<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-20287
--------------------------
NU-KOTE HOLDING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1296153
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
17950 PRESTON ROAD, SUITE 690, DALLAS, 75252
TEXAS
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including Area Code: (972) 250-2785
--------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.01 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(Title of Class)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes ____ No _X_
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of June 27, 1997, there were 21,775,302 shares of Class A Common Stock
outstanding (with one Preferred Share Right attached to each) and the aggregate
market value of the voting stock held by non-affiliates of the registrant was
$30,783,901. Solely for purposes of computing the aggregate market value of the
Class A Common Stock, the share ownership of all directors and executive
officers, and their family members, and of all persons holding more than 10% of
the Registrant's outstanding shares has been excluded.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. BUSINESS
GENERAL
Nu-kote Holding, Inc. (the "Company" or "Registrant"), through its
wholly-owned subsidiaries, is one of the leading independent manufacturers and
distributors of supplies for office and home printing devices. In order to
expand its position in this market, 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 Hardcopy Division (the "Pelikan Hardcopy
Division") of Pelikan Holding AG ("Pelikan") in February 1995 (the "Pelikan
Acquisition"). ICMI is one of the largest U.S. independent manufacturers of
toner for non-impact printers and copiers and Future Graphics is one of the
largest remanufacturers of laser printer cartridges and distributors of laser
cartridge components and supplies in the world. The Pelikan Hardcopy Division is
a major European and U.S. manufacturer of supplies for impact and non-impact
printers.
The Registrant's operations involve a single industry segment--the
manufacturing and distribution of a full line 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,
and calculator ink rollers. 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 17950 Preston
Road, Suite 690, Dallas, Texas 75252, telephone number (972) 250-2785. 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 3,300 different
products, including 280 new products introduced in fiscal 1997, of which
approximately 50% were components for the remanufactured laser cartridge
business, for use in over 30,000 different models of impact and non-impact
printing mechanisms. Of the 280 new products introduced in fiscal 1997, 273 were
non-impact supplies and seven were impact supplies. The Registrant's 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 also one of the largest United
States manufacturers and distributors of magnetic ink character recognition
("MICR") ribbons for check encoding printers, and is one of the largest
independent ink jet ink and cartridge manufacturers in Europe. The Registrant's
non-impact printing products include toner for laser printers, copiers, and
plain paper facsimile machines, supplies for ink jet printers and facsimile
machines, remanufactured cartridges and cartridge components for laser printers
and copiers. In addition, the Registrant manufactures and distributes a range of
thermal wax products for bar code printer and facsimile machines, as well as
facsimile paper, and specialty papers and films for ink jet and laser printers.
Finished products are currently sold both at the retail level under the
Nu-kote-Registered Trademark- and Pelikan-Registered Trademark- brand names and
to original equipment manufacturers ("OEMs") of printing equipment. OEM products
are manufactured to the OEM's specifications and sold both with the original
hardware and in the aftermarket. The Registrant also sells intermediate products
such as rolls of coated film, large containers of bulk laser and copier toner,
bottles of ink jet inks, and laser cartridge components and supplies.
The Registrant's remanufactured cartridges for low to mid-range laser
printers remain some of the Registrant's fastest growing products. These
cartridges were originally designed to be discarded after the toner was consumed
and replaced with new cartridges; however, a number of companies, including the
Registrant, now recover the empty cartridges and remanufacture them for resale.
In both the U.S. and Europe, the Registrant completely disassembles empty
cartridges, replaces or refurbishes worn or damaged parts, replaces the
cartridges photoreceptor drum, replaces the toner supply, then reassembles the
cartridge.
2
<PAGE>
The Pelikan "Easy-Click" and the Nu-kote "Cartridge Plus" Systems for ink
jet printers using the HP Deskjet engine are two of the most successful products
developed by independent hardcopy manufacturers in the past few years. In
calendar 1996, HP cartridges were used in over 60% of all ink jet printers. The
Registrant estimates that over 100 million print heads for the HP Deskjet
mechanism were sold in calendar 1996 in the U.S. with over 150 million sold
worldwide. These ink jet cartridges, which utilize an "all-in-one" design
containing an ink supply and a printhead, were designed to be discarded and
replaced after the original ink supply was consumed. However, the Pelikan
Hardcopy Division was the first company to successfully develop and manufacture
a system consisting of a modified print head and a number of ink containers,
which allows a quick and clean replacement of the ink supply while allowing the
modified print head to be used multiple times.
The Registrant also manufactures and distributes a variety of compatible ink
jet cartridges for use in popular Canon and Epson ink jet printers, as well as a
complete line of Hewlett-Packard cartridge refill kits designed for the cost
conscious home or small business user, and a complete 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-Registered Trademark-,
Pelikan-Registered Trademark- ICMI-Registered Trademark- and
Futura-Registered Trademark- brand names, and also to OEMs and distributors for
resale under their brand names or private labels. Nu-kote-Registered Trademark-
and Pelikan-Registered Trademark- brand products are distributed through all
major office supply marketing channels, including wholesale distributors, office
products dealers, direct mail catalogs, office supply "superstores", warehouse
clubs, information processing specialists, value added resellers and mass market
retailers. ICMI-Registered Trademark- brand laser toners and
Futura-Registered Trademark- brand laser cartridge kits are marketed to
distributors serving the laser cartridge remanufacturing market.
Nu-kote-Registered Trademark- and Pelikan-Registered Trademark- 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 and ink jet printers now on the market. OEM products are
manufactured to the OEM's 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 1997, the Registrant experienced a decline of
approximately 28% 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
Registrant also expects that its selling prices for impact products may come
under pressure in the future as smaller competitors reduce prices in an attempt
to preserve their portion of a declining market. However, the Registrant
believes that it will be able to mitigate the effects of market pressures on
selling prices by transferring production of its impact and labor intensive
non-impact products to its established manufacturing facilities in Mexico and
China.
The Registrant expects the market for non-impact printing supplies to
continue to grow, as awareness of their economic and, in the case of
remanufactured cartridges, environmental benefits, increases.
The Registrant is actively pursuing OEM partners to enhance certain
printhead technology being developed by Modular Ink Technology, A.B. ("MIT") for
the growing ink jet printer supplies market. As of March 31, 1997, the
Registrant had signed two OEM contracts with respect to MIT printheads in the
United States.
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
3
<PAGE>
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 Registrant's
abilities 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 1997. Backlogs are not considered material in the industry in which the
Registrant competes.
BUSINESS STRATEGY
The Registrant intends to further consolidate its position in the 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 and South 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.
The market for supplies for laser, ink jet and other non-impact printers is
growing in North America and Europe. The Registrant intends to expand its sales
in those markets by capitalizing on the marketing and distribution strengths of
the combined Nu-kote and Pelikan Hardcopy Division organizations. Its strategy
for non-impact printing supplies has six key elements: continue aggressive
research and development efforts for ink jet and thermal products; pursue cross
licensing agreements with OEM partners to gain access to newer technologies;
expand the sales efforts for the MIT printhead technology; expand the placement
of non-impact products into the Registrant's worldwide aftermarket distribution
channels consisting of wholesale distributors, office products dealers, direct
mail catalogues, office supply "superstores", warehouse clubs and mass market
and specialty retailers; further improve customer service satisfaction by
reducing order delivery response times as a result of the centralization of
European warehousing and order entry; and further develop a presence in the
"generic" and "private labels" sales channels in the U.S. utilizing its newly
created sales group dedicated to this select group of high volume customers.
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. Although the market for compatible toner supplies is still
developing, there are currently several independent competitors in this market.
Their willingness to offer components and 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, which only
developed over the last several years, has historically consisted of numerous
small independent producers, and the ink jet cartridge remanufacturing and
refilling market is
4
<PAGE>
following the same direction. Future Graphics and the Pelikan Hardcopy Division
position the Registrant as one of the largest remanufactured laser and ink jet
cartridge producers in the industry.
TRADEMARKS, PATENTS AND LICENSES
The NU-KOTE trademark is registered in the United States and 26 foreign
countries and is subject to pending applications in three other countries. Other
significant trademarks of the Registrant are the subject of U.S. and foreign
applications and registrations. The ICMI and FUTURE GRAPHICS trademarks are 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, Future Graphics and
Pelikan Hardcopy Division trademarks material to its business. As of March 31,
1997, 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 25 U.S. and 60 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 mark 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. 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. Still further, the
Registrant is a licensee of Xaar, Inc. under certain patents and know-how
relating to piezoelectric ink jet technology. The Registrant considers this
license to be material to its business.
RESEARCH AND DEVELOPMENT
Primarily as a result of Pelikan Hardcopy Division's European non-impact
products research and development capabilities as well as expenditures
associated with the development of a new generation of the piezoelectric ink jet
technology by MIT, the Registrant incurred $9.6 million, $9.6 million and $1.8
million in research and development costs in fiscal years 1997, 1996 and 1995,
respectively. The Registrant expects to incur approximately $8.0 million in
fiscal 1998 in research and development activities related primarily to the
further development of non-impact printing supplies.
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 and Macedon, New York and Bardstown, Kentucky facilities.
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
5
<PAGE>
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 further tests regarding the Macedon facility pursuant to a consent
order with the DEC, which has listed the facility as a proposed State Superfund
site, to demonstrate that the site requires no remediation. 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 was deposited in an environmental escrow account at the
closing. Pelikan's liability for all other pre-closing environmental liabilities
and costs is unlimited in amount but expires on the third anniversary of the
closing, except as to any claims asserted on or before the 30th day following
the third anniversary of the closing. In 1996, Registrant undertook 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. Registrant has notified Pelikan of the existence of the detected
material contamination. Registrant has also exercised Registrant's right to
assume the defense of the environmental claims which may be associated with the
contamination detected at the Derry and Franklin facilities. Registrant will
work with the applicable federal, state and local agencies to complete the
minimal further environmental investigation and remediation required to bring
the Derry and Franklin facilities into compliance with applicable law. Because
of the limited nature of the environmental investigation to date, Registrant is
unable to estimate the potential amount associated with the contamination
detected at the Derry and Franklin facilities. Based on the indemnification
obligation of Pelikan and environmental surveys conducted by environmental
consultants in connection with the Pelikan Acquisition, 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
believes 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., where office supply "superstores" comprise
a larger portion of the customer base, it is 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.
6
<PAGE>
The registrant employs an environmental compliance officer who is charged
with formulating policies for the Registrant's North American 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 it relates 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 Companys 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 2,800 persons worldwide. Except for
approximately 150 employees who are covered by a collective bargaining agreement
with the United Steel Workers at the Registrant's Derry and Connellsville,
Pennsylvania facilities, none of the Registrant's other North American employees
are represented by a labor union. Approximately 400 of the Registrant's Turriff
(Scotland), Greif (Germany) and MIT (Sweden) employees are also governed by
various union agreements. The Registrant considers its employee relations to be
good.
7
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Registrant, their positions and offices and,
as of June 27, 1997, their ages and years of service with the Registrant (and
its predecessors) are set forth below.
<TABLE>
<CAPTION>
YEARS WITH
THE
REGISTRANT
AND ITS
NAME OF INDIVIDUAL AGE POSITION(S) HELD PREDECESSORS
- ------------------------------ --- ------------------------------------------------------------ -------------
<S> <C> <C> <C>
David F. Brigante............. 45 Chairman of the Board and Chief Executive Officer 17
Patrick E. Howard............. 49 Chief Operating Officer 1
Daniel M. Kerrane............. 56 Executive Vice President, Chief Financial Officer and 5
Director
Hans Paffhausen............... 47 Managing Director of European Operations 20
James H. Groh, Sr............. 44 Executive Vice President, Sales and Marketing 1
C. Ronald Baiocchi............ 53 Senior Vice President, North American Operations 19
Uli Morf...................... 40 Vice President of Global Manufacturing, Research and 19
Development
Anthony G. Schmeck............ 44 Senior Vice President--Finance, Corporate Controller and 10
Secretary
Steven J. DiPasquale.......... 33 Senior Vice President, Treasurer and Assistant Secretary 3
Richard A. Larsen............. 48 Senior Vice President and General Counsel 2
</TABLE>
Mr. Brigante, who became a director of the Registrant in November 1992, was
elected Chairman of the Board in February 1994 and became Chief Executive
Officer of the Registrant in April 1993. Prior thereto, he served as President
and Chief Operating Officer of the Registrant from November 1992 and Executive
Vice President and General Manager--North American Supplies Group from 1991. Mr.
Brigante joined the Registrant's North American Operations in 1980 and served in
positions of ever increasing responsibility in sales, marketing and operations.
Mr. Brigante was appointed to the position of Vice President, Sales and
Marketing in October 1988 and served in that capacity until April 1991.
Mr. Kerrane has been Executive Vice President and Chief Financial Officer of
the Registrant since November 1992 and has been a director of the Registrant
since November 1993. From January 1992 to November 1992, he served as a
consultant to Clayton, Dubilier & Rice and to Homeland Stores, Inc. Mr. Kerrane
was a consultant to Lexmark International, Inc. from March 1991 to November
1992. He served as Director of Finance and Planning of the Information Products
Division at International Business Machines Corporation from 1988 to 1991. On
May 9, 1997 Mr. Kerrane filed suit against the Registrant alleging that the
Registrant breached the terms of his Supplemental Employment Agreement. See
Legal Proceedings below.
Mr. Howard has been Chief Operating Officer of the Registrant since February
1997. From January 1996 to present he has served as Chief Executive Officer of
the Richmont Group. Mr. Howard was Executive Vice President of Mary Kay, Inc.
from December 1985 to January 1996.
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 1995 until the Pelikan Acquisition he also served
as Chief Director of Operations of Pelikan for the worldwide Pelikan
organization.
8
<PAGE>
Mr. Groh has been Executive Vice President, Sales and Marketing, since
December 1996. Prior to joining Nu-kote, Mr. Groh was Executive Vice President
of International Imaging Materials (IIMAK) for 10 years. He also served as a
Director of that company. Mr. Groh began his career with the Burroughs Office
Supplies Division (now Nu-kote), where he held a number of sales and marketing
positions from 1975 to 1984. He holds a B.S. Degree in Engineering from Cornell
University and an MBA from Rochester Institute of Technology.
Mr. Baiocchi has been Senior Vice President, North American Operations since
January 1996. 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. Morf has been Vice President of Global Manufacturing, Research and
Development since April 1997. He joined Pelikan in 1978, serving in positions of
increasing responsibility in research and development and production in both
Europe and the United States, including four years in charge of Pelikan's
research and development group in Franklin, Tennessee, three years as General
Manager of Pelikan's Edenton, North Carolina manufacturing facility and five
years as General Manager of Pelikan's Greif, Germany manufacturing facility.
Most recently, Mr. Morf served as Technical Manager of all production and
research and development facilities in Europe and China.
Mr. Schmeck has been Senior Vice President--Finance, Corporate Controller
and Secretary of the Registrant since August 1994. From 1992 to 1994, Mr.
Schmeck served as Vice President--Finance, Corporate Controller and Secretary of
the Registrant, and from 1991 to 1992, he served as Vice President--Finance and
Administration. Mr. Schmeck joined the Registrant in January 1987 as Director of
Accounting and Tax. He became Group Controller of the North American Operations
in August 1989. Prior to joining the Registrant, Mr. Schmeck was a part of the
finance group of Rockwell International Corporation and previously worked as an
auditor with Price Waterhouse. Mr. Schmeck is a Certified Public Accountant.
Mr. DiPasquale has been Senior Vice President, Treasurer and Assistant
Secretary since February 1997. He joined the Registrant in June 1994 to serve as
Treasurer. Prior to joining the Registrant, Mr. DiPasquale was a senior manager
at Coopers & Lybrand and worked in the Business Assurance group where he
specialized in mergers and acquisitions. Mr. DiPasquale is a Certified Public
Accountant.
Mr. Larsen has been Senior Vice President and General Counsel of the
Registrant since June 1995. Prior to joining Nu-kote, Mr. Larsen was Vice
President, General Counsel and Secretary of Harris Adacom Corporation for five
years.
ITEM 2. PROPERTIES
The Registrant has fee or leasehold interests in each of the facilities
listed below:
<TABLE>
<CAPTION>
SQUARE
LOCATION FEET ACTIVITIES STATUS
- ------------------------------------- --------- ----------------------------------------------- ---------------
<S> <C> <C> <C>
Dallas, Texas........................ 11,985 Headquarters Leased(1)
Rochester, New York.................. 70,232 Manufacturing, engineering, distribution Leased(2)
Rochester, New York.................. 10,952 Manufacturing Leased(3)
Macedon, New York.................... 11,105 Manufacturing Held for Sale
Connellsville, Pennsylvania.......... 61,154 Manufacturing Owned
Bogota, Colombia..................... 24,400 Manufacturing, administration, warehouse Leased(4)
Chatsworth, California............... 46,600 Manufacturing, engineering, warehouse, Leased(3)
administration
Chatsworth, California............... 17,000 Warehouse Leased(4)
Nogales, Sonora, Mexico.............. 75,000 Warehouse, distribution Leased(5)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
SQUARE
LOCATION FEET ACTIVITIES STATUS
- ------------------------------------- --------- ----------------------------------------------- ---------------
<S> <C> <C> <C>
Nogales, Sonora, Mexico.............. 62,775 Manufacturing Leased(3)
Nogales, Arizona..................... 75,000 Warehouse Leased(5)
Franklin, Tennessee.................. 136,703 Manufacturing, distribution, research and Owned
development
Franklin, Tennessee.................. 31,600 Manufacturing, research Leased(5)
Derry, Pennsylvania.................. 133,022 Manufacturing, engineering, research and Held for Sale
development
Bardstown, Kentucky.................. 144,000 Warehouse Held for Sale
Bardstown, Kentucky.................. 7,200 Administration Leased(7)
Uniontown, Pennsylvania.............. 33,600 Manufacturing, distribution Leased(4)
Goodlettsville, Tennessee............ 56,000 Manufacturing, distribution Leased(8)
Turriff, Scotland.................... 137,779 Manufacturing, administration, research and Leased(9)
development
Goslar, Germany...................... 172,224 Manufacturing, administration Owned
Egg, Langwies Nord, Switzerland...... 16,000 Manufacturing, administration, research and Leased(6)
development
Egg, Lee, Switzerland................ 146,390 Manufacturing, research and development Owned
Egg, Rietweis, Switzerland........... 17,750 Office, sales and administration Leased(10)
Monchaltorf, Switzerland............. 37,674 Manufacturing, research and development Owned
Lenglow, China....................... 25,092 Manufacturing Leased(6)
Jarfalla, Sweden..................... 58,400 Manufacturing, research and development Leased(2)
Hong Kong............................ 4,300 Warehouse Leased(6)
Duren, Germany....................... 103,620 Logistics center Leased(9)
</TABLE>
- ------------------------
(1) Expires 2002
(2) Expires 2001
(3) Expires 1999
(4) Month to month
(5) Expires 1998
(6) Expires 2000
(7) Expires 1997
(8) Expires 2004
(9) Expires in 3 increments in 2010, 2015 and 2019
(10) At will with 3 months notice of cancellation by either party
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.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On May 19, 1995 ICMI filed a declaratory judgment 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 cartridge 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 motion has not been heard and no
trial date has been set in the case. The Registrant believes the current design
of ICMI's toner cartridge does not infringe any Ricoh patent and is vigorously
prosecuting its position.
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 Hewlett-Packard's patents are invalid,
unenforceable or not infringed by Nu-kote International, that Hewlett-Packard
has defrauded the U.S. Patent and Trademark Office and trademark misuse. Nu-kote
International has also asserted seven counterclaims against Hewlett-Packard
including counterclaims for false, deceptive and misleading statements in
violation of the Lanham Act, patent invalidity and unenforceability, violations
of the Sherman and Clayton Antitrust Acts, 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 Hewlett-Packard. 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 the
basis that the purpose of the entire project is to prevent resellers from
refilling the cartridge and that the packaging is misleading to customers and,
therefore, violates the Lanham Act. On July 11, 1997, the Court granted in part
and denied in part Nu-kote's Motion for Preliminary Injunction. In pertinent
part, the Court found that Nu-kote had established the requisite combination of
success on the merits of its Lanham Act claim and possibility of irreparable
harm to justify a preliminary injunction. Accordingly, the Court enjoined
Hewlett-Packard from using its false advertising. Trial in this matter is
scheduled for March 1999. Nu-kote International believes the current designs of
Nu-kote's HP compatible ink jet products and refill methods do not infringe any
HP patent and is vigorously defending its position.
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, unenforceable 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
11
<PAGE>
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) which depicts an
ink cartridge for use in the Canon BJC-600 printer. The 140 patent issued on
April 16, 1996. Canon also filed a Motion for Preliminary Injunction, which was
granted. While the motion was pending, Nu-kote International redesigned its
cartridge that is the subject of the 140 patent claims. As a result, the
preliminary injunction does not prevent Nu-kote International from manufacturing
or selling any current cartridge designs. Nu-kote International has appealed the
injunction and the appeal is pending. Nu-kote has moved for summary judgment on
the ground that Nu-kote has not infringed the 140 patent. Trial of the patent
claims is currently scheduled to commence in the Spring of 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 Produktions, A.G. in the U.S. District Court
for the Central District of California. The suit was originally filed on April
25, 1995, and Pelikan was added in September 1996. 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
attorneys fees. Nu-kote International and Pelikan have filed answers which
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 liable,
disparagement of goods, defamation, and unfair competition. By order dated
November 30, 1995, the District Court granted Epson's motion for preliminary
injunction with regard to one type of cartridge. Nu-kote International ceased
selling this cartridge in the United States on March 6, 1996. In February 1997,
Nu-kote International's Motion for Summary Judgment of the unenforceability of
Epson's 5,156,472, 5,158,377, 5,221,148 and 5,421,658 utility patents-in-suit
was granted by the District Court. There remain in the lawsuit Epson's 5,488,401
utility patent and two of its design patents, 351,190 and 365,596. Nu-kote has
moved for summary judgment on the ground that Nu-kote has not infringed the
351,190 design patent. Nu-kote International believes the allegations set forth
in Epson's Complaint are without merit and intends to defend the 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 alleges the Company breached the agreement by substantially
diminishing his responsibilities with the Company. Mr. Kerrane seeks an amount
in excess of $2.0 million for breach of contract, an unspecified amount of
damages for attorneys' fees, damages in excess of $2.0 million breach of duty of
good faith and fair dealing, and punitive damages in the amount of $4.0 million.
The Company denies Mr. Kerrane's allegations and is vigorously defending the
suit.
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 alleges
that it was the exclusive distributor of Nu-kote products in South Africa, but
that Nu-kote breached terms of its distributorship agreement. Actual,
consequential and incidental damages in an amount in excess of $2.5 million are
sought. Neither the Registrant nor Nu-kote International, Inc. ever entered into
any written distributorship agreement with the plaintiff, and they deny all the
plaintiff's allegations in the suit. This matter is being vigorously defended by
the Registrant and Nu-kote International.
In addition, the Registrant is involved in various routine legal matters.
12
<PAGE>
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 and 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 which is adverse to the Company could have an adverse effect
on the Company's business and financial conditions.
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 1997.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is 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, adjusted to give effect to the two-for-one stock split
effected in the form of a 100% dividend, paid August 15, 1995.
<TABLE>
<CAPTION>
MARKET PRICE
-----------------
FISCAL YEAR HIGH LOW
- -------------------------------------------------- ------- -------
<S> <C> <C>
1996
First Quarter................................... 16 1/4 11 1/2
Second Quarter.................................. 22 1/4 15 5/8
Third Quarter................................... 22 1/2 16
Fourth Quarter.................................. 18 1/4 15 1/2
1997
First Quarter................................... 19 15 3/4
Second Quarter.................................. 16 1/2 8 3/4
Third Quarter................................... 12 6 3/4
Fourth Quarter.................................. 11 2 3/8
1998
First Quarter................................... 3 1/2 2 3/8
</TABLE>
The last reported sales price per share of the Common Stock as quoted on the
NASDAQ National Market System on June 27, 1997 was 2 9/16. 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
Registrant presently intends to retain earnings to support the growth of the
Registrant's business. 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 Registrants credit agreement restricts
the payment of dividends by it.
As of June 27, 1997, the Registrant had approximately 3,600 stockholders.
14
<PAGE>
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, 1997, 1996,
1995, 1994 and 1993 were derived from the Consolidated Financial Statements of
the Registrant.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $342,302 $424,070 $193,562 $151,260 $120,085
Cost of sales............................................... 285,144(2) 294,980 142,861 109,521(3) 83,627
-------- -------- -------- -------- --------
Gross margin................................................ 57,158 129,090 50,701 41,739 36,458
Selling, general and administrative expenses................ 66,602 78,100 29,421 22,680 16,626
Research and development expenses........................... 9,646 9,560 1,800 1,600 1,400
Restructuring expense....................................... 15,139 13,825 28,449
Other operating expenses.................................... 1,064 2,500 1,112
-------- -------- -------- -------- --------
Operating income (loss)..................................... (35,293) 27,605 (11,469) 16,347 18,432
Interest expense, net....................................... 8,444 7,435 3,239 1,802 3,179
Other (income) expense, net................................. 714 (557) (245) 1,087(4) 109
-------- -------- -------- -------- --------
Income (loss) from continuing operations before income
taxes..................................................... (44,451) 20,727 (14,463) 13,458 15,144
Provision (benefit) for income taxes........................ 5,201 7,590 (2,392) 5,472 4,424
-------- -------- -------- -------- --------
Income (loss) from continuing operations.................... (49,652) 13,137 (12,071) 7,986 10,720
Discontinued operations(5).................................. (2,500)
-------- -------- -------- -------- --------
Income (loss) before extraordinary items.................... (49,652) 13,137 (12,071) 7,986 8,220
Extraordinary charge(6)..................................... (281) (711)
-------- -------- -------- -------- --------
Net income (loss)........................................... $(49,652) $ 13,137 $(12,352) $ 7,986 $ 7,509
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) from continuing operations per common
share(7).................................................. $ (2.28) $ 0.58 $ (0.69) $ 0.47 $ 0.76
Net income (loss) per common share (primary)(7)............. (2.28) 0.59 (0.71) 0.47 0.53
Net income (loss) per common share (fully diluted)(7)....... (2.28) 0.58 (0.71) 0.47 0.53
BALANCE SHEET DATA:
Working capital............................................. $ 96,392 $118,724 $101,333 $ 33,287 $ 16,596
Total assets................................................ 297,037 366,415 326,517 99,199 80,094
Short-term debt............................................. 1,135 6,358 927 1,064 1,692
Total long-term debt........................................ 134,677 111,843 90,131 20,841 17,617
Shareholders' equity........................................ 49,428 104,909 90,414 48,821 35,913
</TABLE>
- ------------------------------
(1) The Registrant's financial statements for the years ended March 31, 1997,
1996 and 1995 reflect the Pelikan Acquisition, which occurred on February
24, 1995. See Note 3 to the Consolidated Financial Statements.
(2) Includes a $8,039 charge associated with inventory write-offs and increased
excess and obsolescence reserves in North America and $7,724 of costs
associated with the startup of manufacturing of the Company's MIT
piezoelectric ink jet printhead.
(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) Loss from discontinued operations is both pre-tax and after-tax in 1993.
(6) Represents non-recurring charge of $463 ($281 net of tax benefit) and $1,185
($711 net of tax benefit) from early repayments of indebtedness in fiscal
1995 and 1993, respectively.
(7) Per share information has been restated to give effect to the two-for-one
stock split effected in the form of a 100% stock dividend, paid August 15,
1995.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
TRENDS
During fiscal 1997, 1996 and 1995, the transformation of the market from
supplies for typewriters and other impact printers to supplies for ink jet and
laser printers and other non-impact products continued. Worldwide sales of the
Company's impact products declined 28.2%, or $57.4 million in fiscal 1997. This
decline was spread throughout the Company's worldwide markets as sales of the
Company's impact products declined nearly 30% and 27%, in North America and
Europe, respectively.
The Company expects the market for impact supplies to continue to decline as
non-impact printing devices become more popular and replace many of the impact
printers now in service. However, the Company intends to mitigate the effect of
the reduction in the market for impact supplies by transferring production of
the products to its manufacturing facilities in Mexico and China and by
expanding into markets such as Asia with products manufactured in China.
After growing steadily from less than $2 million in worldwide sales in
fiscal 1992 to over $220.5 million in worldwide sales in fiscal 1996, sales of
non-impact products declined nearly 11% in fiscal 1997 and amounted to $196.1
million. Even though sales of toner products declined nearly 33% in fiscal 1997,
sales of non-impact products in North America were $99.3 million in both fiscal
1997 and 1996, as sales of ink jet and laser products grew in excess of 30% in
fiscal 1997. The decline in toner sales in North America was due in 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 American toner facilities. In Europe, non-impact
sales amounted to $96.8 million, a decline of $24.4 million over fiscal 1996
sales. Approximately one-third of the decline in European non-impact sales was
due to exchange rate fluctuation, another one-third was due to price reductions
in the first quarter of fiscal 1997 which did not result in increased sales. The
remaining decline in non-impact sales was due to a decline in sales volumes.
The Company expects that for the foreseeable future it will continue to
experience pressures for increased sales allowances from office supply
superstores and other mass market retailers as the marketplace in North America
continues to experience consolidations within distribution channels. In
addition, in fiscal 1997, the Company began to experience market pressures for
increased sales allowances from OEMs and from office supply superstores that are
now selling in Europe. At the same time, the Company continues to experience
worldwide price competition from small manufacturers that reduce prices in order
to maintain market share.
The Company believes that the total market for supplies of non-impact
printers and copiers will continue to expand as new non-impact printing
technologies become available. Furthermore, the Company believes that, as a
result of its commitment to research and development, it will be able to
increase its sales of non-impact supplies by introducing new products such as
its Pelikan "Easy-Click" and Nu-kote "Cartridge Plus" systems. However, the
Company expects that over the first half of fiscal 1998, the growth in sales of
non-impact products will not be sufficient to offset the decline in sales of
impact supplies. Management is optimistic that sales of Pelikan "Easy-Click" and
Nu-kote "Cartridge Plus" systems will continue to grow, thereby more than
offsetting the decline in sales of impact products in the second half of fiscal
1998 and future years.
The following table sets forth certain historical data from the Company's
Statement of Operations for the fiscal years ended March 31, 1997, 1996 and 1995
and the percentage change in such data from year to
16
<PAGE>
year. The data for the historical year-end periods is derived from the
Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
PERCENTAGE
INCREASE/(DECREASE)
YEAR ENDED MARCH 31, FROM PRIOR PERIOD
---------------------------- ---------------------------
1997 1996 1995 1997 v. 1996 1996 v. 1995
-------- -------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................................................... $342,302 $424,070 $193,562 (19.3)% 119.1%
Cost of sales............................................... 285,144 294,980 142,861 (3.3)% 106.5%
Gross margin................................................ 57,158 129,090 50,701 (55.7)% 154.6%
Selling, general and administrative expenses................ 66,602 78,100 29,421 (14.7)% 165.5%
Research and development expenses........................... 9,646 9,560 1,800 (0.9) 431.1%
Restructuring cost.......................................... 15,139 13,825 28,449 9.5% (51.4)%
Operating income (loss)..................................... (35,293) 27,605 (11,469) (N/A) (N/A)
-------- -------- --------
-------- -------- --------
</TABLE>
The following table sets forth certain data from the Company's Statement of
Operations for the fiscal years ended March 31, 1997, 1996 and 1995 expressed as
a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 83.3 69.6 73.8
------- ------- -------
Gross margin................................................ 16.7 30.4 26.2
Selling, general and administrative expenses................ 19.5 18.4 15.2
Research and development expenses........................... 2.8 2.2 0.9
Other operating expenses.................................... 0.3 1.3
Restructuring cost.......................................... 4.4 3.3 14.7
Operating income (loss)..................................... (10.3) 6.5 (5.9)
Other (income) expense...................................... 0.2 (0.1) (0.1)
Interest expense............................................ 2.5 1.7 1.7
------- ------- -------
Income (loss) before income taxes........................... (13.0) 4.9 (7.5)
Provision (benefit) for income taxes........................ 0.3 1.8 (1.3)
------- ------- -------
Net income (loss)........................................... (13.3)% 3.1% (6.2)%
------- ------- -------
------- ------- -------
</TABLE>
17
<PAGE>
The following table sets forth certain historical revenue data for the
fiscal years ended March 31, 1997 and 1996 and the dollar and percentage changes
in such data from year to year.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1997 v. 1996
-------------- --------------------
1997 1996 DOLLARS PERCENTAGE
------ ------ ------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Impact revenue:
North America................................... $ 73.8 $104.7 $ (30.9) (29.5)%
Europe.......................................... 69.1 94.6 (25.5) (27.0)
Total........................................... 146.2 203.6 (57.4) (28.2)
Percent of total................................ 42.7% 48.0%
Non-impact revenue:
North America................................... 99.3 99.3
Europe.......................................... 96.8 121.2 (24.4) (20.1)
Total........................................... 196.1 220.5 (24.4) (11.1)
Percent of total................................ 57.3% 52.0%
Total revenue:
North America................................... 173.1 204.0 (30.9) (15.1)
Europe.......................................... 165.9 215.8 (49.9) (23.1)
Total........................................... $342.3 $424.1 $ (81.8) (19.3)
Percent of total................................ 100.0% 100.0%
</TABLE>
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,
as 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.
18
<PAGE>
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.
The Company is attempting 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 is also monitoring inventory levels
more closely and is 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, as 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 as 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
predominately 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 Egg, 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
19
<PAGE>
$204.0 million and sales by European entities were $215.7 million. Worldwide
sales of non-impact supplies were $220.5 million, and 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 expense, which was 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 net reduction of $14.6 million in restructuring charges
for fiscal 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
The comparison between fiscal 1995 and 1994 was affected by the Pelikan
Acquisition, which occurred on February 25, 1995. Fiscal 1995 results of
operations included five weeks of the Pelikan Hardcopy Divisions results.
Net sales from continuing operations for fiscal 1995 were $193.6 million, an
increase of $42.3 million (28.0%) over fiscal 1994. The inclusion of five weeks
of the Pelikan Hardcopy Division's operations in fiscal 1995 accounted for $29.0
million of the increase. For the year, sales by Nu-kote's existing operations
increased $13.3 million (8.8%). Worldwide sales of non-impact supplies were
$83.4 million, an increase of 39% over the prior period, and represented 43.0%
of total sales. Sales of non-impact supplies by the
20
<PAGE>
Company's existing operations grew almost 17% for the year, with the remainder
of the increase of non-impact supplies resulting from the inclusion of the
operating results of the Pelikan Hardcopy Division. Sales of impact supplies
grew $18.8 million for the year, with the inclusion of the Pelikan Hardcopy
Divisions results accounting for $15.4 million of the increase.
Cost of sales were $142.9 million (73.8% of net sales) in fiscal 1995
compared to $109.5 million (72.4%) in fiscal 1994. Increased sales allowances
associated with market share advancement accounted for the majority of the
decline in gross profit percentage. Selling, general and administrative expenses
were $29.4 million (15.2% of net sales) for fiscal 1995 compared to $22.7
million (15.0% of net sales) in fiscal 1994. The increase in expenses was
directly attributable to the inclusion of the results of Pelikan operations.
As previously discussed, the Company combined certain of its operations with
those of the Pelikan Hardcopy Division. As a result of such measures, the
Company recognized $28.4 million ($20.6 million after-tax) of restructuring
expenses during fiscal 1995.
During fiscal 1995, the Company settled an action previously filed by Ricoh
Company, Ltd. and Ricoh Corporation, resulting in a pre-tax charge to earnings
of $2.5 million. The Company has deferred recognition of any potential
recoveries from its insurers and the former owners of ICMI until such time as
they are realized. Included in fiscal 1994 were $0.9 million ($0.6 million
after-tax) of expenses, principally related to the value of inventory destroyed
and costs associated with facilities clean-up, incurred as a result of the
California earthquake and $0.2 million ($0.1 million after-tax) of expenses
attributed to property damage and site clean-up costs resulting from the severe
winter weather throughout the country.
Interest expense was $3.2 million in fiscal 1995 compared to $1.8 million
for fiscal 1994. The increase is due to a combination of higher interest rates
and additional bank borrowings used to finance working capital needs and the
acquisition of the Pelikan Hardcopy Division.
Also included as an extraordinary charge to earnings during fiscal 1995 was
$0.3 million related to the early extinguishment of the Company's previous
credit facility with Bankers Trust Company, Barclays Bank PLC and NationsBank
Texas, N.A.
For fiscal 1995, the Company recognized a net loss of $12.4 million compared
to net income of $8.0 million (5.3% of net sales) in fiscal 1994. The decrease
in net income is primarily attributed to the restructuring charge of $28.4
million ($20.6 million after-tax) taken in connection with the Pelikan
Acquisition.
EFFECT 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 $0.4 million and $0.6 million in
exchange gains in fiscal 1997 and 1996, respectively. The five most significant
foreign currencies in which the Company transacts include German Deutschmarks,
Swiss Francs, British Pound Sterling, French Francs and Swedish Krona.
LIQUIDITY AND CAPITAL RESOURCES
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 $11.3
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.
For fiscal 1995, cash used by operating activities amounted to $2.5 million,
primarily due to restructuring expenses, and increased working capital needs
associated with increased inventories resulting from the
21
<PAGE>
acquisition of the Pelikan Hardcopy Division. Additionally, in connection with
the Pelikan Acquisition, in February 1995, the Company entered into new credit
facilities totaling $140.0 million at closing (the "Credit Facilities"). These
Credit Facilities replaced the Company's existing credit agreement which
provided for revolving credit loans of up to $45.0 million. As more fully
discussed in Note 3 to the Consolidated Financial Statements, approximately
$58.0 million was borrowed from the facilities to repay related indebtedness of
the Pelikan Hardcopy Division and acquisition related costs and $34.4 million
was used to retire the existing credit facility.
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 October 15, 1996 the Company entered into an amended and restated credit
agreement (the "First Amended Agreement") which amended and restated its
existing credit agreement that was entered into in February 1995. Under the
terms of the First Amended Agreement the borrowing commitment was increased from
$140 million to $200 million.
On July 31, 1997 the Company entered into amended and restated credit
agreements (the "Second Amended Agreements") which amended and restated the
First Amended Agreement. 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 L6.275 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 .5%. The rate at July 31, 1997
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 at July 31, 1997 was 6.8%. 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 July 31, 1997, the
Company has cash borrowings outstanding of $135.4 million under the Facilities.
The Facilities mature on January 4, 1999.
Principal payments of $2.5 million are required on each of January 2, 1998,
April 1, 1998, July 1, 1998 and October 1, 1998. These payments will permanently
reduce the amount of the U.S. Facility. Additionally, the first $5 million the
Company receives from the sale of assets must be applied to reduce the principal
amount of the Facilities and will constitute a permanent reduction in the amount
available under the Facilities. After the Facilities have been reduced by $5
million as the result of asset sales, proceeds from the sale of assets will be
split between the lenders and the Company. Amounts paid to the lenders will
reduce the principal amount of the Facilities and constitute permanent
reductions in the amount available to the Company thereunder. Availability under
the Facilities is also reduced by outstanding letters of credit.
The lenders have received warrants to acquire approximately 1.7 million
shares of 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 each, which is 150% of the average
closing price of the Company's common stock for the 20 business days prior to
July 15, 1997. The fair value of the warrants is estimated to be $1.0 million
and will be treated as a discount on the debt and amortized to interest expense
over the term of the Second Amended Agreements.
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.
The Second Amended Agreements contain a number of affirmative and negative
covenants, including restrictions on indebtedness, liens, investments (including
intercompany investments and advances),
22
<PAGE>
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, and the Company will be in default under
the Second Amended Agreements if it fails to maintain compliance with this or
any other financial covenant in the agreement. Additionally, the Second Amended
Agreements are subject to other customary events of default, including but not
limited to payment defaults.
During the fiscal year ended March 31, 1997 the Company experienced
operating losses and violated financial ratio covenants under the First Amended
Agreement. In response to the operating results the Company added new senior
officers to key positions in operations, manufacturing and marketing.
Additionally, the Company developed a comprehensive five year plan designed to
return the Company to profitability. The plan calls for the Company to improve
its financial condition by consolidating certain manufacturing facilities,
moving labor intensive manufacturing and assembly to lower cost sites,
implementing worldwide expense reduction programs and improving inventory
management procedures. Many of the components of the plan have been or are in
the process of being implemented. Although there can be no assurance that actual
results will meet the plan, management is closely monitoring performance in
relation to the plan.
Operating results for the remainder of fiscal 1998 will reflect significant
restructuring charges as a result of the actions taken following the
reevaluation of the Company's operations. Under the Second Amended Agreements
the Company is allowed to incur up to $20 million in restructuring expenses and
other nonrecurring charges (as defined), and it is anticipated that at least $13
million will be incurred in fiscal 1998.
Management believes that working capital provided by operations and
borrowings available under the Facilities will provide the Company with adequate
cash flow to meet its obligations. However, if the Company fails to reduce its
expenses as planned, incurs any unexpected costs, or fails to meet its revenue
projections the Company could experience severe liquidity problems. In this
regard it should be noted that the Company has been experiencing declining
revenues for four of the last five fiscal quarters. If the Company experiences
liquidity problems, it could be forced to delay its restructuring efforts which
are critical to returning the Company to profitability, reduce its capital
expenditures and/or reduce its research and development expenditures.
Additionally, the Company could go into default under the Second Amended
Agreements. No assurance can be given that the Company will be successful in
efforts to address its cost structure issues or operate on a profitable basis in
the long term.
CAPITAL EXPENDITURES; ENVIRONMENTAL MATTERS; RESEARCH AND DEVELOPMENT
Capital expenditures for fiscal 1997, 1996 and 1995 amounted to $11.3
million, $11.6 million, and $7.1 million, respectively. Capital expenditures for
fiscal 1997 and 1996 included a full year of expenditures related to the Pelikan
Hardcopy Division versus only five weeks for fiscal 1995. Such expenditures were
primarily for expansion of manufacturing capacity for ink jet and other
non-impact supplies. The Company expects that capital expenditures in fiscal
1998 will total approximately $8.0 million, and that capital expenditures will
approximate $11.0 million per year after fiscal 1998. The Company believes that
the capital expenditure levels permitted under the Second Amended Agreements
will be sufficient to fund anticipated future growth.
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.
23
<PAGE>
Research and development expenses, were $9.6 million, $9.6 million and $1.8
million in fiscal 1997, 1996 and 1995, respectively. Research and development
expense beginning in fiscal 1998 are expected to approximate $8.0 million and
increase each year thereafter proportionately as revenues increase.
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. Because of the expanding
market for non-impact printing supplies, management currently believes that
inflation will have less impact on the Companys non-impact operations.
NEW ACCOUNTING STANDARDS
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
establishes standards for computing and presenting earnings per share. The
disclosure requirements of SFAS No. 128 will be effective for the Companys
financial statements for periods ending after December 15, 1997. The Company's
analysis of this new standard indicates that the standard will not have a
material impact on the Companys calculation of fully diluted earnings per share.
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure", which establishes standards for disclosing information about
an entity's capital structure. The disclosure requirements of SFAS No. 129 will
be effective for the Company's financial statements for periods ending after
December 15, 1997.
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 transferring production to lower cost facilities and expanding into
additional markets; the introduction of new products and the continued growth of
its Pelikan "Easy Click" and Nu-kote "Cartridge Plus" systems; 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; future capital expenditure levels; indemnification obligations of
third parties and other assumptions regarding environmental matters; and the
effect of inflation on future operations. 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is hereby made to the Consolidated Financial Statements and notes
thereto appearing at pages F-1 to F-29 hereof.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
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.
DAVID F. BRIGANTE, AGE 45, CHAIRMAN OF THE BOARD SINCE 1994, CHIEF EXECUTIVE
OFFICER SINCE 1993, DIRECTOR OF THE COMPANY SINCE 1992
Mr. Brigante was elected Chairman of the Board in February 1994 and became
Chief Executive Officer of the Company in April 1993. Prior thereto, he served
as President and Chief Operating Officer of the Company from November 1992 and
Executive Vice President and General Manager-North American Supplies Group from
1991.
DONALD A. BOLKE, AGE 58, DIRECTOR OF THE COMPANY SINCE 1994
Mr. Bolke has been a director of the Company since November 1994. Mr. Bolke
served as Senior Vice President of Customer Relations of United Stationers, Inc.
from June 1992 until his retirement in December 1993. Prior thereto, Mr. Bolke
served as Vice President of Stationers Distributing Company from January 1990
until its acquisition by United Stationers, Inc. in June 1992. Mr. Bolke first
joined Zellerbach Office Products in 1962, which was acquired in 1986 by
Stationers Distributing Company, and at which he held positions of increasing
responsibility.
BRIAN D. FINN, AGE 36, DIRECTOR OF THE COMPANY SINCE 1993
Mr. Finn has been a director of the Company since November 1993. In June
1997 Mr. Finn became a principal with Clayton Dubilier & Rice, Inc. He was a
Managing Director of CS First Boston Corporation ("CS First Boston") from
January 1991 until June 1997. Mr. Finn was elected a Director of CS First Boston
in January 1990 and a Vice President of that company in 1989.
JOHN P. ROCHON, AGE 45, 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.
HUBBARD C. HOWE, AGE 68, VICE CHAIRMAN OF THE BOARD SINCE 1994, DIRECTOR OF THE
COMPANY SINCE 1988
Mr. Howe has been a director of the Company since 1988, serving as Vice
Chairman from April 1991 to April 1992, Chairman of the Board from April 1992 to
February 1994 and Vice Chairman since February 1994. He was Chief Executive
Officer of the Company from March 1989 to April 1992. Mr. Howe has been a
professional employee of Clayton, Dubilier & Rice, ("Clayton, Dubilier & Rice")
since January 1991. He previously spent 12 years as an interim manager and
workout consultant. Mr. Howe is also Chairman and Chief Executive officer of
Remington Arms Co., Inc., Chairman of APS Holding Corporation and a director of
Homeland Holding Corporation and Riverwood Holding, Inc.
25
<PAGE>
THEODORE BARRY, AGE 75, DIRECTOR OF THE COMPANY SINCE 1992
Mr. Barry has been a director of the Company since May 1992. Mr. Barry is an
independent management consultant. He was President of Alondra Development, Inc.
from 1989 to 1990 and was Chairman Emeritus of Theodore Barry & Associates,
Management Consultants from 1987 to 1989. Mr. Barry is also director of AHP
Holding Corporation.
RICHARD C. DRESDALE, AGE 41, DIRECTOR OF THE COMPANY SINCE 1986
Mr. Dresdale has been a director of the Company since 1986. He also served
as Assistant Secretary between 1987 and 1992 and as Vice President and Secretary
of the Company from 1986 to 1987. Since March 1994, Mr. Dresdale has been a
managing director of Fenway Partners, Inc. Prior thereto, he was a principal at
Clayton, Dubilier & Rice, Inc. Mr. Dresdale is also a director of MW
Manufacturers, Inc., Brown Moulding Company, Inc., Teters Floral Products, Inc.,
Bear Archery, Inc., Remington Arms Co., Inc., Aurora Foods, Inc. and CT Farm
Country.
DANIEL M. KERRANE, AGE 56, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
SINCE 1992, DIRECTOR OF THE COMPANY SINCE 1993
Mr. Kerrane has been a director of the Company since November 1993 and
previously served as its Executive Vice President and Chief Financial Officer of
the Company. From January 1992 to November 1992, he served as a consultant to
Clayton, Dubilier & Rice, Inc. and to Homeland Stores, Inc. Mr. Kerrane was a
consultant to Lexmark International, Inc. from March 1991 to November 1992. He
served as Director of Finance and Planning Division at International Business
Machines Corporation from 1988 to 1991. On May 9, 1997 Mr. Kerrane filed a
lawsuit against the Company alleging the Company breached the terms of his
Supplemental Employment Agreement. See, "Executive Compensation-- Employment
Agreements," below.
MEETINGS OF THE BOARD
The Company's Board held twelve regularly scheduled or special meetings
during the fiscal year ended March 31, 1997 (the "Fiscal Year"). The Board has
four standing committees: an Executive Committee, an Audit Committee, a
Compensation and Benefits Committee and a Stock Option Committee.
Each current member of the Board nominated for election at the Annual
Meeting 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 were 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 receive $20,000 per
year, plus $2,000 per year per committee membership and $2,000 per year per
committee Chairmanship. In addition, under the Nu-kote Holding, Inc. 1992 Stock
Option Plan, as amended and restated (the "1992 Plan"), the Company provides
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, Mr. Howe was paid $150,000 as Vice Chairman 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 that 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 book keeping
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
26
<PAGE>
service through death, retirement or otherwise. For 1997, two of the Company's
directors, John P. Rochon and Brian D. Finn, are participating in the Deferred
Stock Plan.
COMMITTEES OF THE BOARD
EXECUTIVE COMMITTEE. The Executive Committee of the Board has authority,
with certain exceptions, to take all actions that may be taken by the full
Board. It may meet between regularly scheduled meetings to take such action as
is necessary for the orderly conduct of the Company's business. During the
fiscal year, the Executive Committee held one meeting. Messrs. Brigante, Howe
and Dresdale are members of the Executive Committee.
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 two times. Messrs. Barry,
Bolke and Rochon are members of the Audit Committee.
COMPENSATION AND BENEFITS COMMITTEE. The Compensation and Benefits
Committee of the Board reviews, considers and acts (i) upon matters of salary
and other compensation and benefits (other than stock options and stock
appreciation rights) of all officers and other key employees of the Company,
(ii) upon all matters concerning the provisions of all Company benefit,
retirement or pension plans and (iii) exercises such authority as is delegated
to it under the provisions of the Company's benefit retirement and pension
plans. During the Fiscal Year, the Compensation and Benefits Committee of the
Board held two regular meetings and held special meetings or acted by unanimous
written consent two times. Messrs. Dresdale, Finn and Rochon are members of the
Compensation and Benefits 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 two
times by unanimous written consent. Messrs. Bolke and Rochon are members of the
Stock Option Committee.
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 other than for
James H. Groh, the Company believes that during the Fiscal Year no executive
officer, director or greater than 10% stockholders was delinquent in filing any
reports, except that Patrick E. Howard, Richard A. Larsen and Mr. Groh each
filed their initial statement of beneficial ownership on Form 3 one month late,
and Mr. Groh also filed his annual statement of changes in beneficial ownership
on Form 5 one month late.
27
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Company's Chief
Executive Officer and the Company's other executive officers whose total salary
and bonus for the Fiscal Year exceeded $100,000 (the "Named Executives") with
respect to all services rendered to the Company during the pervious three fiscal
years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------- SECURITIES
FISCAL YEAR OTHER ANNUAL UNDERLYING ALL OTHER
ENDED MARCH SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION 31 ($)(1) ($) ($)(2) ($)(3) ($)(5)
- -------------------------------------------------- ----------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David F. Brigante................................. 1997 $523,558 -- $13,133 -- $ 3,800
Chairman of the Board and 1996 $450,000 $630,000 $30,720 720,000 $653,696
Chief Executive Officer 1995 $320,269 -- $13,179 36,454 $ 53,136
Patrick E. Howard(4).............................. 1997 -- -- -- -- --
Chief Operating Officer
Daniel M. Kerrane................................. 1997 $299,038 -- 29,498 -- $ 3,800
Executive Vice President 1996 $250,000 $262,500 $44,901 240,000 $423,696
and Chief Financial Officer 1995 $220,173 -- $23,497 22,328 $ 3,275
Anthony G. Schmeck................................ 1997 $224,231 -- $11,549 -- $ 3,800
Senior Vice President--Finance, 1996 $185,000 $168,350 $16,843 160,000 $243,404
Corporate Controller and Secretary 1995 $160,062 $ -- $ 8,368 63,932 $ 43,101
Hans Paffhausen................................... 1997 $249,730 -- $15,511 -- --
Managing Director of European Operations 1996 $267,237 $133,610 $17,240 -- --
Peter D. Kunoth................................... 1997 $218,269 $ -- $12,895 -- $ 72,295
Former President and 1996 $250,000 $262,500 $84,820 -- $253,696
Chief Operating Officer(6) 1995 $220,077 -- $63,386 6,974 --
C. Ronald Baiocchi................................ 1997 $205,000 -- $ 9,012 -- $ 3,674
Senior Vice President--Operations 1996 $138,462 $ 96,000 $ 8,441 160,000 $ 62,437
1995 $104,698 -- $14,262 26,896 $ 36,820
</TABLE>
- ------------------------------
(1) Includes, where applicable, amounts electively deferred by each Named
Executive under the Nu-kote International, Inc. Employees Savings Plan (the
"Savings Plan").
(2) Amounts listed in this column for fiscal 1997 include (a) automobile
allowances in the amounts of $8,770, $7,825, $7,186, $15,511, $8,543 and
$6,000 for Messrs. Brigante, Kerrane, Schmeck, Paffhausen, Kunoth and
Baiocchi, respectively; (b) club dues of $4,363 for each of Messrs.
Brigante, Kerrane and Schmeck, respectively, and $3,012 and $4,352 for
Messrs. Baiocchi and Kunoth, respectively; and (c) imputed interest on
relocation loan of $17,310 for Mr. Kerrane.
(3) No stock appreciation rights awards were granted in fiscal 1997.
(4) The services of Mr. Howard were made available to the Company pursuant to a
consulting agreement between Richmont Corporation and the Company. While the
Company does not compensate Mr. Howard directly for his services, the
Company has agreed to reimburse Richmont Corporation $240,000 per year for
operational, sales, financial, marketing and management consulting services
provided by Mr. Howard and other officers of Richmont Corporation and to
reimburse 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.
(5) Amounts listed in this column for fiscal 1997 includes (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 for each of Messrs. Brigante, Kunoth, Kerrane and
Schmeck and $3,674 for Mr. Baiocchi; and (b) relocation cost reimbursements
of $68,495 for Mr. Kunoth.
(6) President and Chief Operating Officer until October 22, 1996.
28
<PAGE>
The following table sets forth the stock appreciation rights granted during
the Fiscal Year to each of the Named Executives and certain hypothetical values
for such options and rights.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE OF
----------------------------------------------------- ASSUMED ANNUAL
PERCENT OF RATES OF STOCK
TOTAL PRICE
NUMBER OF OPTIONS/ APPRECIATION
SECURITIES SARS GRANTED EXERCISE OR FOR OPTION
UNDERLYING TO EMPLOYEES BASE TERM(1)
OPTION/SARS IN FISCAL PRICE($/ EXPIRATION ---------------
NAME GRANTED(#)(1) YEAR SH) DATE 5%($) 10%($)
- --------------------------- ----------- ------------ ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
David F. Brigante.......... -- -- -- -- -- --
Patrick E. Howard.......... -- -- -- -- -- --
Daniel M. Kerrane.......... -- -- -- -- -- --
C. Ronald Baiocchi......... -- -- -- -- -- --
Peter D. Kunoth............ -- -- -- -- -- --
Anthony G. Schmeck......... -- -- -- -- -- --
Hans Paffhausen............ -- -- -- -- -- --
</TABLE>
- ------------------------
(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, 1997 by each of the
Named Executives.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FY-END(#) AT FY-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David F. Brigante....... -- -- 200,094 112,214 -- --
Patrick E. Howard....... -- -- 0 0 -- --
Daniel M. Kerrane....... -- -- 65,011 62,491 -- --
C. Ronald Baiocchi...... -- -- 18,142 21,060 -- --
Peter D. Kunoth......... -- -- 92,790 0 -- --
Anthony G. Schmeck...... -- -- 52,140 56,070 -- --
Hans Paffhausen......... -- -- 40,000 60,000 -- --
</TABLE>
- ------------------------
(1) Based upon the closing price of the Common Stock ($2.75) on the NASDAQ
National Market System on March 31, 1997.
29
<PAGE>
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.
<TABLE>
<CAPTION>
ANNUALIZED
AVERAGE 10 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
FINAL PAY OF SERVICE OF SERVICE OF SERVICE OF SERVICE OF SERVICE
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 6,777 $ 10,818 $ 12,073 $ 13,551 $ 14,951
75,000 9,438 15,644 18,845 21,918 24,318
100,000 12,563 21,894 26,658 31,293 34,693
125,000 15,688 28,144 34,470 40,668 45,068
150,000 18,813 34,394 42,283 50,043 55,443
175,000 18,813 34,394 42,283 50,043 55,443
200,000 18,813 34,394 42,283 50,043 55,443
225,000 18,813 34,394 42,283 50,043 55,443
250,000 18,813 34,394 42,283 50,043 55,443
</TABLE>
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, 1997, the credited years of service and the compensation
covered under the Pension Plan of the participating Named Executives were as
follows:
<TABLE>
<CAPTION>
YEARS COVERED
OF SERVICE COMPENSATION
--------------- -------------
<S> <C> <C>
David F. Brigante................................................... 17 $ 150,000
Daniel M. Kerrane................................................... 4 $ 150,000
C. Ronald Baiocchi.................................................. 20 $ 150,000
Peter D. Kunoth..................................................... 3 $ 150,000
Anthony G. Schmeck.................................................. 10 $ 150,000
</TABLE>
Mr. Hans Paffhausen is not covered by the above referenced Pension Plan, but
is covered by a separate plan in Switzerland.
EMPLOYMENT AGREEMENTS
Messrs. Brigante and Schmeck are currently employed by the Company pursuant
to agreements which provide, among other things, that each is to receive (i) an
annual base salary at a rate that is not less than his annual fixed or base
compensation in effect prior to February 1995 or such higher rate as may be
determined from time to time by the Board of Directors or the Compensation
Committee, and (ii) an amount equal to not less than the highest aggregate
annual bonus, incentive or other cash compensation made or to be made in any
fiscal year during the three fiscal years prior to the fiscal year ended March
31, 1995. Under the agreements they are also to receive other employment
benefits (such as group health, life
30
<PAGE>
and disability insurance, use of Company automobiles, country club membership
and monthly dues, and participation in retirement and long-term incentive
programs and plans, including stock option, stock appreciation rights, pension,
savings, salary continuation and the like), during a three-year period of
employment (two years with respect to Mr. Schmeck), commencing February 24,
1995, which is extended annually for an additional year unless the executive or
the Company gives notice to the contrary. The agreements also provide that if
the executive is terminated for reasons other than death, disability or cause,
as defined, or if Mr. Brigante elects to terminate his employment because of,
among other things, the failure to elect him to the office or offices, which he
previously held, a significant adverse change in the nature or scope of his
authorities, powers, functions, responsibility or duties, a liquidation,
dissolution, merger, consolidation or reorganization of the Company or transfer
of all or a significant portion of its business and/or assets, or a relocation
of the Company's principal executive offices, the executive will receive a lump
sum payment equal to the present value of the sum of his (i) aggregate base
salary (at the highest rate in effect for any fiscal year prior to the
termination date) for each remaining year or partial year of the employment
period, and (ii) aggregate bonus, incentive or other similar payment (based upon
the highest amount of bonus, incentive or other similar payment paid or payable
to him for any year during the term but prior to the year of termination), which
he would have received during the remainder of his employment period; provided,
however, that such amount will be reduced to the minimum extent necessary so
that no portion of such lump sum payment will constitute an excess parachute
payment as defined in Section 280G of the Internal Revenue Code of 1986, as
amended. Subject to the foregoing limitations, he will also receive for the
remainder of the employment period substantially the same employee benefits as
he was otherwise entitled to immediately prior to termination.
Mr. Kerrane had been employed by the Company under an agreement that was
similar to those of Messrs. Brigante and Schmeck. However, on May 9, 1997, Mr.
Kerrane filed suit against the Company in a Texas State District Court in Dallas
County, Texas. Mr. Kerrane alleges 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. Mr. Kerrane alleges the Company has breached his agreement and breached a
duty of good faith and fair dealing. He seeks specific performance of the
agreement. He also alleges that his agreement with the Company requires the
Company to secure an irrevocable standby letter of credit to pay his legal fees,
and seeks an injunction restraining the Company from refusing to secure the
letter of credit.
For the breach of contract claim, Mr. Kerrane seeks an amount in excess of
$2,000,000.00. He also seeks an unspecified amount of damages for attorneys'
fees. Regarding the breach of duty of good faith and fair dealing, he seeks
damages in excess of $2,000,000.00 and punitive damages in the amount of
$4,000,000.00. The Company denies Mr. Kerrane's allegations and is vigorously
defending the suit.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Benefits Committee currently consists of Messrs.
Dresdale, Finn and Rochon. Mr. Dresdale is a former executive officer of the
Company. The Stock Option Committee currently consists of Messrs. Bolke and
Rochon.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- ---------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
Ligapart AG............................................... 4,600,000 21.1%
Neuhofstrasse 4
6340 Bear, Switzerland
The Kaufmann Fund, Inc.................................... 2,000,000 9.2%
140 East 45th Street
New York, New York 10017
Richmont Capital Partners I, L.P.......................... 2,559,360 11.8%
4300 Westgrove,
Dallas, Texas 75248
Neuberger & Berman L.P.................................... 1,133,800(2) 5.2%
605 Third Avenue,
New York, New York 10158
Joseph H. Reich, Peter K. Seldin
and G. Byron Dutt......................................... 2,390,700(3) 11.0%
900 Third Avenue
New York, New York 10022
Oppenheimer Group, Inc.................................... 2,062,600(4) 9.5%
Oppenheimer Tower
World Financial Center
New York, New York 10281
</TABLE>
- ------------------------
(1) Unless otherwise indicated, such shares of Common Stock are owned with sole
voting and investment powers.
(2) Shared investments power with respect to 1,133,800 shares of Common Stock or
5.2% of the shares of such class outstanding, and sole voting power with
respect to 79,700 shares of Common Stock or .3% of the shares of such class
outstanding. These shares are owned by many unrelated clients of Neuberger &
Berman L.P., a registered broker-dealer, which disclaims any economic
interest in the shares.
(3) Represents the aggregate of shares of Common Stock held by Centennial
Associates, L.P. and Tercentennial Energy Partners, L.P., of which Messrs.
Reich, Seldin and Dutt are general partners. Messrs. Reich, Seldin and Dutt
have shared voting and shared investment power with respect to such shares.
(4) Represents the aggregate shares held by the Oppenheimer Group, Inc., and its
subsidiaries and affiliates including Oppenheimer Financial Corp.,
Oppenheimer Equities, Inc., Oppenheimer Holdings, 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.
32
<PAGE>
MANAGEMENT
The following table sets forth, as of June 27, 1997, certain information as
to the shares of Common Stock beneficially owned by each director of the
Company, by each Named Executive, as defined herein, and by all directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- ---------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
John P. Rochon............................................ 2,577,360(2)(3) 11.5%
Hubbard C. Howe........................................... 208,356(3)(4) *
David F. Brigante......................................... 212,555(5) *
Peter D. Kunoth........................................... 92,790(5) *
Patrick E. Howard......................................... -- *
James H. Groh............................................. 8,000 *
Daniel M. Kerrane......................................... 74,024(5) *
Anthony G. Schmeck........................................ 57,781(5) *
Hans Paffhausen........................................... 40,000(5) *
Richard C. Dresdale....................................... 24,000(3) *
Theodore Barry............................................ 18,000(5) *
Brian D. Finn............................................. 28,000(3) *
Donald A. Bolke........................................... 12,000(5) *
C. Ronald Baiocchi........................................ 21,983(5) *
All directors and executive officers as
a group (17 persons).................................... 3,416,849(6) 15.2%
</TABLE>
- ------------------------
* 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 I, L.P., as to
which shares Mr. Rochon has shared voting and investment power.
(3) Includes 18,000 shares which may be acquired through the exercise of stock
options which are exercisable within 60 days of June 27, 1997.
(4) Includes 190,356 shares owned by Nevada Management Group, Inc. ("Nevada
Management Group"). Nevada Management Group is a Nevada corporation all the
capital stock of which is owned as separate property by Gene S. Howe, who is
married to Mr. Howe. Although Mr. Howe may be deemed beneficially to own
such shares because of his marriage to Gene S. Howe, Mr. Howe expressly
disclaims beneficial ownership of such shares.
(5) Represents shares which may be acquired through the exercise of stock
options which are exercisable within 60 days of June 27, 1997.
(6) Includes 643,133 shares which may be acquired through the exercise of stock
options exercisable within 60 days of June 27, 1997 and other shares deemed
beneficially owned by the Company's directors as described in the preceding
notes.
33
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 20, 1994, the Company provided Mr. Kerrane with an interest-free loan
in the amount of $300,000 for the purpose of assisting Mr. Kerrane in relocating
to the Dallas area. The loan, as amended, was to be repaid from awards granted
to Mr. Kerrane for the contributions to future merger and acquisition
transactions (excluding the acquisition of the worldwide hardcopy supplies
business of Pelikan Holding AG). One third of the principal amount of the loan
was to be forgiven when and if Modular Ink Technology AB, a subsidiary of the
Company, was deemed to have achieved its financial objectives. Under the terms
of the agreement, in the event of a change in control of the Company, a change
in his duties or an involuntary separation from the Company, the loan is to be
considered repaid in full. The agreement further provides that if Mr. Kerrane
voluntarily terminates his employment the Company is to offset any separation
payments due Mr. Kerrane against the loan, and any remaining balance on the loan
after the offset is to be repaid by him within 36 months after the date of
termination. At March 31, 1997, the loan to Mr. Kerrane had an outstanding
principal balance of $300,000.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Reference is made to the Index to Consolidated Financial Statements
appearing at page F-1 of this report.
(2) Reference is made to the Index to Financial Statement Schedules
appearing at page S-1 of this report
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
3.1 --Amended and Restated Certificate of Incorporation of Nu-kote Holding, Inc.
("Holding") (incorporated herein by reference to Exhibit 3(a) of Amendment No. 1,
as filed with the Commission on August 24, 1992 ("Amendment No. 1") to Holding's
Registration Statement on Form S-1 (File No. 33-481012); as filed with the
Commission on May 22, 1992 ("Holding's 1992 Form S-1")).
3.1(a) --Certificate of Amendment to Amended and Restated Certificate of Incorporation,
dated August 4, 1994 (incorporated herein by reference to Exhibit 3(a) to Holding's
Annual Report on Form 10-K for the year ended March 31, 1995 (File No. 0-20287)
("Holding's 1995 Form 10-K")).
3.1(b) --Certificate of Designations of Holding, dated May 19, 1994 (incorporated herein by
reference to Exhibit 3.1(b) to Holding's 1995 Form 10-K).
3.1(c) --Certificate of Increase of Holding, dated February 10, 1995 (incorporated herein by
reference to Exhibit 3.1(c) to Holding's 1995 Form 10-K).
3.2 --By-Laws of Holding (incorporated herein by reference to Exhibit 3.2 to Holding's
1995 Form 10-K).
4.I --Form of Stock Certificate for Class B Common Stock, par value $.01 per share
(incorporated herein by reference to Exhibit 4(d) to Amendment No. 2 to Holding's
1992 Form S-1).
4.II --Rights Agreement, dated as of May 19, 1994 between Holding and Chemical Bank
(incorporated herein by reference to Exhibit 1 of Holding's Form 8-A, as filed with
the Commission on May 20, 1994).
4.III --Amendment No. 1 to Rights Agreement, dated as of November 15, 1994, between Holding
and Chemical Bank (incorporated herein by reference to Exhibit 2 of Holding's Form
8-A/A, as filed with the Commission on February 24, 1995).
4.IV --Registration Rights Agreement, dated as of February 24, 1995, between Holding,
Pelikan, Pelikan, Inc., Caribonum, Limited, Pelikan GmbH and Pelikan International
Handelsgesellschaft mbH & Co, KG (Hannover) (incorporated herein by reference to
Exhibit E to Annex A to Holding's Definitive Proxy Statement, as filed with the
Commission on February 10, 1995 ("Holding's 1995 Proxy Statement").
10.3 --Patent Assignment and License Agreement, dated as of January 16, 1987, between
Unisys and NKI (incorporated herein by reference to Exhibit 10(c) of Holding's 1992
Form S-1).
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.4 --Trademark and Service Mark Assignment, dated as of January 16, 1987, between Unisys
and NKI (incorporated herein by reference to Exhibit 10(d) of Holding's 1992 Form
S-1).
10.8 --Lease, dated as of February 2, 1990, between NKI as Lessee and BA Mortgage and
International Realty as Lessor (Dallas, Texas) (incorporated herein by reference to
Exhibit 10(ppp) of Holding's 1992 Form S-1).
10.9 --Lease, dated November 15, 1991, between NKI as Lessee and KY-TN Conference
Association of Seventh Day Adventists as Lessor (Portland, Tennessee) (incorporated
herein by reference to Exhibit 10(qqq) of Holding's 1992 Form S-1).
10.10 --IBM Cross License, dated as of April 8, 1988, between International Business
Machines Corporation and NKI (incorporated herein by reference to Exhibit 10(rrr)
of Holding's 1992 Form S-1).
10.11 --Technical Information and License Agreements, dated as of June 23, 1987, between
NKI and each of Interfas S.A. and N-K International Limited (incorporated herein by
reference to Exhibit 10(sss) of Holding's 1992 Form S-1).
10.12 --Stock Purchase Agreement, dated as of February 24, 1992, between NKI, Robert W.
Blair and John Ridenour (incorporated herein by reference to Exhibit 10(uuu) of
Holding's 1992 Form S-1).
10.15 --Escrow Agreement, dated February 24, 1992, among NKI, Robert W. Blair, John
Ridenour and the Manufacturers Hanover Trust Company, as Escrow Agent (incorporated
herein by reference to Exhibit 10(xxx) of Holding's 1992 Form S-1).
10.17 --Indemnification Agreement, dated as of May 18, 1992, among NKI, Holding, Clayton,
Dubilier & Rice, Inc., Fund II and Clayton & Dubilier Associates II Limited
Partnership, a Connecticut limited partnership (incorporated herein by reference to
Exhibit 10(dddd) of Holding's 1992 Form S-1).
10.18 --Nu-kote International, Inc. Retirement Income Plan (incorporated herein by
reference to Exhibit 10(eeee) of Holding's 1992 Form S-1).
10.19 --Nu-kote Holding, Inc. Stock Option Plan (incorporated herein by reference to
Exhibit 10(ffff) of Holding's 1992 Form S-1).
10.20 --Nu-kote International, Inc. Key Executive Life Insurance Program (incorporated
herein by reference to Exhibit 10(hhhh) of Holding's 1992 Form S-1).
10.21 --Nu-kote International, Inc. Employee Savings Plan (incorporated herein by reference
to Exhibit 10(iiii) of Holding's 1992 Form S-1).
10.22 --Management Stock Option Agreement, between Holding and each of the grantees named
on the schedule attached thereto (incorporated herein by reference to Exhibit 10.34
to Holding's Registration Statement on Form S-1 (File No. 33-61668), as filed with
the Commission on April 26, 1993) ("Holding's 1993 Form S-1").
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.23 --Purchase Agreement, dated as of February 26, 1993, among NKI on the one hand and
Robert Goldstein, Laurie Goldstein, Lionel Brown and Eugene Fontana, on the other
hand (incorporated herein by reference to Exhibit 2(a) to Holding's Current Report
on Form 8-K (File No. 0-20287), as filed with the Commission on February 26, 1993
("Holding's February 1993 Form 8-K")).
10.24 --Goldsteins Non-Competition Agreement, dated as of February 26, 1993, among Future
Graphics, Inc. ("Future Graphics"), Laurie Goldstein and Robert Goldstein
(incorporated herein by reference to Exhibit 28(a) to February 1993 Form 8-K).
10.25 --Brown Non-Competition Agreement, dated as of February 26, 1993, among Future
Graphics, Inc. ("Future Graphics"), Laurie Goldstein and Robert Goldstein
(incorporated herein by reference to Exhibit 28(b) to February 1993 Form 8-K).
10.26 --Fontana Non-Competition Agreement, dated as of February 26, 1993, among Future
Graphics, Inc. ("Future Graphics"), Laurie Goldstein and Robert Goldstein
(incorporated herein by reference to Exhibit 28(c) to February 1993 Form 8-K).
10.27 --Consulting Agreement, dated as of February 26, 1993, between NKI and Robert
Goldstein (incorporated herein by reference to Exhibit 28(d) to February 1993 Form
8-K).
10.28 --Escrow Agreement, dated as of February 26, 1993, among NKI, Laurie Goldstein,
Robert Goldstein, Eugene Fontana and Lionel Brown and Bank of America NT & SA
(incorporated herein by reference to Exhibit 28(e) to February 1993 Form 8-K).
10.29 --Lease, dated as of February 18, 1993, between Frank DiMino, as Lessor and NKI, as
Lessee, (incorporated herein by reference to Exhibit 10.56 to Amendment No. 1, as
filed with the Commission on May 18, 1993 ("Amendment No. 1"), to Holding's 1993
Form S-1).
10.30 --Amended and Restated Employment Agreement, dated as of April 22, 1993, between NKI
and Larry H. Holswade (incorporated herein by reference to Exhibit 10.57 to
Amendment No. 1 to Holding's 1993 Form S-1).
10.31 --Amendment No. 1 to Credit Agreement, dated as of May 17, 1993, among NKI, U.K.
Borrower, Holding, U.K. Lender, NationsBank of Texas, N.A. and Bankers Trust
Company (incorporated herein by reference to Exhibit 10.60 to Amendment No. 1 to
Holding's 1993 Form S-1).
10.32 --Management Stock Option Agreement, dated as of June 16, 1993, between Holding and
each of the persons named on the schedule attached hereto (incorporated herein by
reference to Exhibit 3.2 to Holding's Annual Report on Form 10-K for the year ended
March 31, 1993 (File No. 0-20287)).
10.33 --Asset and Stock Purchase Agreement, dated as of November 15, 1994, between Holding
and Pelikan Holding AG ("Pelikan") (incorporated herein by reference to Annex A to
Holding's February 1995 Proxy Statement).
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.34 --Amendment to Asset and Stock Purchase Agreement, dated as of February 6, 1995,
between Holding and Pelikan (incorporated herein by reference to Annex C to
Holding's February 1995 Proxy Statement).
10.35 --Trademark License Agreement, dated as of February 24, 1995 between Pelikan, PIH and
Pelikan GmbH (Hannover), on the one hand, and Holding, on the other hand
(incorporated herein by reference to Exhibit B to Annex A to Holding's February
1995 Proxy Statement).
10.36 --Credit Agreement, dated as of February 24, 1995, among NKI, Holding, Barclays Bank
PLC, documentation agent, NationsBank of Texas, N.A., collateral agent and the
lender parties thereto (incorporated herein by reference to Exhibit 4.3.37 to
Holding's Current Report on Form 8-K, dated February 24, 1995).
10.37a --First Amendment to Credit Agreement, dated as of February 5, 1996, among Holding,
NKI, the financial institutions listed on the signature pages thereof, Barclays
Bank PLC, as documentation agent, and NationsBank of Texas, N.A. as administrative
agent (incorporated herein by reference to Exhibit 10.42a to Holding's Quarterly
Report on Form 10-Q for the quarter ended December 29, 1995 (File No. 0-20287)
("Holding's December 1995 10-Q").
10.37b --Second Amendment to Credit Agreement, dated as of June 21, 1995, among Holding,
NKI, the financial institutions listed on the signature pages thereof, Barclays
Bank PLC, as documentation agent, and NationsBank of Texas, N.A. as administrative
agent (incorporated herein by reference to Exhibit 10.42b to Holding's December
1995 10-Q).
10.38 --Amended and Restated Revolving Credit Facility Agreement, dated June 2, 1995, among
Greif-Werke GmbH and Pelikan Hardcopy Deutschland GmbH as borrowers, Barclays de
Zoete Wedd Limited ("BZW") and NationsBanc Capital Markets, Inc. as arrangers,
Barclays Bank PLC as the agent, NationsBank of Texas, N.A. as collateral agent and
documentation agent, and the financial institutions and certain other parties
thereto (incorporated herein by reference to Exhibit 10.43 to Holding's 1995 Form
10-K).
10.39 --Amended and Restated Revolving Credit Facility Agreement, dated June 2, 1995, among
Pelikan Produktions AG, Pelikan Hardcopy (International) AG, BZW and NationsBanc
Capital Markets, Inc. as arrangers, Barclays Bank PLC as the agent, NationsBank of
Texas, N.A. as collateral agent and documentation agent, and the financial
institutions and certain other parties thereto (incorporated herein by reference to
Exhibit 10.44 to Holding's 1995 Form 10-K).
10.40 --Amended and Restated Revolving Credit Facility Agreement, dated June 2, 1995, among
Pelikan Scotland Limited as borrower, BZW and NationsBanc Capital Markets, Inc. as
arrangers, Barclays Bank PLC as the agent, NationsBank of Texas, N.A. as collateral
agent and documentation agent, and the financial institutions and certain other
parties thereto (incorporated herein by reference to Exhibit 10.45 to Holding's
1995 Form 10-K).
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.41 --Nu-kote Holding, Inc. Senior Management Stock Appreciation Rights Plan, effective
June 22, 1995 (incorporated herein by reference to Exhibit 10.46 to Holding's 1995
Form 10-K).
10.42 --Form of Appreciation Right Notification (relating to Exhibit 10.43) (incorporated
herein by reference to Exhibit 10.47 to Holding's 1995 Form 10-K).
10.43 --Nu-kote Holding 1992 Stock Option Plan, as amended and restated on August 1, 1995
(incorporated herein by reference to Exhibit 10.43 to Holding's Annual Report on
Form 10-K for the year ended March 31, 1996 (File No. 0-20287) ("Holding's 1996
Form 10-K")).
10.44 --Amendment, dated as of January 24, 1996, to Nu-kote Holding, Inc. 1992 Stock Option
Plan, as amended and restated (incorporated herein by reference to Exhibit 10.44 to
Holding's 1996 Form 10-K).
10.45 --Amended and Restated Credit Agreement, dated as of October 15, 1996, by and among
NKI as Borrower, Holding, as Guarantor, the lenders listed on the signature pages
thereof, Barclays Bank PLC, as documentation agent, and NationsBank of Texas, N.A.
as administrative agent and collateral agent (incorporated herein by reference to
Exhibit 10.36 to Holding's Quarterly Report on Form 10-Q for the quarter ended
September 27, 1996 (File No. 0-20287) ("Holding's September 1996 10-Q").
10.46 --Amended and Restated Credit Agreement, dated as of October 15, 1996, between
Pelikan Produktions AG and Pelikan Hardcopy (International) AG, as borrowers, BZW
and NationsBanc Capital Markets, Inc., as arrangers, Barclays Bank PLC, as agent,
NationsBank of Texas, N.A. as collateral agent and documentation agent, and Others
(incorporated herein by reference to Exhibit 10.39 to Holding's September 1996
10-Q).
10.47 --Amended and Restated Credit Agreement, dated as of October 15, 1996, between
Pelikan Scotland Limited, as borrower, BZW and NationsBanc Capital Markets, Inc.,
as arrangers, Barclays Bank PLC, as agent, NationsBank of Texas, N.A. as collateral
agent and documentation agent, and Others (incorporated herein by reference to
Exhibit 10.40 to Holding's September 1996 10-Q).
10.48 --Nu-kote Holding, Inc. Senior Management Stock Appreciation Rights Plan, as amended
and restated September 27, 1996 (incorporated herein by reference to Exhibit 10.41
to Holding's September 1996 10-Q).
10.49 --Form of Appreciation Right Notification (relating to Exhibit 10.48 (incorporated
herein by reference to Exhibit 10.42 to Holding's September 1996 10-Q).
10.50 --Nu-kote Holding, Inc. 1992 Stock Option Plan, as amended and restated September 27,
1996 (incorporated herein by reference to Exhibit 10.43 to Holding's September 1996
10-Q).
10.51 --Nu-kote Holding, Inc. Deferred Stock Option Plan, as amended and restated September
27, 1996 (incorporated herein by reference to Exhibit 10.44 to Holding's September
1996 10-Q).
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.52 --First Amendment to Amended and Restated Credit Agreement, dated as of February 7,
1997, among Holding, NKI, the lenders signatory thereto, Barclays Bank PLC, as
documentation agent and NationsBank of Texas, N.A., as administrative agent and
collateral agent (incorporated herein by reference to Exhibit 10.36a to Holding's
Quarterly Report on Form 10-Q for the quarter ended December 27, 1996 (File No.
0-20287)).
11.1 --Statement regarding computation of per share earnings.
21.1 --Subsidiaries of Holding.
23.1 --Consent of Coopers & Lybrand L.L.P.
27 --Financial Data Schedule.
</TABLE>
- ------------------------
(b) Not applicable.
40
<PAGE>
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: July 31, 1997
NU-KOTE HOLDING, INC.
By: /s/ DAVID F. BRIGANTE
-----------------------------------------
David F. Brigante
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.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ THEODORE BARRY
- ------------------------------ Director July 31, 1997
Theodore Barry
/s/ DAVID F. BRIGANTE
- ------------------------------ Chairman of the Board July 31, 1997
David F. Brigante
/s/ RICHARD C. DRESDALE
- ------------------------------ Director July 31, 1997
Richard C. Dresdale
/s/ BRIAN D. FINN
- ------------------------------ Director July 31, 1997
Brian D. Finn
/s/ HUBBARD C. HOWE
- ------------------------------ Vice Chairman July 31, 1997
Hubbard C. Howe
/s/ JOHN P. ROCHON
- ------------------------------ Director July 31, 1997
John P. Rochon
/s/ DONALD S. BOLKE
- ------------------------------ Director July 31, 1997
Donald S. Bolke
Senior Vice
President-Finance/
/s/ ANTHONY G. SCHMECK Corporate
- ------------------------------ Controller/Secretary/ July 31, 1997
Anthony G. Schmeck Principal Accounting
Officer/ Principal
Financial Officer
41
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<PAGE>
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
------------
<S> <C>
Report of Independent Accountants................................................................... F-2
Consolidated Balance Sheets at March 31, 1997 and 1996.............................................. F-3
Consolidated Statements of Operations for the Years Ended
March 31, 1997, 1996 and 1995..................................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1996 and 1995..................................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended March 31, 1997, 1996 and 1995................................................. F-6
Notes to Consolidated Financial Statements.......................................................... F-7 - F-29
</TABLE>
F-1
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for each of the three years in the period ended March 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
July 31, 1997
F-2
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 12,275 $ 6,540
Accounts receivable less allowances of $3,741 and $3,933, respectively.................. 71,024 94,440
Receivables from related party.......................................................... 3,694 5,622
Inventories............................................................................. 93,770 115,226
Prepaid expenses........................................................................ 10,452 9,618
Deferred income taxes................................................................... 1,573 8,122
---------- ----------
Total current assets.................................................................. 192,788 239,568
Property, plant and equipment, net........................................................ 75,683 92,402
Other assets and deferred charges, net.................................................... 4,386 7,430
Assets held for sale...................................................................... 4,482 2,065
Intangibles, net.......................................................................... 19,698 24,950
---------- ----------
Total assets.......................................................................... $ 297,037 $ 366,415
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans and current portion of long-term debt........................................ $ 1,135 $ 6,358
Accounts payable........................................................................ 51,035 50,565
Payables to related party............................................................... 0 2,481
Compensation related liabilities........................................................ 6,500 14,563
Other accrued liabilities............................................................... 37,726 46,877
---------- ----------
Total current liabilities............................................................. 96,396 120,844
Long-term debt, net of current maturities................................................. 134,677 111,843
Other liabilities......................................................................... 9,995 17,433
Deferred income taxes..................................................................... 6,541 11,386
---------- ----------
Total liabilities..................................................................... 247,609 261,506
---------- ----------
Commitments and contingencies (Notes 3, 10 and 12)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
Class A common stock, $.01 par value, 40,000,000 shares authorized; 22,325,302 and
22,292,008 shares issued at March 31, 1997 and 1996, respectively..................... 223 223
Class B common stock, $.01 par value, 15,000,000 shares authorized; none issued
Additional paid-in capital.............................................................. 91,605 91,178
Retained earnings (accumulated deficit)................................................. (36,610) 13,042
Foreign currency translation adjustments................................................ (5,564) 692
Treasury stock, at cost, 550,000 shares................................................. (226) (226)
---------- ----------
Total shareholders' equity............................................................ 49,428 104,909
---------- ----------
Total liabilities and shareholders' equity............................................ $ 297,037 $ 366,415
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales............................................................... $ 342,302 $ 424,070 $ 193,562
Cost of sales........................................................... 285,144 294,980 142,861
------------ ------------ ------------
Gross margin........................................................ 57,158 129,090 50,701
Selling, general and administrative expenses............................ 66,602 78,100 29,421
Research and development expenses....................................... 9,646 9,560 1,800
Other operating expenses................................................ 1,064 2,500
Restructuring expenses.................................................. 15,139 13,825 28,449
------------ ------------ ------------
Operating income (loss)............................................. (35,293) 27,605 (11,469)
Interest expense, net................................................... 8,444 7,435 3,239
Other (income) expense items, net....................................... 714 (557) (245)
------------ ------------ ------------
Income (loss) before income taxes................................... (44,451) 20,727 (14,463)
Provision (benefit) for income taxes.................................... 5,201 7,590 (2,392)
------------ ------------ ------------
Income (loss) before extraordinary loss............................. (49,652) 13,137 (12,071)
Extraordinary loss arising from early repayment of indebtedness, net of
tax benefit of $182................................................... (281)
------------ ------------ ------------
Net income (loss)................................................... $ (49,652) $ 13,137 $ (12,352)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share of common stock--primary:
Income (loss) before extraordinary loss............................... $ (2.28) $ .59 $ (.69)
Extraordinary loss.................................................... (.02)
------------ ------------ ------------
Net income (loss)................................................... $ (2.28) $ .59 $ (.71)
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding--primary............................ 21,770,445 22,394,840 17,462,254
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share of common stock--fully diluted:
Income (loss) before extraordinary loss............................... $ (2.28) $ .58 $ (.69)
Extraordinary loss.................................................... (.02)
------------ ------------ ------------
Net income (loss)................................................... $ (2.28) $ .58 $ (.71)
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding--fully diluted...................... 21,770,445 22,492,343 17,462,254
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ (49,652) $ 13,137 $ (12,352)
Adjustments to reconcile net income to net cash used in operating
activities:
Non-cash loss on write-offs............................................... 11,454 281
Exchange gains............................................................ (417) (569)
Depreciation and amortization............................................. 13,545 12,078 5,378
Deferred income taxes and changes in tax valuation allowance.............. 3,223 2,301 (4,652)
Tax benefit from exercise of stock options................................ 91 1,685 74
Restructuring--impairment provisions...................................... 8,567 10,940
Changes in working capital:
Accounts receivable....................................................... 16,764 (12,358) (9,645)
Inventories............................................................... 7,177 (21,657) (8,923)
Prepaid expenses.......................................................... (1,706) 4,903 (3,353)
Accounts payable.......................................................... 4,511 2,692 14,821
Compensation related liabilities.......................................... (5,622) 2,330 7,104
Other accrued liabilities................................................. (5,181) (10,096) 6,967
Cash paid for restructuring............................................... (5,287) (20,722) (9,144)
Other..................................................................... (2,387) 2,378 (3)
---------- ---------- ----------
Net cash used in operating activities................................... (4,920) (23,898) (2,507)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment................................... (11,287) (11,604) (7,089)
Acquisitions................................................................ (5,337) (42,506)
---------- ---------- ----------
Net cash used in investing activities................................... (11,287) (16,941) (49,595)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings on long-term debt and other loans................................ 97,032 68,947 133,614
Payments on long-term debt and other loans.................................. (73,541) (40,253) (68,379)
Exercise of stock options................................................... 337 2,158 39
---------- ---------- ----------
Net cash provided by financing activities............................... 23,828 30,852 65,274
---------- ---------- ----------
Effect of exchange rate changes on cash....................................... (1,886) (522) 2,166
---------- ---------- ----------
Net increase (decrease) in cash............................................... 5,735 (10,509) 15,338
Cash and cash equivalents at beginning of year................................ 6,540 17,049 1,711
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 12,275 $ 6,540 $ 17,049
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................................. $ 7,276 $ 7,629 $ 2,124
Income taxes.............................................................. 1,978 320 677
Excluded from the consolidated statements of cash flows were the following
effects of non-cash investing and financing activities relating to the
acquisitions of certain assets and assumption of certain liabilities
from the bankruptcy estate of Jarfalla Industry Competence Center, AB
and of the Pelikan Hardcopy Division (see Note 3):
Liabilities assumed..................................................... 770 5,700
Issuance of Class A common stock........................................ 50,600
Additionally, see Note 3 to consolidated financial statements regarding
non-cash purchase price allocation adjustments
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
SHARES ----------------------------- FOREIGN RETAINED
--------------------------------- ADDITIONAL CURRENCY EARNINGS
HELD IN PAR PAID-IN TREASURY TRANSLATION (ACCUMULATED
ISSUED TREASURY OUTSTANDING VALUE CAPITAL STOCK ADJUSTMENTS DEFICIT)
---------- -------- ----------- ----- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at March 31, 1994.......... 17,284,540 (550,000) 16,734,540 $ 172 $38,173 $(226) $(1,555) $ 12,257
Net loss......................... (12,352)
Translation adjustments.......... 4,732
Issuance of common stock......... 4,600,000 4,600,000 46 50,554
Registration rights.............. (1,500)
Exercise of common stock
options........................ 24,000 24,000 2 111
---------- -------- ----------- ----- ---------- -------- ----------- ------------
Balance at March 31, 1995.......... 21,908,540 (550,000) 21,358,540 220 87,338 (226) 3,177 (95)
Net income....................... 13,137
Translation adjustments.......... (2,485)
Exercise of common stock
options........................ 383,468 383,468 3 3,840
---------- -------- ----------- ----- ---------- -------- ----------- ------------
Balance at March 31, 1996.......... 22,292,008 (550,000) 21,742,008 223 91,178 (226) 692 13,042
Net loss......................... (49,652)
Translation adjustments.......... (6,256)
Exercise of common stock
options........................ 33,294 33,294 427
---------- -------- ----------- ----- ---------- -------- ----------- ------------
Balance at March 31, 1997.......... 22,325,302 (550,000) 21,775,302 $ 223 $91,605 $(226) $(5,564) $(36,610)
---------- -------- ----------- ----- ---------- -------- ----------- ------------
---------- -------- ----------- ----- ---------- -------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS 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 one of the leading
independent manufacturers and distributors of impact and non-impact imaging
supplies for office and home printing devices, including the manufacture and
distribution of a full line 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 virtually all major office supply
marketing channels, including wholesale distributors, office products dealers,
direct mail catalogs, office supply "super stores", warehouse clubs, information
processing specialists, value added resellers, and mass market retailers.
The Company refinanced its credit facilities on July 31, 1997. 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 1997, the Company incurred a significant operating loss and
violated a financial covenant relating to its bank indebtedness, and for the
past three fiscal years the Company has had net cash outflows from operations.
In response to the operating results, the Company added new senior officers to
key positions in operations, manufacturing and marketing. As discussed in Note
8, the Company negotiated amended credit agreements which provide for borrowing
up to approximately $145,000. In addition, the Company developed a comprehensive
five year plan designed to return the Company to profitability. The plan calls
for the Company to improve its financial condition by consolidating certain
manufacturing facilities and movement of labor intensive manufacturing and
assembly to lower cost sites, implementing worldwide expense reduction programs
and improving inventory management procedures.
Many of the components of this plan have been or are currently in the
process of being implemented. Although there is no assurance that actual results
will meet the plan, management will closely monitor performance in relation to
the plan and take all practicable steps to achieving profitability.
Management believes that cash provided by operations and borrowings
available under the amended credit agreements will provide the Company with
adequate cash flow to meet its obligations. However, if the Company fails to
reduce its expenses as planned, incurs any unexpected costs, or fails to meet
its revenue projections, the Company could experience severe liquidity problems
and could go into default under its amended credit agreements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nu-kote and
its subsidiaries. All material intercompany transactions have been eliminated.
F-7
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 business
acquisitions (see Note 3), 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 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
have been entered into with sellers and key employees of businesses acquired. A
trademark was acquired in connection with the Pelikan Hardcopy Division
acquisition and remains in effect for 50 years. A technology license was
acquired as part of the acquisition of certain assets of Jarfalla Industry
Competence Center, AB (see Note 3).
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, but are accumulated in a separate component of shareholders' equity.
Foreign currency transaction gains and
F-8
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
losses are included in determining net income, and amounted to income of $417
and $569 in fiscal 1997 and 1996, respectively, and were not significant during
fiscal 1995.
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, 1997 and 1996,
there were no open forward contracts or outstanding options. During fiscal 1997,
1996 and 1995 hedging transactions resulted in losses amounting to $1,397, $113
and $0, 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 $5,134, $5,972 and $3,923 during fiscal 1997, 1996 and 1995,
respectively.
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is based on the weighted average of
common shares outstanding during the period and the effect of considering common
stock equivalents (stock options) under the "Treasury Stock" method.
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 1996 consolidated financial
statements to conform to 1997 presentation.
F-9
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
establishes standards for computing and presenting earnings per share. The
disclosure requirements of SFAS No. 128 will be effective for the Company's
financial statements in periods ending after December 15, 1997. The Company's
analysis of this new standard indicates that the standard will not have a
material impact on the Company's calculation of fully diluted earnings per
share.
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure", which establishes standards for disclosing information about
an entity's capital structure. The disclosure requirements of SFAS No. 129 will
be effective for the Company's financial statements in periods ending after
December 15, 1997.
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.
On February 24, 1995 Nu-kote acquired the worldwide hardcopy supplies
business ("Pelikan Hardcopy Division") of Pelikan Holding AG of Zug, Switzerland
("Pelikan"). The transaction was structured as both a stock and asset
acquisition, whereby Nu-kote acquired (i) substantially all of the hardcopy
assets of Pelikan, Inc., a Tennessee corporation; (ii) all of the issued and
outstanding shares of Pelikan's hardcopy subsidiaries in Switzerland (Pelikan
Produktions AG), Germany (Greif-Werke GmbH) and Scotland (Pelikan Scotland
Ltd.); and (iii) certain other hardcopy assets including a newly created
European sales and distribution network for hardcopy products. In connection
with the acquisition,
Nu-kote was granted an exclusive, fifty-year, fully paid-up license to use the
Pelikan trademark, trade name and logo in connection with the operation of the
Pelikan Hardcopy Division and a five year non-competition agreement.
Total consideration paid by Nu-kote to Pelikan under the terms of the
acquisition totaled approximately $99,600, consisting of: (i) the issuance of
4,600,000 non-registered shares of Nu-kote's Class A Common Stock (valued at
$50,600 based upon a weighted average share price of $11); and (ii) the
repayment of approximately $49,000 in Pelikan Hardcopy Division indebtedness to
Pelikan. In addition, Nu-kote assumed approximately $5,700 of Pelikan, Inc.
trade debt and incurred acquisition costs amounting to approximately $9,000.
Pursuant to a registration rights agreement, Pelikan may require Nu-kote to
register the 4,600,000 shares on or after six months from the closing date and
Nu-kote is required to bear the cost of registering the shares. The estimated
cost of registering these shares is $1,500 and such amount has been accrued and
charged to additional paid-in capital.
F-10
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. ACQUISITIONS (CONTINUED)
The related purchase agreement provides that Pelikan will indemnify Nu-kote
for all pre-closing environmental liabilities through February 24, 1998, except
for items identified on the Final Environmental Certificate for which
indemnification shall not exceed $2,500. The $2,500 related to these items was
placed in escrow at closing. Pelikan will also indemnify Nu-kote for breaches of
representations, warranties and covenants and for certain unknown and
undisclosed liabilities of the Pelikan Hardcopy Division up to an aggregate of
$13,000. Pelikan's obligation to indemnify Nu-kote for environmental liabilities
not listed on the Final Environmental Certificate is unlimited. Additionally,
Nu-kote will indemnify Pelikan for breaches of representation, warranties,
covenants and agreements and certain liabilities of Pelikan, Inc. assumed by
Nu-kote up to an aggregate of $13,000.
The acquisition has been accounted for as a purchase and the Pelikan
Hardcopy Division results of operations and cash flows are included in the
consolidated statements of operations and cash flows from date of acquisition.
The fair value of the net assets acquired was in excess of the total cost of the
acquisition and, accordingly, no goodwill has been recognized.
During the fourth quarter of fiscal 1996, the Company completed its studies
of asset fair values and plant closing costs and other preacquisition contingent
liabilities, and purchase price allocation adjustments were made affecting
various balance sheet accounts. These adjustments had the effect of increasing
property, plant and equipment $14,634, intangibles (trademark and covenant
not-to-compete) $5,481, other liabilities $13,162 and net deferred tax liability
$1,928 and reducing inventories $4,885. The effect of these adjustments on
fiscal 1996 net income was immaterial. In future years these adjustments will
increase depreciation and amortization approximately $1,110 per year.
The following table presents the unaudited pro forma consolidated results of
operations after purchase adjustments, including the adjustments noted in the
preceding paragraph, for the fiscal year ended March 31, 1995, as if the Pelikan
Hardcopy Division acquisition had been completed at the beginning of fiscal
1995. The Pelikan Hardcopy Division's operations included in the pro forma
consolidated results of operations are based on its operations for the fiscal
year ended March 31, 1995.
<TABLE>
<S> <C>
PRO FORMA RESULTS--FISCAL 1995:
Net sales....................................................... $ 437,864
Loss from continuing operations................................. (6,211)
Net loss........................................................ (5,844)
Loss from continuing operations per share....................... (.28)
Net loss per share.............................................. (.26)
</TABLE>
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the acquisition been completed at the
beginning of the aforementioned fiscal year, nor are they necessarily indicative
of the results that may occur in the future.
F-11
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. INVENTORIES
Inventories consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 36,847 $ 42,291
Work-in-process....................................................... 12,354 18,341
Finished goods........................................................ 44,569 54,594
---------- ----------
Total........................................................... $ 93,770 $ 115,226
---------- ----------
---------- ----------
</TABLE>
LIFO costs exceed replacement costs by $7,907 and $9,629 at March 31, 1997
and 1996, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consist of the
following at March 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land.................................................................. $ 4,477 $ 5,323
Buildings and improvements............................................ 19,417 22,742
Machinery and equipment............................................... 80,490 90,827
---------- ----------
104,384 118,892
Less accumulated depreciation......................................... (28,701) (26,490)
---------- ----------
Total........................................................... $ 75,683 $ 92,402
---------- ----------
---------- ----------
</TABLE>
Depreciation expense amounted to $10,662, $9,876 and $3,989 in fiscal 1997,
1996 and 1995, 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
Company's Bardstown, Kentucky facility was closed in fiscal 1995, and is
currently held for sale. Additionally, at March 31, 1997, the Company's Macedon,
New York and Derry, Pennsylvania facilities are being held for sale. The
aggregate net book value of these facilities is $4,482 and $2,065 at March 31,
1997 and 1996, respectively, and has been excluded from property, plant and
equipment and included in assets held for sale.
F-12
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. INTANGIBLE ASSETS
Intangible assets consist of amounts allocated as a result of purchases of
existing businesses and are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
AMORTIZATION --------------------
PERIOD 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
Goodwill.................................................. 20 years $ 9,880 $ 9,880
Covenants-not-to-compete.................................. 3-5 years 5,636 6,642
Trademark................................................. 40 years 9,269 11,306
Technology license........................................ 8 years 1,272 1,272
--------- ---------
26,057 29,100
Less accumulated amortization............................. (6,359) (4,150)
--------- ---------
Total..................................................... $ 19,698 $ 24,950
--------- ---------
--------- ---------
</TABLE>
Covenant-not-to-compete agreements have been recorded at their net present
value using estimated discount rates of 7% and 16%. The trademark has been
recorded at its estimated value based upon royalty rates charged for its use,
discounted at an estimated rate of return of 35%. 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.
7. LINE OF CREDIT
The Company has a line of credit in Colombia in the amount of $1,450.
Borrowings against the line of credit amounted to $603 and $681 at March 31,
1997 and 1996, respectively. The line bears interest at the prevailing Colombia
interest rate plus 2 percentage points. Average interest rates at March 31, 1997
and 1996 were 17.5% and 22.6%, respectively.
8. LONG-TERM DEBT
Long-term debt of the Company consists of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revolving lines of credit............................................. $ 133,917 $ 75,919
Term loan............................................................. 40,000
Other items........................................................... 1,292 1,601
---------- ----------
135,209 117,520
Less current portion.................................................. (532) (5,677)
---------- ----------
Long-term debt, net of current portion................................ $ 134,677 $ 111,843
---------- ----------
---------- ----------
</TABLE>
On October 15, 1996 the Company entered into the First Amended and Restated
Credit Agreement ("First Amended Agreement") which amended and restated its
existing credit agreement that was entered into in February 1995 ("Original
Credit Agreement"). The First Amended Agreement increased the borrowing
commitment from $140,000 to $200,000 and converted the revolver and term
facilities into a five year revolving credit facility. As of December 27, 1996,
the Company was in technical default of its First Amended Agreement. The Company
has obtained waivers of the technical default.
F-13
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LONG-TERM DEBT (CONTINUED)
On July 31, 1997 the Company entered into 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 L
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, $95,000 on April 1, 1998, $92,500 on July 1, 1998 and $90,000
on October 1, 1998. The Facilities mature on January 4, 1999.
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 amounts of earnings before
interest, taxes, depreciation, amortization, certain noncash 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.
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 interest rate at July 31, 1997 was 9.5%.
The Swiss and U.K. Facilities bear interest at LIBOR (as defined) plus 4%
through June 30, 1998 and plus 5% thereafter. The weighted average interest rate
at July 31, 1997 was 6.8%.
The bank group has 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 the exercise price is $3.57, which is 150% of
the average closing price of Nu-kote's Class A shares for twenty business days
prior to July 15, 1997. The fair value of the warrants is estimated to be $1,000
and will be treated as a discount on the debt and amortized to interest expense
on a scientific basis over the term of the Second Amended Agreements. In
addition, the Company incurred various transaction costs and bank fees which
will be amortized to interest expense over the term of the loan.
Unamortized deferred loan costs related to the First Amended Agreement
amounting to approximately $2,500 are to be written off at the closing date and
will be reported as an extraordinary charge in the Company's fiscal 1998 second
quarter financial statements.
At March 31, 1997 and 1996 the interest rate on the U.S. Facility and
weighted average interest rate on the Swiss Facility and U.K. Facility was 7.33%
and 4.52%, and 6.30% and 2.73%, respectively.
F-14
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LONG-TERM DEBT (CONTINUED)
Borrowings under the revolving lines of credit at March 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
LOCAL LOCAL
CURRENCY DOLLARS CURRENCY DOLLARS
---------- -------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Facility............................................... $ 90,000 $ 90,000 $ 46,500 $46,500
---------- ----------
---------- ----------
Swiss Facility.............................................. CHF 49,750 34,574 CHF 35,000 29,419
---------- ----------
---------- ----------
U.K. Facility............................................... L 5,670 9,343 L
---------- -------- ---------- -------
---------- ----------
$133,917 $75,919
-------- -------
-------- -------
</TABLE>
Included in other items at March 31, 1997 and 1996 are certain notes and
liabilities incurred in connection with the acquisition of Future Graphics and
ICMI.
Letters of credit issued at March 31, 1997 amounted to $531 and were all
issued under the Domestic Facility.
The extraordinary charge recognized in fiscal 1995 was taken in the fourth
quarter and is the result of the Original Credit Agreement and the related
write-off of $463 ($281 net of tax benefit) of deferred loan costs related to
the Company's prior credit agreement.
9. OTHER ACCRUED LIABILITIES
Other accrued liabilities in excess of 5% of total current liabilities are
summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Sales incentive rebates................................................. $ 6,292 $ 6,893
Opening balance sheet provisions relating to plant closing costs of
Pelikan Hardcopy Division............................................. 8,952 17,685
--------- ---------
$ 15,244 $ 24,578
--------- ---------
--------- ---------
</TABLE>
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, 1997 minimum annual rental commitments under long-term,
non-cancelable operating leases were as follows:
<TABLE>
<S> <C>
1998................................................................ $ 4,069
1999................................................................ 3,701
2000................................................................ 2,977
2001................................................................ 1,972
2002 and thereafter................................................. 9,768
</TABLE>
Total rental expense incurred in fiscal 1997, 1996 and 1995 was $4,700,
$4,150 and $2,265, respectively.
F-15
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS 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 which give rise to deferred tax
assets and liabilities at March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- ----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Current:
Net operating loss carryforwards.................................. $ $ $ 4,453 $
Reserves and accruals............................................. 12,719 269 7,740
Inventory basis difference........................................ 122 2,164 4,397
Other............................................................. 21 270 1,509 284
---------- ----------- --------- -----------
12,862 2,703 13,702 4,681
Less valuation allowance.......................................... (11,021) (3,299)
---------- ----------- --------- -----------
Subtotal--current............................................. 1,841 2,703 10,403 4,681
---------- ----------- --------- -----------
Non-current:
Net operating loss carryforwards.................................. 17,699
Postretirement and benefits....................................... 1,539 467 1,532 285
Other basis differences principally related to property, plant and
equipment....................................................... 3,003 9,994 6,456 11,556
Other............................................................. 1,700 272 445
---------- ----------- --------- -----------
23,941 10,733 7,988 12,286
Less valuation allowance............................................ (19,749) (7,088)
---------- ----------- --------- -----------
Subtotal--non-current......................................... 4,192 10,733 900 12,286
---------- ----------- --------- -----------
Total......................................................... $ 6,033 $ 13,436 $ 11,303 $ 16,967
---------- ----------- --------- -----------
---------- ----------- --------- -----------
Net current asset................................................... $1,573 $8,122
Net current liability............................................... $2,435 $2,400
Net non-current liability........................................... $6,541 $11,386
</TABLE>
The current deferred tax liability of $2,435 and $2,400 is included in other
accrued liabilities at March 31, 1997 and 1996, respectively.
No U.S. provision for income taxes has been made for unremitted earnings of
the Company's foreign subsidiaries as of March 31, 1997, in that the Company's
foreign subsidiaries have accumulated losses.
The total valuation allowances relating to acquired businesses amount to
$7,051 and $10,047 at March 31, 1997 and 1996, respectively. Future reductions
of these acquisition valuation allowances will be credited to intangible assets
of the acquired businesses.
During fiscal 1997, 1996 and 1995 increases in the valuation allowances for
all jurisdictions increased income tax provisions or reduced income tax benefits
$23,379, $6,171 and $2,609, respectively.
F-16
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS 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:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Domestic................................................... $ (31,375) $ 9,338 $ (15,372)
Foreign.................................................... (13,076) 11,389 909
---------- --------- ----------
$ (44,451) $ 20,727 $ (14,463)
---------- --------- ----------
---------- --------- ----------
</TABLE>
The provisions (benefit) for income tax consist of the following for fiscal
years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Domestic.................................................... $ $ 50 $ 248
Foreign..................................................... (1,109) (45) 1,938
--------- --------- ---------
(1,109) 5 2,186
--------- --------- ---------
Deferred:
Domestic.................................................... 4,210 1,822 (5,058)
Foreign..................................................... (954) 1,542 406
--------- --------- ---------
3,256 3,364 (4,652)
--------- --------- ---------
Change in beginning of the year valuation allowances:
Credited directly to intangibles.......................... 2,996 3,599
Debited (credited) to income tax expense.................. 228 (1,063)
Utilization of foreign tax credits............................ (261)
Tax benefits from exercise of stock options credited to
additional paid-in capital.................................. 91 1,685 74
--------- --------- ---------
Total provision (benefit) for income tax...................... $ 5,201 $ 7,590 $ (2,392)
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 increased net income $1,732. The
effect of these changes in estimate increased earnings per share $.08 on a
primary and fully diluted basis.
F-17
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS 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:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Computed expected tax expense (benefit) based on U.S. rates... $ (10,667) $ 3,117 $ (4,917)
Changes in tax resulted from:
State income tax effect..................................... 656 715 (682)
Valuation allowance changes................................. 14,076 898
Other....................................................... 236 (275) (35)
---------- --------- ---------
Total provision (benefit) for U.S. income taxes............. 4,301 3,557 (4,736)
Provision for foreign income taxes............................ 900 4,033 2,344
---------- --------- ---------
Total provision (benefit) for income tax.................... $ 5,201 $ 7,590 $ (2,392)
---------- --------- ---------
---------- --------- ---------
</TABLE>
At March 31, 1997 the Company had domestic net operating loss carryforwards
that amount to approximately $21,970 which expire from 2010 to 2012. Foreign net
operating loss carryforwards amount to approximately $27,600 of which $8,040
expire from 2002 to 2004 and $19,560 may be carried forward indefinitely.
12. CONTINGENCIES
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,
trade dress 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 A.G. as
defendants. All of the lawsuits are in the discovery stage, and in management's
opinion the potential losses related to these cases are not reasonably
estimable. 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 Judgment of the unenforceablilty of four of the plaintiff's
utility patents was granted although a Motion for Reconsideration with respect
to the ruling is pending before the court that granted the motion.
On May 9, 1997 Daniel M. Kerrane, an officer and director of the Company,
filed suit against the Company in Texas State District Court. He alleges that
his Supplemental Employment 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. Mr.
Kerrane is seeking damages of $8,000, and injunctive relief. The Company is
vigorously defending this lawsuit.
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.
F-18
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. CONTINGENCIES (CONTINUED)
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 the worldwide hardcopy supplies business of Pelikan, Pelikan
agreed to indemnify Nu-kote for certain pre-closing environmental liabilities
(see Note 3). 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 indemnifications 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 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.
Net periodic pension expense recognized by the Company for the
defined-benefit plans for fiscal 1997, 1996 and 1995 included the following
components.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned during the year.................... $ 856 $ 679 $ 302
Interest cost on the projected benefit obligations.............. 2,309 2,188 703
Actual return on plan assets.................................... (1,850) (3,628) (548)
Net amortization and deferral................................... (288) 1,821 46
Curtailment gain................................................ (22)
Effect of changes in actuarial assumptions...................... (379)
--------- --------- ---------
Net periodic pension cost....................................... $ 1,027 $ 681 $ 481
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996, 1995 AND 1994
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the defined-benefit
plans and amounts recognized in the Company's consolidated balance sheets at
March 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NU-KOTE NU-KOTE
INTERNATIONAL, PELIKAN GREIF-WERKE INTERNATIONAL, PELIKAN GREIF-WERKE
INC. SCOTLAND LTD. GMBH INC. SCOTLAND LTD. GMBH
-------------- ------------- ----------- -------------- ------------- -----------
Actuarial present value of benefit:
Vested.............................. $7,548 $17,763 $ 5,435 $7,251 $13,065 $ 5,935
------ ------------- ----------- ------ ------------- -----------
------ ------------- ----------- ------ ------------- -----------
Accumulated......................... $7,904 $17,763 $ 5,437 $7,661 $13,065 $ 6,143
------ ------------- ----------- ------ ------------- -----------
------ ------------- ----------- ------ ------------- -----------
Projected........................... $8,988 $18,921 $ 5,518 $8,779 $13,996 $ 6,233
Plan assets at fair value............. 8,019 19,594 7,822 16,637
------ ------------- ----------- ------ ------------- -----------
Plan assets (less) greater than
projected benefit obligation........ (969) 673 (5,518) (957) 2,641 (6,233)
Unrecognized prior service cost....... (16) (17)
Unrecognized net (gain) loss.......... 2,445 645 (143) 2,384 (1,529)
Tax effect on net assets of acquired
businesses.......................... (52) (60)
------ ------------- ----------- ------ ------------- -----------
Prepaid (accrued) pension cost........ $1,408 $ 1,318 $(5,661) $1,350 $ 1,112 $(6,233)
------ ------------- ----------- ------ ------------- -----------
------ ------------- ----------- ------ ------------- -----------
Weighted average discount rates....... 8.000% 8.000% 6.500% 7.750% 8.500% 7.000%
Expected long-term rate of return on
assets.............................. 9.000 9.000 N/A 9.000 9.000 N/A
Assumed rate of increase in future
compensation........................ 4.500 5.500 2.500 4.500 6.000 2.000
<CAPTION>
1995
--------------------------------------------
<S> <C> <C> <C>
NU-KOTE
INTERNATIONAL, PELIKAN GREIF-WERKE
INC. SCOTLAND LTD. GMBH
-------------- ------------- -----------
Actuarial present value of benefit:
Vested.............................. $5,930 $12,319 $ 6,784
------ ------------- -----------
------ ------------- -----------
Accumulated......................... $6,312 $12,319 $ 6,784
------ ------------- -----------
------ ------------- -----------
Projected........................... $7,205 $13,373 $ 6,882
Plan assets at fair value............. 6,312 14,271
------ ------------- -----------
Plan assets (less) greater than
projected benefit obligation........ (893) 898 (6,882)
Unrecognized prior service cost....... (18)
Unrecognized net (gain) loss.......... 1,530
Tax effect on net assets of acquired
businesses.......................... (67)
------ ------------- -----------
Prepaid (accrued) pension cost........ $ 552 $ 898 $(6,882)
------ ------------- -----------
------ ------------- -----------
Weighted average discount rates....... 8.625% 9.000% 7.000%
Expected long-term rate of return on
assets.............................. 9.000 9.000 N/A
Assumed rate of increase in future
compensation........................ 4.500 7.000 4.000
</TABLE>
F-20
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has a defined contribution 401(k) plan which covers all of the
employees in the U.S. Under this plan, eligible employees are allowed to
contribute up to 6% of their pay (up to federally mandated maximums), and the
Company will contribute an amount equal to 40% of the employee's contribution.
The Company recognized an expense of $343, $343, and $215 in fiscal 1997, 1996
and 1995, respectively, as its contribution to this plan.
The Company has other defined contribution plans, the contributions to which
are based on a percentage of employee's salary. Contributions to these plans
amounted to $1,236, $1,319 and $124 in fiscal 1997, 1996 and 1995, 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, 1997, 1996 and 1995 amounted to $103, $159 and $93,
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:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned during the year.......................... $ $ 1 $ 6
Interest cost on accumulated post-retirement benefit obligation....... 125 126 124
Amortization of actuarial loss........................................ 13
--------- --------- ---------
Net periodic postretirement benefit cost.............................. $ 125 $ 127 $ 143
--------- --------- ---------
--------- --------- ---------
</TABLE>
The actuarial and recorded liabilities for this postretirement benefit, none
of which have been funded, are as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................. $ 1,266 $ 1,506
Fully eligible active plan participants.................................. 80 167
Other active plan participants........................................... 21
--------- ---------
Total accumulated postretirement benefit............................... 1,346 1,694
Unrecognized actuarial (gain) loss......................................... (279) 94
--------- ---------
Accrued benefit liability.................................................. $ 1,625 $ 1,600
--------- ---------
--------- ---------
</TABLE>
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.75% and 7.50% in fiscal 1997 and 1996, respectively, and a
health care cost trend rate of 9.0% for the first year decreasing to 6.0% in the
year 2026 and thereafter.
F-21
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. POSTRETIREMENT BENEFITS (CONTINUED)
The effect on the accumulated postretirement obligation projected as of
March 31, 1997, 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 5.2% in the
aggregate interest and service components of the 1997 expense.
15. INTERNATIONAL OPERATIONS AND SEGMENT DATA
The Company's operations involve a single industry segment--the manufacture
and distribution of a full line of impact and non-impact imaging supplies for
office and home printing devices.
Information concerning the Company's continuing operations by geographic
locations is summarized as follows for the fiscal years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales to unconsolidated customers:
Domestic............................................... $ 173,069 $ 203,992 $ 143,723
Europe................................................. 165,826 215,685 44,280
Other countries........................................ 3,407 4,393 5,559
---------- ---------- ----------
$ 342,302 $ 424,070 $ 193,562
---------- ---------- ----------
---------- ---------- ----------
Operating income (loss):
Domestic............................................... $ (23,522) $ 11,372 $ (14,105)
Europe................................................. (12,015) 15,879 2,112
Other countries........................................ 244 354 524
---------- ---------- ----------
$ (35,293) $ 27,605 $ (11,469)
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
Domestic............................................... $ 137,664 $ 176,679 $ 138,786
Europe................................................. 152,534 182,700 176,809
Other countries........................................ 2,357 4,971 3,552
---------- ---------- ----------
$ 292,555 $ 364,350 $ 319,147
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The above information does not include assets held for sale of $4,482,
$2,065 and $7,370 for the years ended March 31, 1997, 1996 and 1995,
respectively.
Intercompany sales by domestic operations to foreign operations amounted to
$5,692, $2,867 and $1,084 in fiscal 1997, 1996 and 1995, respectively, and
intercompany sales by foreign operations to domestic operations amounted to
$19,232, $18,690 and $4,547 in fiscal 1997, 1996 and 1995, respectively. During
each of the three years in the period ended March 31, 1997, no sales to one
customer accounted for more than 10% of net sales.
F-22
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. INTERNATIONAL OPERATIONS AND SEGMENT DATA (CONTINUED)
The Company's net sales for impact and non-impact imaging supplies were as
follows for the fiscal year ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Impact................................................... $ 146,200 $ 203,590 $ 110,182
Non-impact............................................... 196,102 220,480 83,380
---------- ---------- ----------
$ 342,302 $ 424,070 $ 193,562
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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 office
supply business. The Company performs ongoing credit evaluations of its
customers 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 Option 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, 1997 and
1996, there were 431,775 and 679,592 shares available for grant, respectively.
The stock options granted in fiscal 1997 and 1996 have exercise prices
ranging from $10.00 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.
F-23
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. EMPLOYEE STOCK BASED COMPENSATION PLANS (CONTINUED)
A summary of the status of the Company's stock options as of March 31, 1997,
1996 and 1995 and the changes during the years then ended is presented below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.................... 1,908,940 $ 10.53 2,276,592 $ 9.28 1,274,996 $ 8.22
Granted............................................. 345,000 $ 15.36 180,000 $ 16.03 1,106,006 $ 10.39
Exercised........................................... (33,294) $ 10.13 (383,468) $ 5.31 (24,000) $ 1.65
Forfeited........................................... (97,183) $ 11.10 (164,184) $ 11.49 (80,410) $ 9.84
---------- ---------- ----------
Outstanding at end of year.......................... 2,123,463 $ 11.29 1,908,940 $ 10.53 2,276,592 $ 9.28
---------- ---------- ----------
---------- ---------- ----------
Exercisable at end of year.......................... 870,666 $ 10.04 503,699 $ 9.76 438,854 $ 5.74
---------- ---------- ----------
---------- ---------- ----------
Weighted average fair value of all options granted
during year....................................... $5.94 $7.75
</TABLE>
The fair value of each stock option granted in fiscal 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 40.05%; a range of risk-free interest rates of 5.43% to 6.82%; and
expected lives of 6 years.
The following table summarizes information about stock options outstanding
at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
-------------------------------- -----------------------------
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 3/31/97 CONTRACTUAL LIFE PRICE AT 3/31/97 EXERCISE PRICE
- ---------------- ----------- ------------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$7.375-$11.00 1,743,463 7.22 $ 10.01 843,666 $ 9.84
$11.01-$17.00 170,000 8.68 $ 16.28 25,000 $ 16.15
$17.01-$20.875 210,000 9.12 $ 17.90 2,000 $ 20.875
----------- --- ----------- ----------- -------
$7.375-$20.875 2,123,463 7.53 $ 11.29 870,666 $ 10.04
----------- --- ----------- ----------- -------
----------- --- ----------- ----------- -------
</TABLE>
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. A total of 1,280,000 SARs were outstanding on March 31, 1997.
F-24
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. EMPLOYEE STOCK BASED COMPENSATION PLANS (CONTINUED)
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, 1997 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, 1997, the Class A Common Stock had a market value of $2.75 per share.
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.
PRO FORMA NET INCOME (LOSS) AND NET INCOME (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
1997 and fiscal 1996 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SFAS 123 compensation cost................. $ 0 $ 308 $ 0 $ 100
APB 25 compensation cost................... $ 0 $ 0 $ 0 $ 0
Net income (loss).......................... $ (49,652) $ (49,960) $ 13,137 $ 13,075
Net income (loss) per common share......... $ (2.28) $ (2.29) $ 0.58 $ 0.58
</TABLE>
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 and $114 in fiscal
1996 and 1995, respectively, for the consulting services of Mr. Theodore Barry,
a director of the Company. Mr. Hubbard C. Howe was paid $150, $150 and $105 as
Vice Chairman of the Board in fiscal 1997, 1996 and 1995, respectively, in lieu
of directors fees.
As a result of the Pelikan Hardcopy Division 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 $2,423,
$6,995 and $666 in fiscal 1997, 1996 and 1995, respectively. In addition, sales
to Ligapart related entities amounted to $12,600 and $25,453, and purchases
amounted to $71 and $2,302 in fiscal 1997 and 1996, respectively.
F-25
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
19. SHAREHOLDERS' EQUITY
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 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.
See Note 3 regarding issuance of 4,600,000 shares of Class A Common Stock in
connection with the Pelikan Hardcopy Division acquisition.
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 per share amounts and number of shares have been
restated to reflect this split.
The Company's credit agreement (see Note 8) restricts the Company from
declaring or paying dividends.
20. RESTRUCTURING EXPENSES
Restructuring expenses are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Severance........................................................................ $ 4,461 $ 495 $ 4,395
Impairment provisions for duplicative or incompatible property, plant and
equipment and foreign operations............................................... 8,567 10,940
Incremental manufacturing costs associated with facility closures................ 8,662 6,766
Relocation of employees, equipment and inventory, lease cancellations,
termination of contracts, facility maintenance and other....................... 2,111 4,668 6,348
--------- --------- ---------
$ 15,139 $ 13,825 $ 28,449
--------- --------- ---------
--------- --------- ---------
</TABLE>
During fiscal 1997, the pre-tax charge related 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 Egg, Switzerland. The charge
for severance costs
F-26
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
20. RESTRUCTURING EXPENSES (CONTINUED)
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. The $2,111 in fiscal 1997 relates
to lease cancellations, facility maintenance and other, of which $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. The Company expects to dispose of
these assets by fiscal 1998 year end. The carrying amount of these assets of
$4,482 is reflected in assets held for sale. Included in other accrued
liabilities were the following restructuring items at March 31, 1997:
<TABLE>
<CAPTION>
DESCRIPTION OF AMOUNT
RESTRUCTURING EXPENSE ACCRUED
- ------------------------------------------------------------------------------------ -----------
<S> <C>
Lease cancellations................................................................. $ 430
Severance costs..................................................................... 1,204
Other............................................................................... 247
-----------
$ 1,881
-----------
-----------
</TABLE>
The Company estimates that an additional $5,000 of restructuring expenses
will be recognized in fiscal 1998. Most of this amount relates to expected
severance and relocation costs related to continuing consolidation efforts.
Management currently anticipates completion in fiscal 1998.
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 (see Note 3). 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.
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:
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
DESCRIPTION OF ACCRUED AT PAID IN CHANGES IN ACCRUED AT
RESTRUCTURING EXPENSE 3-31-96 FISCAL 1997 ESTIMATES 3-31-97
- -------------------------------------------- ------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Severance................................... $ 71 $ (152) $ 81 $ 0
Lease cancellations......................... 425 (213) (212) 0
Facility maintenance and other.............. 384 (231) (153) 0
--
----- ----- -----
$ 880 $ (596) $ (284) $ 0
--
--
----- ----- -----
----- ----- -----
</TABLE>
F-27
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
20. RESTRUCTURING EXPENSES (CONTINUED)
The changes in estimates noted above decreased fiscal 1997 net loss $284 and
loss per share $.01 on a primary and fully diluted basis.
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
DESCRIPTION OF ACCRUED AT PAID IN CHANGES IN ACCRUED AT
RESTRUCTURING EXPENSE 3-31-95 FISCAL 1996 ESTIMATES 3-31-96
- -------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Severance................................... $ 3,171 $ (3,595) $ 495 $ 71
Lease cancellations......................... 1,210 (178) (607) 425
Termination of contract manufacturing and
other contracts........................... 2,350 (1,344) (1,006) 0
Facility maintenance and other.............. 1,634 (1,780) 530 384
----------- ----------- ----------- -----
$ 8,365 $ (6,897) $ (588) $ 880
----------- ----------- ----------- -----
----------- ----------- ----------- -----
</TABLE>
The changes in estimates noted above increased fiscal 1996 net income $373
and earnings per share $.02 on a primary and fully diluted basis.
21. OTHER OPERATING EXPENSES
Included in other operating expenses in fiscal 1997 are write-offs of
certain deferred acquisition costs of $738. Included in other operating expenses
in fiscal 1995 is $2,500 related to the settlement of a patent and trademark
action.
F-28
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(DOLLARS, LS AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
JUNE 28 SEPTEMBER 27 DECEMBER 27 MARCH 31
--------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Fiscal 1997:
Net sales............................... $ 87,457 $ 86,241 $ 82,923 $ 85,681
Gross margin............................ 25,227 20,708 15,355 (4,132)(a)
Restructuring expense................... 1,145 4,635 2,031 7,328
Operating income (loss)................. 4,152 (2,154) (4,580) (32,711)(a)(b)
Net income (loss)....................... 1,795 (2,332) (4,029) (45,086)(a)(b)
Net income (loss) per share............. 0.08 (0.11) (0.19) (2.07)(a)(b)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
JUNE 30 SEPTEMBER 29 DECEMBER 29 MARCH 31
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Fiscal 1996:
Net sales.............................. $ 104,122 $ 102,810 $ 104,660 $ 112,478
Gross margin........................... 30,184 30,403 30,408 38,095
Restructuring expense.................. 195 4,032 5,457 4,141
Operating income....................... 9,056 5,007 4,706 8,836
Net income............................. 4,873 1,863 2,020 4,381
Net income per share................... 0.22 0.08 0.09 0.19
</TABLE>
- ------------------------
(a) Includes the following significant charges: (1) $8,039 for inventory
write-offs 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 $2,000 was deferred at March 31, 1996 and
approximately $1,500, $1,400 and $1,700 were deferred during the first,
second and third quarters, respectively, of fiscal 1997.
(b) Includes the effect of no tax benefit for losses incurred during the year
and a $4,301 increase in the valuation allowance recorded 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, 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. Accordingly, a valuation allowance was recorded.
F-29
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants on Schedule........................... S-2
Schedule II--Valuation and Qualifying Accounts and Reserves for the
fiscal years ended March 31, 1997, 1996 and 1995...................... S-3
</TABLE>
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.
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Nu-kote Holding, Inc.
and Subsidiaries is included on page F-2 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 this 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
July 31, 1997
S-2
<PAGE>
SCHEDULE II
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
ALLOWANCES FOR SALES RETURNS AND DOUBTFUL RECEIVABLES
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES OTHER(A) DEDUCTIONS PERIOD
- ------------------------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
March 31, 1995........................................ $ 1,049 $ 1,325 $ 3,103 $ 1,139 $ 4,338
March 31, 1996........................................ 4,338 652 10 1,067 3,933
March 31, 1997........................................ 3,933 1,786 (455) 1,523 3,741
</TABLE>
- ------------------------
(a) Other additions for the fiscal year ended March 31, 1995 include $2,769
relating to the Pelikan acquisition and $334 arising from exchange rate
differences. Other deductions for the fiscal year ended March 31, 1997
relate primarily to exchange rate differences.
S-3
<PAGE>
EXHIBIT 11.1
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATE)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
PRIMARY:
Shares outstanding:
Weighted average number of shares outstanding................................ 21,770 21,499 17,462
Net effect of dilutive stock options(1)...................................... 896
---------- --------- ----------
21,770 22,395 17,462
---------- --------- ----------
---------- --------- ----------
Income (loss) before extraordinary loss........................................ $ (49,652) $ 13,137 $ (12,071)
---------- --------- ----------
---------- --------- ----------
Income (loss) per common share before extraordinary loss....................... $ (2.28) $ 0.59 $ (0.69)
---------- --------- ----------
---------- --------- ----------
Loss from extraordinary item................................................... $ (281)
---------- --------- ----------
---------- --------- ----------
Loss per common share from extraordinary item.................................. $ (0.02)
---------- --------- ----------
---------- --------- ----------
Net income (loss).............................................................. $ (49,652) $ 13,137 $ (12,352)
---------- --------- ----------
---------- --------- ----------
Net income (loss) per common share............................................. $ (2.28) $ 0.59 $ (0.71)
---------- --------- ----------
---------- --------- ----------
FULLY DILUTED:
Shares outstanding:
Weighted average number of shares outstanding................................ 21,770 21,499 17,462
Net effect of dilutive stock options(1)...................................... 993
---------- --------- ----------
21,770 22,492 17,462
---------- --------- ----------
---------- --------- ----------
Income (loss) before extraordinary loss........................................ $ (49,652) $ 13,137 $ (12,071)
---------- --------- ----------
---------- --------- ----------
Income (loss) per common share before extraordinary loss....................... $ (2.28) $ 0.58 $ (0.69)
---------- --------- ----------
---------- --------- ----------
Loss from extraordinary item................................................... $ (281)
---------- --------- ----------
---------- --------- ----------
Loss per common share from extraordinary item.................................. $ (0.02)
---------- --------- ----------
---------- --------- ----------
Net income (loss).............................................................. $ (49,652) $ 13,137 $ (12,352)
---------- --------- ----------
---------- --------- ----------
Net income (loss) per common share............................................. $ (2.28) $ 0.58 $ (0.71)
---------- --------- ----------
---------- --------- ----------
</TABLE>
- ------------------------
(1) The net effects of dilutive stock options for periods resulting in income
are based upon the treasury stock method using average market price during
the period for the primary amounts, and the higher of the average market
price or the market price at the end of the year for the fully diluted
amounts. For years resulting in losses, stock options are considered
anti-dilutive and are excluded from the computation.
<PAGE>
EXHIBIT 23.1
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Nu-kote Holding, Inc. on Form S-8 (File No. 333-13093, File No. 33-60326,
File No. 33-69708 and File No. 33-97376) of our reports dated July 31, 1997 on
our audits of the consolidated financial statements and financial statement
schedule of Nu-kote Holding, Inc. and Subsidiaries as of March 31, 1997 and
1996, and for each of the three years in the period ended March 31, 1997, which
reports are included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Dallas, Texas
July 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 12275
<SECURITIES> 0
<RECEIVABLES> 74765
<ALLOWANCES> 3741
<INVENTORY> 93770
<CURRENT-ASSETS> 192788
<PP&E> 104384
<DEPRECIATION> 28701
<TOTAL-ASSETS> 297037
<CURRENT-LIABILITIES> 96396
<BONDS> 134677
0
0
<COMMON> 223
<OTHER-SE> 49205
<TOTAL-LIABILITY-AND-EQUITY> 297037
<SALES> 342302
<TOTAL-REVENUES> 342302
<CGS> 285144
<TOTAL-COSTS> 285144
<OTHER-EXPENSES> 93165
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8444
<INCOME-PRETAX> (44451)
<INCOME-TAX> 5201
<INCOME-CONTINUING> (49652)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49652)
<EPS-PRIMARY> (2.28)
<EPS-DILUTED> (2.28)
</TABLE>
