1.0 million, respectively.
Interest expense was $7.4 million in fiscal 1996 compared to $3.2 million for fiscal 1995. The increase was attributed to additional borrowings resulting from the financing of the Pelikan acquisition and associated working capital needs.
Also included as an extraordinary charge to earnings during fiscal 1995 was a $0.3 million charge related to the early extinguishment of the Company's previous credit facility with Banker's Trust Company, Barclays Bank PLC and NationsBank Texas, N.A. (the "previous credit facility").
For fiscal 1996, the Company recognized net income of $13.1 million compared to a net loss of $12.4 million in fiscal 1995. The increase in net income is primarily attributed to a net reduction of $14.6 million in restructuring charges for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 1998, cash used by operating activities amounted to $5.8 million. Capital expenditures, primarily related to the purchase of manufacturing equipment related to non-impact product lines, were $5.6 million.
For fiscal 1997, cash used by operating activities amounted to $4.9 million, primarily to fund restructuring expenses. Capital expenditures, primarily related to the purchase of ink jet and toner manufacturing equipment, were $12.3 million.
For fiscal 1996, cash used by operating activities amounted to $23.9 million, primarily due to restructuring expenses, and increased working capital needs associated with increased inventories.
The Company's cash requirements are related to funding working capital for operations, restructuring costs, research and development costs, capital expenditures and interest expense. Cash provided by operating activities and through borrowings under the Second Amended Agreements described below and open account trade terms from vendors are the primary sources of liquidity and capital for the Company.
On July 31, 1997 the Company entered into the Second Amended and Restated Credit Agreements (the "Second Amended Agreements"). The Second Amended Agreements provide for a total borrowing commitment at date of closing of approximately $145 million including a $10 million letter of credit facility (the "Facilities"). The Facilities are comprised of a $100 million U.S. facility (the "U.S. Facility"), a CHF 50 million Swiss facility (the "Swiss Facility") and a (Pounds)6.275 million U.K. facility (the "U.K. Facility"). The
Second Amended Agreements are funded through a syndicate of commercial lenders and include a senior secured reducing revolving credit facility.
The U.S. Facility bears interest at (a) 1% through June 30, 1998 and thereafter at 2%, plus (b) the greater of (i) the prime rate of NationsBank of Texas, N.A. or (ii) the Federal Funds rate plus 0.5%. The rate at March 31, 1998 was 9.5%. The Swiss Facility and the U.K. Facility bear interest at LIBOR plus 4% through June 30, 1998 and LIBOR plus 5% thereafter. The weighted average interest rate for the Swiss Facility and the U.K. Facility at March 31, 1998 was 7.33%. The Second Amended Agreements provide for a commitment fee during the period prior to maturity of 0.75% of the unutilized commitment under the Second Amended Agreements. At March 31, 1998, the Company has cash borrowings outstanding of $141.5 million under the Facilities. The Facilities mature on January 4, 1999.
The Second Amended Agreements contain a number of affirmative and negative covenants, including restrictions on indebtedness, liens, investments (including intercompany investments and advances), contingent obligations, dividend payments, sale or transfer of assets and acquisition or disposition of the stock of subsidiaries. In addition, the Second Amended Agreements contain financial covenants requiring the maintenance of certain financial ratios and net worth and limits restructuring charges and capital expenditures. The most restrictive of the financial covenants is the requirement that the Company maintain specified minimum amounts of earnings before interest, taxes, depreciation, amortization, certain noncash losses and gains, restructuring and other nonrecurring charges (as defined) ("EBITDAR"). The EBITDAR covenant is tested monthly. Additionally, the Second Amended Agreements are subject to customary events of default, including but not limited to payment defaults and compliance of financial covenants. The Facilities are guaranteed by the Company and all its significant subsidiaries and are collateralized by substantially all of the assets of the Company and its significant subsidiaries.
As of and since the quarter ended December 26, 1997, the Company has been in violation of certain financial covenants related to the Second Amended Agreements. Since that time, the Company and its lenders have entered into a series of amendments and waivers to the Second Amended Agreements. The amendments and waivers provided, among other things, the following:
. Waived for the period from December 26, 1997 through August 31, 1998 violations of certain financial covenants as of and for the quarters ended December 26, 1997, March 31, 1998 and June 27, 1998;
. Deferred the mandatory principal reduction of $4.0 million due on May 29, 1998 and scheduled a $5.0 million payment due on August 31, 1998;
. Restricted the Company from making intercompany loans and investments in certain subsidiaries;
. Required the Company to use all proceeds from the sale of assets as a permanent reduction of the revolver under the credit Second Amended Agreements; and
. Required monthly principal reductions of $0.5 million commencing May, 1998 through July, 1998.
In response to the poor operating results, the Company added new senior officers to various key positions.
Management does not believe that the Company has adequate sources of working capital to provide the Company with sufficient cash to meet its near term obligations. In December 1997, the Company engaged Glass & Associates, Inc., management consultants, to provide interim management services and to assist the Company in finding solutions to its current operating issues and in developing a business restructuring plan. In addition, the Company has engaged BT Alex. Brown Incorporated to assist in the sale of all or part of the Company's business. The Company will also continue to focus on managing net working capital. However, there can be no assurance that any of these strategies will provide the Company with adequate working capital and sufficient cash flow to meet its near term obligations. The current waiver of existing defaults under the Second Amended Agreements expires at the end of August 1998. While the Company's lenders have previously provided waivers, there can be no assurance they will do so in the future. Unless the Company's lenders agree to a new waiver, the Company will be in default under the Second Amended Agreements, and the Company will not have adequate cash to pay the outstanding indebtedness at that time.
EFFECTS OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
Because the Company conducts business in many countries, fluctuations in foreign currency exchange rates affect the Company's financial position and results of operations. It is the Company's policy to monitor currency exposures and enter into hedging arrangements to manage the Company's exposure to currency fluctuations. As a result, the Company reported a $0.2 million exchange loss in fiscal 1998 and a $0.4 million exchange gain in fiscal 1997. The five most significant foreign currencies in which the Company transacts include German Deutschmarks, Swiss Francs, British Pound Sterling, French Francs, and Swedish Krona.
CAPITAL EXPENDITURES; ENVIRONMENTAL MATTERS; RESEARCH AND DEVELOPMENT
Capital expenditures for fiscal 1998, 1997 and 1996 amounted to $5.6 million, $12.3 million, and $13.1 million, respectively. Such expenditures were primarily for the purchase of computer equipment and the expansion of manufacturing capacity for ink jet and other non-impact supplies. The Company expects that capital expenditures in fiscal 1999 will total approximately $5.0 million and that capital expenditures will approximate $6.0 million per year after fiscal 1999.
The Company is subject to regulation at the federal, state and local levels in the U.S. and Europe, including in particular, regulation pertaining to environmental matters. To date these matters have not resulted in significant cost to the Company. Based on indemnification obligations of third parties to the Company, current regulations and the condition of its facilities, the Company does not currently anticipate a material amount of environmental expenditures. See also Item 1 - -Environmental and Regulatory Matters.
Research and development expenses were $6.6 million, $9.6 million and $9.6 million in fiscal 1998, 1997 and 1996, respectively. Research and development expenses beginning in fiscal 1999 are expected to approximate $6.2 million and will increase or decrease each year thereafter proportionately as revenues increase or decrease.
INFLATION
The Company is subject to the effects of changing prices. Prices for the Company's impact products have generally declined over the past three years. Because of the declining market for impact printing supplies, the company expects prices for these products to continue to decrease. As a result of its general inability to pass along cost increases, with respect to its impact printing supplies, future increases in production costs or raw material prices could have an adverse effect on the Company's business. Management currently believes that inflation will have less impact on the Company's non-impact operations because of the expanding market for non-impact printing supplies.
NEW ACCOUNTING STANDARDS
During June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information". These standards are effective for financial statements for fiscal years beginning after December 15, 1997. During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 "Employer's Disclosure about Pension and Other Postretirement Benefits", which is effective for financial statements for fiscal years beginning after December 15, 1997, and Statement of Financial Accounting Standards No. 133 "Accounting for Derivatives and Hedging Activity", which is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company is currently evaluating the impact of these new standards on its financial statements but has not yet determined the full impact.
YEAR 2000 COMPUTER ISSUES
The Company has completed its initial assessment of the year 2000 issues facing its information systems. Certain of the Company's information systems are not currently in compliance with the modifications necessary
for the year 2000. It is believed that through modifications or conversions to new hardware, software and embedded technologies that the year 2000 issues can be mitigated. The Company expects to utilize both internal and external resources to reprogram, replace and test software and embedded technologies for the year 2000 modifications. Additionally, the Company also plans to communicate with customers, vendors and others to ensure that their systems are year 2000 compliant. However, there can be no guarantee that the systems of other companies on which the Company's system rely will be timely converted, or that a failure to convert by another company or a conversion that is incompatible with the Company's systems would not have a material effect on the Company. The cost of the year 2000 compliance has not yet been finalized. There can be no assurance that the Company will have adequate resources to implement such system changes.
ECONOMIC AND MONETARY UNION IN EUROPE ("EMU")
EMU refers to the movement toward economic and monetary union in Europe with the ultimate goal of introducing a single currency called the Euro. Monetary union will have profound financial and political implications. It removes the existence of different currencies, monetary policies, and, to some degree, fiscal policies from Europe's financial markets. It effectively brings about a merger of the capital markets of the countries that join EMU.
The European Pelikan Hardcopy businesses will be affected by EMU. EMU will require many significant changes for all of banking and commerce including currency conversion and modifications of payment and settlement systems, to name a few. As with the year 2000 issue, EMU poses various operating risks. The Company has implemented a new system to address the changes required and expects all areas of the Company to be ready well in advance of the EMU start date of January 1, 1999. Management anticipates that the formation of EMU will not materially affect the trend of earnings of the Company.
CAUTIONARY STATEMENT
The foregoing "Management's Discussion and Analysis of Financial Condition and Results of Operations" section contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, in particular those statements which represent the Company's expectations or beliefs concerning, among other things: the Company's ability to mitigate the effect of the reduction in the impact market by realizing cost savings as a result of transferring production to lower cost facilities and by expanding into additional markets; the introduction of new products and reversal of the overall decline in its revenues; the ability to maximize conversion of excess inventories into cash; the adequacy of the Company's current credit facilities to provide sufficient cash flow to meet its obligations; the ability to restructure the Company's debt or obtain additional waivers from its lenders with respect to defaults under the Second Amended Agreements; future capital expenditure levels; indemnification obligations of third parties and other assumptions regarding environmental matters; the effect of inflation on future operations; the impact of the formation of the EMU; and the effect of the year 2000 compliance issues. The Company cautions that such matters necessarily involve significant risks and uncertainties that could cause actual operating results and liquidity needs to differ materially from such statements, including, without limitation, general economic conditions, product demand and industry capacity, competitive products and pricing, particularly the possibility of increased competition from OEMs, manufacturing efficiencies, new product development, consumer acceptance of new products developed by the Company, particularly non-impact supplies, availability of raw materials and critical manufacturing equipment, and the regulatory and trade environment.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is hereby made to the Consolidated Financial Statements and notes thereto appearing at pages to hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following information with respect to other principal occupation or employment and other affiliations and business experience of each director during the last five years has been furnished to the Company by such director. Except as otherwise indicated, each of the directors has had the same principal occupation for the last five years.
John P. Rochon, age 46, Director of the Company since 1994
Mr. Rochon has been a director of the Company since 1994. Mr. Rochon has been Chairman of the Richmont Corporation since 1990 and Chief Executive Officer of Mary Kay Holding Corporation since 1991. Prior thereto, Mr. Rochon served in positions of increasing responsibility with Mary Kay Holding Corporation, including Vice Chairman from 1987 to 1991. Through Richmont Corporation and its predecessor and affiliated companies, Mr. Rochon has built a large, diversified portfolio of companies and investments strongly focused on consumer goods and services. Mr. Rochon is also a director of Royal Appliance Manufacturing Company.
Patrick E. Howard, age 50, Director of the Company since 1997
Mr. Howard had been Chief Operating Officer of the Company since February 1997 and became Chief Executive Officer of the Company in August 1997, serving in those capacities until December 1997. He has been a Director of the Company since August 1997. He was Executive Vice President of Mary Kay, Inc. from December 1985 until January 1996. Since January 1996 Mr. Howard has been Chief Executive Officer of the Richmont Group.
MEETINGS OF THE BOARD
The Company's Board held 10 regularly scheduled or special meetings during the fiscal year ended March 31, 1998 and acted by unanimous consent nine times. The entire Board acts as the Audit Committee and Stock Option Committee.
During fiscal 1998, Messrs. Donald A. Bolke and Hubbard C. Howe, who had been directors since 1994 and 1988, respectively, resigned from the Board. In addition, Brian D. Finn, who had been a director since 1993, and David F. Brigante, who had been a director since 1992, both resigned from the Board after the end of the last fiscal year.
Each current member of the Board attended at least 75% of the total number of meetings of the Board and of the Committees of the Board on which he served that was held during the fiscal year.
COMPENSATION OF DIRECTORS
Directors who are also employees of the company are not compensated for services as directors. Non-employee directors of the Company formerly received $20,000 per year, plus $2,000 per year per committee membership and $2,000 per year per committee Chairmanship. The directors waived all fees due to them for fiscal 1998. In addition, under the Nu-kote Holding, Inc. 1992 Stock Option Plan, as amended and restated (the "1992 Plan"), the Company provided non- employee directors one-time grants of non-qualified stock options for 30,000 shares of Common Stock upon his or her initial election or appointment to the Board. During the Fiscal Year and prior to his resignation in July 1997, Mr. Hubbard C. Howe was paid $37,500 as Vice President of the Board in lieu of directors' fees otherwise payable to him.
Under the terms of the Nu-kote Holding, Inc. Deferred Stock Compensation Plan (the "Deferred Stock Plan"), non-employee directors may elect to defer all or a portion of their director's fees, including fees for attendance at regular and special Board and committee meetings, for any calendar year (the "Deferred
Amount"). Each Deferred Amount is credited by the company to a bookkeeping account (the "Stock Account") and is converted into a stock equivalent (a "Stock Equivalent") on the date the amount is credited. The number of Stock Equivalents is based on the closing price of the Company's Common Stock. Distributions are only made from a director's Stock Account upon termination of the director's service through death, retirement or otherwise.
COMMITTEES OF THE BOARD
Audit Committee. The Audit Committee of the Board reviews and approves the scope and results of any outside audit of the Company, and the fees therefor, and makes recommendations to the Board of Directors or management concerning auditing and accounting matters and the selection of outside auditors. During the Fiscal Year, the Audit Committee of the Board met one time. At this time, the entire Board acts as the Audit Committee.
Stock Option Committee. The Stock Option Committee of the Board was formed on September 27, 1996 and is empowered to administer the Company's 1992 Plan, Senior Management Stock Appreciation Rights Plan and such other employee benefit plans, programs, policies and procedures as the Board may select. From inception to the end of the Fiscal Year, the Stock Option Committee of the Board acted three times by unanimous written consent. At this time, the entire Board acts as the Stock Option Committee.
By resolution and vote of the Company's Board of Directors, both the Executive Committee and Compensation and Benefits Committee were eliminated during the Fiscal Year due to the reduction of the number of directors constituting the Board of Directors. Responsibilities normally associated with these Committees are being administered by the entire Board of Directors.
EXECUTIVE OFFICERS
Information about the current Officers of the Company appears above under the caption "Executive Officers of the Registrant".
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange act of 1934 requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC") and the NASDAQ National Market System. Executive officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports they file. Based solely on a review of the copies of such reports furnished to the Company and written representations that no Forms 5 were required for the Fiscal Year, the Company believes that during the Fiscal Year no executive officer, director or greater that 10% stockholder was delinquent in filing any reports other than Messrs. Donnellan, Ligon and Theodore who filed their initial statements of beneficial ownership on Form 3 late.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Company's Chief Executive Officer and certain of the Company's other executive officers and significant employees whose total salary and bonus for the Fiscal Year exceeded $100,000 (the "Named Executives") with respect to all services rendered to the Company during the previous three fiscal years.
SUMMARY COMPENSATION TABLE
- - --------
Footnotes to the Summary Compensation Table are on the following page.
(1) Includes, where applicable, amounts electively deferred by each Named Executive under the Nu-kote International, Inc. Employee Savings Plan (the "Savings Plan")
(2) Amounts listed in this column for fiscal 1998 include (a) automobile allowances in the amounts of $13,690, $6,000, $7,200, $4,800, $11,504, $7,793, and $4,912 for Messrs. Paffhausen, Baiocchi, Larsen, Elliott, Brigante, Kerrane and Schmeck, respectively; (b) club dues of $3,321, $4,482, $4,482 and $3,361 for each of Messrs. Baiocchi, Brigante, Kerrane and Schmeck, respectively; and (c) imputed interest of $17,310 on a relocation loan for Mr. Kerrane.
(3) No stock appreciation rights awards were granted in either fiscal 1998 or 1997.
(4) Amounts listed in this column for fiscal 1998 include (a) the Company's contributions to the Savings Plan (exclusive of amounts deferred at the election of the Named Executive) on behalf of each of the Named Executives, in the amount of $3,800, $3,800, $3,600, $6,708, $3,800 and $3,904 for Messrs. Baiocchi, Larsen, Elliott, Brigante, Kerrane and Schmeck, respectively.
(5) The services of Messrs. Donnellan and Ligon were made available to the Company pursuant to a consulting agreement between Glass & Associates, Inc. and the Company. While the Company does not compensate Messrs. Donnellan and Ligon directly for their services, the Company has paid Glass & Associates, Inc. $539,585 during fiscal 1998 for operational, sales, financial, marketing and management consulting services provided by Messrs. Donnellan and Ligon and other associates of Glass & Associates, Inc. Additionally, Messrs. Donnellan and Ligon and other associates of Glass & Associates, Inc. have been reimbursed actual and reasonable expenses of $108,685 incurred by them in performing services for the Company. Glass & Associates, Inc. is a third-party consulting firm, independent of the Company.
(6) Chief Executive Officer of the Company until August 1997 and Chairman of the Board until May 1998.
(7) The services of Mr. Howard were made available to the Company pursuant to a consulting agreement between Richmont Corporation and the Company, until his resignation on December 9, 1997. The Company did not compensate Mr. Howard directly for his services. The Company received the services of the Richmont Corporation free of charge during fiscal 1998, which included operational, sales, financial, marketing and management consulting services provided by Mr. Howard and other employees of Richmont Corporation. Mr. Howard and other employees of Richmont Corporation have been reimbursed actual and reasonable expenses incurred by them in performing services for the Company. Richmont Corporation is an affiliate of Richmont Capital Partners I, L.P., see: Security Ownership of Principal Stockholders and Management.
(8) Executive Vice President and Chief Financial Officer of the Company until October 10, 1997.
(9) Senior Vice President Finance, Corporate Controller and Secretary of the Company until December 19, 1997.
The following table sets forth the stock appreciation rights granted during the fiscal year to each of the named executives and certain hypothetical values for such options and rights.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- - -------- (1) Based upon the per share market price on the date of grant and on annual appreciation of such market price through the expiration date of such awards at the stated rates. These amounts represent assumed rates of appreciation only and may not necessarily be achieved. Actual gains, if any are dependent on the future performance of the Common Stock, as well as the continued employment of the Named Executive through the term of the awards. The potential realizable values indicated have not taken into account amounts required to be paid as income tax under the Internal Revenue Code of 1986, as amended and any applicable state laws.
The following table sets forth the number of and value realized on shares acquired on exercise of stock options during the Fiscal Year and the number of shares covered by exercisable and unexercisable options and stock appreciation rights held, and the dollar values which would have been realized on exercise of such options and stock appreciation rights, on March 31, 1998 by each of the Named Executives.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AT FY-END OPTION/SAR VALUES
- - -------- (1) Based upon the closing price of the Common Stock ($0.219) on the NASDAQ National Market System on March 31, 1998.
PENSION PLAN TABLE
The following table sets forth the estimated annual benefits payable to hypothetical participants who are entitled to the maximum benefits under the tax-qualified non-contributory defined benefit plan maintained by the Company (the "Pension Plan") in the compensation and years-of-service categories indicated in the table upon retirement at normal retirement age (65 years of age). The amounts shown are based upon the assumption that such benefits will be paid in the form of a single life annuity and assume offset for social security benefits.
The Pension Plan provides retirement benefits of an employee's years of service and such employee's average annual earnings (subject to a maximum of $150,000 annually, as adjusted by the Internal Revenue Service for cost of living increases after 1995) for the 60 highest consecutive months' compensation during the 120 months prior to retirement (and if the employee has been employed less than five years, the average of compensation during all months employed.) Compensation includes all salary or wages, including commission, shift premiums, tax deferred contributions made to the Nu-kote International, Inc. Employees Savings Plan on an employee's behalf and payments for non-work periods during active employment, but does not include any other form of remuneration.
At March 31, 1998, the credited years of service and the compensation covered under the Pension Plan of the participation Named Executives were as follows:
Mr. Hans Paffhausen is not covered by the above referenced Pension Plan, but is covered by a separate plan in Switzerland.
EMPLOYMENT AGREEMENTS
None of the Company's executive officers have written employment agreements. In May 1998, however, Messrs. Baiocchi, Larsen, Paffhausen, Theodore and Elliott entered into retention agreements, which are triggered upon a change in control or a restructuring of the Company's long-term financing agreement with its lender. Shaun Donnellan, the Company's Chief Executive Officer, serves in such capacity pursuant to a contract between the Company and Glass & Associates, Inc., and he is compensated by Glass & Associates, Inc.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board currently acts as the Stock Option Committee and Compensation Committee.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding each person known to the Company to own beneficially more than 5% of the outstanding Common Stock of the Company. Such information has been obtained from the most recent public filings submitted or other information made available to the Company by such holders.
- - -------- (1) Unless otherwise indicated, such shares of Common Stock are owned with sole voting and investment powers. (2) Represents the aggregate shares held by the Oppenheimer Group, Inc. and its subsidiaries and affiliates, including Oppenheimer Financial Corp., Oppenheimer Equities Inc., Oppenheimer Holding, Inc., Oppenheimer & Co., Inc. and Oppenheimer Capital, L.P. Oppenheimer Group, Inc. is a parent holding company and disclaims beneficial ownership and voting and dispositive power over the shares held by its subsidiaries and their clients.
MANAGEMENT
The following table sets forth, as of June 22, 1998, certain information as to the shares of Common Stock beneficially owned by each director and nominee as director of the Company, by each Named Executive, as defined herein, and by all directors and executive officers of the Company as a group:
- - -------- * less than 1% of class (1) Unless otherwise indicated, such shares of Common Stock are owned directly with sole voting and sole investment power. (2) Includes 2,559,360 shares owned by Richmont Capital Partners L.P., as to which shares Mr. Rochon has shared voting and investment power. (3) Includes 18,000 shares that may be acquired through the exercise of stock options, which are exercisable within 60 days of June 22, 1998. (4) Represents shares that may be acquired through the exercise of stock options, which are exercisable within 60 days of June 22, 1998. (5) Includes 380,576 shares which may be acquired through the exercise of stock options exercisable within 60 days of June 22, 1998 and other shares deemed beneficially owned by the Company's directors as described in the preceding notes.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Mr. Brigante entered into a severance agreement with the Company on March 9, 1998. Mr. Brigante will receive $262,500 over a twelve-month period and will receive other employment benefits (such as group health, life and disability insurance, use of Company automobiles, and country club membership along with monthly dues) until March 9, 1999. Mr. Brigante will not engage in any Competitive Activity (as defined in the agreement) with the Company during the time he is receiving benefits from the Company. This agreement canceled all prior contracts and agreements between Mr. Brigante and the Company. Mr. Brigante resigned as a director following the end of the fiscal year.
Mr. Kerrane had been employed by the Company under an employment agreement. However, on May, 1997, Mr. Kerrane filed suit against the Company in a Texas State District Court in Dallas county, Texas. Mr. Kerrane alleged that his agreement with the Company entitled him to terminate his employment and receive a lump sum severance payment because the Company "substantially reduced" his authorities, powers and duties in April 1997. The suit was settled with a settlement agreement between Mr. Kerrane and the Company, dated May 6, 1998. In the settlement agreement, the Company agreed to make bi-weekly payments of $12,500 to Mr. Kerrane, totaling $150,000, agreed to pay Mr. Kerrane's attorney's fees related to the dispute and lawsuit, up to a sum of $40,000, agreed to pay approximately $23,000 in withholding taxes and paid Mr. Kerrane's country club dues, totaling $15,000. Further, the Company waived all payments due to the Company by Mr. Kerrane on an interest free home purchase loan made by the Company to Mr. Kerrane in May 1994, such payments due totaling $300,000. See "Certain Transactions."
On December 10, 1997, the Company engaged Glass & Associates, Inc. ("Glass") to provide general management of the Company's operating and business affairs. Glass provided Shaun K. Donnellan to serve as interim Chief Executive Officer of the Company. Pursuant to the engagement agreement, the Company agreed to compensate Glass for its services at its regular published rates of $250-$300 per hour for Principals, $250-$200 per hour for any Case Director, $175-$225 per hour for any Senior Consultant, $125-$175 per hour for any Consultant and $45-$60 per hour for any clerical or administrative person. The Company will also pay all expenses of Glass. The Company made an initial payment of $200,000 as a deposit, which unused portion will be refunded to the Company at the end of the assignment. Additionally, the Company paid Glass $539,585 in fees and reimbursed them for $108,685 in expenses during the fiscal year ended March 31, 1997.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) Reference is made to the Index to Consolidated Financial Statements appearing at page of this report. (2)Reference is made to the Index to Financial Statement Schedules appearing at page S-1 of this report. (3)Exhibits.
- - -------- * To be filed by amendment.
(b) The Registrant filed no reports on Form 8-K during the quarterly period ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: June 29, 1998
NU-KOTE HOLDING, INC.
/s/ Shaun K. Donnellan By: _________________________________ Shaun K. Donnellan President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Nu-kote Holding, Inc.:
We have audited the accompanying consolidated balance sheets of Nu-kote Holding, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the related consolidated statements of operations, cash flows and changes in shareholders' equity (deficit) for each of the three years in the period ended March 31, 1998. 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 have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nu-kote Holding, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring operating losses, violated certain financial convenants related to its bank indebtedness, has had recurring net cash outflows from operations, has negative working capital and a shareholders' deficit. In addition the Company's credit facilities expire January 4, 1999 and there is no assurance that the facilities will be extended or that alternative financing can be obtained. All of these matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Dallas, Texas June 26, 1998
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
The accompanying notes are an integral part of the consolidated financial statements.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
The accompanying notes are an integral part of the consolidated financial statements.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
The accompanying notes are an integral part of the consolidated financial statements.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. THE COMPANY
Nu-kote Holding, Inc. ("Nu-kote") and its wholly-owned subsidiaries are referred to collectively as the "Company". The Company is an independent manufacturer and distributor of impact and non-impact imaging supplies for office and home printing devices, including the manufacture and distribution of typewriter and printer ribbons, thermal fax ribbons, cartridges and toners for laser printers, facsimile machines and copiers, cartridges and ink for ink jet printers, specialty papers, calculator ink rollers and carbon paper.
The Company sells products primarily in the United States and Europe, directly to wholesale and retail markets, and also to original equipment manufacturers and distributors for resale under their brand names or private labels. The Company distributes through major office supply marketing channels, including wholesale distributors, office products dealers, direct mail catalogs, office supply "super stores", information processing specialists, value added resellers, and mass market retailers.
The Company refinanced its credit facilities on July 31, 1997 and subsequently entered into amendments and waivers dated December 26, 1997, April 1, 1998, and May 29, 1998. See Note 8 regarding the terms of the refinancing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared on a going concern basis. During fiscal 1998 and 1997, the Company incurred significant operating losses and violated certain financial covenants relating to its bank indebtedness, and for the past three fiscal years has had net cash outflows from operations. At March 31, 1998 the Company has negative working capital and a shareholders' deficit. As discussed in Note 8, the Company's credit facilities expire January 4, 1999 and there is no assurance that the facilities will be extended or alternative financing obtained.
In December 1997, the Company engaged Glass & Associates, Inc., management consultants, to provide interim management services and to assist the Company in finding solutions to its current operating issues and in developing a business restructuring plan. In addition, the Company has engaged BT Alex. Brown Incorporated to assist in the sale of all or part of the Company's business. The Company will also continue to focus on managing net working capital.
Management does not believe that the Company has adequate sources of working capital to provide the Company with sufficient cash to meet its near term obligations. The current waiver of existing defaults under the Second Amended Agreements expires at the end of August 1998. Unless the Company's lenders agree to a new waiver, the Company will be in default under the Second Amended Agreements, and the Company will not have adequate cash to pay the outstanding indebtedness at that time.
Principles of Consolidation
The consolidated financial statements include the accounts of Nu-kote and its subsidiaries. All material intercompany transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity date at time of purchase of three months or less to be cash equivalents.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventories
Inventories are valued at the lower of cost or market using the last-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and depreciated using the straight-line method on an individual asset or composite group basis over the estimated useful lives of the individual assets or composite groups (33 years for building and improvements and 3 to 10 years for machinery and equipment). Leasehold improvements are amortized over the shorter of the estimated assets lives or the terms of the lease.
Except for assets originally acquired in connection with certain business acquisitions, the cost of property, plant and equipment retired or otherwise disposed of, and the accumulated depreciation thereon, are eliminated from the asset and related accumulated depreciation accounts and any resulting gain or loss is reflected in income. With respect to property, plant and equipment originally acquired in connection with certain business acquisitions, no gain or loss is recognized on the retirement or disposal of individual assets within the composite groups and proceeds from retirement or sale are credited to accumulated depreciation of the composite group, unless the assets in the composite group are retired because of significant casualty or impairment, in which case the resulting loss is recognized.
Intangibles
Goodwill arose from the excess of cost over the fair value of the net underlying assets of International Communications Materials, Inc. ("ICMI") and Future Graphics, Inc. ("Future Graphics"). Covenant-not-to-compete agreements were entered into with sellers and key employees of businesses acquired. As discussed in Note 6, the unamortized goodwill associated with the acquisition of Future Graphics, Inc. was written off upon the sale of the components division on December 31,1997. A trademark was acquired in connection with the Pelikan Hardcopy Division acquisition and remains in effect for 50 years (see Note 12). A technology license was acquired as part of the acquisition of certain assets of Jarfalla Industry Competence Center, AB (see Notes 3 and 12).
All intangibles are being amortized on the straight-line method over their estimated life or contract term but not in excess of forty years.
The Company evaluates the recoverability of intangibles based on the estimated future undiscounted cash flows of the related investment. An impairment provision is made at the time that estimated cash flows are not sufficient to assure recovery.
Foreign Currency Translation
The local currency is the functional currency for substantially all of Nu- kote's foreign subsidiaries. Therefore, all assets and liabilities of the foreign subsidiaries are translated at exchange rates in effect at the balance sheet dates. Translation gains and losses are not included in determining net income or loss, but are accumulated in a separate component of shareholders' equity (deficit). Foreign currency transaction gains and losses are included in determining net income or loss, and amounted to a loss of $181 in fiscal 1998 and income of $417 and $569 in fiscal 1997 and 1996, respectively.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Foreign Currency Hedging
The Company operates internationally, giving rise to market risks from changes in foreign exchange rates. The Company utilizes derivative financial instruments to reduce those risks, and does not hold or issue financial instruments for trading purposes. The Company enters into various types of foreign exchange contracts in managing its foreign exchange risk. Forward contracts and purchased options are used to hedge foreign currency risks, primarily with respect to accounts receivable and accounts payable. These instruments generally have terms of three months or less. Gains and losses receiving hedge accounting treatment are recognized in earnings in the same period as the underlying hedged transactions. As of March 31, 1998 and 1997, there were no open forward contracts or outstanding options. During fiscal 1998, 1997 and 1996 hedging transactions resulted in losses amounting to $29, $1,397 and $113, respectively, and are included in foreign currency transaction gains and losses.
Income Taxes
The Company accounts for certain income and expense items differently for financial reporting purposes than for purposes of computing income taxes currently payable. Provisions for deferred income taxes are made in recognition of such temporary differences. Investment tax credits are accounted for on the flow through method.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs expensed were approximately $3,046, $5,134 and $5,972 during fiscal 1998, 1997 and 1996, respectively.
Net Income (Loss) Per Share of Common Stock
During fiscal 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which establishes standards for computing and presenting earnings per share. All per share data presented for prior years and periods has been restated to reflect the adoption of the statement (See Note 22).
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, particularly deferred tax assets and accrued plant closing costs, and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain amounts have been reclassified in the 1997 consolidated financial statements to conform to the 1998 presentation.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
New Accounting Standards
During June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information". These standards are effective for financial statements for fiscal years beginning after December 15, 1997. During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 "Employer's Disclosure about Pension and Other Postretirement Benefits", which is effective for financial statements for fiscal years beginning after December 15, 1997, and Statement of Financial Accounting Standards No. 133 "Accounting for Derivatives and Hedging Activity", which is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company is currently evaluating the impact of these new standards on its financial statements but has not yet determined the full impact.
3. ACQUISITIONS
On July 31, 1995 Nu-kote acquired certain assets and assumed certain liabilities from the bankruptcy estate of Jarfalla Industry Competence Center, AB in a business combination accounted for as a purchase. The assets were contributed to, and the liabilities assumed by, Modular Ink Technology, AB, a wholly-owned subsidiary. In connection with the acquisition, Nu-kote acquired a license from Xaar Limited to use certain patents and know-how related to ink jet printheads. Total consideration paid by Nu-kote to the bankruptcy estate was $5,337. As the predecessor company was not material and was not an operating company but was only involved in product research and development, pro forma financial information is not presented.
During the fourth quarter of fiscal 1996, the Company completed its studies of asset fair values and plant closing costs and other pre-acquisition contingent liabilities recorded in connection with its acquisition of the Pelikan Hardcopy Division ("Pelikan") in fiscal 1995. Based on these studies, purchase price allocation adjustments were made affecting various balance sheet accounts. These adjustments had the effect of increasing property, plant and equipment by $14,634, intangibles (trademark and covenant not-to-compete) by $5,481, other liabilities by $13,162, net deferred tax liability by $1,928 and reducing inventories by $4,885. The effect of these adjustments on fiscal 1996 net income was immaterial.
4. INVENTORIES
Inventories consist of the following at March 31:
LIFO costs exceed replacement costs by $5,527 and $7,907 at March 31, 1998 and 1997, respectively.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consist of the following at March 31:
Depreciation expense amounted to $10,620, $10,662 and $9,876 in fiscal 1998, 1997 and 1996, respectively.
In connection with the restructuring of the Company's business (See Note 20), the Company is selling certain of its property, plant and equipment. The aggregate net book value of facilities held for sale is $1,806 and $4,482 at March 31, 1998 and 1997, respectively, and has been excluded from property, plant and equipment and included in assets held for sale.
6. INTANGIBLE ASSETS
Intangible assets consist of amounts allocated as a result of purchases of existing businesses and are summarized as follows:
Convenant-not-to-compete agreements have been recorded at their net present value using estimated discount rates of 7% and 16%. The trademark, which was acquired in connection with the Pelikan acquisition, has been recorded at its estimated value based upon royalty rates charged for its use, discounted at an estimated rate of return of 35% (see Note 12). The technology license has been recorded at its estimated fair value on the date of acquisition, which is based on forecasted discounted cash flows using a 16% discount rate (see Note 12).
During fiscal 1998, the Company determined that the liabilities established for certain employee termination and relocation costs to be incurred in connection with the Pelikan acquisition were $2,400 in excess of the amount required. Accordingly, the Company reduced the liability and the Pelikan trademark account by $2,400.
As described in Note 21, the Company sold the components division of Future Graphics, Inc. As a result, the net unamortized goodwill associated with the original acquisition of Future Graphics, Inc., amounting to $2,826 was written off during fiscal 1998.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. LINE OF CREDIT
The Company's Colombian subsidiary has a line of credit in Colombia in the amount of $1,450. Borrowings against the line of credit amounted to $227 and $603 at March 31, 1998 and 1997, respectively. The line bears interest at the prevailing Colombia interest rate plus 2 percentage points. This Colombian subsidiary was sold on April 1, 1998 and all existing debt was assumed by the purchaser.
8. LONG-TERM DEBT
Long-term debt of the Company consists of the following at March 31:
On July 31, 1997 the Company entered into the Second Amended and Restated Credit Agreements ("Second Amended Agreements"). The Second Amended Agreements provide revolving credit facilities ("Facilities") comprised of a $100,000 U.S. facility ("U.S. Facility"), a 50,000 CHF Swiss facility ("Swiss Facility") and a 6,275 (Pounds) U.K. facility ("U.K. Facility"). The Swiss and U.K. Facilities provide for multi-currency borrowings in U.S. dollars, Deutschmarks and Pound Sterling up to certain limits, in addition to Swiss Francs and Pound Sterling, respectively. The U.S. Facility calls for mandatory commitment reductions to $97,500 on January 2, 1998 and $95,000 on April 1, 1998 with further reductions to $92,500 on July 1, 1998 and $90,000 on October 1, 1998. The Facilities mature on January 4, 1999.
The U.S. Facility is guaranteed by Nu-kote Holding, Inc. and all subsidiaries. The Swiss and U.K. Facilities are guaranteed by Nu-kote Holding, Inc. and all of its significant U.S. subsidiaries. The Facilities are collateralized by substantially all of the assets of the Company including the capital stock of all subsidiaries and intercompany advances.
The U.S. Facility bears interest at (1) 1% through June 30, 1998 and thereafter at 2% plus (2) the greater of (i) a lender's bank prime rate or (ii) the Federal Funds rate plus .50%. The Swiss and U.K. Facilities bear interest at LIBOR (as defined) plus 4% through June 30, 1998 and plus 5% thereafter. At March 31, 1998 and 1997 the interest rate on the U.S. Facility and weighted average interest rate on the Swiss Facility and U.K. Facility was 9.5% and 5.5%, and 7.33% and 4.52%, respectively.
The Second Amended Agreements provide for affirmative and negative covenants that, among other things, restrict indebtedness, liens, investments (including intercompany investments and advances), contingent obligations, dividend payments, sale or transfer of assets and acquisitions and disposals of subsidiary stock. In addition, the Second Amended Agreements contain financial covenants requiring the maintenance of certain financial ratios and net worth and limits restructuring charges and capital expenditures. The most restrictive of the financial covenants is the minimum required amount of earnings before interest, taxes, depreciation, amortization, certain non-cash losses and gains, restructuring and other nonrecurring charges (as defined) (EBITDAR), which is required to be tested monthly and results in violation if the covenant is not met for two consecutive months or is not met at the end of a quarter.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LONG-TERM DEBT--(CONTINUED)
As of and since the quarter ended December 26, 1997, the Company has been in violation of certain financial covenants related to the Second Amended Agreements. Since that time, the Company and its lenders have entered into a series of amendments and waivers to the Second Amended Agreements. The amendments and waivers provided, among other things, the following:
. Waived for the period from December 26, 1997 through August 31, 1998 violations of certain financial covenants as of and for the quarters ended December 26, 1997, March 31, 1998 and June 27, 1998;
. Deferred the mandatory principal reduction of $4,000 due on May 29, 1998 and scheduled a $5,000 payment due on August 31, 1998;
. Restricted the Company from making intercompany loans and investments in certain subsidiaries;
. Required the Company to use all proceeds from the sale of assets as a permanent reduction of the revolver under the credit Second Amended Agreements; and
. Required monthly principal reductions of $500 commencing May, 1998 through July, 1998. Unamortized deferred loan costs related to the First Amended Agreement amounting to $2,550, were written off at the closing date and were reported as an extraordinary loss in the Company's fiscal 1998 financial statements.
Borrowings under the revolving lines of credit at March 31, 1998 and 1997 are as follows:
In connection with the Second Amended Agreements, the lenders received warrants to acquire approximately 1.7 million shares of Nu-kote Class A Common Stock, which represents 7% of the issued and outstanding shares of Nu-kote on a fully diluted basis at July 31, 1997. The warrants have a five year term and an exercise price of $3.57, which is 150% of the average closing price of the Company's common stock for 20 business days prior to July 15, 1997. The fair value of the warrants at time of issuance was estimated to be $1,005 and was charged to deferred loan costs. In addition, the Company incurred various transaction costs and bank fees, which were charged to deferred loan costs. Deferred loan costs are being amortized on a straight line basis over the term of the Second Amended Agreements.
Letters of credit issued at March 31, 1998 amounted to $75 and were all issued under the Domestic Facility.
Included in other items at March 31, 1998 and 1997 are certain notes and liabilities incurred in connection with certain business acquisitions.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. OTHER ACCRUED LIABILITIES
No single accrued liability exceeded 5% of total current liabilities in fiscal 1998. However, comparative March 31, 1998 balances are shown for those items that were in excess of 5% of total current liabilities at March 31, 1997.
10. LEASES
The Company has operating leases which expire at various dates through 2012 with, in some instances, renewal privileges. Certain leases provide for escalation of the rentals primarily for increases in maintenance costs and property taxes.
At March 31, 1998 minimum annual rental commitments under long-term, non- cancelable operating leases were as follows:
Total rental expense incurred in fiscal 1998, 1997 and 1996 was $4,481, $4,700 and $4,150 respectively.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws.
Temporary differences and carryforwards that give rise to deferred tax assets and liabilities at March 31, 1998 and 1997 are as follows:
The net current deferred tax liability of $1,528 and $2,435 is included in other accrued liabilities at March 31, 1998 and 1997, respectively.
No U.S. provision for income taxes has been made for unremitted earnings of the Company's foreign subsidiaries as of March 31, 1998, in that the Company's foreign subsidiaries have accumulated losses.
The total valuation allowances relating to acquired businesses amount to approximately $7,000 at March 31, 1998 and 1997, respectively. Future reductions of these acquisition valuation allowances will be credited to intangible assets of the acquired businesses.
During fiscal 1998, 1997 and 1996 increases in the valuation allowances for all jurisdictions increased income tax provisions or reduced income tax benefits $14,200, $23,379 and $6,171, respectively.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES--(CONTINUED)
The components of income (loss) before income taxes are as follows for fiscal years ended March 31:
The provisions (benefit) for income tax consist of the following for fiscal years ended March 31:
During fiscal 1996 changes in estimates related to beginning of the year deferred taxes were as follows: Deferred income tax expense was reduced $669 as a result of temporary differences reversing at a lower tax rate than originally provided. This change coupled with the change in the beginning of the year valuation allowance credited to tax expense of $1,063, increased net income a total of $1,732. The effect of these changes in estimates increased earnings per share $0.08 on a basic and diluted basis.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES--(CONTINUED)
The factors accounting for the difference between the total provision (benefit) for income taxes and the amount computed by applying the U.S. statutory income tax rate are as follows:
At March 31, 1998 the Company had domestic net operating loss carryforwards that amount to approximately $55,000 which expire from 2010 to 2013. Foreign net operating loss carryforwards amount to approximately $47,000, which approximately $26,000 expire from 2003 and 2005 and approximately $21,000 may be carried forward indefinately.
Should the Company have an "ownership change" as defined by the Internal Revenue Code of 1986, the Company's use of its domestic net operating loss carryforwards after such ownership change will be subject to an annual limitation.
12. CONTINGENCIES
On January 23, 1998 a suit seeking class action status was filed by a shareholder against Nu-kote, its current directors, certain of its current officers and certain former officers and directors in the United States District Court for the Northern District of Texas, Dallas Division, case number 3-98CV0161-T. The complaint alleges that Nu-kote and the specified individuals violated the Securities Exchange Act of 1934 by knowingly making false and misleading statements about the Company's business and issued false and misleading financial statements between July 28, 1995 and May 29, 1997. The plaintiff is seeking, on behalf of the purported class, compensatory damages and reimbursement of fees and expenses. Nu-kote denies the plaintiff's allegations and intends to vigorously defend the suit.
Three original equipment manufacturers ("OEMs") filed lawsuits against Nu- kote International, Inc. ("NII") alleging that certain NII ink jet replacement cartridges, refill inks and packaging infringe their trademarks, tradedress and patents and alleging, among other things, unfair competition and misleading representations. The plaintiffs are seeking injunctive relief, monetary damages, court costs and attorney's fees. The complaint in one of the cases has been amended to name Nu-kote and Pelikan Produktions AG as defendants. None of the lawsuits have been concluded or settled and in management's opinion the potential losses related to these cases are not reasonably estimatable. All of the cases are being vigorously contested, and in each case the Company or NII has asserted affirmative defenses and counterclaims and has requested damages and affirmative injunctive relief. In one of the cases NII's Motion for Summary Judgement of the
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. CONTINGENCIES--(CONTINUED)
unenforceability of four of the plaintiff's utility patents was granted and in another case NII's Motion for Summary Judgement of the unenforceability of ten of the plaintiff's patents was granted although a Motion for Reconsideration with respect to the ruling is pending before the respective court that granted each motion.
On March 10, 1998, a lawsuit was filed against Nu-kote and a subsidiary accusing the Company of infringing on the plaintiff's patent with respect to certain inkjet printheads manufactured by Nu-kote's Swedish subsidiary. The lawsuit is in a very preliminary stage. The Company will assert various defenses and at the same time proceed with negotiations to settle the dispute.
In June 1998, Nu-kote received a letter from the licensor of the Pelikan trademark license purporting to terminate this license based upon the failure to cure alleged defaults under the license. Nu-kote believes that, to the extent there were any breaches under the license, they were properly cured and it is unaware of any grounds that could allow the licensor to terminate such license.
In addition, the Company is involved in various routine legal matters.
In the opinion of management, all matters discussed above are covered by insurance or are without merit or the disposition is not anticipated to have a material effect on the Company's financial position; however, one or more of these matters could have a material effect on future quarterly or annual results of operations or cash flow when resolved.
A lawsuit filed by Daniel M. Kerrane, a former officer and director of the Company was settled on May 6, 1998 with the Company agreeing to make bi-weekly payments of $12.5 to Mr. Kerrane, totaling $150, agreeing to pay Mr. Kerrane's attorneys fees, up to a sum of $40, agreeing to pay approximately $23 in withholding taxes, and paying Mr. Kerrane's country club dues, totaling $15. Further, the Company waived all payments due to the Company by Mr. Kerrane on an interest-free home purchase loan made by the Company to Mr. Kerrane in May 1994, such payments due totaling $300. Mr. Kerrane originally sought an amount in excess of $8,000.
In connection with Nu-kote's acquisition of the Office Supplies Division and the International Business Forms Division of Unisys Corporation ("Unisys"), Unisys agreed to retain all liabilities resulting from or arising out of any environmental conditions existing on or before January 16, 1987 at the Company's Rochester, Macedon and Bardstown facilities and, additionally, to indemnify the Company for such. State environmental agencies have alleged that environmental contamination exists at all three sites. To date, Unisys has handled all remediation efforts related to these properties. In connection with Nu-kote's acquisition of Pelikan, the seller, Pelikan Holding AG, agreed to indemnify Nu-kote for certain pre-closing environmental liabilities. The Company has found environmental contamination at former Pelikan facilities in Derry, Pennsylvania and Franklin, Tennessee, and has asserted a claim for indemnification. As a result of the indemnification from Unisys and Pelikan, in the opinion of management, the ultimate cost to resolve these environmental matters will not have a material adverse effect on the Company's financial position, results of future operations or liquidity.
13. EMPLOYEE BENEFIT PLANS
The Company has non-contributory and contributory defined-benefit pension plans covering nearly all of its employees at Nu-kote International, Inc. and its domestic subsidiaries, Pelikan Scotland Ltd. and Greif-Werke GmbH.
The Company's funding policy in the United States is to fund amounts as are necessary on an actuarial basis to provide for benefits in accordance with the Employee Retirement Income Security Act. The Nu-kote International, Inc. plan's assets consist primarily of investments in Treasury obligations, federal agency bonds and corporate bonds. The Pelikan Scotland Ltd. Plan assets comprise a portfolio of equities and bonds. The Greif-Werke GmbH plan is unfunded.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. EMPLOYEE BENEFIT PLANS--(CONTINUED)
Net periodic pension expense recognized by the Company for the defined- benefit plans for fiscal 1998, 1997 and 1996 included the following components.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The following table sets forth the funded status of the defined-benefits plans and amounts recognized in the Company's consolidated balance sheets at March 31:
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The Company has a defined contribution 401(k) plan that covers all of the employees in the U.S. Under this plan, eligible employees are allowed to contribute up to 15% of their pay (up to federally mandated maximums), and the Company will contribute an amount equal to 40% of the initial 6% of the employee's contribution. The Company recognized an expense of $276, $343 and $343 in fiscal 1998, 1997 and 1996, respectively, as its contribution to this plan.
The Company has other defined contribution plans, the contributions to which are based on a percentage of the employee's salary. Contributions to these plans amounted to $1,563, $1,236 and $1,319 in fiscal 1998, 1997 and 1996, respectively.
14. POSTRETIREMENT BENEFITS
The Company sponsors an unfunded postretirement medical and life insurance plan that covers certain employees who were with the Company prior to January 1987. The Company sponsors no other postretirement benefit plans.
Cash payments made by the Company for retiree benefits during the years ended March 31, 1998, 1997 and 1996 amounted to $160, $103 and $159, respectively. The Company's policy is to fund these obligations as incurred. The components of net periodic expense for this postretirement benefit are as follows:
The actuarial and recorded liabilities for this postretirement benefit, none of which have been funded, are as follows at March 31:
The accumulated postretirement benefit obligation was determined using a discount rate of 6.75% and 7.75% in fiscal 1998 and 1997, respectively, and a health care cost trend rate of 8.3% for the first year decreasing to 6.0% in the year 2026 and thereafter.
The effect on the accumulated postretirement obligation projected as of March 31, 1998, of a 1% increase each year in the health cost trend rate used, would result in an increase of 6.2% in the obligation and of 7.8% in the aggregate interest and service components of the fiscal 1998 expense.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. INTERNATIONAL OPERATIONS AND SEGMENT DATA
The Company's operations involve a single industry segment--the manufacture and distribution of impact and non-impact imaging supplies for office and home printing devices.
Information concerning the Company's operations by geographic locations is summarized as follows for the fiscal years ended March 31:
The above information does not include assets held for sale of $1,806, $4,482 and $2,065 for the years ended March 31, 1998, 1997 and 1996, respectively.
Intercompany sales by domestic operations to foreign operations amounted to $740, $5,692 and $2,867 in fiscal 1998, 1997 and 1996, respectively, and intercompany sales by foreign operations to domestic operations amounted to $10,660, $19,232 and $18,690 in fiscal 1998, 1997 and 1996, respectively
The Company's net sales for impact and non-impact imaging supplies were as follows for the fiscal year ended March 31:
16. CONCENTRATION OF CREDIT RISK
Accounts receivable potentially expose the company to concentrations of credit risk. The Company provides credit in its normal course of business to a large number of distributors and large retailers concentrated in the
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
16. CONCENTRATION OF CREDIT RISK--(CONTINUED)
office supplies business. The Company performs ongoing credit evaluations of its customer and maintains allowances for potential credit losses.
17. EMPLOYEE STOCK BASED COMPENSATION PLANS
The Company sponsors the Nu-kote Holding, Inc. Stock Option Plan and the Nu- kote Holding, Inc. 1992 Stock Option Plan (the "Stock Option Plans"). The Company also sponsors the Nu-kote Holding, Inc. Senior Management Stock Appreciation Rights Plan (the "Plan").
Stock Options
Under the Stock Options Plans, the Company is authorized to issue shares of Class A Common Stock pursuant to "Awards" granted to officers, key employees and directors in the form of non-qualified stock options not qualified under Section 422 of the Internal Revenue Code of 1986, as amended. As of March 31, 1998 and 1997, there were 1,405,876 and 631,775 shares available for grant, respectively.
The stock options granted in fiscal 1998, 1997 and 1996 have exercise prices ranging from $2.75 to $20.875, and contractual terms of 10 years. All options vest on a graded schedule, 20% per year over 5 years, beginning on the first anniversary of the date of grant.
A summary of the status of the Company's stock options as of March 31, 1998, 1997 and 1996 and the changes during the years then ended is present below:
The fair value of each stock option granted in fiscal 1998, 1997 and 1996 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0.00%; expected volatility of 45.75%; a weighted risk-free interest rate of 6.26%, and expected lives of 6 years.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. EMPLOYEE STOCK BASED COMPENSATION PLANS--(CONTINUED)
The following table summarizes information about stock options outstanding at March 31, 1998:
Stock Appreciation Rights
Under the Plan, the Company is authorized to grant awards to participants of appreciation rights with respect to a specified number of shares of Class A Common Stock. Stock appreciation rights ("SAR") permit a participant to receive, upon exercise of each SAR, an amount equal to a percentage, as defined in the Plan, of the difference between the grant price and the fair market value per share of the Company's Class A Common Stock at the exercise date. The Company granted 1,520,000 SARs and canceled 240,000 SARs during the year ended March 31, 1996. No additional grantings have since occurred. During fiscal 1998 the Company canceled 240,000 SARs, resulting in a total of 1,040,000 SARs that were outstanding on March 31, 1998.
The SARs granted during the year ended March 31, 1996 are exercisable five years subsequent to the grant date and only in 20% installments per year for each year thereafter. As of March 31, 1998 these SARs had no intrinsic value.
Under the provisions of the Plan, liability to any participant ceases once the Company's Class A Common Stock price falls below $15.43 per share. At March 31, 1998, the Class A Common Stock had a market value of $0.219. Accordingly, no liability for the Plan has been recorded. Incremental shares under the Plan for purposes of computing earnings per share are not recognized until awards under the Plan exceed $10,000.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. EMPLOYEE STOCK BASED COMPENSATION PLANS--(CONTINUED)
Pro Forma Net Loss and Net Loss Per Common Share
The Company applies Accounting Principles Board Opinion 25 ("APB 25") and related interpretations in accounting for employee compensation costs related to its plans. APB 25 is an intrinsic value approach for measuring compensation costs. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") is a fair value approach for measuring compensation costs. Had employee compensation cost for the Company's employee stock-based compensation plans been determined consistent with SFAS 123, the Company's net income (loss) and net income (loss) per common share for fiscal 1998, 1997 and 1996 would approximate the pro forma amounts below:
The effects of applying SFAS 123 in this pro forma disclosure are not necessarily indicative of future results.
18. RELATED PARTY AND OTHER TRANSACTIONS
The Company paid to Ballyglen Company, Inc. fees of $118 in fiscal 1996 for the consulting services of Mr. Theodore Barry, a former director of the Company. Mr. Hubbard C. Howe was paid $38, $150 and $150 as Vice Chairman of the Board in fiscal 1998, 1997 and 1996, respectively, in lieu of directors fees. Payments to Mr. Howe were discontinued in July 1997, upon his resignation from the Board.
As a result of the Pelikan acquisition, Ligapart AG ("Ligapart"), which owned the majority of Pelikan, became a major shareholder of the Company. In connection with the acquisition, the Company entered into various management and lease agreements with Ligapart related entities. The net expense incurred by the Company under these agreements amounted to $782, $2,423 and $6,995 in fiscal 1998, 1997 and 1996, respectively. In addition, sales to Ligapart related entities amounted to $7,936, $12,600 and $25,453 and purchases amounted to $0, $71 and $2,302 in fiscal 1998, 1997 and 1996, respectively.
19. SHAREHOLDERS' EQUITY (DEFICIT)
On May 19, 1994 the Board of Directors of Nu-kote, in connection with a Shareholder Rights Agreement adopted on that date, declared a dividend distribution of one preferred share purchase right ("Right") for each outstanding share of Class A Common Stock to be paid on June 6, 1994 to holders of record on that date. The Rights are represented by the certificates for the Class A Common Stock and trade with such stock until another party acquires, or announces its intention to acquire, beneficial ownership of 15% or more of the outstanding Class A Common Stock. The Rights expire June 6, 2004, unless earlier redeemed by Nu-kote, and entitle the
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
19. SHAREHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
holder to purchase from Nu-kote one one-hundredth of a share of Series A Junior Participating Preferred Stock of Nu-kote at an exercise price of $37.50. The rights will be exercisable if another party acquires or announces its intention to acquire beneficial ownership of 15% or more of the outstanding Class A Common Stock. The 15% threshold may be lowered by the Board, but not below 10%. The rights, if exercised, will enable the holder to buy a number of common shares having a market value equal to twice the exercise price. Also, after a person or group acquires 15% or more of the outstanding Class A Common Stock of Nu-kote and if Nu-kote is involved in a merger or other transaction in which it is not the surviving corporation, or if it sells or transfers 50% or more of its assets or earning power to another party, each right will enable the holder to buy a number of common shares of the other party equal in market value to twice the exercise price.
On August 30, 1995 shareholders voted to increase the number of shares of authorized Class A Common Stock from 25 million to 40 million.
On July 19, 1995, Nu-kote's Board of Directors declared a 2 for 1 stock split to be effected in the form of a 100% stock dividend on Nu-kote's Class A Common Stock. All prior period share amounts and number of shares have been restated to reflect this split.
The Company's credit agreements (see Note 8) restrict the Company from declaring or paying dividends.
20. RESTRUCTURING EXPENSES
Restructuring expenses for the fiscal years ended March 31, 1998, 1997 and 1996 are as follows:
The fiscal 1998 restructuring expenses related primarily to the centralization of sales and distribution into Franklin, Tennessee, and the closure of the Dallas, Texas headquarters. The charge for severance was approximately $1,242 representing the severance of approximately 70 people in manufacturing, sales and administration, of which virtually all had been terminated by March 31, 1998. This charge was offset by changes in estimates of $428 related to fiscal 1997 severance accruals. Approximately $1,104 of the fiscal 1998 severance had been paid by March 31, 1998. Other restructuring expenses of $1,208, net of fiscal 1997 changes in estimates of $353, related primarily to relocation of employees and outplacement counseling and were expensed as incurred. The asset write-downs were related to property, plant and equipment at the Company's Derry, Pennsylvania facility, and were written down to their estimated net realizable value as a result of the Company's decision to dispose of these assets as part of its consolidation effort. A significant portion of the machinery and equipment at the Derry, Pennsylvania facility was sold in fiscal 1999.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
20. RESTRUCTURING EXPENSES--(CONTINUED)
The Company estimates that an additional $2,000 of restructuring expenses will be recognized in fiscal 1999. Most of this amount relates to expected severance and relocation costs related to continuing consolidation efforts in Europe. Management currently anticipates completion of its restructuring efforts in fiscal 1999.
During fiscal 1997, restructuring expenses amounted to $15,139 relating primarily to the consolidation of impact product production into Scotland, Mexico, and China; centralization of distribution primarily into Franklin, Tennessee and Duren, Germany; and the closure of one toner facility, and consolidation of toner manufacturing into Connellsville, Pennsylvania and Monchaltorf, Switzerland. The charge for severance costs represents the severance of approximately 110 people in manufacturing and administration, of which virtually all had been terminated by March 31, 1997. Of this charge, $3,257 was paid in fiscal 1997. Of the $2,111 in fiscal 1997 relating to lease cancellations, facility maintenance and other, $1,434 was paid in fiscal 1997. The assets written down were comprised of property, plant and equipment at the Company's Macedon, New York and Derry, Pennsylvania facilities, and were written down as a result of the Company's decision to dispose of these assets as part of its consolidation effort. Fiscal 1997 activity related to these accrued restructuring costs is as follows:
The changes in estimates noted above decreased fiscal 1998 net loss $781 and loss per share $0.04 on a basic and diluted basis.
During fiscal 1996, the Company substantially completed the merger of its operations with those of the Pelikan Hardcopy Division, which was acquired in February 1995. That plan included, among other things , the closure of the Company's manufacturing, distribution and administration facility in Bardstown, Kentucky and merger of its operations into the Pelikan Hardcopy Division's facility in Franklin, Tennessee; the termination of contract manufacturing and other contracts; closure of the Company's manufacturing facility in Deeside, Wales and merger of its operations with the Pelikan Hardcopy Division's operations in Scotland; consolidation of certain toner manufacturing operations of ICMI's Connellsville, Pennsylvania facility and the Pelikan Hardcopy Division's Derry, Pennsylvania facility; and consolidation of sales and administrative organizations of the two companies.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
20. RESTRUCTURING EXPENSES--(CONTINUED)
As part of the original plan, the Company terminated a total of approximately 400 employees through March 31, 1996. Estimated severance charges related to those terminations charged to restructuring expense during fiscal 1995 amounted to $4,395 of which $1,224 was paid in fiscal 1995. Fiscal 1997 and 1996 activity related to these accrued restructuring costs is as follows:
The changes in estimates noted above decreased fiscal 1997 net loss $284 and loss per share $0.01 on a basic and diluted basis.
The changes in estimates noted above increased fiscal 1996 net income $373 and net income per share $0.02 on a basic and diluted basis.
21. SALE OF BUSINESSES
The Company sold the assets of the components division of Future Graphics, Inc. on December 31, 1997, for approximately $3,700 in a combination of cash and assumed liabilities. This division was sold as part of the Company's continuing effort to exit non-core businesses. The sale of the components division resulted in a loss of $4,061, which includes the write off of $2,826 of related unamortized goodwill.
On April 1, 1998 the Company sold its Colombian subsidiary, Nu-kote de Colombia, to local management. The subsidiary's financial statements were not significant to the consolidated financial statements.
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
22. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
The following is the composition of the common shares used in computing basic and diluted net income (loss) per share for fiscal 1998, 1997 and 1996:
Options and warrants excluded from the computation because they were anti- dilutive were 2,849, 1,923 and 916 in fiscal 1998, 1997 and 1996, respectively.
The effect of this accounting change on previously reported net income (loss) per share was as follows:
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996 (DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
23. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended March 31, 1998 and 1997:
- - -------- (a) Includes provisions for excess and obsolete inventories of $5,488 in North America. (b) Includes the following significant charges: (1) $8,039 for provisions for excess and obsolete inventories in North America; and (2) $7,724 of costs associated with the startup of manufacturing of the Company's MIT piezoelectric ink jet printhead, of which approximately $1,500, $1,400 and $1,700 were deferred during the first, second and third quarters, respectively, of fiscal 1997. (c) Includes the effect of minimal tax benefit for losses during fiscal 1998 and 1997 and a $4,301 increase in the valuation allowance recorded in fiscal 1997, against certain beginning of the year deferred tax assets pursuant to Statement of Financial Accounting Standards No. 109. Through the first three quarters of fiscal 1997, the Company increased deferred tax assets by approximately $3,100, which represented 40% of the current year loss through nine months. During the fourth quarter of fiscal 1997, it was determined that, based on weight of available evidence, it was not "more likely than not" that the net deferred tax assets would be realized, and, accordingly, a valuation allowance was recorded. (d) Per share information has been restated to reflect the adoption of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share".
INDEX TO FINANCIAL STATEMENT SCHEDULES
The separate combined financial statements of Nu-kote Holding, Inc. ("Nu- kote") required by Rule 12-04 of Regulation S-X are not presented as Nu-kote has no operations and its balance sheet consists of only $40 thousand cash, equity in and advances to subsidiaries and shareholders' equity as reflected in the consolidated financial statements.
All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements, related notes or other schedules.
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REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Nu-kote Holding, Inc. and Subsidiaries is included on page of this Form 10-K. In connection with our audits of such financial statements we have also audited the related financial statement schedule listed in the index on Page S-1 of the Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Dallas, Texas June 26, 1998
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SCHEDULE II
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (IN THOUSANDS)
ALLOWANCES FOR SALES RETURNS AND DOUBTFUL RECEIVABLES
- - -------- (a) Other deductions for the fiscal year ended March 31, 1997 relate primarily to exchange rate differences.
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