<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended SEPTEMBER 26, 1997
- --------------------------------------------------------------------------------
Commission file number 0-20287
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NU-KOTE HOLDING, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1296153
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17950 PRESTON ROAD, SUITE 690, DALLAS, TEXAS 75252
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(Address of principal executive offices) (Zip Code)
(972) 250-2785
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock of registrant outstanding at November 5,
1997:
Class Outstanding
----- -----------
Class A common stock $.01 par value 21,775,302
1
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NU-KOTE HOLDING, INC.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets as of
September 26, 1997 and March 31, 1997 3
Consolidated Statements of Operations and Retained
Earnings (Accumulated Deficit) for the Three Month Periods
Ended September 26, 1997 and September 27, 1996 4
Consolidated Statements of Operations and Retained
Earnings (Accumulated Deficit) for the Six Month Periods
Ended September 26, 1997 and September 27, 1996 5
Consolidated Statements of Cash Flows for the Six
Month Periods Ended September 26, 1997
and September 27, 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II - OTHER INFORMATION
Other Information 21
Signature Page 23
2
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NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
September 26, March 31,
1997 1997
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,346 $ 12,275
Accounts receivable, net 66,964 71,024
Receivables from related party 3,030 3,694
Inventories, net 92,878 93,770
Prepaid expenses 8,327 10,452
Deferred income taxes 3,048 1,573
-------- --------
Total current assets 179,593 192,788
Property, plant, and equipment, net 72,332 75,683
Other assets and deferred charges 7,631 4,386
Assets held for sale 4,482 4,482
Intangibles, net 18,744 19,698
-------- --------
Total assets $282,782 $297,037
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans and current portion of
long-term debt $ 857 $ 1,135
Accounts payable 41,968 51,035
Compensation related liabilities 5,936 6,500
Other accrued liabilities 45,644 37,726
-------- --------
Total current liabilities 94,405 96,396
Long-term debt, net of current maturities 138,395 134,677
Other liabilities 11,206 9,995
Deferred income taxes 6,592 6,541
-------- --------
Total liabilities 250,598 247,609
-------- --------
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
shares issued 223 223
Class B common stock, $.01 par value,
15,000,000 shares authorized; none issued
Additional paid-in capital 92,610 91,605
Accumulated deficit (53,150) (36,610)
Foreign currency translation adjustment (7,273) (5,564)
Treasury stock, at cost, 550,000 shares (226) (226)
-------- --------
Total shareholders' equity 32,184 49,428
-------- --------
Total liabilities and
shareholders' equity $282,782 $297,037
-------- --------
-------- --------
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 26, 1997
AND SEPTEMBER 27, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
September 26, September 27,
1997 1996
------------- -------------
Net sales $ 72,688 $ 86,241
Cost of sales 60,140 65,533
----------- -----------
Gross margin 12,548 20,708
Selling, general and administrative
expenses 14,084 15,656
Research and development expenses 1,830 2,571
Restructuring expense 1,194 4,635
----------- -----------
Operating loss (4,560) (2,154)
Interest expense 3,612 2,156
Other income items, net (496) (382)
----------- -----------
Loss before income taxes and
extraordinary item (7,676) (3,928)
Provision (benefit) for income taxes 342 (1,596)
----------- -----------
Loss before extraordinary item (8,018) (2,332)
Extraordinary loss arising from
early extinguishment of indebtedness 2,550
----------- -----------
Net loss (10,568) (2,332)
----------- -----------
Retained earnings (accumulated
deficit) - Beginning of period (42,582) 14,837
----------- -----------
Retained earnings (accumulated
deficit) - End of period $ (53,150) $ 12,505
----------- -----------
----------- -----------
Net loss per share of common stock:
Loss before extraordinary
item $ (.37) $ (.11)
Extraordinary loss (.12)
----------- -----------
Net loss $ (.49) $ (.11)
----------- -----------
----------- -----------
Weighted average shares outstanding
21,775,302 21,775,302
----------- -----------
----------- -----------
The accompanying notes are an integral part
of the consolidated financial statements.
4
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NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 26, 1997
AND SEPTEMBER 27, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
September 26, September 27,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 152,415 $ 173,698
Cost of sales 124,084 127,763
---------- ----------
Gross margin 28,331 45,935
Selling, general and administrative expenses 28,774 33,026
Research and development expenses 3,618 5,131
Restructuring expense 2,817 5,780
---------- ----------
Operating income (loss) (6,878) 1,998
Interest expense 6,577 4,024
Other (income) expense items, net 193 (1,093)
---------- ----------
Loss before income taxes and
extraordinary item (13,648) (933)
Provision (benefit) for income taxes (342) (396)
---------- ----------
Loss before extraordinary item (13,990) (537)
Extraordinary loss arising from
early extinguishment of indebtedness 2,550
---------- ----------
Net loss (16,540) (537)
---------- ----------
Retained earnings (accumulated deficit) -
Beginning of period (36,610) (13,042)
---------- ----------
Retained earnings (accumulated deficit) -
End of period $ (53,150) $ (12,505)
---------- ----------
---------- ----------
Net loss per share of common stock:
Loss before extraordinary item $ (.64) $ (.02)
Extraordinary loss (.12)
---------- ----------
Net loss $ (.76) $ (.02)
---------- ----------
---------- ----------
Weighted average shares outstanding 21,775,302 21,759,921
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 26, 1997 AND
SEPTEMBER 27, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
--------------------------------
September 26, September 27,
1997 1996
------------- -------------
Cash flows from operating activities:
Net loss $ (16,540) $ (537)
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Extraordinary loss from early
extinguishment of debt 2,550
Exchange (gains) losses 203 (1,066)
Depreciation and amortization 7,009 6,671
Deferred income taxes (1,369) (537)
Tax benefit from exercise of
stock options 75
Other (56) (1,762)
Changes in working capital:
Accounts receivable 4,724 9,043
Inventories 892 (1,936)
Prepaid expenses 2,125 (3,262)
Accounts payable (9,173) (6,531)
Compensation related liabilities (564) (331)
Other accrued liabilities 9,261 2,908
Cash paid for restructuring (2,882) (3,373)
--------- ----------
Net cash used in operating
activities (3,820) (638)
--------- ----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (2,817) (6,145)
Sale of property, plant and
equipment 50 556
--------- ----------
Net cash used in investing
activities (2,767) (5,589)
--------- ----------
Cash flows from financing activities:
Borrowings on long-term debt and
other loans 15,463 50,651
Payments on long-term debt and
other loans (11,483) (43,863)
Payments of financing costs (2,559)
Exercise of stock options 337
--------- ----------
Net cash provided by
financing activities 1,421 7,125
--------- ----------
Effect of exchange rate changes
on cash (1,763) (2,182)
--------- ----------
Net decrease in cash (6,929) (1,284)
Cash and cash equivalents at
beginning of period 12,275 6,540
--------- ----------
Cash and cash equivalents at end
of period $ 5,346 $ 5,256
--------- ----------
--------- ----------
Excluded from the consolidated
statements of cash flows
was the effect of non-cash
financing activities related
to the issuance of stock
warrants $ 1,005
---------
---------
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 rolls, 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 consolidated balance sheet as of September 26, 1997 and the related
consolidated statements of operations and retained earnings
(accumulated deficit) for the three and six month periods and
consolidated statements of cash flows for the six month periods ended
September 26, 1997 and September 27, 1996 are unaudited. However, in
the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of such financial
statements have been included. Interim results are not necessarily
indicative of results for a full year.
The financial statements and notes are presented as permitted by Form
10-Q, and do not contain certain information included in the Company's
annual financial statements and notes.
2. NET LOSS PER SHARE OF COMMON STOCK
Net loss per share of common stock for the three and six month periods
ended September 26, 1997 and September 27, 1996 is based on the weighted
average number of common shares outstanding during the period and the
effect of considering common stock equivalents (stock options and
warrants) under the treasury stock method. Primary and fully diluted net
loss per share of common stock are the same and, therefore, are not
shown separately.
7
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3. ACCOUNTS RECEIVABLE
Accounts receivable are reflected net of allowances for doubtful
accounts of $4,153 and $3,741 at September 26, 1997 and March 31, 1997,
respectively.
4. INVENTORIES
Inventories consist of the following:
September 26, March 31,
1997 1997
------------- ---------
Raw materials $39,162 $36,847
Work-in-process 14,149 12,354
Finished goods 39,567 44,569
------- -------
Total $92,878 $93,770
------- -------
------- -------
Since physical inventories taken during the year do not necessarily
coincide with the end of a quarter, management has estimated the
composition of inventories with respect to raw materials,
work-in-process and finished goods. It is management's opinion that
this estimate represents a reasonable approximation of the inventory
levels at September 26, 1997. The amounts at March 31, 1997 are based
upon the audited balance sheet at that date.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consists of the
following components:
September 26, March 31,
1997 1997
------------- ---------
Land $ 4,477 $ 4,477
Buildings and improvements 19,417 19,417
Machinery and equipment 82,156 80,490
-------- --------
106,050 104,384
Less accumulated depreciation (33,718) (28,701)
-------- --------
Total $ 72,332 $ 75,683
-------- --------
-------- --------
Depreciation expense amounted to $2,584 and $2,859 for the three month
periods and $5,429 and $5,170 for the six month periods ended September 26,
1997 and September 27, 1996, respectively.
8
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6. INTANGIBLE ASSETS
Intangible assets consist of amounts allocated as a result of purchases
of existing businesses and are summarized as follows:
Amortization September 26, March 31,
Period 1997 1997
------------ ------------- ---------
Goodwill 20 years $ 9,880 $ 9,880
Covenants-not-to-compete 3-5 years 5,636 5,636
Trademark 40 years 9,269 9,269
Technology license 8 years 1,272 1,272
------- -------
26,057 26,057
Less accumulated amortization (7,313) (6,359)
------- -------
Total $18,744 $19,698
------- -------
------- -------
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 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 $454 and $603 at
September 26, 1997 and March 31, 1997, respectively. The line bears
interest at the prevailing Colombia interest rate plus 2 percentage
points. Average interest rates at September 26, 1997 and March 31, 1997
were 16.7% and 17.5%, respectively.
8. LONG-TERM DEBT
Long-term debt of the Company consists of the following:
September 26, March 31,
1997 1997
------------- ---------
Revolving lines of credit $137,635 $133,917
Other items 1,163 1,292
-------- --------
138,798 135,209
Less current portion (403) (532)
-------- --------
Long-term debt, net of current
portion $138,395 $134,677
-------- --------
-------- --------
9
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9. INCOME TAXES
Following are the approximate effective blended tax rates for significant
jurisdictions:
North America 40 %
Switzerland 22 %
Germany 64 %
United Kingdom 33 %
The above resulted in a worldwide effective blended tax rate of 41% and 42%
for the three and six month periods ended September 27, 1996, respectively.
For the six months ended and quarter ended September 26, 1997, no tax benefit
has been provided with respect to any jurisdiction as it is currently not
considered more likely than not that resulting deferred tax assets will be
realized. Additionally, a provision has been made in the amount of $342 for
income taxes in certain foreign jurisdictions.
10. CONTINGENCIES
Three original equipment manufacturers 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 these cases NII's Motion for Summary Judgment of the
unenforceability 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, a former 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.
10
<PAGE>
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. The Company has found environmental
contamination at former Pelikan facilities in Derry, Pennsylvania and
Franklin, Tennessee, and has asserted a claim for indemnification. As a
result of the indemnification's 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.
This note contains various "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934, which represent the Company's expectations or
beliefs concerning the possible outcome of the various litigation matters
described herein and estimates of the Company's liabilities associated with
identified environmental matters. The Company cautions that the actual
outcome of the various litigation matters could be affected by a number of
factors beyond its control, 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 of insurance coverage, and
that the final resolution of such matters could differ materially from the
Company's current evaluation of such matters. The Company further cautions
that the statements regarding identified environmental matters are qualified
by important factors that could cause the Company's actual liabilities 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; (ii) the remedial action selected; (iii) the actual
cleanup level required; (iv) changes in regulatory requirements; (v) the
ability of other responsible parties, if any, to pay their respective shares;
and (vi) any insurance recoveries.
11
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11. RESTRUCTURING EXPENSE
Restructuring activities commenced during fiscal 1997 (the "1997
Restructuring") 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.
Activity related to accrued restructuring costs for the 1997 Restructuring
during the three and six month periods ended September 26, 1997 are as
follows:
Amount Amount
Accrued at Amount Accrued at
Description of Beginning of Paid in Additional End of
Restructuring Expense Period Period Provision Period
--------------------- ------------ ------- ---------- ----------
Three Months Ended
September 26, 1997:
Severance $ 1,426 $ 737 $ 464 $ 1,153
Lease cancellations 430 430
Facility maintenance
and other 233 730 730 233
------- ------- ------- -------
$ 2,089 $ 1,467 $ 1,194 $ 1,816
------- ------- ------- -------
------- ------- ------- -------
Amount Amount
Accrued at Amount Accrued at
Description of Beginning of Paid in Additional End of
Restructuring Expense Period Period Provision Period
--------------------- ------------ ------- ---------- ----------
Six Months Ended
September 26, 1997:
Severance $ 1,204 $ 1,455 $ 1,404 $ 1,153
Lease cancellations 430 430
Facility maintenance
and other 247 1,427 $ 1,413 233
------- ------- ------- -------
$ 1,881 $ 2,882 $ 2,817 $ 1,816
------- ------- ------- -------
------- ------- ------- -------
The Company estimates that an additional $2,200 of restructuring expenses will
be recognized in the remainder of 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. 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
12
<PAGE>
Deeside, Wales and merger of its operations with the Pelikan Hardcopy
Division's operations is 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.
The Company completed the merger activities in fiscal 1997.
Activity related to accrued restructuring costs for the Pelikan merger during
the three and six month periods ended September 27, 1996 are as follows:
Amount Amount
Accrued at Amount Accrued at
Description of Beginning of Paid in Additional End of
Restructuring Expense Period Period Provision Period
--------------------- ------------ ------- ---------- ----------
Three Months Ended
September 27, 1996:
Severance $ 0 $ $ 2,693 $ 2,693
Lease cancellations 425 40 385
Facility maintenance
and other 287 78 209
----- ----- ------- -------
$ 712 $ 118 $ 2,693 $ 3,287
----- ----- ------- -------
----- ----- ------- -------
Amount Amount
Accrued at Amount Accrued at
Description of Beginning of Paid in Additional End of
Restructuring Expense Period Period Provision Period
--------------------- ------------ ------- ---------- ----------
Six Months Ended
September 27, 1996:
Severance $ 71 $ 71 $ 2,693 $ 2,693
Lease cancellations 425 40 385
Facility maintenance
and other 384 175 209
----- ----- ------- -------
$ 880 $ 286 $ 2,693 $ 3,287
----- ----- ------- -------
----- ----- ------- -------
13
<PAGE>
12. 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 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.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards
No. 131, "Disclosure About Segments of an Enterprise and Related
Information". Preliminary analysis of these new standards by the
Company indicates that the standards will not have a material impact on
the Company. the standards are effective for financial statements for
fiscal years beginning after December 15, 1997.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 26, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 27, 1996
Net sales for the quarter ended September 26, 1997 were $72.7 million, a
decline of $13.6 million (15.7%) over the quarter ended September 27, 1996.
For the quarter ended September 26, 1997, sales by North American entities
were $39.4 million, a decline of $5.3 million or 11.9%, as compared to
sales in the previous year period. Sales by European entities declined
$8.4 million, or 20.6%, as compared to the previous year period and were
$32.4 million. Nearly all of the decline in sales by North American
entities was due to the $4.4 million, or 49.4%, decline in sales of ink jet
products which resulted from an across the board decline in sales of ink
jet products combined with the fact that current quarter sales are sales of
units with a lower average sell price versus sales in the previous year
period. Approximately $0.6 million of the decline in sales in Europe was
due to exchange rate fluctuations. The balance of the decline in sales in
Europe was due largely to the continuing decline in sales of impact
products of $7.5 million and a slight across the board decline in sales of
non-impact products, principally in the German market place, of $0.3
million over the previous year period.
Worldwide sales of non-impact supplies accounted for approximately 61% of
total sales for the quarter ended September 26, 1997, compared to 57% of
total sales in the quarter ended September 27, 1996. Sales of non-impact
products as a percentage of worldwide sales increased largely because sales
of impact products declined by $9.0 million (24.3%).
In North America, sales of non-impact supplies amounted to $21.5 million in
the quarter ended September 26, 1997, down $4.1 million or 16% as compared
to the previous year period, and represented 55% of total North American
sales. As previously noted, all of this decline was attributed to a
decline in sales of ink jet products. Sales of non-impact supplies in
Europe were $23.1 million in the quarter ended September 26, 1997 as
compared to $23.6 million in the previous year period.
Cost of sales were $60.1 million (82.7% of net sales) for the quarter ended
September 26, 1997, compared to $65.5 million (76.0% of net sales) in the
previous year period. Included in cost of sales for the quarter ended
September 26, 1997 were $1.7 million (2.4% of net sales) of expenses
incurred because the Company had not completed the transition of impact
product production from the Company's German facility to the Company's
facilities in Scotland, Mexico or China. In addition, gross margin was
adversely impacted during the quarter by $1.0 million (1.4% of net sales),
associated with increased customer allowances and customer rebates in both
North America and Europe.
15
<PAGE>
For the quarter ended September 26, 1997, research and development expenses
amounted to $1.8 million, (2.5% of net sales), as compared to $2.6 million
(3.0% of net sales) in the previous year period. All of the decline in
this expense category occurred in Europe where the Company has implemented
an expense reduction program to maintain research and development expenses
at approximately 2% of net sales.
Selling, general and administrative expenses were $14.1 million in the
quarter ended September 26, 1997 as compared to $15.6 million in the
previous year period. All of the reduction in these expenses resulted from
the Company's implementation of worldwide expense reduction programs.
Restructuring expenses amounted to $1.2 million in the current period and
were in line with previous projections. These expenses related primarily
to: (1) consolidating impact product production into Scotland, Mexico
and China; (2) centralizing distribution primarily into Franklin, Tennessee
and Duren, Germany; and (3) closing one toner facility and consolidating
toner manufacturing into Connellsville, Pennsylvania and Egg, Switzerland.
Interest expense for the current fiscal quarter was $3.6 million, compared
to $2.2 million for the previous year period. The increase is the result
of higher outstanding borrowings and higher interest rates.
For the quarter ended September 26, 1997, the Company increased its tax
valuation allowance by approximately $4.1 million for certain deferred tax
assets generated during the quarter. Under the provisions of SFAS 109, the
Company will recognize an income tax benefit when the deferred tax assets
are actually realized or at such time as it is determined that realization
of the deferred tax assets is more likely than not. The Company reported
tax benefit of $1.6 million in the previous year period.
For the quarter ended September 26, 1997, the Company recognized a net loss
of $10.6 million compared to a net loss of $2.3 million in the previous
year period. The increase in net loss is directly attributable to: (1) the
recognition of an extraordinary charge resulting from the early
extinguishment of debt of $2.6 million; (2) the decrease in sales and the
increased cost of goods sold as a percentage of sales; and (3) the
restructuring charges, higher interest expense and income tax valuation
allowances discussed above.
SIX MONTHS ENDED SEPTEMBER 26, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 27,
1996
Net sales for the six months ended September 26, 1997 were $152.4 million,
a decline of $21.3 million (12.3%) over the six months ended September 27,
1996. For the six months ended September 26, 1997, sales by North American
entities were $81.4 million, a decline of $5.0 million or 5.8%, as compared
to sales in the previous year period. Sales by European entities declined
$16.5 million, or 19.3%, as compared to the previous year period and were
$69.2 million. Sales of ink jet products in North America declined $4.1
16
<PAGE>
million or 28.7% as a result of an across the board decline in sales of ink
jet products combined with the fact that current period sales were sales of
units with a lower average sell price versus sales in the previous year
period. Sales of impact products, toners and laser cartridges and
components in North America were down slightly as compared to the previous
year period. Approximately $1.5 million of the decline in sales in Europe
was due to exchange rate fluctuations. The balance of the decline in sales
in Europe was due largely to the continuing decline in sales of impact
products of $12.4 million and a slight across the board decline in sales of
non-impact products, principally in the German market place, of $2.6
million over the previous year period.
Worldwide sales of non-impact supplies accounted for approximately 60% of
total sales for the six months ended September 26, 1997, compared to 57% of
total sales in the six months ended September 27, 1996. Sales of non-
impact products as a percentage of worldwide sales increased largely
because sales of impact products declined by $14.0 million (18.7%).
In North America, sales of non-impact supplies amounted to $45.6 million in
the six months ended September 26, 1997, down $4.1 million or 8.2% as
compared to the previous year period, and represented 56% of total North
American sales. Sales of non-impact supplies in Europe were $46.1 million
in the six months ended September 26, 1997 as compared to $49.4 million in
the previous year period. All of the decline in sales of non-impact
products in Europe was due to exchange rate fluctuations.
Cost of sales were $124.1 million (81.4% of net sales) for the six months
ended September 26, 1997, compared to $127.8 million (73.6% of net sales)
in the previous year period. Included in cost of sales for the six months
ended September 26, 1997 were $3.2 million (2.1% of net sales) of expenses
incurred because the Company had not completed the transition of impact
product production from the Company's German facility to the Company's
facilities in Scotland, Mexico or China. In addition, gross margin was
adversely impacted during the current period by $2.8 million (1.8% of net
sales), associated with increased customer allowances, rebates and outbound
freight, principally in North America.
For the six months ended September 26, 1997, research and development
expenses amounted to $3.6 million, (2.4% of net sales), as compared to $5.1
million (3.0% of net sales) in the previous year period. All of the
decline in this expense category occurred in Europe where the Company has
implemented an expense reduction program to maintain research and
development expenses at approximately 2% of net sales.
Selling, general and administrative expenses were $28.8 million in the six
months ended September 26, 1997 as compared to $33.0 million in the
previous year period. All of the reduction in these expenses resulted from
the Company's implementation of worldwide expense reduction programs.
Restructuring expenses amounted to $2.8 million in the current period and
were in line with previous projections. These expenses related primarily
to: (1) consolidating impact
17
<PAGE>
product production into Scotland, Mexico and China; (2) centralizing
distribution primarily into Franklin, Tennessee and Duren, Germany; and
(3) closing one toner facility and consolidating toner manufacturing
into Connellsville, Pennsylvania and Egg, Switzerland.
Interest expense for the current fiscal period was $6.6 million, compared
to $4.0 million for the previous year period. The increase is the result
of higher outstanding borrowings and higher interest rates.
For the six months ended September 26, 1997, the Company increased its tax
valuation allowance by approximately $6.5 million for certain deferred tax
assets generated during the period. Under the provisions of SFAS 109, the
Company will recognize an income tax benefit when the deferred tax assets
are actually realized or at such time as it is determined that realization
of the deferred tax assets is more likely than not. The Company reported
tax benefit of $0.4 million in the previous year period.
For the six months ended September 26, 1997, the Company recognized a net
loss of $16.5 million compared to a net loss of $0.5 million in the
previous year period. The increase in net loss is directly attributable
to: (1) the recognition of an extraordinary charge resulting from the early
extinguishment of debt of $2.6 million; (2) the decrease in sales and the
increased cost of goods sold as a percentage of sales; and (3) the
restructuring charges, higher interest expense and income tax valuation
allowances discussed above.
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 $0.2
million in exchange losses and $1.1 million in exchange gains in the six
months ended September 26, 1997 and September 27, 1996, respectively.
LIQUIDITY AND CASH FLOW
For the six months ended September 26, 1997, the Company used $3.8 million
in cash for operations, primarily to fund reductions of accounts payable
and restructuring expenses plus $6.0 for interest payments and $2.8 million
for capital expenditures. As of November 4, 1997, borrowings outstanding
under the Company's credit facilities amounted to $141.6 million, up $7.7
million from March 31, 1997. As of November 4, 1997, the Company had
approximately $2.0 million available for future borrowings under the credit
facilities.
The Company's sources of liquidity and capital include cash provided by
operating activities and borrowings under the Company's credit facility.
The Company has
18
<PAGE>
experienced declining revenues and this has negatively impacted the cash
from operations. As a result, management believes that the Company may
not have adequate sources of cash to meet its near term obligations.
The Company has engaged BT Alex Brown Incorporated to evaluate its
strategic alternatives; to assist the Company in evaluating potential
divestitures, candidates for business combinations; and to assist the
Company in raising new equity capital. Additionally, the Company is
continuing its efforts to sell non-essential assets and reduce
inventories. There can be no assurance that any of these options will
provide the Company with adequate cash to meet its near term
obligations.
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 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.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards
No. 131, "Disclosure About Segments of an Enterprise and Related
Information". Preliminary analysis of these new standards by the
Company indicates that the standards will not have a material impact on
the Company. the standards are effective for financial statements for
fiscal years beginning 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 and Exchange Act of 1934,
which represent the Company's expectations or beliefs concerning, among
other things, future operating results and various components thereof
and the adequacy of future operations to provide sufficient liquidity.
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,
19
<PAGE>
without limitation, general economic conditions, product demand and
industry capacity, competitive products and pricing, manufacturing
efficiencies, new product development, availability of raw materials and
critical manufacturing equipment, new plant startups and the regulatory
and trade environment.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Item 3 - Legal Proceedings in the registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997 and Note 10
of Notes to Consolidated Financial Statements for the three and
six month periods ended September 26, 1997 and September 27, 1996
included elsewhere in this report.
ITEMS 2 - 3 INAPPLICABLE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The registrant's annual meeting of shareholders was held
on September 25, 1997 (the "Annual Meeting").
(b) See item (c) below.
(c) The following matters were considered at the Annual
Meeting and approved by the votes indicated:
(i) Each of the following nominees was elected to the
Board of Directors of the registrant:
Votes For Votes Withheld
--------- --------------
Donald A. Bolke 13,903,560 98,705
David F. Brigante 11,372,760 2,629,505
Brian D. Finn 13,907,460 94,805
Patrick E. Howard 13,909,360 92,905
John P. Rochon 13,909,560 92,705
(ii) The appointment of Coopers & Lybrand L.L.P. as the
registrant's independent auditors for the fiscal year
ending March 31, 1998 was ratified at the Annual
Meeting by a vote of 11,427,377shares "For",
47,525 shares "Against" and 2,527,363 shares "Abstain".
(d) Inapplicable.
ITEM 5- INAPPLICABLE
21
<PAGE>
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 11.1 - Statement regarding computation of per
share earnings.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
The registrant filed no reports on Form 8-K during the
quarterly period ended September 26, 1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirements 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 November 7, 1997 /s/ Patrick E. Howard
--------------------------- ----------------------------
Patrick E. Howard
Chief Executive Officer
Date November 7, 1997 /s/ Anthony G. Schmeck
--------------------------- ----------------------------
Anthony G. Schmeck
Senior Vice President, Finance
Corporate Controller and Secretary
23
<PAGE>
EXHIBIT 11.1
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
FOR THE THREE MONTHS ENDED
-----------------------------
SEPTEMBER 26, SEPTEMBER 27,
1997 1996
------------- -------------
<S> <C> <C>
PRIMARY
Shares outstanding:
Weighted average number of shares outstanding 21,775 21,775
Net effect of dilutive stock options and warrants (1)
-------- -------
21,775 21,775
-------- -------
-------- -------
Loss before extraordinary item $ (8,018) $(2,332)
Extraordinary loss (2,550)
-------- -------
Net loss $(10,568) $(2,332)
-------- -------
-------- -------
Loss per common share before extraordinary item $ (0.37) $ (0.11)
Extraordinary loss per common share (0.12)
-------- -------
Net loss per common share $ (0.49) $ (0.11)
-------- -------
-------- -------
FULLY DILUTED
Shares outstanding:
Weighted average number of shares outstanding 21,775 21,775
Net effect of dilutive stock options and warrants (1)
-------- -------
21,775 21,775
-------- -------
-------- -------
Loss before extraordinary item $ (8,018) $(2,332)
Extraordinary loss (2,550)
-------- -------
Net loss $(10,568) $(2,332)
-------- -------
-------- -------
Loss per common share before extraordinary item $ (0.37) $ (0.11)
Extraordinary loss per common share (0.12)
-------- -------
Net loss per common share $ (0.49) $ (0.11)
-------- -------
-------- -------
</TABLE>
24
<PAGE>
EXHIBIT 11.1 (CONTINUED)
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
FOR THE SIX MONTHS ENDED
-----------------------------
SEPTEMBER 26, SEPTEMBER 27,
1997 1996
------------- -------------
<S> <C> <C>
PRIMARY
Shares outstanding:
Weighted average number of shares outstanding 21,775 21,760
Net effect of dilutive stock options and warrants (1)
-------- -------
21,775 21,760
-------- -------
-------- -------
Loss before extraordinary item $(13,990) $ (537)
Extraordinary loss (2,550)
-------- -------
Net loss $(16,540) $ (537)
-------- -------
-------- -------
Loss per common share before extraordinary item $ (0.64) $ (0.02)
Extraordinary loss per common share (0.12)
-------- -------
Net loss per common share $ (0.76) $ (0.02)
-------- -------
-------- -------
FULLY DILUTED
Shares outstanding:
Weighted average number of shares outstanding 21,775 21,760
Net effect of dilutive stock options and warrants (1)
-------- -------
21,775 21,760
-------- -------
-------- -------
Loss before extraordinary item $(13,990) $ (537)
Extraordinary loss (2,550)
-------- -------
Net loss $(16,540) $ (537)
-------- -------
-------- -------
Loss per common share before extraordinary item $ (0.64) $ (0.02)
Extraordinary loss per common share (0.12)
-------- -------
Net loss per common share $ (0.76) $ (0.02)
-------- -------
-------- -------
</TABLE>
- -------------------
(1) For the three and six month periods ended September 26, 1997 and
September 27, 1996, respectively, stock options and warrants are not
considered as those periods resulted in net losses, making the stock
options and warrants anti-dilutive.
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-26-1997
<CASH> 5,346
<SECURITIES> 0
<RECEIVABLES> 71,117
<ALLOWANCES> 4,153
<INVENTORY> 92,878
<CURRENT-ASSETS> 179,593
<PP&E> 106,050
<DEPRECIATION> 33,718
<TOTAL-ASSETS> 282,782
<CURRENT-LIABILITIES> 94,405
<BONDS> 138,395
0
0
<COMMON> 223
<OTHER-SE> 31,961
<TOTAL-LIABILITY-AND-EQUITY> 282,782
<SALES> 152,415
<TOTAL-REVENUES> 152,415
<CGS> 124,084
<TOTAL-COSTS> 124,084
<OTHER-EXPENSES> 35,402
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,577
<INCOME-PRETAX> (13,648)
<INCOME-TAX> 342
<INCOME-CONTINUING> (13,990)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,550)
<CHANGES> 0
<NET-INCOME> (16,540)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
