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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[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, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20287
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NU-KOTE HOLDING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
16-1296153
DELAWARE (I.R.S. EMPLOYER-
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
200 BEASLEY DRIVE, FRANKLIN, 37064
TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code: (615) 794-9000
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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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
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 22, 1998, 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 $5,002,962. 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 that 10% of the Registrant's outstanding shares has been excluded.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ITEM 1. BUSINESS
GENERAL
Nu-kote Holding, Inc. (the "Company" or "Registrant"), through its wholly
owned subsidiaries, is a manufacturer and distributor of impact and non-impact
imaging supplies for office and home printing devices. The Registrant acquired
International Communication Materials, Inc. ("ICMI") in February 1992 (the
"ICMI Acquisition"), Future Graphics, Inc. ("Future Graphics") in February
1993 (the "Future Graphics Acquisition"), and the worldwide hardcopy supplies
business (the "Pelikan Hardcopy Division") of Pelikan Holding AG of Zug,
Switzerland ("Pelikan") in February 1995 (the "Pelikan Acquisition"). ICMI is
an independent manufacturer of toner for non-impact printers and copiers and
Future Graphics is a remanufacturer of laser printer cartridges. Both are
located in the United States. In December 1997, the Company disposed of the
Future Graphics cartridge components division. The Company's Pelikan Hardcopy
Division is both a European and U.S. manufacturer of supplies for impact and
non-impact printers.
The Registrant's operations involve a single industry segment--the
manufacture and distribution of typewriter and printer ribbons, thermal fax
ribbons, cartridges and toners for laser printers, facsimile machines and
copiers, cartridges and ink for ink jet printers, specialty papers, calculator
ink rollers, and carbon paper. For financial information relating to foreign
and domestic operations, see Note 15 of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS."
The Registrant's principal executive offices are located at 200 Beasley
Drive, Franklin, Tennessee 37064, telephone number (615) 794-9000. All
references herein to the "Company" or "Registrant" include the Company and its
subsidiaries, unless the context otherwise requires.
PRODUCTS
The Registrant manufactures and/or distributes over 1,500 products in more
than 3,000 different packaging configurations through its North American
operations and over 1,700 products in more than 4,800 different packaging
configurations through its European operations. Additionally, the Registrant
introduced nine new products into the North American market and twenty-three
new products into the European market in fiscal 1998, all of which were non-
impact supplies. The Registrant discontinued selling approximately 1,300
packaging configurations in the U.S. and 2,200 in Europe in fiscal 1998. There
is significant overlap between the North America and European product lines
and many of the 1,500 products manufactured and/or distributed in North
America are the same as the 1,700 products manufactured and distributed in
Europe. The Registrant's products are used in over 30,000 different models of
impact and non-impact printing mechanisms. Impact printer products include
printer, typewriter, point of sale and calculator ribbons, calculator and cash
register ink rollers, and other supplies for use in impact printing
mechanisms. The Registrant is a manufacturer and distributor of magnetic ink
character recognition ("MICR") ribbons for check encoding printers. The
Registrant's non-impact printing products include monochrome and color toner
for laser printers, copiers, and plain paper facsimile machines, supplies for
ink jet printers and facsimile machines, and remanufactured cartridges for
laser printers. In addition, the Registrant manufactures and distributes
thermal wax products for bar code and facsimile machines, and specialty papers
and films for use in ink jet printers.
Finished products are currently sold both at the retail level under the Nu-
kote and Pelikan brand names and to original equipment manufacturers ("OEMs")
of printing equipment. OEM products are manufactured to the OEMs
specifications and sold both with the original hardware and in the
aftermarket. The Registrant also sells intermediate products such as rolls of
coated film and containers of bulk laser and copier toner.
The Registrant also manufactures and distributes a variety of compatible ink
jet cartridges for use in Canon and Epson and HP ink jet printers, as well as
a line of HP compatible cartridge refill kits designed for the home or small
business user, and provides a cartridge remanufacturing service similar to the
one employed for remanufactured laser toner cartridges.
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MARKETS AND DISTRIBUTION
The Registrant currently sells its products directly to wholesale, retail
and manufacturing markets under the Nu-kote(R), Pelikan(R), and ICMI(R) brand
names, and also to OEMs and distributors for resale under their brand names or
private labels. Nu-kote(R) and Pelikan(R) branded products are distributed
through major office supply marketing channels, including wholesale
distributors, office products dealers, direct mail catalogs, office supply
"superstores", information processing specialists, value added resellers and
mass market retailers. ICMI(R) brand laser toners are marketed to distributors
serving the laser cartridge remanufacturing market. Nu-kote(R) and Pelikan(R)
brand products are compatible with substantially all impact printing devices
currently in use and the Registrant's laser products are compatible with over
90% of the low to mid-range laser printers now on the market. OEM products are
manufactured to the OEMs specifications and sold both with the original
hardware and in the aftermarket. The Registrant sells its products subject to
limited warranties. Historically, product liability and warranty claims have
been immaterial.
The market for supplies for typewriters and other impact printers has been
declining in recent years and is expected to continue to decline as non-impact
printing devices become more popular and replace many of the impact printers
now in service. During fiscal 1998, the Registrant experienced a decline of
approximately 6.5% in its sales from impact products. While the Registrant
expects the market for supplies for typewriters and other impact printers to
continue to decline as a whole, the Registrant believes there will continue to
be an important market for its ribbon products for the foreseeable future. The
selling prices for the Registrant's impact products have come under pressure
as competitors have reduced prices in an attempt to preserve their portion of
a declining market.
MATERIALS
The principal raw materials used in the production of the Registrant's
impact and non-impact products are polymer film and fabric, packaging
materials, polypropylene pellets, wax, carbon and ink. These materials
generally are readily available. The Registrant has not historically
experienced difficulties obtaining an adequate supply of raw materials from
outside sources and does not currently anticipate that it will experience any
such shortage in the foreseeable future. The Registrant obtains certain
materials from single suppliers, but believes that such supplies could be
obtained from alternative sources if required without creating any material
shortage for the Registrant.
To a large extent, the Registrant relies on its ability to obtain used laser
printer cartridges and ink jet heads for remanufacturing. While used
cartridges and ink jet heads are currently readily available, potential entry
into the markets for such products by OEMs could adversely affect the
Registrants ability to obtain used cartridges or ink jet heads for
remanufacturing.
CUSTOMERS
No one customer accounted for more than 10% of the Registrant's sales in
fiscal 1998. Backlogs were $29.4 million and $23.3 million as of March 31,
1998 and March 31, 1997, respectively, and are anticipated to be satisfied
within the succeeding fiscal year.
BUSINESS STRATEGY
The Registrant intends to maintain its current market position in the impact
and non-impact printer supplies market by continuing to capitalize on its
quality reputation, research and development capabilities, customer service
and marketing innovations, as well as its ability to offer wholesalers,
catalog merchandisers and retailers a complete line of impact and non-impact
printing supplies ("one-stop shopping"). Although the Registrant expects the
ribbon market to continue to decline as a whole, it believes that the large
base of existing typewriters and impact printers in North America and Europe
and the demand for basic printing and imaging products will result in
continuation of an important market for impact supplies for the foreseeable
future.
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COMPETITION
The printing supplies market is extremely competitive. In both the impact
and non-impact markets, the Registrant's biggest competitors are the OEMs,
most of which are substantially larger and have greater financial resources
than the Registrant. In the impact supplies business, some OEMs manufacture
their own ribbon products. Other OEMs buy ribbons from outside suppliers. In
addition, there are currently over 100 independent ribbon manufacturers in the
United States and over 200 worldwide, ranging from small local producers to
national and international companies.
OEMs currently dominate the market for the majority of toner products and
ink jet supplies. However, the market for compatible toner supplies is still
developing, and there are currently several independent competitors in this
market. The willingness of OEMs to offer ink jet products at very low prices,
and the possibility of substantial price reductions by one or more OEMs, could
have a material adverse effect on the portion of the Registrant's business
affected thereby. The remanufactured laser printer cartridge market and the
cartridge remanufacturing and refilling market have historically consisted of
numerous small independent producers. Recently, however, various OEMs have
entered these markets resulting in a significant increase in competition.
TRADEMARK, PATENTS AND LICENSES
The NU-KOTE trademark is registered in the United States and 28 foreign
countries and is subject to pending application in one other country. Other
significant trademarks of the Registrant are subject to U.S. and foreign
applications and registrations. The ICMI trademark is also registered in the
United States as well as being registered or the subject of pending
applications in several other countries. The Registrant also holds over 80
registered trademarks related to the Pelikan Hardcopy Division, nine of which
are in the U.S. The Registrant considers the NU-KOTE, ICMI, and Pelikan
Hardcopy Division trademarks material to its business. As of March 31, 1998,
the Registrant held over 60 patents in the United States and approximately 400
patents in various foreign jurisdictions. In addition, the Registrant has more
than 30 U.S. and 90 foreign patent applications pending. All of such patents
and applications are for product or production methods. The Registrant
considers these patents to be material to its business.
The Registrant has obtained licenses to use certain intellectual property
rights of other companies, including an exclusive, fifty-year, royalty-free,
fully paid-up, worldwide license, directly and through its subsidiaries, to
use the "PELIKAN" name or trademark and Pelikan BIRD LOGO, and the
registrations and applications therefor, in the hardcopy supplies business
subject to certain terms and conditions. The Registrant considers the Pelikan
trademark to be material to its business. In June 1998, the Registrant
received a letter from Pelikan GmbH purporting to terminate this license based
upon the alleged misuse of the trademark by one of Registrant's distributors
that is located in Dubai (United Arab Emiretes). The distributor is alleged to
have improperly used the trademark in connection with an invitation to an
exhibit, one trade show in 1997 and a newspaper report. Although the
Registrant and the licensor have previously discussed alleged defaults under
the license, the Registrant believes that, to the extent there were any
breaches under the license, they were addressed. The Registrant also holds a
license to use certain IBM patents in various countries. In return for such
IBM patent rights, the Registrant must disclose, and upon payment of a
royalty, license its technological developments related to such patents to
IBM.
RESEARCH AND DEVELOPMENT
The Registrant incurred $6.6 million, $9.6 million, and $9.6 million in
research and development costs in fiscal years 1998, 1997, and 1996,
respectively. These costs are primarily related to non-impact product research
conducted by the Registrant's European subsidiaries. The Registrant expects to
incur approximately $6.2 million in fiscal 1999 in research and development
activities.
ENVIRONMENTAL AND REGULATORY MATTERS
The Registrant is subject to regulation at the federal, state and local
levels, as well as outside of the U.S., including, in particular, regulations
relating to environmental matters. Such regulations are often complex and
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are subject to change. The Registrant is required to obtain permits from a
number of governmental agencies in order to conduct various aspects of its
business. Such permits are subject to modification and revocation, which could
impair the Registrant's ability to conduct its business in the manner and at
the places it is presently conducted. Regulatory or legislative changes may
cause future increases in the Registrant's operating costs or otherwise affect
its operations.
In connection with the acquisition by the Registrant in 1986 of the
Worldwide Office Supplies Division and the International Business Forms
Division (the "Unisys Divisions") of Unisys Corporation ("Unisys"), Unisys
agreed to indemnify the Registrant for liabilities resulting from or arising
out of any environmental conditions existing on or before January 16, 1987 at
the Registrant's Rochester, New York facility and at facilities located in
Macedon, New York and Bardstown, Kentucky, which have been sold by the
Registrant. The New York Department of Environmental Conservation ("DEC"),
with respect to the Rochester and Macedon facilities, and the Kentucky
Environmental Protection Agency, with respect to the Bardstown facility, have
alleged that environmental contamination exists at such sites. The Registrant
has been advised that Unisys is cooperating with these state environmental
agencies in connection with the testing for and investigation of contamination
and, with respect to the Rochester and Bardstown sites, is implementing
measures to complete remediation. The Registrant has been informed that Unisys
is undertaking three years of groundwater monitoring at the Macedon facility
pursuant to a consent order with the DEC, to demonstrate that the site
requires no further remediation or monitoring. As a result of the
indemnification from Unisys, in the opinion of the Registrant's management,
the ultimate cost to resolve these environmental matters will not have a
material adverse effect on the Registrant's financial position, results of
future operations or liquidity.
In connection with the Pelikan Acquisition, Pelikan agreed to indemnify the
Registrant for all losses, liabilities and costs resulting from or arising out
of environmental conditions existing on or prior to the closing on February
24, 1995 at the facilities acquired from Pelikan, such as Registrant's Derry,
Pennsylvania and Franklin, Tennessee facilities. With respect to certain
potential pre-closing environmental liabilities and costs identified on a
schedule agreed to by the Registrant and Pelikan, Pelikan's liability is
limited to $2.5 million, which is collateralized by a letter of credit.
Pelikan's liability for all other pre-closing environmental liabilities and
costs is unlimited in amount but expired on the third anniversary of the
closing, except as to the certain claims that were asserted by the Registrant
before the 30th day following the third anniversary of the closing. Registrant
has undertaken limited environmental investigations at Registrant's Derry,
Pennsylvania and Franklin, Tennessee facilities due to reports of certain
environmentally suspect activities having taken place pre-closing at those
facilities. The investigation of the environmental condition of the soil at
the Derry facility detected material contamination. The investigation of the
environmental condition of the soil and groundwater at the Franklin facility
also detected material contamination at this site as well as at certain
European facilities. Registrant has notified Pelikan of the existence of the
detected material contamination.
With regard to the Derry facility, the Registrant has requested the
Pennsylvania Department of Environmental Protection ("PA-DEP") determine the
minimum further investigation and remediation required to bring this facility
into compliance with Pennsylvania law and to allow the Registrant to receive a
release from further liability under Pennsylvania law. After completion of the
forthcoming phase of site characterization activities to be conducted with the
concurrence of PA-DEP, the Registrant expects to enter into an administrative
agreement for the remaining investigation and remediation at this facility.
With regard to the Franklin facility, the Registrant has agreed upon the
terms of administrative Consent Order and Agreement, Index No. 94-511, with
the Tennessee Department of Environment and Conservation("T-DEC") to
facilitate the investigation, removal and remediation of the hazardous
substances, and to reimburse the T-DEC for certain costs incurred by T-DEC at
or in connection with the Franklin facility. The Registrant expects to enter
into the administrative Consent Order and Agreement with T-DEC within the next
30 days.
With regard to the Derry and Franklin facilities, the Registrant has not
been able to estimate the potential cleanup costs with any degree of
certainty. The Registrant, nevertheless, has obtained and notified Pelikan of
very preliminary cost estimates for the cleanup associated with these
facilities. Based on the indemnification
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obligation of Pelikan, environmental surveys conducted by environmental
consultants in connection with the Pelikan Acquisition, and the notice of the
existence of environmental contamination given by the Company prior to the
30th day following the third anniversary of the closing, management of the
Registrant nevertheless does not believe that any environmental costs incurred
in connection with the environmental matters identified on the pre-closing
schedule or during the limited environmental investigations of Registrant's
Derry and Franklin facilities will have a material impact on the Registrant's
financial condition, results of operations or liquidity.
Management of the Registrant believes that changes in the Pelikan Hardcopy
Division's facilities and operations to comply with current environmental
discharge and emission regulations will mainly result in costs to acquire
tangible property which the Registrant expects to depreciate over at least a
ten-year period. Therefore, management of the Registrant does not expect
expenses associated with compliance by the Pelikan Hardcopy Division with
current environmental regulations to have a material impact on future
recurring operating costs. A number of raw materials used to manufacture
toners and inks in the Pelikan Hardcopy Division's products are subject to
frequent scientific and regulatory reevaluation to determine the potential
environmental hazards, and may be subjected to changing regulations.
Management of the Registrant does not believe that in Europe any increases in
net operating costs associated with compliance with future environmental
regulations can be passed on to most present European customers without a
material impact on future earnings. Management believes that in the U.S., it
is also unlikely that it will be able to pass on to such customers future
increases, if any, in environmental compliance costs.
Federal, state and local and foreign agencies regulate the disposal,
handling and storage of waste, and air and water discharges from the
Registrant's facilities. Based on current regulations and the condition of its
facilities, the Registrant does not currently anticipate a material amount of
environmental capital expenditures in excess of the amounts for which the
Company is indemnified by third parties.
The Registrant employs an environmental compliance officer who is charged
with formulating policies for the Registrant's facilities to promote
compliance with environmental laws. The Registrant has taken measures to
improve monitoring of the Registrant's emissions to the environment at the
Rochester and Macedon facilities, including the implementation of a chemical
usage tracking system (which generates incoming solvent inventory and usage
data) and a mass balance method for calculating total emissions. In addition,
Registrant has had an environmental consultant conduct a regulatory
environmental compliance audit of Registrant's Franklin, Tennessee,
Connellsville, Pennsylvania, Derry, Pennsylvania and Chatsworth, California
facilities. These measures help the Registrant to comply with its reporting
and record keeping obligations under applicable environmental laws.
The foregoing "Environmental and Regulatory Matters" section and Note 12 of
"Notes to Consolidated Financial Statements", insofar as they relate to such
matters, contain various "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities and Exchange Act of 1934 (the "Exchange Act"), which
represent the Registrant's expectations or beliefs concerning future events,
including statements regarding estimates of the Company's liabilities
associated with identified environmental matters and the likelihood that any
liability in excess of expected indemnification payments and reserves for such
matters will not materially affect the Company's financial position or results
of future operations or liquidity. The Company cautions that these statements
are further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements, including,
without limitation, the following: (i) the actual nature and extent of
contamination, if any, which exists at the Company's facilities, (ii) the
remedial action selected by the company or required by governmental agencies,
(iii) the cleanup level required, (iv) changes in regulatory requirements, (v)
the ability of other responsible parties, if any to pay their respective
shares of remediation costs and meet their indemnification obligations, and
(vi) whether any insurance recoveries are available or realized. Results
actually achieved thus may differ materially from expected results included in
these and any other forward looking statements contained herein.
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EMPLOYEES
The Registrant employs approximately 2,300 persons worldwide. Except for
approximately 90 employees who are covered by a collective bargaining
agreement with the United Steel Workers at the Registrant's Connellsville,
Pennsylvania facility, none of the Registrant's other North American employees
are represented by a labor union. Approximately 300 of the Registrant's
Turriff (Scottland), Greif (Germany) and MIT (Sweden) employees are also
governed by various union agreements. The Registrant considers its employee
relations to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Registrant, their positions and offices and,
as of June 22, 1998, their ages and years of service with the Registrant (and
its predecessors) are set forth below.
<TABLE>
<CAPTION>
YEARS WITH
THE REGISTRANT
POSITION(S) AND ITS
NAME OF INDIVIDUAL AGE HELD PREDECESSORS
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<S> <C> <C> <C>
Shaun K. Donnellan...... 53 President and Chief Executive Officer 1
William R. Ligon........ 57 General Manager, North American Operations 1
Richard A. Larsen....... 49 Senior Vice President, General Counsel and 3
Secretary
Phillip L. Theodore..... 31 Senior Vice President, Chief Financial 4
Officer, Treasurer and Assistant Secretary
</TABLE>
Mr. Donnellan has been President, Chief Executive Officer and Chief
Operating Officer of the Company since December 1997. Mr. Donnellan is also
President of Glass & Associates, Inc., a management-consulting firm, engaged
by the Company to provide interim management services. He has been an
associate of Glass & Associates, Inc. since 1990. Prior to that, Mr. Donnellan
held various executive positions with both international and domestic
companies in the areas of marketing, operations, engineering and finance.
Mr. Ligon has been General Manager, North American Operations since January
1998. Mr. Ligon has been an associate of Glass & Associates, Inc. since 1997,
a management consulting firm, engaged by the Company to provide interim
management services. Prior to that, he was President of PAL Health
Technologies from 1994 to 1997 and Vice President of Operations of Morton
Metalcraft Co. from 1990 to 1994.
Mr. Larsen has been Senior Vice President and General Counsel of the
Registrant since June 1995 and has also been Secretary of the Company since
March 1998. Prior to joining Nu-kote, Mr. Larsen was Vice President, General
Counsel and Secretary of Harris Adacom Corporation for five years.
Mr. Theodore has been Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary since March 1998. He joined the Registrant
in June 1994 to serve as controller of the North American Operations. Prior to
joining the Registrant, Mr. Theodore was a manager at Coopers & Lybrand L.L.P.
and worked in the business assurance group where he specialized in mergers and
acquisitions. Mr. Theodore is a Certified Public Accountant.
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CERTAIN SIGNIFICANT EMPLOYEES
The following individuals are not Executive Officers of the Registrant, but
have significant management roles.
<TABLE>
<CAPTION>
YEARS WITH
THE REGISTRANT
AND ITS
NAME OF INDIVIDUAL AGE POSITION(S) HELD PREDECESSORS
------------------ --- ---------------- --------------
<S> <C> <C> <C>
Hans Paffhausen......... 48 Managing Director, European Operations 21
C. Ronald Baiocchi...... 54 Vice President, Nu-kote International, Inc. 20
Ian Elliott............. 40 Vice President--Product Development, Nu- 20
kote International, Inc.
</TABLE>
Mr. Paffhausen has been Managing Director of the Registrant's European
Operations since the Pelikan Acquisition in February 1995. He joined Pelikan
in 1977 and served in positions of increasing responsibility in research and
development, engineering, production and operations, including three years as
the General Manager of Pelikan Scotland (formerly Caribonum) and two and one-
half years as Director of Pelikan's U.S. Operations in Franklin, Tennessee.
Mr. Paffhausen was appointed Managing Director of the Pelikan Hardcopy
Division in January 1994. From January 1994 until the Pelikan Acquisition he
also served as Chief Director of Operations of Pelikan for the worldwide
Pelikan organization.
Mr. Baiocchi has been Vice President, Nu-kote International, Inc. since
January 1987. Mr. Baiocchi joined Burroughs Corporation (now Unisys) in
October 1978 and has held a number of executive positions in manufacturing,
product management, sales and marketing and business planning.
Mr. Elliott has been Vice President, Product Development, Nu-kote
International, Inc. since September 1996. He joined Burroughs Corporation (now
Unisys) in the United Kingdom in 1978 and has served in positions of
increasing responsibility primarily in sales and product management functions,
within Europe and the U.S. From April 1994 to September 1996, he served as
Vice President, Business Development and Director, Product Management--North
American Supplies Group from 1993.
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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>
Rochester, New York..... 70,232 Manufacturing, research and Leased (1)
development and distribution
Rochester, New York..... 10,952 Manufacturing Leased (2)
Macedon, New York....... 11,105 Manufacturing Held for Sale (3)
Connellsville, 61,154 Manufacturing, research and Owned
Pennsylvania........... development and distribution
Chatsworth, California.. 46,600 Manufacturing, research and Leased (2)
development and distribution
Chatsworth, California.. 17,000 Warehouse Leased (4)
Nogales, Sonora, Mexico. 75,000 Warehouse Held for Sublet
Nogales, Sonora, Mexico. 62,775 Manufacturing Leased (2)
Nogales, Arizona........ 75,000 Warehouse Held for Sublet
Franklin, Tennessee..... 136,703 Manufacturing, distribution and Owned
headquarters
Franklin, Tennessee..... 31,600 Manufacturing, research and Leased (1)
development
Derry, Pennsylvania..... 133,022 Warehouse Held for Sale
Bardstown, Kentucky..... 7,200 Administration Leased (5)
Uniontown, Pennsylvania. 33,600 Manufacturing, distribution Leased (4)
Uniontown, Pennsylvania. 6,000 Warehouse Leased (4)
Goodlettsville, 56,000 Warehouse Held for Sublet
Tennessee..............
Turriff, Scotland....... 137,779 Manufacturing, administration, Leased (7)
research and development
Goslar, Germany......... 172,224 Manufacturing, administration Held for Sale
Egg Lee, Switzerland.... 146,390 Manufacturing, research and Owned
development
Egg, Rietweis, 17,750 Office, sales and administration Leased (2)
Switzerland............
Monchaltorf, 37,674 Manufacturing, research and Owned
Switzerland............ development
Lenglow, China.......... 25,092 Manufacturing Leased (2)
Jarfalla, Sweden........ 58,400 Manufacturing, research and Leased (1)
development
Hong Kong............... 4,300 Warehouse Leased (2)
Duren, Germany.......... 103,620 Logistics center Leased (7)
</TABLE>
- - --------
(1) Lease expires 2001
(2) Lease expires 2000
(3) Sold June 15, 1998
(4) Month to month lease
(5) Lease expires 2002
(6) Lease expires 2004
(7) Lease expires in 3 increments in 2010, 2015, and 2019
In addition, the Registrant maintains sales offices in various locations
throughout the United States and Europe.
The Registrant believes its facilities are in good operating condition,
suitable for their intended purposes and provide sufficient production
capacity for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
On May 19, 1995, ICMI filed a declaratory judgement action against Ricoh
Company, Ltd. and Ricoh Corporation (collectively, "Ricoh") in the United
States District Court for the Western District of Pennsylvania seeking a
determination by the court that the current design of one of its toner
cartridges does not infringe one of Ricoh's patents. In August of 1995, Ricoh
filed a motion for preliminary injunction to enjoin the sale of the cartridge.
Following a hearing on Ricoh's motion for preliminary injunction held on
August 19, 1995, the Court denied Ricoh's motion, finding in part that the
evidence indicated ICMI's current toner cartridge did not infringe Ricoh's
patent. In September 1995, ICMI filed a motion for summary judgment as to the
noninfringement of the Ricoh patent by ICMI's current toner cartridge. This
case was settled and dismissed by joint stipulation by the parties in late
1997.
On September 19, 1994, Hewlett-Packard Company, a California corporation
("HP"), filed a lawsuit against Nu-kote International in the United States
District Court for the Northern District of California seeking, among other
things, to have the Court enjoin Nu-kote International and its affiliates from
infringing its patents and from using HP's trademarks in a manner likely to
cause confusion or mistake, or to deceive, and from making any false and
misleading statements regarding Nu-kote International replacement ink jet
cartridges and kits, and, also seeks compensatory punitive and treble damages,
court costs and attorney's fees. Nu-kote International has filed an answer to
the lawsuit denying HP's allegations and asserting twelve affirmative defenses
that include, among others, that HP's patents are invalid, unenforceable or
not infringed by Nu-kote International, that HP has defrauded the U.S. Patent
and Trademark Office and trademark misuse. Nu-kote International has also
asserted seven counterclaims against HP including counterclaims for false,
deceptive and misleading statements in violation of the Lanham Act, patent
invalidity and unenforceablility, violations of the Sherman and Clayton
Antitrust Acts for monopolization and attempted monopolization, illegal
conduct in restraint of trade and illegal tying arrangements, and has
requested a declaration that Nu-kote International has not infringed any valid
patent of HP. Nu-kote seeks damages and an injunction for acts in restraint of
trade, false advertising, trade liable, defamation and unfair competition. In
April 1997, Nu-kote International filed a Motion for Preliminary Injunction
seeking to enjoin HP from producing and selling its bottom ink filler
cartridges. On July 11, 1997, the Court granted in part and denied in part Nu-
kote's Motion for Preliminary Injunction.
The court held oral arguments regarding the complaint in June 1998 and a
ruling is expected during the summer or early fall of 1998. On September 25,
1997, Nu-kote International filed a motion for Summary Judgment with regard to
ten of HP's patents. On May 5, 1998, the Special Master appointed by the Court
granted Nu-kote International's motion and recommended that 10 of HP's
asserted patents be ruled not infringed. HP has appealed the decision to the
District Court. On January 21, 1998 HP filed a Third Amended Complaint. That
Complaint adds a new claim against Nu-kote International for federal trademark
dilution. This claim is similar to the California claims for trademark
dilution and injury to business reputation that HP already alleged. The Court
has scheduled a claim construction hearing to construe the claims of the
patents-in-suit. The parties will exchange claim construction charts in May
through August of 1998 and a hearing is scheduled for September 18, 1998. The
parties have been and continue to be engaged in a court ordered mediation
process in an effort to settle this litigation.
On April 3, 1995, Canon, Inc., a Japan corporation, and its U.S. affiliates,
Canon Computer Systems, Inc. and Canon USA, Inc. (collectively "Canon"), filed
a lawsuit against Nu-kote International in the United States District Court
for the Central District of California seeking, among other things, to have
the Court enjoin Nu-kote International and its affiliates from infringing its
patents and from making false designations of origin or false descriptions
regarding Nu-kote International's cartridges and kits, and, also seeks
compensatory, punitive and treble damages, court costs and attorney's fees.
Nu-kote International has filed an answer asserting twelve affirmative
defenses to the claims alleged in Canon's complaint. These include, among
others, defenses that Canon's patents are invalid, unenforcable and/or not
infringed by Nu-kote International, that Canon has defrauded the U.S. Patent
and Trademark office and trademark misuse. Additionally, Nu-kote International
has alleged counterclaims which include claims of monopolization and attempted
monopolization of the aftermarket for replacement cartridges for Canon
printers. Nu-kote International is also seeking declaratory relief asking the
Court to find that it has not infringed any valid claim of Canon's right in
the six patents in the suits, cancellation
10
<PAGE>
of Canon's patents because of fraud on the U.S. Patent and Trademark Office,
damages and an injunction for intentional interference with business
relations, trade liable, disparagement of goods, defamation and unfair
competition. In July 1996 Canon filed a second and related lawsuit, alleging
infringement of its 5,509,140 utility patent (the "140" patent).
The Court granted Canon's motion for summary judgement on validity and
infringement on the 140 patent. Trial of the other patent claims is currently
scheduled to commence in September 1998. Nu-kote International believes the
current designs of its Canon compatible ink jet cartridges do not infringe any
Canon patent and is vigorously defending its position.
Seiko Epson Corporation, a Japan corporation, and its U.S. affiliate, Epson
America Inc. (collectively "Epson"), filed a lawsuit against the Registrant,
Nu-kote International and Pelikan Productions, A.G. in the U.S. District Court
for the Central District of California. Epson seeks to have the court enjoin
Nu-kote International and its affiliates from selling replacement Epson
compatible ink jet cartridges and from using Epson's registered trademarks in
a manner likely to cause confusion or mistake, or to deceive, and from making
any false and misleading representations regarding replacement Epson
compatible ink jet cartridges, and, also seeks compensatory and treble
damages, court costs and attorney's fees. Nu-kote International and Pelikan
have filed answers that assert nine affirmative defenses to the claims alleged
in Epson's complaint. These include, among others, that Epson's patents are
invalid, unenforceable and are not infringed and trademark misuse. Nu-kote
International and Pelikan also allege various counterclaims against Epson,
including claims for monopolization and attempted monopolization of the
aftermarket for certain replacement cartridges and violation of the Lanham
Act. Additionally, Nu-kote International seeks damages and an injunction for
false advertising, trade libel, disparagement of goods, defamation, and unfair
competition.
Although Nu-kote was enjoined by the District Court from engaging in certain
activities, on March 5, 1997, the District Court held that four of Epson's
patents-in-suit were unenforceable. On August 11, 1997, the District Court
held one of Epson's design patents invalid and also ordered Nu-kote
International and Pelikan to pay Epson $1,050,849 in damages and $31,413 in
attorney's fees as a result of a contempt citation. Nu-kote International and
Pelikan appealed the contempt citation to the Federal Circuit, and the finding
of contempt and the payment of damages and attorney's fees has been stayed
pending the appeal of the contempt citation. On the same day, the District
Court held invalid Epson's design patent 351,190. By order dated August 11,
1997, the District Court granted Epson's Motion for Preliminary Injunction
with regard to the manufacturing of ink cartridges and other products that
infringe claims of Epson's 5,488,401 utility patent. The District Court issued
a second contempt citation against Nu-kote International and Pelikan on August
12, 1997, ordering Nu-kote International and Pelikan to pay to Epson its lost
profits and attorney's fees. This contempt order was grounded on alleged
violations of the preliminary injunction order with regard to Epson's 351,190
patent (which patent, as noted above, was held invalid). Nu-kote International
and Pelikan have appealed this contempt order to the Federal Circuit. There
remain in the lawsuit Epson's 5,488,401 utility patent and its 365,596 design
patent. On October 15, 1997, Epson filed a separate action against Nu-kote
International and Pelikan alleging infringement of Epson's 5,156,470 and
5,156,472 utility patents. Nu-kote International and Pelikan filed motions to
dismiss and stay the proceedings, and the District Court granted a motion to
dismiss Pelikan as a defendant. The District Court consolidated the two cases
into one action on January 12, 1998. No trial date has been set for the
consolidated action. Nu-kote International believes the allegations set forth
in Epson's complaint are without merit and intends to defend the consolidated
lawsuit vigorously.
On May 9, 1997, Daniel M. Kerrane filed suit against the Company in Texas
State District Court in Dallas County, Texas. Mr. Kerrane alleges he and the
Company entered a Supplemental Employment Agreement in February 1994 (the
"Agreement") which was to become operative upon a "Change in Control" as
defined by the Agreement. He alleged the Company breached the agreement by
substantially diminishing his responsibilities with the Company. Mr. Kerrane
originally sought an amount in excess of $8,000,000. This case was settled on
May 6, 1998 with the Company agreeing to pay Mr. Kerrane approximately
$213,000 over a period of six months and release claims against Mr. Kerrane
totaling $315,000.
On June 10, 1997, Financial Business Information System, Ltd., a South
African corporation, filed suit against Nu-kote International and the
Registrant in U.S. District Court for the Northern District of Texas. The
11
<PAGE>
plaintiff alleged that it was the exclusive distributor of Nu-kote products in
South Africa, but that Nu-kote breached the terms of its distributorship
agreement. This case was settled and dismissed by the District Court in May
1998 with the Company agreeing to pay the plaintiff $75,000 on the date of the
settlement and to pay the plaintiff $4,166 a month for twelve months and a
balloon payment of $54,178 on May 1, 1999.
On January 23, 1998, a lawsuit was filed against the Company and certain of
its officers and directors in the District Court for the Northern District of
Texas, seeking class action status on behalf of purchasers of the Company's
common stock between July 2, 1995 and May 29, 1997. The complaint alleges that
the defendants violated Sections 10(b) and 20 of the Securities Exchange Act
of 1934 (including Rule 10b-5) based upon purported misstatements and/or
omissions of material facts. Among other things, the plaintiff alleges that
misstatements and omissions by defendants relating to (1) the Company's
acquisition of Pelikan; (2) the transition from sales of impact products to
non-impact products, and (3) prospects for strong earnings per share growth
resulted in an inflation of the price of the Company's common stock. The
plaintiff seeks, on behalf of the purported class, an unspecified amount of
compensatory damages and reimbursement for fees and expenses. The Company
denies the allegations and intends to defend the lawsuit vigorously.
On March 10, 1998, Spectra, Inc. ("Spectra") of Hanover, New Hampshire,
filed a complaint against the Company and Modular Ink Technology Stockholm, AB
("MIT"), an indirect subsidiary of the Company, in the U.S. District Court for
the District of New Hampshire. In this action, Case No. 98-CV-130-JD, Spectra
accused the Company and MIT of infringing Spectra's U.S. Patent No. 4,825,227
(the 227 patent), which was issued on April 25, 1989. The complaint
specifically alleged that claims 10 and 11 of the 227 patent were infringed
by products identified as PiezoJet(TM) 64 and PiezoJet(TM) 128. On April 28,
1998, the Company filed a motion to dismiss the New Hampshire action against
it for lack of personal jurisdiction. At that time, MIT had not been served
with the complaint and a summons. Also on April 28, 1998, Nu-kote
International, Inc. ("International") and MIT filed an action against Spectra
in U.S. District Court for the District of Delaware. In this action, Civil
Acton No. 98-213-JJF, International and MIT seek a declaratory judgment that
the 227 patent is invalid and not infringed, and asserts state law claims for
tortious interference with prospective contractual relations and common law
unfair competition. On June 11, 1998, Spectra amended its pleadings in the New
Hampshire action to add International as a defendant and dismiss the Company
from the suit. Thus far, the amended complaint has not been served on either
International or MIT, but the Company is no longer a defendant in the New
Hampshire action. Also on May 22, 1998, Spectra filed a motion to dismiss the
Delaware action or transfer it to the District of New Hampshire. International
and MIT opposed the motion to dismiss or transfer, which is still pending.
International and MIT intend to file a motion to transfer the New Hampshire
action to Delaware in part on the ground that the Delaware action was the
first-filed action that brought together the proper parties to the dispute.
They also intend to proceed with substantive discovery of Spectra.
International and MIT have and will assert various defenses. At the same time,
however, they are proceeding with negotiations intended to settle the dispute.
In addition, the Registrant is involved in various routine legal matters.
In the opinion of management, all matters discussed above are covered by
insurance or are without merit or the disposition is not anticipated to have a
material effect on the Registrant's financial position; however, one or more
of these matters could have a material effect on future quarterly or annual
results of operations or cash flows when resolved.
The foregoing "Legal Proceedings" section and Note 12 of "Notes to
Consolidated Financial Statements", insofar as it relates to pending
litigation matters, contain various "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933 (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act),
which represent the Registrant's expectations or beliefs concerning the
possible outcome of the various litigation matters described herein. The
Registrant cautions that the actual outcome of such matters could be affected
by a number of factors, including, without limitation, judicial
interpretations of applicable laws, rules and regulations, the uncertainties
and risks inherent in any litigation, particularly a jury trial, the nature
and extent of any counter claims, and the scope and collectability of
insurance coverage. A decision in any of the foregoing lawsuits that is
adverse to the Company could have an adverse effect on the Company's business
and financial condition.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the Company
during the fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company has received notification of its delisting by the NASDAQ
National Market System as of June 12, 1998. Prior to its delisting, the Common
Stock was quoted on the NASDAQ National Market System under the symbol "NKOT".
The following table sets forth the high and low reported sales prices for the
Common Stock as quoted on the NASDAQ National Market System for the periods
indicated.
<TABLE>
<CAPTION>
MARKET
PRICE
-------------
FISCAL YEAR HIGH LOW
----------- ---- ---
<S> <C> <C>
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
Second Quarter........................................ 2 5/8 13/16
Third Quarter......................................... 1 22/32 1/2
Fourth Quarter........................................ 26/32 5/32
1999
First Quarter......................................... 5/8 3/16
</TABLE>
The last reported sales price per share of the Common Stock as quoted on the
NASDAQ National Market System on June 22, 1998 was 7/16. As of the date
hereof, the Registrant had 21,775,302 shares of Common Stock outstanding.
The Registrant has never declared or paid any cash dividends on its Common
Stock and has no current plans to pay cash dividends on the Common Stock. The
payment of any future cash dividends will be determined by the Board of
Directors in light of conditions then existing, including the Registrant's
earnings, financial condition and capital requirements, restrictions in
financing agreements, business conditions and other factors.
The Registrant is a holding company and thus its ability to pay cash
dividends on its Common Stock depends on the Registrant's subsidiaries ability
to pay dividends to the Registrant. The Registrant's credit agreement
restricts the payment of dividends.
As of June 22, 1998, the Registrant had in excess of 3,000 stockholders.
13
<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, 1998, 1997,
1996, 1995, 1994 were derived from the Consolidated Financial Statements of
the Registrant.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $295,703 $342,302 $424,070 $193,562 $151,260
Cost of sales........... 255,268(2) 285,144(2) 294,980 142,861 109,521(3)
-------- -------- -------- -------- --------
Gross margin............ 40,435 57,158 129,090 50,701 41,739
Selling, general and
administrative
expenses............... 59,756 66,602 78,100 29,421 22,680
Research and development
expenses............... 6,645 9,646 9,560 1,800 1,600
Loss on sale of
division............... 4,061 -- -- -- --
Restructuring expenses.. 3,349 15,139 13,825 28,449 --
Other operating
expenses............... -- 1,064 -- 2,500 1,112
-------- -------- -------- -------- --------
Operating income (loss). (33,376) (35,293) 27,605 (11,469) 16,347
Interest expense, net... 15,474 8,444 7,435 3,239 1,802
Other (income) expense,
net.................... 1,296 714 (557) (245) 1,087(4)
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... (50,146) (44,451) 20,727 (14,463) 13,458
Provision (benefit) for
income taxes........... (329) 5,201 7,590 (2,392) 5,472
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before extraordinary
loss................... (49,817) (49,652) 13,137 (12,071) 7,986
Extraordinary loss(5)... (2,550) -- -- (281) --
-------- -------- -------- -------- --------
Net income (loss)....... $(52,367) $(49,652) $ 13,137 $(12,352) $ 7,986
======== ======== ======== ======== ========
Basic net income (loss)
per common share: (6)
Income (loss) before
extraordinary loss... $ (2.28) $ (2.28) $ 0.61 $ (0.69) $ 0.50
Extraordinary loss.... (0.12) -- -- (0.02) --
-------- -------- -------- -------- --------
Net income (loss)..... $ (2.40) $ (2.28) $ 0.61 $ (0.71) $ 0.50
======== ======== ======== ======== ========
Diluted net income
(loss) per common
share: (6)
Income (loss) before
extraordinary loss... $ (2.28) $ (2.28) $ 0.58 $ (0.69) $ 0.47
Extraordinary loss.... (0.12) -- -- (0.02) --
-------- -------- -------- -------- --------
Net income (loss)..... $ (2.40) $ (2.28) $ 0.58 $ (0.71) $ 0.47
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital
(deficit).............. $(77,538) $100,291 $118,724 $101,333 $ 33,287
Total assets............ 228,103 300,936 366,415 326,517 99,199
Short-term debt......... 142,009 1,135 6,358 927 1,064
Total long-term debt.... 760 134,677 111,843 90,131 20,841
Shareholders' equity
(deficit).............. (9,128) 49,428 104,909 90,414 48,821
</TABLE>
- - --------
(1) The Registrant's financial statements for the years ended March 31, 1998,
1997, 1996, and 1995 reflect the Pelikan Acquisition, which occurred on
February 24, 1995.
(2) Includes a $5,488 and $8,039 charge associated with increased inventory
excess and obsolescence provisions in North America in fiscal 1998 and
1997, respectively, and $7,724 of costs associated with the startup of
manufacturing of the Company's MIT piezoelectric ink jet printhead in
fiscal 1997.
(3) Includes a $650 charge for inventory spoilage resulting from the
installation of new equipment coupled with severe winter weather and a
$775 charge resulting from the revision of estimated future workers'
compensation costs.
(4) Includes a $1,000 non-recurring pre-tax and after-tax charge associated
with the Registrant's secondary offering completed in May 1993.
(5) Represents extraordinary loss from early extinguishment of indebtedness in
fiscal 1998 and 1995.
(6) Per share information has also been restated to reflect the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share".
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TRENDS
During the current and preceding three fiscal years, there have been
significant consolidations in the office supplies distribution industry. As a
result of such consolidations, the purchasing power of the Company's customer
base has increased significantly, which compounded with intense price
competition, has resulted in significantly lower margins across all product
lines. In response to these developments, the Company is continuing to
aggressively pursue cost reduction initiatives, and organizing itself into
product focused business units that can provide the value added savings
demanded by larger customers.
North American sales of non-impact products have declined significantly due
to the lack of consumer acceptance of certain inkjet supplies, intense
competition and certain operational problems encountered during the Company's
restructuring efforts. The Company's European non-impact sales remained
relatively flat in fiscal 1998. Although, the Company believes it can remedy
its operational problems, the lack of consumer acceptance of inkjet products
for certain printers is expected to significantly limit any growth
opportunities for this product line. The Company also expects to see increased
competition in laser cartridges as large OEMs enter the replacement laser
cartridge market.
Worldwide sales of impact products continue to decline as non-impact
printing devices become more popular and replace impact printers now in
service.
The Company expects to continue to reduce costs through reductions in
overall inventory and infrastructure related thereto and by implementing
supply chain management initiatives such as order scheduling and freight and
inventory management. The Company has organized itself into product focused
operating units which is expected to result in better quality, cost control
and overall service to the customer.
The following table sets forth certain historical data from the Company's
Statement of Operations for the fiscal years ended March 31, 1998, 1997, and
1996 and the percentage change in such data from year to year. The data for
the historical year-end periods is derived from the Consolidated Financial
Statements of the Company.
<TABLE>
<CAPTION>
PERCENTAGE
INCREASE/(DECREASE) FROM
YEAR ENDED MARCH 31, PRIOR PERIOD
---------------------------- -------------------------
(IN THOUSANDS)
1998 1997 1996 1998 V. 1997 1997 V. 1996
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $295,703 $342,302 $424,070 (13.6)% (19.3)%
Cost of sales........... 255,268 285,144 294,980 (10.5)% (3.3)%
Gross margin............ 40,435 57,158 129,090 (29.3)% (55.7)%
Selling, general and ad-
ministrative expenses.. 59,756 66,602 78,100 (10.3)% (14.7)%
Research and development
expenses............... 6,645 9,646 9,560 (31.1)% (0.9)%
Loss on sale of divi-
sion................... 4,061 -- -- N/A --
Restructuring expenses.. 3,349 15,139 13,825 (77.9)% 9.5 %
Other operating ex-
penses................. -- 1,064 -- N/A --
Operating income (loss). (33,376) (35,293) 27,605 (5.4)% (N/A)
</TABLE>
15
<PAGE>
The following table sets forth certain data from the Company's Statement of
Operations for fiscal years ended March 31, 1998, 1997, and 1996 expressed as
a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales............... 100.0 % 100.0 % 100.0 %
Cost of sales........... 86.3 83.3 69.6
----- ----- -----
Gross margin............ 13.7 16.7 30.4
Selling, general and ad-
ministrative expenses.. 20.2 19.5 18.4
Research and development
expenses............... 2.2 2.8 2.2
Loss on sale of divi-
sion................... 1.4 -- --
Other operating ex-
penses................. -- 0.3 --
Restructuring expenses.. 1.1 4.4 3.3
----- ----- -----
Operating income (loss). (11.3) (10.3) 6.5
Other (income) expense.. 0.4 0.2 (0.1)
Interest expense........ 5.2 2.5 1.7
----- ----- -----
Income (loss) before in-
come taxes............. (16.9) (13.0) 4.9
Provision (benefit) for
income taxes........... (0.1) 0.3 1.8
----- ----- -----
Net income (loss) before
extraordinary items.... (16.8)% (13.3)% 3.1%
===== ===== =====
</TABLE>
The following table sets forth certain historical revenue data for the
fiscal years ended March 31, 1998 and 1997 and the dollar and percentage
changes in such data from year to year.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1998 V. 1997
-------------- -------------------
1998 1997 DOLLARS PERCENTAGE
------ ------ ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Impact revenue:
North America........................ $ 66.6 $ 73.8 $ (7.2) (9.8)%
Europe............................... 54.2 69.1 (14.9) (21.6)
Other................................ 3.5 3.3 0.2 6.0
Total................................ $124.3 $146.2 $(21.9) (15.0)%
Percent of total..................... 42.0% 42.7%
Non-impact revenue:
North America........................ $ 81.8 $ 99.3 $(17.5) (17.6)%
Europe............................... 89.6 96.8 (7.2) (7.4)
Total................................ $171.4 $196.1 $(24.7) (12.6)%
Percent of total..................... 58.0% 57.3%
Net sales:
North America........................ $148.4 $173.1 $(24.7) (14.3)%
Europe............................... 143.8 165.9 (22.1) (13.3)
Other................................ 3.5 3.3 0.2 6.1
Total................................ $295.7 $342.3 $(46.6) (13.6)%
Percent of total..................... 100.0% 100.0%
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net revenue for fiscal 1998 was $295.7 million, a decline of $46.6 million
(13.6%) over fiscal 1997. Worldwide sales of non-impact supplies accounted for
approximately 58.0% of total sales for fiscal 1998 compared to 57.3% of total
sales in fiscal 1997.
The North American non-impact sales decline of $17.5 million resulted from a
$6.5 million, or 26.3%, decrease in inkjet sales due to lack of sell-through
of certain of the Company's products introduced in fiscal year 1997 and fiscal
year 1998. Toner sales in North America declined $8.4 million, or 25.1%, as
compared to fiscal 1997. North American toner sales were adversely impacted by
quality issues and poor delivery performance resulting from the relocation of
certain of the manufacturing operations from its toner facility in
Connellsville,
16
<PAGE>
Pennsylvania to the Company's facility in Nogales, Mexico. During the fourth
quarter of fiscal year 1998 and subsequent to the year then ended, the Company
relocated all of its toner related production in Nogales, Mexico back to its
toner facility in Connellsville, Pennsylvania. Other non-impact revenues
decreased a net $2.6 million due to the sale of its components division in
December 1997.
The European non-impact sales decline of $7.2 million resulted from a $2.9
million decline in inkjet, primarily in the "Easy-Click" product line.
Compatable inkjet products were up slightly over fiscal year 1997.
Approximately $7.9 million of the decline was due to exchange rate
fluctuations. MIT printhead and ink sales increased by $5.4 million in fiscal
year 1998. The remaining decline of $1.8 million resulted from the Company's
French Forms division.
Worldwide sales of impact supplies accounted for approximately 42.0% of
total sales in fiscal 1998, compared to 42.7% of total sales in fiscal 1997.
Impact sales declined $7.2 million (9.8%) in North America and $14.9 million
(21.6%) in Europe between fiscal 1997 and fiscal 1998. Approximately $6.0
million of the decline in Europe was due to exchange rate fluctuations. The
decrease is directly related to the shift to non-impact printing devices that
are slowly rendering impact printing devices obsolete for many applications.
The overall 10.9% decline in impact products for the market outperformed the
overall industry decline in impact products which is estimated to have
declined 15%.
Cost of sales were $255.3 million (86.3% of net sales) for fiscal 1998,
compared to $285.1 million (83.3% of net sales) in fiscal 1997. Included in
cost of sales for fiscal 1998 were $5.5 million (1.9% of net sales) of
expenses associated with increased inventory excess and obsolescence reserves
in North America. Such charges were caused by poor inventory management and
the introduction of unprofitable low volume products in prior years that were
subsequently discontinued in fiscal year 1998. The Company has implemented
certain controls over the forecasting and purchasing of inventory, as well as
controls over the introduction of new products in North America. In addition,
gross margin in North America was adversely impacted during the current fiscal
year by $6.7 million (2.3% of net sales), associated with increased customer
allowances, due to competition and price pressures in the market place.
Pricing pressures are expected to continue across all product lines in North
America and Europe.
For fiscal 1998, research and development expenses amounted to $6.6 million,
(2.2% of net sales), compared to $9.6 million (2.8% of net sales) in fiscal
1997. Approximately $2.2 million, or 73%, of the decline in this expense
category occurred in Europe where the Company has implemented an expense
reduction program to maintain research and development expenses at
approximately 2.0% of net sales.
Selling, general and administrative expenses were $59.7 million for fiscal
1998, compared to $66.6 million in the previous year. The reduction in these
expenses resulted primarily from the Company's implementation of worldwide
expense reduction programs, which included significant reductions in
headcount.
Restructuring expenses amounted to $3.3 million in the current fiscal year.
These expenses related primarily to: (1) closure of the Dallas, Texas
headquarters; (2) centralization of sales and distribution into Franklin,
Tennessee; and (3) closing one toner facility and consolidating toner
manufacturing into Connellsville, Pennsylvania.
Interest expense for fiscal 1998 was $15.5 million, compared to $8.4 million
for the previous year. The increase is the result of higher outstanding
borrowings, higher interest rates and the amortization of bank fees related to
the July 31, 1997 refinancing of indebtedness with its lender.
For fiscal 1998, the Company received minimum tax benefits from its losses
because of an increase in its tax valuation allowance of approximately $14.2
million against certain deferred tax assets, particularly its net operating
loss carryforwards. Pursuant to Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109") the Company will recognize
an income tax benefit when the deferred tax assets are actually realized or at
such time as it is determined that realization of the deferred tax assets is
more likely than not. The Company reported an income tax benefit of $0.3
million in fiscal 1998 and an income tax expense of $5.2 million in the
previous year.
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For fiscal 1998, the Company recognized a net loss of $52.4 million,
compared to a net loss of $49.7 million in fiscal 1997. The greater net loss
is directly attributable to: (1) a $46.6 million decrease in sales and a 3.0%
increase in cost of goods sold as a percentage of sales; (2) the recognition
of an extraordinary charge resulting from the early extinguishment of debt of
$2.6 million; (3) higher interest expense of $7.0 million; and (4) a $4.1
million loss on the sale of division of the Company. The increase in net loss
was offset by a $6.8 million reduction in selling, general and administrative
costs, $3.0 million reduction in research and development costs and $11.8
million decline in restructuring costs.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 were $342.3 million, a decline of $81.8 million
(19.3%) over fiscal 1996. For fiscal year 1997, sales by North American
entities were $173.1 million, a decline of $30.9 million, or 15.1%, as
compared to sales in the previous year. Sales by European entities declined
approximately $49.9 million, or 23.1%, as compared to the previous year and
were $165.9 million. Sales of impact products in North America declined by 30%
during the fiscal year. Sales of toner products also declined but the decline
in sales of these products was offset by increases in sales of ink jet and
laser products. Approximately $14.4 million of the decline in net sales in
Europe was due to exchange rate fluctuations. An additional $14.9 million of
the decline in net sales in Europe was the result of the Company's decision to
reduce unit sales prices in the first quarter of fiscal 1997, which did not
result in increased sales. The balance of the decline in sales in Europe was
due to a decline in sales of impact products.
Worldwide sales of non-impact supplies accounted for 57.3% of total
worldwide sales for fiscal year 1997, as compared to 52.0% of total worldwide
sales for fiscal year 1996. Sales of non-impact products as a percentage of
worldwide sales increased largely because sales of impact products declined by
$57.4 million (28.2%).
In North America, sales of non-impact supplies amounted to $99.3 million in
fiscal year 1997 and 1996 and represented 57.3% and 48.9%, respectively, of
total North American sales. As a percentage of total North American sales, the
percentage of non-impact sales increased because sales of impact products
declined by $30.9 million (29.5%). For the year, sales of toner products in
North America declined nearly 33% as compared to sales in fiscal year 1996,
due in large part to: (1) the Company's decision to reduce sales of recharger
toners in non-profitable markets; (2) delays in introduction of certain new
products due to patent infringement issues; and (3) quality issues resulting
from the consolidation of toner formulas at its two North America toner
facilities. Sales of the Company's other non-impact products, namely ink jet
cartridges, laser printer cartridges, components for laser printers and
thermal products, grew over 30% during fiscal 1997.
Sales of non-impact supplies in Europe were $96.8 million for fiscal 1997,
compared to $121.2 million in fiscal 1996, and represented 58.3% of total
European sales for fiscal 1997. Approximately $7.5 million of the decline in
sales of non-impact products in Europe was due to exchange rate fluctuations.
An additional $7.7 million of the decline resulted from unit sales price
reductions initiated in the first quarter of fiscal 1997, which did not result
in increased sales. The balance of the decrease, $9.1 million, resulted from a
decline in sales of laser cartridges and components.
Cost of sales were $285.1 million (83.3% of net sales) in fiscal 1997,
compared to $295.0 million (69.6% of net sales) in fiscal 1996. Included in
cost of sales for the year ended March 31, 1997 were the following significant
charges: (1) a $8.0 million (2.3% of net sales) charge associated with
inventory write-offs and increased excess and obsolescence reserves in North
America; and (2) $7.7 million (2.2% of net sales) of costs associated with the
startup of manufacturing of the Company's MIT piezoelectric ink jet printhead.
In addition, gross margin was adversely impacted during the year by: (1) a
revenue decline of $14.9 million (4.4% of net sales) resulting from the
reduction in unit selling prices in Europe noted above; and (2) $9.8 million
(2.9% of net sales) associated with increased customer allowances and rebates.
Lastly, gross margin was also impacted by the decline in net sales of impact
and toner products in North America and the related effect on absorption of
manufacturing overhead costs.
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During fiscal 1997 the Company attempted to reduce its worldwide
manufacturing costs for impact products and labor intensive non-impact
products by accelerating the migration of the manufacturing of such products
to its lower labor cost facilities in Mexico and China. The Company also began
monitoring inventory levels more closely and evaluating inventory management
systems and procedures in an effort to mitigate the effects of future write-
offs of inventories and to maximize the conversion of excess inventories into
cash.
Research and development expenses were $9.6 million, substantially the same
as in fiscal 1996.
Selling, general and administrative expenses were $66.6 million (19.5% of
net sales) for fiscal 1997, a reduction of $11.5 million, compared to $78.1
million (18.4% of net sales) for fiscal year 1996. Approximately $3.4 million
of the reduction was due to exchange rate fluctuations with the balance
resulting from the implementation of expense reduction programs in Europe.
Restructuring expenses amounted to $15.1 million in fiscal 1997, compared to
$13.8 million in the previous year. For fiscal 1997 these costs related
primarily to: (1) consolidation of impact product production into Scotland,
Mexico and China; (2) centralization of distribution into primarily Franklin,
Tennessee and Duren, Germany; (3) transition of European sales forces from a
predominantly fixed-cost basis to a sales force with commission-based agents;
and (4) closing of one toner facility and consolidation of toner manufacturing
into Connellsville, Pennsylvania and Monchaltorf, Switzerland.
Interest expense was $8.4 million in fiscal 1997, compared to $7.4 million
for the fiscal 1996. The increase is a result of larger outstanding
borrowings.
At March 31, 1997 the Company has a tax valuation allowance of $30.7 million
against certain deferred tax assets pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Under the provisions of SFAS 109, the Company will recognize an income tax
benefit to the extent of $23.7 million when the deferred tax assets are
actually realized or at such time as it is determined that realization of the
deferred tax assets is more likely than not. The Company reported income tax
expense of $7.6 million in fiscal 1996.
For fiscal 1997, the Company recognized a net loss of $49.7 million compared
to net income of $13.1 million for fiscal 1996. The decrease in net income is
directly attributable to the decrease in sales and the increased cost of goods
sold as a percentage of sales combined with the restructuring charges and
income tax valuation allowances discussed above.
FISCAL 1996 COMPARED TO FISCAL 1995
The comparison between fiscal 1996 and fiscal 1995 was significantly
affected by the Pelikan Acquisition, which occurred on February 25, 1995.
Net sales from continuing operations for fiscal 1996 were $424.1 million, an
increase of $230.5 million (119.1%) over fiscal 1995. The inclusion of the
Pelikan Hardcopy Division operations in fiscal 1996 accounted for
substantially all of this increase. For the year, sales by North American
entities amounted to $204.0 million and sales by European entities were $215.7
million. Worldwide sales of non-impact supplies were $220.5 million, an
increase of $137.5 million, or 165.7%, over the prior year. Sales of non-
impact products represented 51.9% of total fiscal 1996 sales versus 43.0% of
fiscal 1995 sales. Sales of impact supplies almost doubled in fiscal 1996 and
amounted to $203.6 million.
Cost of sales were $295.0 million (69.6% of net sales) in fiscal 1996
compared to $142.9 million (73.8%) in fiscal 1995. The improvement in gross
margins was due to the inclusion in the current year period of the results of
the Pelikan Hardcopy Division' European operations, which operate at higher
gross margins. Selling, general and administrative expenses were $78.1 million
(18.4% of net sales) for fiscal 1996 compared to $29.4 million (15.2% of net
sales) in fiscal 1995. Research and development expenses amounted to $9.6
million in fiscal 1996 compared to $1.8 million in fiscal 1995. The increase
in both of these expense categories was directly attributable to the inclusion
of the results of the Pelikan Hardcopy Division operations.
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Restructuring expenses, which were incurred as a result of the Pelikan
Acquisition and includes the elimination of redundant facilities and the
consolidation of operations, amounted to $13.8 million and $28.4 million in
fiscal 1996 and 1995, respectively. The total cumulative restructuring charge
incurred by the Company related to the merger of certain of its North American
operations with those of Pelikan amounted to $29.3 million and included, among
other things: (1) closure of the Company's Bardstown, Kentucky manufacturing,
distribution and administrative facility and merger of its operations into the
Pelikan Franklin, Tennessee facility; (2) consolidation of ICMI with the
Pelikan Derry, Pennsylvania facility; (3) termination of a contract ribbon
manufacturing arrangement and merger of these operations into the Pelikan
Franklin, Tennessee facility; and (4) consolidation of administrative and
sales personnel. The total cumulative restructuring charge incurred by the
Company related to the merger of its European operations with those of Pelikan
amounted to $11.4 million and included: (1) costs associated with the closure
of the Company's Deeside, Wales manufacturing facility and merger of its
operations into the Pelikan Scotland facility; and (2) redundancy costs
associated with the down-sizing of the German production facility.
In fiscal 1996, the Company revised its estimates with respect to the
aforementioned restructuring plan. The changes in the Company's estimates
resulted in increases in the amounts required for severance and facility
maintenance of $0.5 million in each case and decreases in amounts required for
lease cancellations and contract cancellations of $0.6 million and $1.0
million, respectively.
Interest expense was $7.4 million in fiscal 1996 compared to $3.2 million
for fiscal 1995. The increase was attributed to additional borrowings
resulting from the financing of the Pelikan acquisition and associated working
capital needs.
Also included as an extraordinary charge to earnings during fiscal 1995 was
a $0.3 million charge related to the early extinguishment of the Company's
previous credit facility with Banker's Trust Company, Barclays Bank PLC and
NationsBank Texas, N.A. (the "previous credit facility").
For fiscal 1996, the Company recognized net income of $13.1 million compared
to a net loss of $12.4 million in fiscal 1995. The increase in net income is
primarily attributed to a net reduction of $14.6 million in restructuring
charges for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 1998, cash used by operating activities amounted to $5.8 million.
Capital expenditures, primarily related to the purchase of manufacturing
equipment related to non-impact product lines, were $5.6 million.
For fiscal 1997, cash used by operating activities amounted to $4.9 million,
primarily to fund restructuring expenses. Capital expenditures, primarily
related to the purchase of ink jet and toner manufacturing equipment, were
$12.3 million.
For fiscal 1996, cash used by operating activities amounted to $23.9
million, primarily due to restructuring expenses, and increased working
capital needs associated with increased inventories.
The Company's cash requirements are related to funding working capital for
operations, restructuring costs, research and development costs, capital
expenditures and interest expense. Cash provided by operating activities and
through borrowings under the Second Amended Agreements described below and
open account trade terms from vendors are the primary sources of liquidity and
capital for the Company.
On July 31, 1997 the Company entered into the Second Amended and Restated
Credit Agreements (the "Second Amended Agreements"). The Second Amended
Agreements provide for a total borrowing commitment at date of closing of
approximately $145 million including a $10 million letter of credit facility
(the "Facilities"). The Facilities are comprised of a $100 million U.S.
facility (the "U.S. Facility"), a CHF 50 million Swiss facility (the "Swiss
Facility") and a (Pounds)6.275 million U.K. facility (the "U.K. Facility").
The
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Second Amended Agreements are funded through a syndicate of commercial lenders
and include a senior secured reducing revolving credit facility.
The U.S. Facility bears interest at (a) 1% through June 30, 1998 and
thereafter at 2%, plus (b) the greater of (i) the prime rate of NationsBank of
Texas, N.A. or (ii) the Federal Funds rate plus 0.5%. The rate at March 31,
1998 was 9.5%. The Swiss Facility and the U.K. Facility bear interest at LIBOR
plus 4% through June 30, 1998 and LIBOR plus 5% thereafter. The weighted
average interest rate for the Swiss Facility and the U.K. Facility at March
31, 1998 was 7.33%. The Second Amended Agreements provide for a commitment fee
during the period prior to maturity of 0.75% of the unutilized commitment
under the Second Amended Agreements. At March 31, 1998, the Company has cash
borrowings outstanding of $141.5 million under the Facilities. The Facilities
mature on January 4, 1999.
The Second Amended Agreements contain a number of affirmative and negative
covenants, including restrictions on indebtedness, liens, investments
(including intercompany investments and advances), contingent obligations,
dividend payments, sale or transfer of assets and acquisition or disposition
of the stock of subsidiaries. In addition, the Second Amended Agreements
contain financial covenants requiring the maintenance of certain financial
ratios and net worth and limits restructuring charges and capital
expenditures. The most restrictive of the financial covenants is the
requirement that the Company maintain specified minimum amounts of earnings
before interest, taxes, depreciation, amortization, certain noncash losses and
gains, restructuring and other nonrecurring charges (as defined) ("EBITDAR").
The EBITDAR covenant is tested monthly. Additionally, the Second Amended
Agreements are subject to customary events of default, including but not
limited to payment defaults and compliance of financial covenants. The
Facilities are guaranteed by the Company and all its significant subsidiaries
and are collateralized by substantially all of the assets of the Company and
its significant subsidiaries.
As of and since the quarter ended December 26, 1997, the Company has been in
violation of certain financial covenants related to the Second Amended
Agreements. Since that time, the Company and its lenders have entered into a
series of amendments and waivers to the Second Amended Agreements. The
amendments and waivers provided, among other things, the following:
. Waived for the period from December 26, 1997 through August 31, 1998
violations of certain financial covenants as of and for the quarters
ended December 26, 1997, March 31, 1998 and June 27, 1998;
. Deferred the mandatory principal reduction of $4.0 million due on May 29,
1998 and scheduled a $5.0 million payment due on August 31, 1998;
. Restricted the Company from making intercompany loans and investments in
certain subsidiaries;
. Required the Company to use all proceeds from the sale of assets as a
permanent reduction of the revolver under the credit Second Amended
Agreements; and
. Required monthly principal reductions of $0.5 million commencing May,
1998 through July, 1998.
In response to the poor operating results, the Company added new senior
officers to various key positions.
Management does not believe that the Company has adequate sources of working
capital to provide the Company with sufficient cash to meet its near term
obligations. In December 1997, the Company engaged Glass & Associates, Inc.,
management consultants, to provide interim management services and to assist
the Company in finding solutions to its current operating issues and in
developing a business restructuring plan. In addition, the Company has engaged
BT Alex. Brown Incorporated to assist in the sale of all or part of the
Company's business. The Company will also continue to focus on managing net
working capital. However, there can be no assurance that any of these
strategies will provide the Company with adequate working capital and
sufficient cash flow to meet its near term obligations. The current waiver of
existing defaults under the Second Amended Agreements expires at the end of
August 1998. While the Company's lenders have previously provided waivers,
there can be no assurance they will do so in the future. Unless the Company's
lenders agree to a new waiver, the Company will be in default under the Second
Amended Agreements, and the Company will not have adequate cash to pay the
outstanding indebtedness at that time.
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EFFECTS OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
Because the Company conducts business in many countries, fluctuations in
foreign currency exchange rates affect the Company's financial position and
results of operations. It is the Company's policy to monitor currency
exposures and enter into hedging arrangements to manage the Company's exposure
to currency fluctuations. As a result, the Company reported a $0.2 million
exchange loss in fiscal 1998 and a $0.4 million exchange gain in fiscal 1997.
The five most significant foreign currencies in which the Company transacts
include German Deutschmarks, Swiss Francs, British Pound Sterling, French
Francs, and Swedish Krona.
CAPITAL EXPENDITURES; ENVIRONMENTAL MATTERS; RESEARCH AND DEVELOPMENT
Capital expenditures for fiscal 1998, 1997 and 1996 amounted to $5.6
million, $12.3 million, and $13.1 million, respectively. Such expenditures
were primarily for the purchase of computer equipment and the expansion of
manufacturing capacity for ink jet and other non-impact supplies. The Company
expects that capital expenditures in fiscal 1999 will total approximately $5.0
million and that capital expenditures will approximate $6.0 million per year
after fiscal 1999.
The Company is subject to regulation at the federal, state and local levels
in the U.S. and Europe, including in particular, regulation pertaining to
environmental matters. To date these matters have not resulted in significant
cost to the Company. Based on indemnification obligations of third parties to
the Company, current regulations and the condition of its facilities, the
Company does not currently anticipate a material amount of environmental
expenditures. See also Item 1--Environmental and Regulatory Matters.
Research and development expenses were $6.6 million, $9.6 million and $9.6
million in fiscal 1998, 1997 and 1996, respectively. Research and development
expenses beginning in fiscal 1999 are expected to approximate $6.2 million and
will increase or decrease each year thereafter proportionately as revenues
increase or decrease.
INFLATION
The Company is subject to the effects of changing prices. Prices for the
Company's impact products have generally declined over the past three years.
Because of the declining market for impact printing supplies, the company
expects prices for these products to continue to decrease. As a result of its
general inability to pass along cost increases, with respect to its impact
printing supplies, future increases in production costs or raw material prices
could have an adverse effect on the Company's business. Management currently
believes that inflation will have less impact on the Company's non-impact
operations because of the expanding market for non-impact printing supplies.
NEW ACCOUNTING STANDARDS
During June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
and Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information". These standards are
effective for financial statements for fiscal years beginning after December
15, 1997. During 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 "Employer's Disclosure
about Pension and Other Postretirement Benefits", which is effective for
financial statements for fiscal years beginning after December 15, 1997, and
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivatives and Hedging Activity", which is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The Company is currently
evaluating the impact of these new standards on its financial statements but
has not yet determined the full impact.
YEAR 2000 COMPUTER ISSUES
The Company has completed its initial assessment of the year 2000 issues
facing its information systems. Certain of the Company's information systems
are not currently in compliance with the modifications necessary
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for the year 2000. It is believed that through modifications or conversions to
new hardware, software and embedded technologies that the year 2000 issues can
be mitigated. The Company expects to utilize both internal and external
resources to reprogram, replace and test software and embedded technologies
for the year 2000 modifications. Additionally, the Company also plans to
communicate with customers, vendors and others to ensure that their systems
are year 2000 compliant. However, there can be no guarantee that the systems
of other companies on which the Company's system rely will be timely
converted, or that a failure to convert by another company or a conversion
that is incompatible with the Company's systems would not have a material
effect on the Company. The cost of the year 2000 compliance has not yet been
finalized. There can be no assurance that the Company will have adequate
resources to implement such system changes.
ECONOMIC AND MONETARY UNION IN EUROPE ("EMU")
EMU refers to the movement toward economic and monetary union in Europe with
the ultimate goal of introducing a single currency called the Euro. Monetary
union will have profound financial and political implications. It removes the
existence of different currencies, monetary policies, and, to some degree,
fiscal policies from Europe's financial markets. It effectively brings about a
merger of the capital markets of the countries that join EMU.
The European Pelikan Hardcopy businesses will be affected by EMU. EMU will
require many significant changes for all of banking and commerce including
currency conversion and modifications of payment and settlement systems, to
name a few. As with the year 2000 issue, EMU poses various operating risks.
The Company has implemented a new system to address the changes required and
expects all areas of the Company to be ready well in advance of the EMU start
date of January 1, 1999. Management anticipates that the formation of EMU will
not materially affect the trend of earnings of the Company.
CAUTIONARY STATEMENT
The foregoing "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section contains various "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, in particular those
statements which represent the Company's expectations or beliefs concerning,
among other things: the Company's ability to mitigate the effect of the
reduction in the impact market by realizing cost savings as a result of
transferring production to lower cost facilities and by expanding into
additional markets; the introduction of new products and reversal of the
overall decline in its revenues; the ability to maximize conversion of excess
inventories into cash; the adequacy of the Company's current credit facilities
to provide sufficient cash flow to meet its obligations; the ability to
restructure the Company's debt or obtain additional waivers from its lenders
with respect to defaults under the Second Amended Agreements; future capital
expenditure levels; indemnification obligations of third parties and other
assumptions regarding environmental matters; the effect of inflation on future
operations; the impact of the formation of the EMU; and the effect of the year
2000 compliance issues. The Company cautions that such matters necessarily
involve significant risks and uncertainties that could cause actual operating
results and liquidity needs to differ materially from such statements,
including, without limitation, general economic conditions, product demand and
industry capacity, competitive products and pricing, particularly the
possibility of increased competition from OEMs, manufacturing efficiencies,
new product development, consumer acceptance of new products developed by the
Company, particularly non-impact supplies, availability of raw materials and
critical manufacturing equipment, and the regulatory and trade environment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is hereby made to the Consolidated Financial Statements and notes
thereto appearing at pages F-1 to F-30 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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.
John P. Rochon, age 46, Director of the Company since 1994
Mr. Rochon has been a director of the Company since 1994. Mr. Rochon has
been Chairman of the Richmont Corporation since 1990 and Chief Executive
Officer of Mary Kay Holding Corporation since 1991. Prior thereto, Mr. Rochon
served in positions of increasing responsibility with Mary Kay Holding
Corporation, including Vice Chairman from 1987 to 1991. Through Richmont
Corporation and its predecessor and affiliated companies, Mr. Rochon has built
a large, diversified portfolio of companies and investments strongly focused
on consumer goods and services. Mr. Rochon is also a director of Royal
Appliance Manufacturing Company.
Patrick E. Howard, age 50, Director of the Company since 1997
Mr. Howard had been Chief Operating Officer of the Company since February
1997 and became Chief Executive Officer of the Company in August 1997, serving
in those capacities until December 1997. He has been a Director of the Company
since August 1997. He was Executive Vice President of Mary Kay, Inc. from
December 1985 until January 1996. Since January 1996 Mr. Howard has been Chief
Executive Officer of the Richmont Group.
MEETINGS OF THE BOARD
The Company's Board held 10 regularly scheduled or special meetings during
the fiscal year ended March 31, 1998 and acted by unanimous consent nine
times. The entire Board acts as the Audit Committee and Stock Option
Committee.
During fiscal 1998, Messrs. Donald A. Bolke and Hubbard C. Howe, who had
been directors since 1994 and 1988, respectively, resigned from the Board. In
addition, Brian D. Finn, who had been a director since 1993, and David F.
Brigante, who had been a director since 1992, both resigned from the Board
after the end of the last fiscal year.
Each current member of the Board attended at least 75% of the total number
of meetings of the Board and of the Committees of the Board on which he served
that was held during the fiscal year.
COMPENSATION OF DIRECTORS
Directors who are also employees of the company are not compensated for
services as directors. Non-employee directors of the Company formerly received
$20,000 per year, plus $2,000 per year per committee membership and $2,000 per
year per committee Chairmanship. The directors waived all fees due to them for
fiscal 1998. In addition, under the Nu-kote Holding, Inc. 1992 Stock Option
Plan, as amended and restated (the "1992 Plan"), the Company provided non-
employee directors one-time grants of non-qualified stock options for 30,000
shares of Common Stock upon his or her initial election or appointment to the
Board. During the Fiscal Year and prior to his resignation in July 1997, Mr.
Hubbard C. Howe was paid $37,500 as Vice President of the Board in lieu of
directors' fees otherwise payable to him.
Under the terms of the Nu-kote Holding, Inc. Deferred Stock Compensation
Plan (the "Deferred Stock Plan"), non-employee directors may elect to defer
all or a portion of their director's fees, including fees for attendance at
regular and special Board and committee meetings, for any calendar year (the
"Deferred
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Amount"). Each Deferred Amount is credited by the company to a bookkeeping
account (the "Stock Account") and is converted into a stock equivalent (a
"Stock Equivalent") on the date the amount is credited. The number of Stock
Equivalents is based on the closing price of the Company's Common Stock.
Distributions are only made from a director's Stock Account upon termination
of the director's service through death, retirement or otherwise.
COMMITTEES OF THE BOARD
Audit Committee. The Audit Committee of the Board reviews and approves the
scope and results of any outside audit of the Company, and the fees therefor,
and makes recommendations to the Board of Directors or management concerning
auditing and accounting matters and the selection of outside auditors. During
the Fiscal Year, the Audit Committee of the Board met one time. At this time,
the entire Board acts as the Audit Committee.
Stock Option Committee. The Stock Option Committee of the Board was formed
on September 27, 1996 and is empowered to administer the Company's 1992 Plan,
Senior Management Stock Appreciation Rights Plan and such other employee
benefit plans, programs, policies and procedures as the Board may select. From
inception to the end of the Fiscal Year, the Stock Option Committee of the
Board acted three times by unanimous written consent. At this time, the entire
Board acts as the Stock Option Committee.
By resolution and vote of the Company's Board of Directors, both the
Executive Committee and Compensation and Benefits Committee were eliminated
during the Fiscal Year due to the reduction of the number of directors
constituting the Board of Directors. Responsibilities normally associated with
these Committees are being administered by the entire Board of Directors.
EXECUTIVE OFFICERS
Information about the current Officers of the Company appears above under
the caption "Executive Officers of the Registrant".
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange act of 1934 requires the Company's
executive officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and the NASDAQ National Market System. Executive officers, directors
and greater than 10% stockholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) reports they file. Based solely
on a review of the copies of such reports furnished to the Company and written
representations that no Forms 5 were required for the Fiscal Year, the Company
believes that during the Fiscal Year no executive officer, director or greater
that 10% stockholder was delinquent in filing any reports other than Messrs.
Donnellan, Ligon and Theodore who filed their initial statements of beneficial
ownership on Form 3 late.
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ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Company's Chief
Executive Officer and certain of the Company's other executive officers and
significant employees whose total salary and bonus for the Fiscal Year
exceeded $100,000 (the "Named Executives") with respect to all services
rendered to the Company during the previous three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ ------------
SECURITIES
FISCAL YEAR OTHER ANNUAL UNDERYLING ALL OTHER
ENDED SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION MARCH 31, ($)(1) ($) ($)(2) (3) ($)(4)
- - --------------------------- ----------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Shaun K. Donnellan (5)... 1998 -- -- -- -- --
Chief Executive Officer,
President, and Chief
Operating Officer
William R. Ligon (5)..... 1998 -- -- -- -- --
General Manager, North
American Operations
Hans Paffhausen.......... 1998 $220,409 -- $13,690 -- --
Managing Director, 1997 $249,730 -- $15,511 -- --
European Operations 1996 $267,237 $133,610 $17,240 -- --
C. Ronald Baiocchi....... 1998 $226,733 -- $ 9,321 -- $ 3,800
Vice President -- 1997 $205,000 -- $ 9,012 -- $ 3,674
Nu-kote International, 1996 $138,462 $ 96,000 $ 8,441 160,000 $ 62,437
Inc.
Richard A. Larsen........ 1998 $160,000 -- $ 7,200 -- $ 3,800
Senior Vice President, 1997 $160,000 -- $ 7,200 -- $ 2,806
General Counsel 1996 $126,154 $112,896 $ 5,677 -- --
and Secretary
Ian Elliott.............. 1998 $140,000 -- $ 4,800 -- $ 3,360
Vice President--Product 1997 $124,039 -- $ 4,355 -- $ 2,977
Development 1996 $ 99,498 $ 50,000 -- -- $ 1,829
Nu-kote International,
Inc.
David F. Brigante (6).... 1998 $539,993 -- -- -- $ 6,708
Former Chairman of the 1997 $523,558 -- $13,133 -- $ 3,800
Board and Former 1996 $450,000 $630,000 $30,720 720,000 $653,696
Chief Executive Officer
Patrick E. Howard (7).... 1998 -- -- -- -- --
Former Chief Executive 1997 -- -- -- -- --
Officer
Daniel M. Kerrane (8).... 1998 $198,113 -- $29,585 -- $ 3,800
Former Executive Vice 1997 $299,038 -- $29,498 -- $ 3,800
President and Chief 1996 $250,000 $262,500 $44,901 240,000 $423,696
Financial Officer
Anthony G. Schmeck (9)... 1998 $193,627 -- -- -- $ 3,904
Former Senior Vice 1997 $224,231 -- $11,549 -- $ 3,800
President-- 1996 $185,000 $168,350 $16,843 160,000 $243,404
Finance, Corporate
Controller
and Secretary
</TABLE>
- - --------
Footnotes to the Summary Compensation Table are on the following page.
26
<PAGE>
(1) Includes, where applicable, amounts electively deferred by each Named
Executive under the Nu-kote International, Inc. Employee Savings Plan (the
"Savings Plan")
(2) Amounts listed in this column for fiscal 1998 include (a) automobile
allowances in the amounts of $13,690, $6,000, $7,200, $4,800, $11,504,
$7,793, and $4,912 for Messrs. Paffhausen, Baiocchi, Larsen, Elliott,
Brigante, Kerrane and Schmeck, respectively; (b) club dues of $3,321,
$4,482, $4,482 and $3,361 for each of Messrs. Baiocchi, Brigante, Kerrane
and Schmeck, respectively; and (c) imputed interest of $17,310 on a
relocation loan for Mr. Kerrane.
(3) No stock appreciation rights awards were granted in either fiscal 1998 or
1997.
(4) Amounts listed in this column for fiscal 1998 include (a) the Company's
contributions to the Savings Plan (exclusive of amounts deferred at the
election of the Named Executive) on behalf of each of the Named
Executives, in the amount of $3,800, $3,800, $3,600, $6,708, $3,800 and
$3,904 for Messrs. Baiocchi, Larsen, Elliott, Brigante, Kerrane and
Schmeck, respectively.
(5) The services of Messrs. Donnellan and Ligon were made available to the
Company pursuant to a consulting agreement between Glass & Associates,
Inc. and the Company. While the Company does not compensate Messrs.
Donnellan and Ligon directly for their services, the Company has paid
Glass & Associates, Inc. $539,585 during fiscal 1998 for operational,
sales, financial, marketing and management consulting services provided by
Messrs. Donnellan and Ligon and other associates of Glass & Associates,
Inc. Additionally, Messrs. Donnellan and Ligon and other associates of
Glass & Associates, Inc. have been reimbursed actual and reasonable
expenses of $108,685 incurred by them in performing services for the
Company. Glass & Associates, Inc. is a third-party consulting firm,
independent of the Company.
(6) Chief Executive Officer of the Company until August 1997 and Chairman of
the Board until May 1998.
(7) The services of Mr. Howard were made available to the Company pursuant to
a consulting agreement between Richmont Corporation and the Company, until
his resignation on December 9, 1997. The Company did not compensate Mr.
Howard directly for his services. The Company received the services of the
Richmont Corporation free of charge during fiscal 1998, which included
operational, sales, financial, marketing and management consulting
services provided by Mr. Howard and other employees of Richmont
Corporation. Mr. Howard and other employees of Richmont Corporation have
been reimbursed actual and reasonable expenses incurred by them in
performing services for the Company. Richmont Corporation is an affiliate
of Richmont Capital Partners I, L.P., see: Security Ownership of Principal
Stockholders and Management.
(8) Executive Vice President and Chief Financial Officer of the Company until
October 10, 1997.
(9) Senior Vice President Finance, Corporate Controller and Secretary of the
Company until December 19, 1997.
27
<PAGE>
The following table sets forth the stock appreciation rights granted during
the fiscal year to each of the named executives and certain hypothetical
values for such options and rights.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
POTENTIAL REALIZABLE
VALUE OF ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SECURITIES TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION
OPTION/SARS GRANTED TO EXERCISE OR FOR OPTION TERM(1)
GRANTED EMPLOYEES BASE PRICE EXPIRATION ----------------------
NAME (#)(1) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- - ---- ----------- -------------- ----------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Shaun K. Donnellan...... -- -- -- -- -- --
William R. Ligon........ -- -- -- -- -- --
Hans Paffhausen......... -- -- -- -- -- --
C. Ronald Baiocchi...... -- -- -- -- -- --
Richard A. Larsen....... -- -- -- -- -- --
Ian Elliott............. -- -- -- -- -- --
David F. Brigante....... -- -- -- -- -- --
Patrick E. Howard....... -- -- -- -- -- --
Daniel M. Kerrane....... -- -- -- -- -- --
Anthony G. Schmeck...... -- -- -- -- -- --
</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, 1998 by each of
the Named Executives.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AT FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY"
OPTIONS/SARS AT FY- OPTIONS/SARS
SHARES END (#) AT FY-END ($)(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shaun K. Donnellan...... -- -- -- -- -- --
William R. Ligon........ -- -- -- -- -- --
Hans Paffhausen......... -- -- 60,000 40,000 -- --
C. Ronald Baiocchi...... -- -- 25,983 13,220 -- --
Richard A. Larsen....... -- -- 20,000 30,000 -- --
Ian Elliott............. -- -- 32,038 21,512 -- --
David F. Brigante....... -- -- -- -- -- --
Patrick E. Howard....... -- -- -- 200,000 -- --
Daniel M. Kerrane....... -- -- -- -- -- --
Anthony G. Schmeck...... -- -- -- -- -- --
</TABLE>
- - --------
(1) Based upon the closing price of the Common Stock ($0.219) on the NASDAQ
National Market System on March 31, 1998.
28
<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, 1998, the credited years of service and the compensation
covered under the Pension Plan of the participation Named Executives were as
follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE COVERED COMPENSATION
---------------- --------------------
<S> <C> <C>
C. Ronald Baiocchi.................. 21 $150,000
Richard A. Larsen................... 3 $150,000
Ian Elliott......................... 20 $150,000
David F. Brigante................... 18 $150,000
Daniel M. Kerrane................... 5 $150,000
Anthony G. Schmeck.................. 11 $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
None of the Company's executive officers have written employment agreements.
In May 1998, however, Messrs. Baiocchi, Larsen, Paffhausen, Theodore and
Elliott entered into retention agreements, which are triggered upon a change
in control or a restructuring of the Company's long-term financing agreement
with its lender. Shaun Donnellan, the Company's Chief Executive Officer,
serves in such capacity pursuant to a contract between the Company and Glass &
Associates, Inc., and he is compensated by Glass & Associates, Inc.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board currently acts as the Stock Option Committee and
Compensation Committee.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding each person
known to the Company to own beneficially more than 5% of the outstanding Common
Stock of the Company. Such information has been obtained from the most recent
public filings submitted or other information made available to the Company by
such holders.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- - ------------------- ------------- ----------
<S> <C> <C>
Ligapart AG.......................................... 4,600,000 21.1%
Neuhofstrasse 4
6340 Bear, Switzerland
Richmont Capital Partners I, L.P..................... 2,559,360 11.8%
4300 Westgrove
Dallas, Texas 75428
Heartland Advisors, Inc.............................. 1,100,000 5.1%
790 North Milwaukee St.
Milwaukee, Wisconson 53202
Oppenheimer Group, Inc............................... 2,062,600(2) 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) Represents the aggregate shares held by the Oppenheimer Group, Inc. and its
subsidiaries and affiliates, including Oppenheimer Financial Corp.,
Oppenheimer Equities Inc., Oppenheimer Holding, Inc., Oppenheimer & Co.,
Inc. and Oppenheimer Capital, L.P. Oppenheimer Group, Inc. is a parent
holding company and disclaims beneficial ownership and voting and
dispositive power over the shares held by its subsidiaries and their
clients.
30
<PAGE>
MANAGEMENT
The following table sets forth, as of June 22, 1998, certain information as
to the shares of Common Stock beneficially owned by each director and nominee
as director of the Company, by each Named Executive, as defined herein, and by
all directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
------------------- ----------------- ----------
<S> <C> <C>
John P. Rochon.............................. 2,577,360 (2)(3) 11.5%
Patrick E. Howard........................... -- *
Hans Paffhausen............................. 60,000 (4) *
C. Ronald Baiocchi.......................... 25,982 (4) *
Shaun K. Donnellan.......................... -- *
William R. Ligon............................ -- *
Richard A. Larsen........................... -- *
Ian Elliott................................. 32,038 (4) *
David F. Brigante........................... 262,556 (4) *
All directors and executive officers as a
group (9 persons).......................... 2,957,936 (5) 13.6%
</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 L.P., as to
which shares Mr. Rochon has shared voting and investment power.
(3) Includes 18,000 shares that may be acquired through the exercise of stock
options, which are exercisable within 60 days of June 22, 1998.
(4) Represents shares that may be acquired through the exercise of stock
options, which are exercisable within 60 days of June 22, 1998.
(5) Includes 380,576 shares which may be acquired through the exercise of
stock options exercisable within 60 days of June 22, 1998 and other shares
deemed beneficially owned by the Company's directors as described in the
preceding notes.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Mr. Brigante entered into a severance agreement with the Company on March 9,
1998. Mr. Brigante will receive $262,500 over a twelve-month period and will
receive other employment benefits (such as group health, life and disability
insurance, use of Company automobiles, and country club membership along with
monthly dues) until March 9, 1999. Mr. Brigante will not engage in any
Competitive Activity (as defined in the agreement) with the Company during the
time he is receiving benefits from the Company. This agreement canceled all
prior contracts and agreements between Mr. Brigante and the Company. Mr.
Brigante resigned as a director following the end of the fiscal year.
Mr. Kerrane had been employed by the Company under an employment agreement.
However, on May, 1997, Mr. Kerrane filed suit against the Company in a Texas
State District Court in Dallas county, Texas. Mr. Kerrane alleged that his
agreement with the Company entitled him to terminate his employment and
receive a lump sum severance payment because the Company "substantially
reduced" his authorities, powers and duties in April 1997. The suit was
settled with a settlement agreement between Mr. Kerrane and the Company, dated
May 6, 1998. In the settlement agreement, the Company agreed to make bi-weekly
payments of $12,500 to Mr. Kerrane, totaling $150,000, agreed to pay Mr.
Kerrane's attorney's fees related to the dispute and lawsuit, up to a sum of
$40,000, agreed to pay approximately $23,000 in withholding taxes and paid Mr.
Kerrane's country club dues, totaling $15,000. Further, the Company waived all
payments due to the Company by Mr. Kerrane on an interest free home purchase
loan made by the Company to Mr. Kerrane in May 1994, such payments due totaling
$300,000. See "Certain Transactions."
31
<PAGE>
On December 10, 1997, the Company engaged Glass & Associates, Inc. ("Glass")
to provide general management of the Company's operating and business affairs.
Glass provided Shaun K. Donnellan to serve as interim Chief Executive Officer
of the Company. Pursuant to the engagement agreement, the Company agreed to
compensate Glass for its services at its regular published rates of $250-$300
per hour for Principals, $250-$200 per hour for any Case Director, $175-$225
per hour for any Senior Consultant, $125-$175 per hour for any Consultant and
$45-$60 per hour for any clerical or administrative person. The Company will
also pay all expenses of Glass. The Company made an initial payment of
$200,000 as a deposit, which unused portion will be refunded to the Company at
the end of the assignment. Additionally, the Company paid Glass $539,585 in
fees and reimbursed them for $108,685 in expenses during the fiscal year ended
March 31, 1997.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) Reference is made to the Index to Consolidated Financial Statements
appearing at page 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 NO.
------- ----------- ----------
<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")).
3.2 --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")).
3.3 --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).
3.4 --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).
3.5 --By-Laws of Holding (incorporated herein by reference to
Exhibit 3.2 to Holding's 1995 Form 10-K).
4.1 --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).
4.2 --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).
4.3 --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).
4.4 --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").
10.1 --Second Amended an Restated Credit Agreement dated as of
July 31, 1997 by and among Nu-kote International, Inc.
as borrower, Nu-kote Holding, Inc. as Guarantor, the
lenders listed on the signature page thereto as Lenders,
and NationsBank of Texas, N.A. as Administrative Agent
and Collateral Agent (incorporated herein by reference
to Exhibit 10.3 of Holding's June 1997 10-Q).
10.2 --(Pounds)6,275,000--Third Amended and Restated Revolving
Credit Agreement dated July 31, 1997 between Pelikan
Scotland Limited as borrower, Barclays Bank PLC as
Agent, NationsBank of Texas, N.A. as Collateral Agent
and NationsBank of Texas, N.A. as Documentation Agent
and Others (incorporated herein by reference to Exhibit
10.3 of Holding's June 1997 10-Q).
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- ----------- ----------
<C> <S> <C>
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).
10.4 --CHF50,000,000--Third Amended and Restated Revolving
Credit Agreement dated July 31, 1997 between Pelikan
Produktions AG and Pelikan Hardcopy (International) AG
as borrower, Barclay Bank PLC as Agent, NationsBank of
Texas, N.A. as Collateral Agent and NationsBank of
Texas, N.A. as Documentation Agent and Others
(incorporated herein by reference to Exhibit 10.2 of
Holding's June 1997 10-Q).
10.5 --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).
10.6 --Warrant Agreement between Nu-kote Holding, Inc. and the
Warrantholders on the signature page thereof, dated as
of July 31, 1997 (incorporated herein by reference to
Exhibit 10.4 of Holding's June 1997 10-Q).
10.7 --Registration Rights Agreement dated as of July 31, 1997
by and among Nu-kote Holding, Inc. and the
Warrantholders listed on the signature page thereto
(incorporated herein by reference to Exhibit 10.5 of
Holding's June 1997 10-Q).
10.8 --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).
10.9 --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).
10.10 --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).
10.11 --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).
10.12 --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).
10.13 --Nu-kote International, Inc. Retirement Income Plan
(incorporated herein by reference to Exhibit 10(eeee) of
Holding's 1992 Form S-1).
10.14 --Nu-kote Holding, Inc. Stock Option Plan (incorporated
herein by reference to Exhibit 10(ffff) of Holding's
1992 Form S-1).
10.15 --Nu-kote International, Inc. Employee Savings Plan
(incorporated herein by reference to Exhibit 10(iiii) of
Holding's 1992 Form S-1).
10.16 --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").
10.17 --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).
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- ----------- ----------
<C> <S> <C>
10.18 --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)).
10.19 --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).
10.20 --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).
10.21 --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).
10.22 --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).
10.23 --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).
10.24 --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).
10.25 --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")).
10.26 --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).
10.27 --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).
10.28 --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).
10.29 --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).
10.30 --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).
10.31 --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).
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- ----------- ----------
<C> <S> <C>
10.32 --Second Amendment to Second Amended and Restated Credit
Agreement and Waiver dated March 30, 1998.
10.33* --Third Amendment to Second Amended and Restated Credit
Agreement, Waiver and Amendment to Certain Eurocurrency
Loan Documents dated April 1, 1998.
10.34* --Fourth Amendment to Second Amended and Restated Credit
Agreement, Waiver and Amendment to Certain Eurocurrency
Loan Documents dated May 29, 1998.
10.35 --Management consulting agreement with Glass &
Associates, Inc. (incorporated herein by reference to
Exhibit 10.7 to Holding's December 1997 10-Q).
10.36 --Daniel Kerrane employment contract dated May 6, 1998.
10.37 --David Brigante severance agreement dated March 9, 1998.
10.38 --Form of Employee Retention Agreement.
21.1 --Subsidiaries of Holding.
23.1 --Consent of Coopers & Lybrand L.L.P.
27 --Financial Data Schedule
</TABLE>
- - --------
* To be filed by amendment.
(b) The Registrant filed no reports on Form 8-K during the quarterly period
ended March 31, 1998.
36
<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: June 29, 1998
NU-KOTE HOLDING, INC.
/s/ Shaun K. Donnellan
By: _________________________________
Shaun K. Donnellan
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Shaun K. Donnellan President and Chief June 29, 1998
- - ------------------------------------ Executive Officer
Shaun K. Donnellan
/s/ Patrick E. Howard Director June 29, 1998
- - ------------------------------------
Patrick E. Howard
/s/ John P. Rochon Director June 29, 1998
- - ------------------------------------
John P. Rochon
/s/ Phillip L. Theodore Senior Vice President--Chief June 29, 1998
- - ------------------------------------ Financial
Phillip L. Theodore Officer/Treasurer/
Assistant
Secretary/Principal
Accounting
Officer/Principal Financial
Officer
</TABLE>
37
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
---------
<S> <C>
Report of Independent Accountants................................. F-2
Consolidated Balance Sheets at March 31, 1998 and 1997............ F-3
Consolidated Statements of Operations for the Years Ended March
31, 1998,
1997 and 1996.................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended March
31, 1998,
1997 and 1996.................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity (Defi-
cit) for the Years Ended March 31, 1998, 1997 and 1996........... F-6
Notes to Consolidated Financial Statements........................ F-7--F-30
</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, 1998 and 1997, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity (deficit) for each of the three years in the period ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Nu-kote
Holding, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 2
to the consolidated financial statements, the Company has suffered recurring
operating losses, violated certain financial convenants related to its bank
indebtedness, has had recurring net cash outflows from operations, has
negative working capital and a shareholders' deficit. In addition the
Company's credit facilities expire January 4, 1999 and there is no assurance
that the facilities will be extended or that alternative financing can be
obtained. All of these matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Coopers & Lybrand L.L.P.
Dallas, Texas
June 26, 1998
F-2
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 9,488 $ 12,275
Accounts receivable less allowances of $5,473 and $3,741,
respectively............................................ 46,412 71,024
Receivables from related party........................... 2,674 3,694
Inventories.............................................. 73,651 93,770
Prepaid expenses......................................... 6,907 10,452
Deferred income taxes.................................... 3,457 5,472
-------- --------
Total current assets................................... 142,589 196,687
Property, plant and equipment, net......................... 66,652 75,683
Other assets and deferred charges, net..................... 4,344 4,386
Assets held for sale....................................... 1,806 4,482
Intangibles, net........................................... 12,712 19,698
-------- --------
Total assets........................................... $228,103 $300,936
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Bank loans and current maturities of long-term debt...... $142,009 $ 1,135
Accounts payable......................................... 40,730 51,035
Compensation related liabilities......................... 8,031 6,500
Other accrued liabilities................................ 29,357 37,726
-------- --------
Total current liabilities.............................. 220,127 96,396
Long-term debt, net of current maturities.................. 760 134,677
Other liabilities.......................................... 7,079 9,995
Deferred income taxes...................................... 9,265 10,440
-------- --------
Total liabilities...................................... 237,231 251,508
-------- --------
Commitments and contingencies (Notes 10 and 12)............ -- --
Shareholders' equity (deficit):
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; none issued................................. -- --
Class A common stock, $0.01 par value, 40,000,000 shares
authorized; 22,325,302 shares issued and 21,775,302
shares outstanding at March 31, 1998 and 1997........... 223 223
Class B common stock, $0.01 par value, 15,000,000 shares
authorized; none issued................................. -- --
Additional paid-in capital............................... 92,610 91,605
Accumulated deficit...................................... (88,977) (36,610)
Foreign currency translation adjustments................. (10,349) (5,564)
Excess pension liability................................. (2,409) --
Treasury stock, at cost 550,000 shares................... (226) (226)
-------- --------
Total shareholders' equity (deficit)................... (9,128) 49,428
-------- --------
Total liabilities and shareholders' equity (deficit)... $228,103 $300,936
======== ========
</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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net sales.................................. $ 295,703 $ 342,302 $ 424,070
Cost of sales.............................. 255,268 285,144 294,980
---------- ---------- ----------
Gross margin............................. 40,435 57,158 129,090
Selling, general and administrative ex-
penses.................................... 59,756 66,602 78,100
Research and development expenses.......... 6,645 9,646 9,560
Other operating expenses................... -- 1,064 --
Loss on sale of division................... 4,061 -- --
Restructuring expenses..................... 3,349 15,139 13,825
---------- ---------- ----------
Operating income (loss).................. (33,376) (35,293) 27,605
Interest expense, net...................... 15,474 8,444 7,435
Other (income) expense items, net.......... 1,296 714 (557)
---------- ---------- ----------
Income (loss) before income taxes........ (50,146) (44,451) 20,727
Provision (benefit) for income taxes....... (329) 5,201 7,590
---------- ---------- ----------
Income (loss) before extraordinary loss.. (49,817) (49,652) 13,137
Extraordinary loss from early extinguish-
ment of indebtedness...................... (2,550) -- --
---------- ---------- ----------
Net income (loss)........................ $ (52,367) $ (49,652) $ 13,137
========== ========== ==========
Net income (loss) per share of common
stock--basic:
Income (loss) before extraordinary loss.. $ (2.28) $ (2.28) $ 0.61
Extraordinary loss....................... (0.12) -- --
---------- ---------- ----------
Net income (loss)........................ $ (2.40) $ (2.28) $ 0.61
========== ========== ==========
Weighted average shares outstanding........ 21,775,302 21,770,445 21,498,604
========== ========== ==========
Net income (loss) per share of common
stock--diluted:
Income (loss) before extraordinary loss.. $ (2.28) $ (2.28) $ 0.58
Extraordinary loss....................... (0.12) -- --
---------- ---------- ----------
Net income (loss)........................ $ (2.40) $ (2.28) $ 0.58
========== ========== ==========
Weighted average shares outstanding plus
effect of dilutive securities............. 21,775,302 21,770,445 22,492,343
========== ========== ==========
</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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $(52,367) $(49,652) $13,137
Adjustments to reconcile net income to net cash
used in operating activities:
Extraordinary loss from early extinguishment
of debt...................................... 2,550 -- --
Inventory provisions and other write-offs..... 5,488 11,454 --
Loss on sale of division...................... 4,061 -- --
Exchange (gains) losses....................... 181 (417) (569)
Depreciation and amortization................. 15,183 13,545 12,078
Deferred income taxes and changes in tax
valuation allowance.......................... 405 6,219 5,900
Tax benefit from exercise of stock options.... -- 91 1,685
Restructuring--impairment provisions.......... 1,327 8,567 --
Other......................................... (2,303) (2,387) (1,221)
Changes in working capital:
Accounts receivable........................... 18,985 16,764 (12,358)
Inventories................................... 10,735 7,177 (21,657)
Prepaid expenses.............................. 3,409 (1,706) 4,903
Accounts payable.............................. (5,853) 4,511 2,692
Compensation related liabilities.............. 1,839 (5,622) 2,330
Other accrued liabilities..................... (5,814) (8,177) (10,096)
Cash paid for restructuring................... (3,585) (5,287) (20,722)
-------- -------- -------
Net cash used in operating activities....... (5,759) (4,920) (23,898)
-------- -------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment....... (5,629) (12,283) (13,108)
Sale of property, plant and equipment........... 3,081 996 1,504
Acquisitions.................................... -- -- (5,337)
-------- -------- -------
Net cash used in investing activities......... (2,548) (11,287) (16,941)
-------- -------- -------
Cash flows from financing activities:
Borrowing on long-term debt and other loans..... 21,626 97,032 68,947
Payments on long-term debt and other loans...... (12,410) (73,541) (40,253)
Payments of financing costs..................... (2,559) -- --
Exercise of stock options....................... -- 337 2,158
-------- -------- -------
Net cash provided in financing activities..... 6,657 23,828 30,852
-------- -------- -------
Effect of exchange rate changes on cash........... (1,137) (1,886) (522)
-------- -------- -------
Net increase (decrease) in cash................... (2,787) 5,735 (10,509)
Cash and cash equivalents at beginning of year.... 12,275 6,540 17,049
-------- -------- -------
Cash and cash equivalents at end of year.......... $ 9,488 $ 12,275 $ 6,540
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................... $ 14,690 $ 7,276 $ 7,629
Income taxes.................................. 359 1,978 320
Excluded from the consolidated statements of
cash flows were the following effects of non-
cash investing and financing activities:
Assumption of certain liabilities from the
bankruptcy estate of Jarfalla Industry
Competence Center, AB...................... -- -- 770
Issuance of stock warrants.................. 1,005 -- --
</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 (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
SHARES COMMON STOCK
-------------------------------- ------------------------- FOREIGN RETAINED
ADDITIONAL CURRENCY EXCESS EARNINGS
HELD IN PAR PAID-IN TREASURY TRANSLATION PENSION (ACCUMULATED
ISSUED TREASURY OUTSTANDING VALUE CAPITAL STOCK ADJUSTMENTS LIABILITY DEFICIT)
---------- -------- ----------- ----- ---------- -------- ----------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Net loss............... -- -- -- -- -- -- -- -- (52,367)
Translation
adjustments........... -- -- -- -- -- -- (4,785) -- --
Excess pension
liability............. -- -- -- -- -- -- -- (2,409) --
Issuance of stock
warrants.............. -- -- -- -- 1,005 -- -- -- --
---------- -------- ---------- ---- ------- ----- -------- ------- --------
Balance at March 31,
1998................... 22,325,302 (550,000) 21,775,302 $223 $92,610 $(226) $(10,349) $(2,409) $(88,977)
========== ======== ========== ==== ======= ===== ======== ======= ========
</TABLE>
F-6
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. THE COMPANY
Nu-kote Holding, Inc. ("Nu-kote") and its wholly-owned subsidiaries are
referred to collectively as the "Company". The Company is an independent
manufacturer and distributor of impact and non-impact imaging supplies for
office and home printing devices, including the manufacture and distribution
of typewriter and printer ribbons, thermal fax ribbons, cartridges and toners
for laser printers, facsimile machines and copiers, cartridges and ink for ink
jet printers, specialty papers, calculator ink rollers and carbon paper.
The Company sells products primarily in the United States and Europe,
directly to wholesale and retail markets, and also to original equipment
manufacturers and distributors for resale under their brand names or private
labels. The Company distributes through major office supply marketing
channels, including wholesale distributors, office products dealers, direct
mail catalogs, office supply "super stores", information processing
specialists, value added resellers, and mass market retailers.
The Company refinanced its credit facilities on July 31, 1997 and
subsequently entered into amendments and waivers dated December 26, 1997,
April 1, 1998, and May 29, 1998. See Note 8 regarding the terms of the
refinancing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared on a going concern
basis. During fiscal 1998 and 1997, the Company incurred significant operating
losses and violated certain financial covenants relating to its bank
indebtedness, and for the past three fiscal years has had net cash outflows
from operations. At March 31, 1998 the Company has negative working capital
and a shareholders' deficit. As discussed in Note 8, the Company's credit
facilities expire January 4, 1999 and there is no assurance that the
facilities will be extended or alternative financing obtained.
In December 1997, the Company engaged Glass & Associates, Inc., management
consultants, to provide interim management services and to assist the Company
in finding solutions to its current operating issues and in developing a
business restructuring plan. In addition, the Company has engaged BT Alex.
Brown Incorporated to assist in the sale of all or part of the Company's
business. The Company will also continue to focus on managing net working
capital.
Management does not believe that the Company has adequate sources of working
capital to provide the Company with sufficient cash to meet its near term
obligations. The current waiver of existing defaults under the Second Amended
Agreements expires at the end of August 1998. Unless the Company's lenders
agree to a new waiver, the Company will be in default under the Second Amended
Agreements, and the Company will not have adequate cash to pay the outstanding
indebtedness at that time.
Principles of Consolidation
The consolidated financial statements include the accounts of Nu-kote and
its subsidiaries. All material intercompany transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity date at
time of purchase of three months or less to be cash equivalents.
F-7
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventories
Inventories are valued at the lower of cost or market using the last-in,
first-out method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and depreciated using the
straight-line method on an individual asset or composite group basis over the
estimated useful lives of the individual assets or composite groups (33 years
for building and improvements and 3 to 10 years for machinery and equipment).
Leasehold improvements are amortized over the shorter of the estimated assets
lives or the terms of the lease.
Except for assets originally acquired in connection with certain business
acquisitions, the cost of property, plant and equipment retired or otherwise
disposed of, and the accumulated depreciation thereon, are eliminated from the
asset and related accumulated depreciation accounts and any resulting gain or
loss is reflected in income. With respect to property, plant and equipment
originally acquired in connection with certain business acquisitions, no gain
or loss is recognized on the retirement or disposal of individual assets
within the composite groups and proceeds from retirement or sale are credited
to accumulated depreciation of the composite group, unless the assets in the
composite group are retired because of significant casualty or impairment, in
which case the resulting loss is recognized.
Intangibles
Goodwill arose from the excess of cost over the fair value of the net
underlying assets of International Communications Materials, Inc. ("ICMI") and
Future Graphics, Inc. ("Future Graphics"). Covenant-not-to-compete agreements
were entered into with sellers and key employees of businesses acquired. As
discussed in Note 6, the unamortized goodwill associated with the acquisition
of Future Graphics, Inc. was written off upon the sale of the components
division on December 31,1997. A trademark was acquired in connection with the
Pelikan Hardcopy Division acquisition and remains in effect for 50 years (see
Note 12). A technology license was acquired as part of the acquisition of
certain assets of Jarfalla Industry Competence Center, AB (see Notes 3 and
12).
All intangibles are being amortized on the straight-line method over their
estimated life or contract term but not in excess of forty years.
The Company evaluates the recoverability of intangibles based on the
estimated future undiscounted cash flows of the related investment. An
impairment provision is made at the time that estimated cash flows are not
sufficient to assure recovery.
Foreign Currency Translation
The local currency is the functional currency for substantially all of Nu-
kote's foreign subsidiaries. Therefore, all assets and liabilities of the
foreign subsidiaries are translated at exchange rates in effect at the balance
sheet dates. Translation gains and losses are not included in determining net
income or loss, but are accumulated in a separate component of shareholders'
equity (deficit). Foreign currency transaction gains and losses are included
in determining net income or loss, and amounted to a loss of $181 in fiscal
1998 and income of $417 and $569 in fiscal 1997 and 1996, respectively.
F-8
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Foreign Currency Hedging
The Company operates internationally, giving rise to market risks from
changes in foreign exchange rates. The Company utilizes derivative financial
instruments to reduce those risks, and does not hold or issue financial
instruments for trading purposes. The Company enters into various types of
foreign exchange contracts in managing its foreign exchange risk. Forward
contracts and purchased options are used to hedge foreign currency risks,
primarily with respect to accounts receivable and accounts payable. These
instruments generally have terms of three months or less. Gains and losses
receiving hedge accounting treatment are recognized in earnings in the same
period as the underlying hedged transactions. As of March 31, 1998 and 1997,
there were no open forward contracts or outstanding options. During fiscal
1998, 1997 and 1996 hedging transactions resulted in losses amounting to $29,
$1,397 and $113, respectively, and are included in foreign currency
transaction gains and losses.
Income Taxes
The Company accounts for certain income and expense items differently for
financial reporting purposes than for purposes of computing income taxes
currently payable. Provisions for deferred income taxes are made in
recognition of such temporary differences. Investment tax credits are
accounted for on the flow through method.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs expensed were
approximately $3,046, $5,134 and $5,972 during fiscal 1998, 1997 and 1996,
respectively.
Net Income (Loss) Per Share of Common Stock
During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share", which establishes standards
for computing and presenting earnings per share. All per share data presented
for prior years and periods has been restated to reflect the adoption of the
statement (See Note 22).
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
particularly deferred tax assets and accrued plant closing costs, and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain amounts have been reclassified in the 1997 consolidated financial
statements to conform to the 1998 presentation.
F-9
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
New Accounting Standards
During June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
and Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information". These standards are
effective for financial statements for fiscal years beginning after December
15, 1997. During 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 "Employer's Disclosure
about Pension and Other Postretirement Benefits", which is effective for
financial statements for fiscal years beginning after December 15, 1997, and
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivatives and Hedging Activity", which is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The Company is currently
evaluating the impact of these new standards on its financial statements but
has not yet determined the full impact.
3. ACQUISITIONS
On July 31, 1995 Nu-kote acquired certain assets and assumed certain
liabilities from the bankruptcy estate of Jarfalla Industry Competence Center,
AB in a business combination accounted for as a purchase. The assets were
contributed to, and the liabilities assumed by, Modular Ink Technology, AB, a
wholly-owned subsidiary. In connection with the acquisition, Nu-kote acquired
a license from Xaar Limited to use certain patents and know-how related to ink
jet printheads. Total consideration paid by Nu-kote to the bankruptcy estate
was $5,337. As the predecessor company was not material and was not an
operating company but was only involved in product research and development,
pro forma financial information is not presented.
During the fourth quarter of fiscal 1996, the Company completed its studies
of asset fair values and plant closing costs and other pre-acquisition
contingent liabilities recorded in connection with its acquisition of the
Pelikan Hardcopy Division ("Pelikan") in fiscal 1995. Based on these studies,
purchase price allocation adjustments were made affecting various balance
sheet accounts. These adjustments had the effect of increasing property, plant
and equipment by $14,634, intangibles (trademark and covenant not-to-compete)
by $5,481, other liabilities by $13,162, net deferred tax liability by $1,928
and reducing inventories by $4,885. The effect of these adjustments on fiscal
1996 net income was immaterial.
4. INVENTORIES
Inventories consist of the following at March 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials............................................. $31,000 $36,847
Work-in-process........................................... 11,539 12,354
Finished goods............................................ 31,112 44,569
------- -------
Total................................................... $73,651 $93,770
======= =======
</TABLE>
LIFO costs exceed replacement costs by $5,527 and $7,907 at March 31, 1998
and 1997, respectively.
F-10
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consist of the
following at March 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land.................................................... $ 4,312 $ 4,477
Buildings and improvements.............................. 19,413 19,417
Machinery and equipment................................. 80,194 80,490
------- -------
103,919 104,384
Less: accumulated depreciation.......................... (37,267) (28,701)
------- -------
Total................................................. $66,652 $75,683
======= =======
</TABLE>
Depreciation expense amounted to $10,620, $10,662 and $9,876 in fiscal 1998,
1997 and 1996, respectively.
In connection with the restructuring of the Company's business (See Note
20), the Company is selling certain of its property, plant and equipment. The
aggregate net book value of facilities held for sale is $1,806 and $4,482 at
March 31, 1998 and 1997, respectively, and has been excluded from property,
plant and equipment and included in assets held for sale.
6. INTANGIBLE ASSETS
Intangible assets consist of amounts allocated as a result of purchases of
existing businesses and are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
AMORTIZATION ----------------
PERIOD 1998 1997
------------ ------- -------
<S> <C> <C> <C>
Goodwill................................... 20 years $ 6,184 $ 9,880
Covenants-not-to-compete................... 3-5 years 4,556 5,636
Trademark.................................. 40 years 6,869 9,269
Technology license......................... 8 years 1,272 1,272
------- -------
18,881 26,057
Less: accumulated amortization............. (6,169) (6,359)
------- -------
Total.................................... $12,712 $19,698
======= =======
</TABLE>
Convenant-not-to-compete agreements have been recorded at their net present
value using estimated discount rates of 7% and 16%. The trademark, which was
acquired in connection with the Pelikan acquisition, has been recorded at its
estimated value based upon royalty rates charged for its use, discounted at an
estimated rate of return of 35% (see Note 12). The technology license has been
recorded at its estimated fair value on the date of acquisition, which is
based on forecasted discounted cash flows using a 16% discount rate (see Note
12).
During fiscal 1998, the Company determined that the liabilities established
for certain employee termination and relocation costs to be incurred in
connection with the Pelikan acquisition were $2,400 in excess of the amount
required. Accordingly, the Company reduced the liability and the Pelikan
trademark account by $2,400.
As described in Note 21, the Company sold the components division of Future
Graphics, Inc. As a result, the net unamortized goodwill associated with the
original acquisition of Future Graphics, Inc., amounting to $2,826 was written
off during fiscal 1998.
F-11
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. LINE OF CREDIT
The Company's Colombian subsidiary has a line of credit in Colombia in the
amount of $1,450. Borrowings against the line of credit amounted to $227 and
$603 at March 31, 1998 and 1997, respectively. The line bears interest at the
prevailing Colombia interest rate plus 2 percentage points. This Colombian
subsidiary was sold on April 1, 1998 and all existing debt was assumed by the
purchaser.
8. LONG-TERM DEBT
Long-term debt of the Company consists of the following at March 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revolving lines of credit............................. $141,456 $133,917
Other items........................................... 1,313 1,292
-------- --------
142,769 135,209
Less current portion.................................. (142,009) (532)
-------- --------
Long-term debt, net of current portion................ $ 760 $134,677
======== ========
</TABLE>
On July 31, 1997 the Company entered into the Second Amended and Restated
Credit Agreements ("Second Amended Agreements"). The Second Amended Agreements
provide revolving credit facilities ("Facilities") comprised of a $100,000
U.S. facility ("U.S. Facility"), a 50,000 CHF Swiss facility ("Swiss
Facility") and a 6,275 (Pounds) U.K. facility ("U.K. Facility"). The Swiss and
U.K. Facilities provide for multi-currency borrowings in U.S. dollars,
Deutschmarks and Pound Sterling up to certain limits, in addition to Swiss
Francs and Pound Sterling, respectively. The U.S. Facility calls for mandatory
commitment reductions to $97,500 on January 2, 1998 and $95,000 on April 1,
1998 with further reductions to $92,500 on July 1, 1998 and $90,000 on October
1, 1998. The Facilities mature on January 4, 1999.
The U.S. Facility is guaranteed by Nu-kote Holding, Inc. and all
subsidiaries. The Swiss and U.K. Facilities are guaranteed by Nu-kote Holding,
Inc. and all of its significant U.S. subsidiaries. The Facilities are
collateralized by substantially all of the assets of the Company including the
capital stock of all subsidiaries and intercompany advances.
The U.S. Facility bears interest at (1) 1% through June 30, 1998 and
thereafter at 2% plus (2) the greater of (i) a lender's bank prime rate or
(ii) the Federal Funds rate plus .50%. The Swiss and U.K. Facilities bear
interest at LIBOR (as defined) plus 4% through June 30, 1998 and plus 5%
thereafter. At March 31, 1998 and 1997 the interest rate on the U.S. Facility
and weighted average interest rate on the Swiss Facility and U.K. Facility was
9.5% and 5.5%, and 7.33% and 4.52%, respectively.
The Second Amended Agreements provide for affirmative and negative covenants
that, among other things, restrict indebtedness, liens, investments (including
intercompany investments and advances), contingent obligations, dividend
payments, sale or transfer of assets and acquisitions and disposals of
subsidiary stock. In addition, the Second Amended Agreements contain financial
covenants requiring the maintenance of certain financial ratios and net worth
and limits restructuring charges and capital expenditures. The most
restrictive of the financial covenants is the minimum required amount of
earnings before interest, taxes, depreciation, amortization, certain non-cash
losses and gains, restructuring and other nonrecurring charges (as defined)
(EBITDAR), which is required to be tested monthly and results in violation if
the covenant is not met for two consecutive months or is not met at the end of
a quarter.
F-12
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LONG-TERM DEBT--(CONTINUED)
As of and since the quarter ended December 26, 1997, the Company has been in
violation of certain financial covenants related to the Second Amended
Agreements. Since that time, the Company and its lenders have entered into a
series of amendments and waivers to the Second Amended Agreements. The
amendments and waivers provided, among other things, the following:
. Waived for the period from December 26, 1997 through August 31, 1998
violations of certain financial covenants as of and for the quarters
ended December 26, 1997, March 31, 1998 and June 27, 1998;
. Deferred the mandatory principal reduction of $4,000 due on May 29,
1998 and scheduled a $5,000 payment due on August 31, 1998;
. Restricted the Company from making intercompany loans and investments
in certain subsidiaries;
. Required the Company to use all proceeds from the sale of assets as a
permanent reduction of the revolver under the credit Second Amended
Agreements; and
. Required monthly principal reductions of $500 commencing May, 1998
through July, 1998.
Unamortized deferred loan costs related to the First Amended Agreement
amounting to $2,550, were written off at the closing date and were reported as
an extraordinary loss in the Company's fiscal 1998 financial statements.
Borrowings under the revolving lines of credit at March 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
LOCAL LOCAL
CURRENCY DOLLARS CURRENCY DOLLARS
--------------- -------- --------------- --------
<S> <C> <C> <C> <C>
U.S. Facility.......... $ 98,100 $ 98,100 $ 90,000 $ 90,000
=============== =============== ========
Swiss Facility......... CHF 50,000 32,832 CHF 49,750 34,574
=============== =============== ========
U.K. Facility.......... (Pounds) 6,275 10,524 (Pounds) 5,670 9,343
=============== -------- =============== --------
$141,456 $133,917
======== ========
</TABLE>
In connection with the Second Amended Agreements, the lenders received
warrants to acquire approximately 1.7 million shares of Nu-kote Class A Common
Stock, which represents 7% of the issued and outstanding shares of Nu-kote on
a fully diluted basis at July 31, 1997. The warrants have a five year term and
an exercise price of $3.57, which is 150% of the average closing price of the
Company's common stock for 20 business days prior to July 15, 1997. The fair
value of the warrants at time of issuance was estimated to be $1,005 and was
charged to deferred loan costs. In addition, the Company incurred various
transaction costs and bank fees, which were charged to deferred loan costs.
Deferred loan costs are being amortized on a straight line basis over the term
of the Second Amended Agreements.
Letters of credit issued at March 31, 1998 amounted to $75 and were all
issued under the Domestic Facility.
Included in other items at March 31, 1998 and 1997 are certain notes and
liabilities incurred in connection with certain business acquisitions.
F-13
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. OTHER ACCRUED LIABILITIES
No single accrued liability exceeded 5% of total current liabilities in
fiscal 1998. However, comparative March 31, 1998 balances are shown for those
items that were in excess of 5% of total current liabilities at March 31,
1997.
<TABLE>
<CAPTION>
MARCH 31,
--------------
1998 1997
------ -------
<S> <C> <C>
Sales incentive rebates................................... $5,631 $ 6,292
Opening balance sheet provisions relating to plant closing
costs of Pelikan Hardcopy Division....................... 2,557 8,952
------ -------
$8,188 $15,244
====== =======
</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, 1998 minimum annual rental commitments under long-term, non-
cancelable operating leases were as follows:
<TABLE>
<S> <C>
1999............................................................... $4,279
2000............................................................... 3,355
2001............................................................... 2,344
2002............................................................... 1,634
2003 and thereafter................................................ 8,113
</TABLE>
Total rental expense incurred in fiscal 1998, 1997 and 1996 was $4,481,
$4,700 and $4,150 respectively.
F-14
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws.
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities at March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Current:
Reserves and accruals.............. $ 8,056 $ 499 $12,719 $ 269
Inventory basis difference......... 225 649 122 2,164
Other.............................. 2 727 21 270
------- ------- ------- -------
8,283 1,875 12,862 2,703
Less valuation allowance........... (4,479) -- (7,122) --
------- ------- ------- -------
Subtotal--current................ 3,804 1,875 5,740 2,703
------- ------- ------- -------
Non-current:
Net operating loss carryforwards... 35,563 -- 17,699
Postretirement and benefits........ 2,419 436 1,539 467
Other basis differences principally
related to property, plant
equipment......................... 3,309 8,607 3,003 9,994
Other.............................. 19 222 1,700 272
------- ------- ------- -------
41,310 9,265 23,941 10,733
Less valuation allowance........... (41,310) -- (23,648) --
------- ------- ------- -------
Subtotal--non-current............ -- 9,265 293 10,733
------- ------- ------- -------
Total............................ $ 3,804 $11,140 $ 6,033 $13,436
======= ======= ======= =======
Net current asset.................... $3,457 $ 5,472
====== =======
Net current liability................ $1,528 $ 2,435
====== =======
Net non-current liability............ $9,265 $10,440
====== =======
</TABLE>
The net current deferred tax liability of $1,528 and $2,435 is included in
other accrued liabilities at March 31, 1998 and 1997, respectively.
No U.S. provision for income taxes has been made for unremitted earnings of
the Company's foreign subsidiaries as of March 31, 1998, in that the Company's
foreign subsidiaries have accumulated losses.
The total valuation allowances relating to acquired businesses amount to
approximately $7,000 at March 31, 1998 and 1997, respectively. Future
reductions of these acquisition valuation allowances will be credited to
intangible assets of the acquired businesses.
During fiscal 1998, 1997 and 1996 increases in the valuation allowances for
all jurisdictions increased income tax provisions or reduced income tax
benefits $14,200, $23,379 and $6,171, respectively.
F-15
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES--(CONTINUED)
The components of income (loss) before income taxes are as follows for
fiscal years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Domestic...................................... $(39,471) $(31,375) $ 9,338
Foreign....................................... (10,675) (13,076) 11,389
-------- -------- -------
$(50,146) $(44,451) $20,727
======== ======== =======
</TABLE>
The provisions (benefit) for income tax consist of the following for fiscal
years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Current:
Domestic........................................ $(771) $ -- $ 50
Foreign......................................... 37 (1,109) (45)
----- ------ ------
(734) (1,109) 5
----- ------ ------
Deferred:
Domestic........................................ -- 4,210 1,822
Foreign......................................... 405 (954) 1,542
----- ------ ------
405 3,256 3,364
----- ------ ------
Change in beginning of the year valuation allow-
ances:
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 cred-
ited to additional paid-in capital............... -- 91 1,685
----- ------ ------
Total provision (benefit) for income tax.......... $(329) $5,201 $7,590
===== ====== ======
</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 of $1,063, increased net
income a total of $1,732. The effect of these changes in estimates increased
earnings per share $0.08 on a basic and diluted basis.
F-16
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES--(CONTINUED)
The factors accounting for the difference between the total provision
(benefit) for income taxes and the amount computed by applying the U.S.
statutory income tax rate are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Computed expected tax expense (benefit)
based on U.S. rates........................ $(13,420) $(10,667) $3,117
Changes in tax resulted from:
Amortization of goodwill.................. 1,111 165 165
State income tax effect................... 664 656 715
Valuation allowance changes............... 9,781 14,076 --
Other..................................... 1,093 71 (440)
-------- -------- ------
Total provision (benefit) for U.S. income
taxes.................................... (771) 4,301 3,557
Provision for foreign income taxes.......... 442 900 4,033
-------- -------- ------
Total provision (benefit) for income
taxes.................................... $ (329) $ 5,201 $7,590
======== ======== ======
</TABLE>
At March 31, 1998 the Company had domestic net operating loss carryforwards
that amount to approximately $55,000 which expire from 2010 to 2013. Foreign
net operating loss carryforwards amount to approximately $47,000, which
approximately $26,000 expire from 2003 and 2005 and approximately $21,000 may
be carried forward indefinately.
Should the Company have an "ownership change" as defined by the Internal
Revenue Code of 1986, the Company's use of its domestic net operating loss
carryforwards after such ownership change will be subject to an annual
limitation.
12. CONTINGENCIES
On January 23, 1998 a suit seeking class action status was filed by a
shareholder against Nu-kote, its current directors, certain of its current
officers and certain former officers and directors in the United States
District Court for the Northern District of Texas, Dallas Division, case
number 3-98CV0161-T. The complaint alleges that Nu-kote and the specified
individuals violated the Securities Exchange Act of 1934 by knowingly making
false and misleading statements about the Company's business and issued false
and misleading financial statements between July 28, 1995 and May 29, 1997.
The plaintiff is seeking, on behalf of the purported class, compensatory
damages and reimbursement of fees and expenses. Nu-kote denies the plaintiff's
allegations and intends to vigorously defend the suit.
Three original equipment manufacturers ("OEMs") filed lawsuits against Nu-
kote International, Inc. ("NII") alleging that certain NII ink jet replacement
cartridges, refill inks and packaging infringe their trademarks, tradedress
and patents and alleging, among other things, unfair competition and
misleading representations. The plaintiffs are seeking injunctive relief,
monetary damages, court costs and attorney's fees. The complaint in one of the
cases has been amended to name Nu-kote and Pelikan Produktions AG as
defendants. None of the lawsuits have been concluded or settled and in
management's opinion the potential losses related to these cases are not
reasonably estimatable. All of the cases are being vigorously contested, and
in each case the Company or NII has asserted affirmative defenses and
counterclaims and has requested damages and affirmative injunctive relief. In
one of the cases NII's Motion for Summary Judgement of the
F-17
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. CONTINGENCIES--(CONTINUED)
unenforceability of four of the plaintiff's utility patents was granted and in
another case NII's Motion for Summary Judgement of the unenforceability of ten
of the plaintiff's patents was granted although a Motion for Reconsideration
with respect to the ruling is pending before the respective court that granted
each motion.
On March 10, 1998, a lawsuit was filed against Nu-kote and a subsidiary
accusing the Company of infringing on the plaintiff's patent with respect to
certain inkjet printheads manufactured by Nu-kote's Swedish subsidiary. The
lawsuit is in a very preliminary stage. The Company will assert various
defenses and at the same time proceed with negotiations to settle the dispute.
In June 1998, Nu-kote received a letter from the licensor of the Pelikan
trademark license purporting to terminate this license based upon the failure
to cure alleged defaults under the license. Nu-kote believes that, to the
extent there were any breaches under the license, they were properly cured and
it is unaware of any grounds that could allow the licensor to terminate such
license.
In addition, the Company is involved in various routine legal matters.
In the opinion of management, all matters discussed above are covered by
insurance or are without merit or the disposition is not anticipated to have a
material effect on the Company's financial position; however, one or more of
these matters could have a material effect on future quarterly or annual
results of operations or cash flow when resolved.
A lawsuit filed by Daniel M. Kerrane, a former officer and director of the
Company was settled on May 6, 1998 with the Company agreeing to make bi-weekly
payments of $12.5 to Mr. Kerrane, totaling $150, agreeing to pay Mr. Kerrane's
attorneys fees, up to a sum of $40, agreeing to pay approximately $23 in
withholding taxes, and paying Mr. Kerrane's country club dues, totaling $15.
Further, the Company waived all payments due to the Company by Mr. Kerrane on an
interest-free home purchase loan made by the Company to Mr. Kerrane in May 1994,
such payments due totaling $300. Mr. Kerrane originally sought an amount in
excess of $8,000.
In connection with Nu-kote's acquisition of the Office Supplies Division and
the International Business Forms Division of Unisys Corporation ("Unisys"),
Unisys agreed to retain all liabilities resulting from or arising out of any
environmental conditions existing on or before January 16, 1987 at the
Company's Rochester, Macedon and Bardstown facilities and, additionally, to
indemnify the Company for such. State environmental agencies have alleged that
environmental contamination exists at all three sites. To date, Unisys has
handled all remediation efforts related to these properties. In connection
with Nu-kote's acquisition of Pelikan, the seller, Pelikan Holding AG, agreed
to indemnify Nu-kote for certain pre-closing environmental liabilities. The
Company has found environmental contamination at former Pelikan facilities in
Derry, Pennsylvania and Franklin, Tennessee, and has asserted a claim for
indemnification. As a result of the indemnification from Unisys and Pelikan,
in the opinion of management, the ultimate cost to resolve these environmental
matters will not have a material adverse effect on the Company's financial
position, results of future operations or liquidity.
13. EMPLOYEE BENEFIT PLANS
The Company has non-contributory and contributory defined-benefit pension
plans covering nearly all of its employees at Nu-kote International, Inc. and
its domestic subsidiaries, Pelikan Scotland Ltd. and Greif-Werke GmbH.
The Company's funding policy in the United States is to fund amounts as are
necessary on an actuarial basis to provide for benefits in accordance with the
Employee Retirement Income Security Act. The Nu-kote International, Inc.
plan's assets consist primarily of investments in Treasury obligations,
federal agency bonds and corporate bonds. The Pelikan Scotland Ltd. Plan
assets comprise a portfolio of equities and bonds. The Greif-Werke GmbH plan
is unfunded.
F-18
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. EMPLOYEE BENEFIT PLANS--(CONTINUED)
Net periodic pension expense recognized by the Company for the defined-
benefit plans for fiscal 1998, 1997 and 1996 included the following components.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service cost-benefits earned during the year..... $ 960 $ 856 $ 679
Interest cost on the projected benefit obliga-
tions........................................... 2,572 2,309 2,188
Actual return on plan assets..................... (5,876) (1,850) (3,628)
Net amortization and deferral.................... 3,591 (288) 1,821
Curtailment gain................................. (77) -- --
Effect of changes in actuarial assumptions....... -- -- (379)
------ ------ ------
Net periodic pension cost........................ $1,170 $1,027 $ 681
====== ====== ======
</TABLE>
F-19
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The following table sets forth the funded status of the defined-benefits
plans and amounts recognized in the Company's consolidated balance sheets at
March 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
NU-KOTE PELIKAN GREIF- NU-KOTE PELIKAN GREIF- NU-KOTE PELIKAN GREIF-
INTERNATIONAL, SCOTLAND WERKE INTERNATIONAL, SCOTLAND WERKE INTERNATIONAL, SCOTLAND WERKE
INC. LTD. GMBH INC. LTD. GMBH INC. LTD. GMBH
-------------- -------- ------- -------------- -------- ------- -------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Actual present value
of benefit:
Vested............ $10,123 $22,725 $ 4,781 $7,548 $17,763 $ 5,435 $7,251 $13,065 $ 5,935
======= ======= ======= ====== ======= ======= ====== ======= =======
Accumulated....... $10,424 $22,725 $ 4,784 $7,904 $17,763 $ 5,437 $7,661 $13,065 $ 6,143
======= ======= ======= ====== ======= ======= ====== ======= =======
Projected......... $11,604 $23,815 $ 4,818 $8,988 $18,921 $ 5,518 $8,779 $13,996 $ 6,233
Plan assets at fair
value............... 9,020 24,628 -- 8,019 19,594 -- 7,822 16,637 --
------- ------- ------- ------ ------- ------- ------ ------- -------
Plan assets (less)
greater than
projected benefit
obligation.......... (2,584) 813 (4,818) (969) 673 (5,518) (957) 2,641 (6,233)
Unrecognized prior
service cost........ (14) 248 -- (16) -- -- (17) -- --
Unrecognized net
(gain) loss......... 3,648 211 (174) 2,445 645 (143) 2,384 (1,529) --
Tax effect on net
assets of acquired
businesses.......... (45) -- -- (52) -- -- (60) -- --
Adjustment required
to recognize minimum
liability........... (2,409) -- -- -- -- -- -- -- --
------- ------- ------- ------ ------- ------- ------ ------- -------
Prepaid (accrued)
pension cost........ $(1,404) $ 1,272 $(4,992) $1,408 $ 1,318 $(5,661) $1,350 $ 1,112 $(6,233)
======= ======= ======= ====== ======= ======= ====== ======= =======
Weighted average
discount rates...... 7.000% 6.000% 6.500% 8.000% 8.000% 6.500% 7.750% 8.500% 7.000%
Expected long-term
rate of return on
assets.............. 9.000 8.000 N/A 9.000 9.000 N/A 9.000 9.000 N/A
Assumed rate of
increase in future
compensation........ 4.000 4.000 2.500 4.500 5.500 2.500 4.500 4.500 2.000
</TABLE>
F-20
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The Company has a defined contribution 401(k) plan that covers all of the
employees in the U.S. Under this plan, eligible employees are allowed to
contribute up to 15% of their pay (up to federally mandated maximums), and the
Company will contribute an amount equal to 40% of the initial 6% of the
employee's contribution. The Company recognized an expense of $276, $343 and
$343 in fiscal 1998, 1997 and 1996, respectively, as its contribution to this
plan.
The Company has other defined contribution plans, the contributions to which
are based on a percentage of the employee's salary. Contributions to these
plans amounted to $1,563, $1,236 and $1,319 in fiscal 1998, 1997 and 1996,
respectively.
14. POSTRETIREMENT BENEFITS
The Company sponsors an unfunded postretirement medical and life insurance
plan that covers certain employees who were with the Company prior to January
1987. The Company sponsors no other postretirement benefit plans.
Cash payments made by the Company for retiree benefits during the years
ended March 31, 1998, 1997 and 1996 amounted to $160, $103 and $159,
respectively. The Company's policy is to fund these obligations as incurred.
The components of net periodic expense for this postretirement benefit are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the year.............. $-- $ -- $ 1
Interest cost on accumulated post retirement benefit obli-
gation................................................... 83 125 126
--- ---- ----
Net periodic postretirement benefit cost.................. $83 $125 $127
=== ==== ====
</TABLE>
The actuarial and recorded liabilities for this postretirement benefit, none
of which have been funded, are as follows at March 31:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $1,347 $1,266
Fully eligible active plan participants.................. 85 80
------ ------
Total accumulated postretirement benefit............... 1,432 1,346
Unrecognized actuarial gain................................ 170 279
------ ------
Accrued benefit liability.................................. $1,602 $1,625
====== ======
</TABLE>
The accumulated postretirement benefit obligation was determined using a
discount rate of 6.75% and 7.75% in fiscal 1998 and 1997, respectively, and a
health care cost trend rate of 8.3% for the first year decreasing to 6.0% in
the year 2026 and thereafter.
The effect on the accumulated postretirement obligation projected as of
March 31, 1998, of a 1% increase each year in the health cost trend rate used,
would result in an increase of 6.2% in the obligation and of 7.8% in the
aggregate interest and service components of the fiscal 1998 expense.
F-21
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. INTERNATIONAL OPERATIONS AND SEGMENT DATA
The Company's operations involve a single industry segment--the manufacture
and distribution of impact and non-impact imaging supplies for office and home
printing devices.
Information concerning the Company's operations by geographic locations is
summarized as follows for the fiscal years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales to unconsolidated customers:
Domestic.................................. $148,341 $173,069 $203,992
Europe.................................... 143,793 165,826 215,685
Other countries........................... 3,569 3,407 4,393
-------- -------- --------
$295,703 $342,302 $424,070
======== ======== ========
Operating income (loss):
Domestic.................................. $(26,262) $(23,522) $ 11,372
Europe.................................... (7,531) (12,015) 15,879
Other countries........................... 417 244 354
-------- -------- --------
$(33,376) $(35,293) $ 27,605
======== ======== ========
Identifiable assets:
Domestic.................................. $ 98,605 $141,563 $176,679
Europe.................................... 125,318 152,534 182,700
Other countries........................... 2,374 2,357 4,971
-------- -------- --------
$226,297 $296,454 $364,350
======== ======== ========
</TABLE>
The above information does not include assets held for sale of $1,806,
$4,482 and $2,065 for the years ended March 31, 1998, 1997 and 1996,
respectively.
Intercompany sales by domestic operations to foreign operations amounted to
$740, $5,692 and $2,867 in fiscal 1998, 1997 and 1996, respectively, and
intercompany sales by foreign operations to domestic operations amounted to
$10,660, $19,232 and $18,690 in fiscal 1998, 1997 and 1996, respectively
The Company's net sales for impact and non-impact imaging supplies were as
follows for the fiscal year ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Impact......................................... $124,303 $146,200 $203,590
Non-impact..................................... 171,400 196,102 220,480
-------- -------- --------
$295,703 $342,302 $424,070
======== ======== ========
</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
F-22
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
16. CONCENTRATION OF CREDIT RISK--(CONTINUED)
office supplies business. The Company performs ongoing credit evaluations of
its customer and maintains allowances for potential credit losses.
17. EMPLOYEE STOCK BASED COMPENSATION PLANS
The Company sponsors the Nu-kote Holding, Inc. Stock Option Plan and the Nu-
kote Holding, Inc. 1992 Stock Option Plan (the "Stock Option Plans"). The
Company also sponsors the Nu-kote Holding, Inc. Senior Management Stock
Appreciation Rights Plan (the "Plan").
Stock Options
Under the Stock Options Plans, the Company is authorized to issue shares of
Class A Common Stock pursuant to "Awards" granted to officers, key employees
and directors in the form of non-qualified stock options not qualified under
Section 422 of the Internal Revenue Code of 1986, as amended. As of March 31,
1998 and 1997, there were 1,405,876 and 631,775 shares available for grant,
respectively.
The stock options granted in fiscal 1998, 1997 and 1996 have exercise prices
ranging from $2.75 to $20.875, and contractual terms of 10 years. All options
vest on a graded schedule, 20% per year over 5 years, beginning on the first
anniversary of the date of grant.
A summary of the status of the Company's stock options as of March 31, 1998,
1997 and 1996 and the changes during the years then ended is present below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
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................ 1,923,463 $10.62 1,908,940 $10.53 2,276,592 $ 9.28
Granted................. 455,000 $ 2.75 145,000 $12.06 180,000 $16.03
Exercised............... -- $ -- (33,294) $10.13 (383,468) $ 5.31
Forfeited............... (1,229,099) $10.04 (97,183) $11.10 (164,184) $11.49
---------- --------- ---------
Outstanding at end of
year................... 1,149,364 $ 8.12 1,923,463 $10.62 1,908,940 $10.53
========== ========= =========
Exercisable at end of
year................... 532,862 $10.03 878,054 $10.04 503,699 $ 9.76
Weighted average fair
value of all options
granted during year.... $ 1.62 $ 5.94 $ 7.75
====== ====== ======
</TABLE>
The fair value of each stock option granted in fiscal 1998, 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: dividend yield of 0.00%;
expected volatility of 45.75%; a weighted risk-free interest rate of 6.26%,
and expected lives of 6 years.
F-23
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. EMPLOYEE STOCK BASED COMPENSATION PLANS--(CONTINUED)
The following table summarizes information about stock options outstanding at
March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
------------------------- ----------------------------
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE WEIGHTED AVERAGE
EXERCISE AT 3/31/98 CONTRACTUAL LIFE PRICE AT 3/31/98 EXERCISE PRICE
PRICES ----------- ---------------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.75 355,000 9.16 $ 2.75 -- $ N/A
$7.375 to
$11.00 719,364 6.18 $ 9.90 506,862 $ 9.70
$11.01 to
$17.00 70,000 7.46 $ 16.18 24,000 $ 17.57
$17.01 to
$20.875 5,000 7.61 $20.875 2,000 $20.875
--------- ---- ------- ------- -------
$2.75 to
$20.875 1,149,364 7.18 $ 8.12 532,862 $ 10.03
========= ==== ======= ======= =======
</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. No additional grantings have since occurred. During
fiscal 1998 the Company canceled 240,000 SARs, resulting in a total of
1,040,000 SARs that were outstanding on March 31, 1998.
The SARs granted during the year ended March 31, 1996 are exercisable five
years subsequent to the grant date and only in 20% installments per year for
each year thereafter. As of March 31, 1998 these SARs had no intrinsic value.
Under the provisions of the Plan, liability to any participant ceases once
the Company's Class A Common Stock price falls below $15.43 per share. At
March 31, 1998, the Class A Common Stock had a market value of $0.219.
Accordingly, no liability for the Plan has been recorded. Incremental shares
under the Plan for purposes of computing earnings per share are not recognized
until awards under the Plan exceed $10,000.
F-24
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. EMPLOYEE STOCK BASED COMPENSATION PLANS--(CONTINUED)
Pro Forma Net Loss and Net Loss Per Common Share
The Company applies Accounting Principles Board Opinion 25 ("APB 25") and
related interpretations in accounting for employee compensation costs related
to its plans. APB 25 is an intrinsic value approach for measuring compensation
costs. Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") is a fair value approach for measuring
compensation costs. Had employee compensation cost for the Company's employee
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income (loss) and net income (loss) per common share for fiscal
1998, 1997 and 1996 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 compensation
cost................... $ -- $ 99 $ -- $ 308 $ -- $ 100
APB 25 compensation
cost................... $ -- $ -- $ -- $ -- $ -- $ --
Net income (loss)....... $( 52,367) $(52,466) $(49,652) $(49,960) $13,137 $13,075
Net income (loss) per
common share:.......... $ -- $ -- $ -- $ -- $ -- $ --
Basic................. $ (2.40) $ (2.41) $ (2.28) $ (2.29) $ 0.61 $ 0.61
Diluted............... $ (2.40) $ (2.41) $ (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 in fiscal 1996 for
the consulting services of Mr. Theodore Barry, a former director of the
Company. Mr. Hubbard C. Howe was paid $38, $150 and $150 as Vice Chairman of
the Board in fiscal 1998, 1997 and 1996, respectively, in lieu of directors
fees. Payments to Mr. Howe were discontinued in July 1997, upon his
resignation from the Board.
As a result of the Pelikan acquisition, Ligapart AG ("Ligapart"), which
owned the majority of Pelikan, became a major shareholder of the Company. In
connection with the acquisition, the Company entered into various management
and lease agreements with Ligapart related entities. The net expense incurred
by the Company under these agreements amounted to $782, $2,423 and $6,995 in
fiscal 1998, 1997 and 1996, respectively. In addition, sales to Ligapart
related entities amounted to $7,936, $12,600 and $25,453 and purchases
amounted to $0, $71 and $2,302 in fiscal 1998, 1997 and 1996, respectively.
19. SHAREHOLDERS' EQUITY (DEFICIT)
On May 19, 1994 the Board of Directors of Nu-kote, in connection with a
Shareholder Rights Agreement adopted on that date, declared a dividend
distribution of one preferred share purchase right ("Right") for each
outstanding share of Class A Common Stock to be paid on June 6, 1994 to
holders of record on that date. The Rights are represented by the certificates
for the Class A Common Stock and trade with such stock until another party
acquires, or announces its intention to acquire, beneficial ownership of 15%
or more of the outstanding Class A Common Stock. The Rights expire June 6,
2004, unless earlier redeemed by Nu-kote, and entitle the
F-25
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
19. SHAREHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
holder to purchase from Nu-kote one one-hundredth of a share of Series A
Junior Participating Preferred Stock of Nu-kote at an exercise price of
$37.50. The rights will be exercisable if another party acquires or announces
its intention to acquire beneficial ownership of 15% or more of the
outstanding Class A Common Stock. The 15% threshold may be lowered by the
Board, but not below 10%. The rights, if exercised, will enable the holder to
buy a number of common shares having a market value equal to twice the
exercise price. Also, after a person or group acquires 15% or more of the
outstanding Class A Common Stock of Nu-kote and if Nu-kote is involved in a
merger or other transaction in which it is not the surviving corporation, or
if it sells or transfers 50% or more of its assets or earning power to another
party, each right will enable the holder to buy a number of common shares of
the other party equal in market value to twice the exercise price.
On August 30, 1995 shareholders voted to increase the number of shares of
authorized Class A Common Stock from 25 million to 40 million.
On July 19, 1995, Nu-kote's Board of Directors declared a 2 for 1 stock
split to be effected in the form of a 100% stock dividend on Nu-kote's Class A
Common Stock. All prior period share amounts and number of shares have been
restated to reflect this split.
The Company's credit agreements (see Note 8) restrict the Company from
declaring or paying dividends.
20. RESTRUCTURING EXPENSES
Restructuring expenses for the fiscal years ended March 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Severance......................................... $ 814 $ 4,461 $ 495
Impairment provisions for duplicate or incompati-
ble property, plant and equipment and foreign op-
erations......................................... 1,327 8,567 --
Incremental manufacturing costs associated with
facility closures................................ -- -- 8,662
Relocation of employees, equipment and inventory,
lease cancellations, termination of contracts,
facility maintenance and other................... 1,208 2,111 4,668
------ ------- -------
$3,349 $15,139 $13,825
====== ======= =======
</TABLE>
The fiscal 1998 restructuring expenses related primarily to the
centralization of sales and distribution into Franklin, Tennessee, and the
closure of the Dallas, Texas headquarters. The charge for severance was
approximately $1,242 representing the severance of approximately 70 people in
manufacturing, sales and administration, of which virtually all had been
terminated by March 31, 1998. This charge was offset by changes in estimates
of $428 related to fiscal 1997 severance accruals. Approximately $1,104 of the
fiscal 1998 severance had been paid by March 31, 1998. Other restructuring
expenses of $1,208, net of fiscal 1997 changes in estimates of $353, related
primarily to relocation of employees and outplacement counseling and were
expensed as incurred. The asset write-downs were related to property, plant
and equipment at the Company's Derry, Pennsylvania facility, and were written
down to their estimated net realizable value as a result of the Company's
decision to dispose of these assets as part of its consolidation effort. A
significant portion of the machinery and equipment at the Derry, Pennsylvania
facility was sold in fiscal 1999.
F-26
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
20. RESTRUCTURING EXPENSES--(CONTINUED)
The Company estimates that an additional $2,000 of restructuring expenses
will be recognized in fiscal 1999. Most of this amount relates to expected
severance and relocation costs related to continuing consolidation efforts in
Europe. Management currently anticipates completion of its restructuring
efforts in fiscal 1999.
During fiscal 1997, restructuring expenses amounted to $15,139 relating
primarily to the consolidation of impact product production into Scotland,
Mexico, and China; centralization of distribution primarily into Franklin,
Tennessee and Duren, Germany; and the closure of one toner facility, and
consolidation of toner manufacturing into Connellsville, Pennsylvania and
Monchaltorf, Switzerland. The charge for severance costs represents the
severance of approximately 110 people in manufacturing and administration, of
which virtually all had been terminated by March 31, 1997. Of this charge,
$3,257 was paid in fiscal 1997. Of the $2,111 in fiscal 1997 relating to lease
cancellations, facility maintenance and other, $1,434 was paid in fiscal 1997.
The assets written down were comprised of property, plant and equipment at the
Company's Macedon, New York and Derry, Pennsylvania facilities, and were
written down as a result of the Company's decision to dispose of these assets
as part of its consolidation effort. Fiscal 1997 activity related to these
accrued restructuring costs is as follows:
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
DESCRIPTION OF RESTRUCTURING ACCRUED AT PAID IN CHANGES IN ACCRUED AT
EXPENSE 3/31/97 FISCAL1998 ESTIMATES 3/31/98
- - ---------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Severance costs................... $1,204 $(776) $(428) $ --
Lease cancellations............... 430 (139) (111) 180
Facility maintenance and other.... 247 (5) (242) --
------ ----- ----- ----
$1,881 $(920) $(781) $180
====== ===== ===== ====
</TABLE>
The changes in estimates noted above decreased fiscal 1998 net loss $781 and
loss per share $0.04 on a basic and diluted basis.
During fiscal 1996, the Company substantially completed the merger of its
operations with those of the Pelikan Hardcopy Division, which was acquired in
February 1995. That plan included, among other things , the closure of the
Company's manufacturing, distribution and administration facility in
Bardstown, Kentucky and merger of its operations into the Pelikan Hardcopy
Division's facility in Franklin, Tennessee; the termination of contract
manufacturing and other contracts; closure of the Company's manufacturing
facility in Deeside, Wales and merger of its operations with the Pelikan
Hardcopy Division's operations in Scotland; consolidation of certain toner
manufacturing operations of ICMI's Connellsville, Pennsylvania facility and
the Pelikan Hardcopy Division's Derry, Pennsylvania facility; and
consolidation of sales and administrative organizations of the two companies.
F-27
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
20. RESTRUCTURING EXPENSES--(CONTINUED)
As part of the original plan, the Company terminated a total of
approximately 400 employees through March 31, 1996. Estimated severance
charges related to those terminations charged to restructuring expense during
fiscal 1995 amounted to $4,395 of which $1,224 was paid in fiscal 1995. Fiscal
1997 and 1996 activity related to these accrued restructuring costs is as
follows:
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
DESCRIPTION OF RESTRUCTURING ACCRUED AT PAID IN CHANGES IN ACCRUED AT
EXPENSE 3/31/96 FISCAL 1997 ESTIMATES 3/31/97
- - ---------------------------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Severance........................ $ 71 $(152) $ 81 $--
Lease cancellations.............. 425 (213) (212) --
Facility maintenance and other... 384 (231) (153) --
---- ----- ----- ---
$880 $(596) $(284) $--
==== ===== ===== ===
</TABLE>
The changes in estimates noted above decreased fiscal 1997 net loss $284 and
loss per share $0.01 on a basic and diluted basis.
<TABLE>
<CAPTION>
AMOUNT AMOUNT AMOUNT
DESCRIPTION OF RESTRUCTURING ACCRUED AT PAID IN CHANGES IN ACCRUED AT
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 manufac-
turing and other contracts....... 2,350 (1,344) (1,006) --
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 net income per share $0.02 on a basic and diluted basis.
21. SALE OF BUSINESSES
The Company sold the assets of the components division of Future Graphics,
Inc. on December 31, 1997, for approximately $3,700 in a combination of cash
and assumed liabilities. This division was sold as part of the Company's
continuing effort to exit non-core businesses. The sale of the components
division resulted in a loss of $4,061, which includes the write off of $2,826
of related unamortized goodwill.
On April 1, 1998 the Company sold its Colombian subsidiary, Nu-kote de
Colombia, to local management. The subsidiary's financial statements were not
significant to the consolidated financial statements.
F-28
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
22. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
The following is the composition of the common shares used in computing
basic and diluted net income (loss) per share for fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Basic--weighted average shares outstanding........... 21,775 21,770 21,499
Add: dilutive options................................ -- -- 993
------ ------ ------
Diluted.............................................. 21,775 21,770 22,492
====== ====== ======
</TABLE>
Options and warrants excluded from the computation because they were anti-
dilutive were 2,849, 1,923 and 916 in fiscal 1998, 1997 and 1996,
respectively.
The effect of this accounting change on previously reported net income
(loss) per share was as follows:
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Primary net income (loss) as reported...................... $(2.28) $0.59
Effect of SFAS 128......................................... -- 0.02
------ -----
Basic net income (loss) as restated........................ $(2.28) $0.61
====== =====
Fully diluted net income (loss) as reported................ $(2.28) $0.58
Effect of SFAS 128......................................... -- --
------ -----
Diluted net income (loss) as restated...................... $(2.28) $0.58
====== =====
</TABLE>
F-29
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998, 1997 AND 1996
(DOLLARS, (Pounds)S AND CHFS IN THOUSANDS, EXCEPT PER SHARE DATA)
23. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------
JUNE 27 SEPTEMBER 26 DECEMBER 26 MARCH 31
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Fiscal 1998:
Net sales...................... $79,727 $72,688 $70,755 $72,533
Gross margin................... 15,783 12,548 9,615 2,489 (a)
Restructuring expense.......... 1,623 1,194 488 44
Operating loss................. (2,318) (4,560) (10,597) (15,901)
Net loss....................... (5,972) (10,568) (14,980) (20,847)(c)
Net loss per share (d)......... $ (0.27) $ (0.49) $ (0.69) $ (0.97)(c)
</TABLE>
<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)(b)
Restructuring expense........... 1,145 4,635 2,031 7,328
Operating income (loss)......... 4,152 (2,154) (4,580) (32,711)
Net income (loss)............... 1,795 (2,332) (4,029) (45,086)(c)
Net income (loss) per share(d).. $ 0.08 $ (0.11) $ (0.19) $ (2.07)(c)
</TABLE>
- - --------
(a) Includes provisions for excess and obsolete inventories of $5,488 in North
America.
(b) Includes the following significant charges: (1) $8,039 for provisions for
excess and obsolete inventories in North America; and (2) $7,724 of costs
associated with the startup of manufacturing of the Company's MIT
piezoelectric ink jet printhead, of which approximately $1,500, $1,400 and
$1,700 were deferred during the first, second and third quarters,
respectively, of fiscal 1997.
(c) Includes the effect of minimal tax benefit for losses during fiscal 1998
and 1997 and a $4,301 increase in the valuation allowance recorded in
fiscal 1997, against certain beginning of the year deferred tax assets
pursuant to Statement of Financial Accounting Standards No. 109. Through
the first three quarters of fiscal 1997, the Company increased deferred
tax assets by approximately $3,100, which represented 40% of the current
year loss through nine months. During the fourth quarter of fiscal 1997,
it was determined that, based on weight of available evidence, it was not
"more likely than not" that the net deferred tax assets would be realized,
and, accordingly, a valuation allowance was recorded.
(d) Per share information has been restated to reflect the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share".
F-30
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants on Financial Statement Schedule....... S-2
Schedule II--Valuation and Qualifying Accounts and Reserves for the
fiscal years ended March 31, 1998, 1997 and 1996....................... 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 the Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Dallas, Texas
June 26, 1998
S-2
<PAGE>
SCHEDULE II
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS)
ALLOWANCES FOR SALES RETURNS AND DOUBTFUL RECEIVABLES
<TABLE>
<CAPTION>
ADDITIONS
--------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FISCAL YEAR ENDED PF PERIOD EXPENSES OTHER (A) DEDUCTIONS PERIOD
- - ----------------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
March 31, 1996............ $4,338 $ 652 $ 10 $(1,067) $3,933
March 31, 1997............ 3,933 1,786 (455) (1,523) 3,741
March 31, 1998............ 3,741 2,740 (111) (897) 5,473
</TABLE>
- - --------
(a) Other deductions for the fiscal year ended March 31, 1997 relate primarily
to exchange rate differences.
S-3
<PAGE>
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED CREDIT AGREEMENT AND WAIVER
THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND
WAIVER ("Amendment") is dated as of the 31st day of December, 1997, and entered
into among NU-KOTE HOLDINGS, INC., a Delaware corporation ("Holding"), NU-KOTE
INTERNATIONAL, INC., a Delaware corporation ("Company"), the Lenders signatory
hereto, BARCLAYS BANK PLC, in its capacity as documentation agent
("Documentation Agent") and NATIONSBANK OF TEXAS, N.A., a national banking
association, as administrative agent and collateral agent (in such capacities,
"Agent").
WITNESSETH:
WHEREAS, Holding, Company, Lenders, Documentation Agent and Agent entered
into a Second Amended and Restated Credit Agreement, dated as of July 31, 1997,
as amended by First Amendment to Second Amended and Restated Credit Agreement
dated as of November 28, 1997 (as amended, the "Credit Agreement");
WHEREAS, Holding and Company have requested that Lenders (i) defer the
mandatory $2,500,000 reduction in the commitments of the lenders to lend from
January 2, 1998, until April 1, 1998, (ii) waive during the period starting on
December 31, 1997, to April 2, 1998, inclusive (the "Waiver Period"), Holding
and the Company's failure to comply with certain financial covenants set forth
in the Credit Agreement, and (iii) consent to an asset sale and permit certain
proceeds of such asset sale to be retained by the Company for working capital
purposes; and
WHEREAS, Lenders and Agent have agreed to grant the request of Holding and
Company and to modify the Credit Agreement upon the terms and conditions set
forth below.
NOW, THEREFORE, for valuable consideration hereby acknowledged, Holding,
Company, Lenders, Documentation Agent and Agent agree as follows:
SECTION 1. Definitions. Unless specifically defined or redefined below,
capitalized terms used herein shall have the meanings ascribed thereto in the
Credit Agreement.
SECTION 2. Waivers. Subject to the terms and conditions hereof, Lenders
hereby waive, but only during the Waiver Period, the Specified Defaults
(hereinafter defined); provided, however, that Lenders' waiver of the Specified
Defaults and their rights and remedies as a result of the occurrence thereof
shall not constitute and shall not be deemed to constitute a waiver of any other
Event of Default, whether arising as a result of further violations of any
provision of the Credit Agreement previously violated by Holding or Company, or
a waiver of any rights and remedies arising as a result of such other Events of
Default. As used herein, "Specified Defaults" shall mean the failure of Holding
and Company to observe (i) the covenants set forth in Section 6.6A, Section
6.6B, Section 6.6C, Section 6.6E, and Section 6.6H of the Credit
<PAGE>
Agreement for the fiscal quarter ended December 31, 1997, and (ii) the covenants
set forth in Section 6.6F and Section 6.6G for the months ended December 31,
1997, January 31, 1998, and February 28, 1998. At the end of the Waiver Period,
the waiver of the Specified Defaults will automatically terminate.
SECTION 3. Amendments to Credit Agreement. Subject to the terms and
conditions hereof, the provisions of the Credit Agreement enumerated below are
amended as follows:
(a) Section 2.4A(ii) of the Credit Agreement is amended to read as follows:
The Company shall, promptly on the date of receipt of any Net Cash Proceeds
from any Asset Sale, prepay an aggregate principal amount of the Revolving
Credit Loans or Eurocurrency Loans as elected by Requisite Lenders in an
amount equal to the amount of all such Net Cash Proceeds, with each such
prepayment constituting a permanent reduction in the Revolving Credit
Commitments or the Commitments of the Eurocurrency Lenders under the
Eurocurrency Credit Agreements (whichever is prepaid with such proceeds).
Each such prepayment of Eurocurrency Loans shall be accompanied by payment
of amounts sufficient to compensate the Eurocurrency Lenders for any loss,
cost, or expense incurred as a result of payment on a date other than the
last day of the Term (as defined in the Eurocurrency Credit Agreements) for
such Eurocurrency Loans.
(b) Section 2.4A(iii)(a) of the Credit Agreement is amended to read as follows:
On April 1, 1998, July 1, 1998, and October 1, 1998, prepay an aggregate
principal amount of the Revolving Credit Loans in the amount, if any,
necessary to reduce the sum of the aggregate principal amount of all
Revolving Credit Loans on such date plus the Letter of Credit Usage on such
date, to an amount which does not exceed the aggregate Revolving Credit
Commitments on such date. On each such date the Company shall also prepay
all accrued and unpaid interest on the principal amount so prepaid.
(c) Section 2.4E(ii) of the Credit Agreement is amended to read as follows:
In addition to the reductions specified in subsection 2.4E(i) above, the
Revolving Credit Commitments shall automatically and permanently reduce by
the amount of $5,000,000 on April 1, 1998, and the amount of $2,500,000 on
each of July 1, 1998, and October 1, 1998.
(d) Section 5.1 of the Credit Agreement is hereby amended to add thereto
subsection (xiii) to read as follows:
On or prior to January 27, 1998, a written analysis of the Company's core
business plan prepared by the Company.
(e) Section 5.6 of the Credit Agreement is amended to read as follows:
-2-
<PAGE>
Neither Holding, Company nor any Subsidiary shall enter into any agreement
prohibiting the creation or assumption of any Lien upon its properties or
assets, whether now owned or hereafter acquired.
(f) The preamble of Section 5.13 of the Credit Agreement is amended to read as
follows:
On or before December 15, 1997, and thereafter on or prior to twenty days
after Agent's request that the guarantees and/or Liens contemplated by
subsection (iii) below be provided (to the extent that same can be provided
in compliance with such subsection (iii) below), Holding and Company shall
deliver or cause to be delivered to Agent the following:
(g) Section 6.3(vi) of the Credit Agreement is amended to read as follows:
On and after December 31, 1997, through and including April 1, 1998,
Company and its Domestic Subsidiaries may not make further Investments in
(including intercompany loans to) or otherwise transfer funds or other
assets to Eurocurrency Borrowers for any purpose except for fundings to or
for the benefit of MIT if the prior written consent of Required Lenders to
such fundings has been obtained; furthermore (A) with respect to the
aggregate principal amount of all such Investments in all such Eurocurrency
Borrowers, Company or any such Domestic Subsidiary, as appropriate, shall
maintain a ledger recording all such Investments in and intercompany loans
made pursuant to this subsection 6.3(vi), and such ledger shall be
available for inspection at any Lender's request and (B) all intercompany
loans made pursuant to this subsection 6.3(vi) shall be evidenced by
promissory notes which shall be on terms and conditions satisfactory to
Agent, including collateral, and which shall be pledged and delivered to
Agent pursuant to the Collateral Documents;
(h) Section 6.3(vii) of the Credit Agreement is amended to read as follows:
On and after December 31, 1997, through and including April 1, 1998,
Company and its Domestic Subsidiaries may not make further Investments in
(including intercompany loans to) or otherwise transfer funds or other
assets to Latin American Subsidiaries for any purpose; furthermore (A) with
respect to the aggregate principal amount of all such Investments
outstanding on December 31, 1997, Company or any such Domestic Subsidiary,
as appropriate, shall maintain a ledger recording all such Investments in
and intercompany loans made pursuant to this subsection 6.3(vii) prior to
December 31, 1997, and such ledger shall be available for inspection at any
Lender's request and (B) all intercompany loans made pursuant to this
subsection 6.3(vii) shall be evidenced by promissory notes which shall be
on terms and conditions satisfactory to Agent, including collateral, and
which shall be pledged and delivered to Agent pursuant to the Collateral
Documents;
(i) Section 6.7B(ii)(E) of the Credit Agreement is amended to read as follows:
-3-
<PAGE>
no Asset Sale transactions involving assets located in the United States
may be made after December 31, 1997, other than the sale of the Components
Division of Future Graphics, Inc., under the terms set forth in that
certain Second Amendment to Second Amended and Restated Credit Agreement
and Waiver dated as of December 31, 1997, among Company, Agent, and the
others named therein;
(j) The proviso at the end of Section 6.8 of the Credit Agreement is amended to
read as follows:
provided that Company and its Subsidiaries may enter into sale/leaseback
arrangements if permitted by subsection 6.6 and subsection 6.7.
(k) Section 8.13 of the Credit Agreement is amended to read as follows:
(A) Except as otherwise permitted by subsection 6.7B(i), Holding shall
cease to own and control 100% of the common stock and 100% of the voting
power of Company entitled to vote for an election of the board of directors
of Company; or (B) individuals who on February 24, 1995 were members of the
board of directors of Holding (together with any new directors whose
election to such board of directors or whose nomination for election by the
stockholders of Holding was approved by a vote of a majority of the
directors then still in office who were either directors on February 24,
1995 or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of such board of
directors then in office; or (C) a "person" or "group" (within the meaning
of Section 13(d) of the Exchange Act), becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 30% of the total
issued and outstanding common stock of Holding; or (D) on or after December
15, 1997, the Company shall fail to retain management resources reasonably
satisfactory to Requisite Lenders, for the purpose of facilitating the
restructuring of Holding and its Subsidiaries, which management resources
shall be subject solely to Holding and Company's direction and authority;
SECTION 4. Consent to Sale of Components Division of Future Graphics, Inc.
and Retention of Certain Net Cash Proceeds Thereof. Subject to the terms and
conditions hereof, Lenders hereby consent to the sale of the Components Division
of Future Graphics, Inc., so long as the gross cash proceeds thereof are not
less than $1,000,000, all liabilities due and owing in connection with the
business to which such assets relate are assumed by the purchaser thereof, such
sale occurs on or before January 31, 1998, and such sale is otherwise upon terms
reasonably satisfactory to Agent and heretofore disclosed to Lenders. Lenders
furthermore consent to the retention by the Company of such cash proceeds for
use by the Company as working capital notwithstanding the provisions of Section
2.4A of the Credit Agreement.
SECTION 5. Releases. In consideration of Lenders' agreements herein and
certain other good and valuable consideration, Holding and Company each hereby
expressly acknowledge
-4-
<PAGE>
and agree that neither of them has any setoffs, counterclaims, adjustments,
recoupments, defenses, claims or actions of any character, whether contingent,
non-contingent, liquidated, unliquidated, fixed, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured, known or unknown, against
any Lender, Documentation Agent or Agent or any grounds or cause for reduction,
modification or subordination of the Obligations or any liens or security
interests of any Lender or the Collateral Agent. To the extent Holding or
Company may possess any such setoffs, counterclaims, adjustments, recoupments,
claims, actions, grounds or causes, each of Holding and Company hereby waives,
and hereby releases each Lender, Documentation Agent and Agent from, any and all
of such setoffs, counterclaims, adjustments, recoupments, claims, actions,
grounds and causes, such waiver and release being with full knowledge and
understanding of the circumstances and effects of such waiver and release and
after having consulted counsel with respect thereto.
SECTION 6. Conditions Precedent. This Amendment shall not be effective
until all proceedings of Company taken in connection herewith and the
transactions contemplated hereby shall be satisfactory in form and substance to
Documentation Agent, Agent and Lenders, and each of the following conditions
precedent shall have been satisfied:
(a) All fees and expenses, including legal and other professional fees
and expenses incurred on or prior to the date of this Amendment by Agent or
any Lender, including, without limitation, the fees and expenses of U.S.
and foreign counsel and title insurance expenses, shall have been paid to
the extent that same have been billed.
(b) Agent and each Lender shall have received each of the following,
in form and substance satisfactory to Agent, Lenders and Agent's counsel in
their sole and absolute discretion:
(1) a certificate of Holding and Company certifying (i) as to
the accuracy, after giving effect to this Amendment, of the
representations and warranties set forth in Section 4 of the Credit
Agreement, the other Loan Documents and in this Amendment, and (ii)
that there exists no Potential Event of Default or Event of Default,
after giving effect to this Amendment, and the execution, delivery and
performance of this Amendment will not cause a Potential Event of
Default or Event of Default; and
(2) such other documents, instruments, and certificates, in form
and substance reasonably satisfactory to Lenders, as Lenders shall
deem necessary or appropriate in connection with this Amendment and
the transactions contemplated hereby, including without limitation
copies of resolutions of the boards of directors of each of Holding
and Company authorizing the transactions contemplated by this
Amendment.
(c) All accrued and unpaid interest on the Revolving Credit Loans and
the Eurocurrency Loans through and including December 31, 1997, shall have
been paid in full.
-5-
<PAGE>
SECTION 7. Representations and Warranties; Ratifications. Holding and
Company represent and warrant to Lenders, Documentation Agent and Agent that (a)
this Amendment constitutes their legal, valid, and binding obligations,
enforceable in accordance with the terms hereof (subject as to enforcement of
remedies to any applicable bankruptcy, reorganization, moratorium, or other laws
or principles of equity affecting the enforcement of creditors' rights
generally), (b) there exists no Potential Event of Default or Event of Default
under the Credit Agreement after giving effect to this Amendment, (c) their
representations and warranties set forth in the Credit Agreement and other Loan
Documents are true and correct on the date hereof after giving effect to this
Amendment, (d) they have complied with all agreements and conditions to be
complied with by them under the Credit Agreement and the other Loan Documents by
the date hereof after giving effect to this Amendment, and (e) the Credit
Agreement, as amended hereby, and the other Loan Documents remain in full force
and effect. Except as expressly modified by this Amendment, the terms and
provisions of the Credit Agreement and the other Loan Documents are ratified and
confirmed and shall continue in full force and effect. Except as provided
herein, this Amendment shall not constitute an amendment or waiver of any terms
and provisions of the Credit Agreement and other Loan Documents nor a waiver of
the rights of the Lenders, Documentation Agent and Agent to insist upon
compliance with each term, covenant, condition or provision of the Credit
Agreement and other Loan Documents.
SECTION 8. Expenses of Lenders. Holding and Company hereby jointly and
severally agree to pay on demand all reasonable costs and expenses incurred by
Agent or any Lender, including costs and fees of counsel to Agent or any Lender
and other professional fees and expenses, in connection with the preparation,
negotiation, review and execution of this Amendment and the other Loan Documents
executed pursuant hereto and any and all amendments, modifications and
supplements thereto. Holding and Company hereby confirm their obligation to pay
promptly the costs and expenses for which they are obligated pursuant to Section
10.3 of the Credit Agreement.
SECTION 9. Further Assurances. Holding and Company shall execute and
deliver such further agreements, documents, instruments, and certificates in
form and substance satisfactory to Agent, as Agent or any Lender may deem
necessary or appropriate in connection with this Amendment.
SECTION 10. Consents of Eurocurrency Borrowers and Eurocurrency Lenders.
Each Eurocurrency Borrower and Eurocurrency Lender by its execution below
consents and agrees to this Amendment and agrees that the Eurocurrency Credit
Agreement or Eurocurrency Credit Agreements to which it is a party are and shall
continue to be in full force and effect and are hereby ratified and confirmed in
all respects except that, upon the effectiveness of and on and after the date of
this Amendment each reference to the Credit Agreement, "thereunder", "thereof"
or words of like import referring to the Credit Agreement shall mean and be a
reference to the Credit Agreement as amended by this Amendment. Each
Eurocurrency Borrower agrees that the collateral described in the Eurocurrency
Security Documents to which it is a party shall continue
-6-
<PAGE>
to secure the payment of the indebtedness therein described.
SECTION 11. Counterparts. This Amendment and the other Loan Documents may
be executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument. In making proof of any such agreement,
it shall not be necessary to produce or account for any counterpart other than
one signed by the party against which enforcement is sought. Telecopies of
signatures shall be binding and effective as originals.
SECTION 12. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW,
HOLDING AND COMPANY EACH HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY
JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE)
ARISING UNDER OR RELATING TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY
RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE
SITTING WITHOUT A JURY.
SECTION 13. GOVERNING LAW. (A) THIS AGREEMENT AND ALL LOAN DOCUMENTS
SHALL BE DEEMED CONTRACTS MADE UNDER THE LAWS OF TEXAS AND SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF TEXAS, EXCEPT TO THE
EXTENT (1) FEDERAL LAWS GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF ALL OR ANY PART OF THIS AGREEMENT AND ALL LOAN DOCUMENTS OR
(2) STATE LAW GOVERNS UCC COLLATERAL INTERESTS FOR PROPERTIES OUTSIDE THE STATE
OF TEXAS. WITHOUT EXCLUDING ANY OTHER JURISDICTION, HOLDING AND COMPANY EACH
AGREES THAT THE COURTS OF TEXAS WILL HAVE JURISDICTION OVER PROCEEDINGS IN
CONNECTION HEREWITH.
(b) HOLDING AND COMPANY EACH HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL
PROCESS UPON IT. IN ADDITION, HOLDING AND COMPANY EACH AGREES THAT SERVICE OF
PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED)
DIRECTED TO IT AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT AND
SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON RECEIPT BY IT. NOTHING IN
THIS SECTION SHALL AFFECT THE RIGHT OF AGENT OR ANY LENDER TO SERVE LEGAL
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
SECTION 14. ENTIRE AGREEMENT. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. THIS AMENDMENT
SHALL CONSTITUTE A LOAN DOCUMENT.
-7-
<PAGE>
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW.]
-8-
<PAGE>
IN WITNESS WHEREOF, this Amendment is executed as of the date first set
forth above.
Holding: NU-KOTE HOLDING, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Company: NU-KOTE INTERNATIONAL, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Agent: NATIONSBANK OF TEXAS, N.A.,
By:
-------------------------------
Name: William E. Livingstone, IV
Title: Senior Vice President
Documentation Agent: BARCLAYS BANK PLC
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Lenders and Eurocurrency NATIONSBANK OF TEXAS, N.A.
Lenders:
By:
-------------------------------
Name: William E. Livingstone, IV
Title: Senior Vice President
BARCLAYS BANK PLC
<PAGE>
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
ABN AMRO BANK, N.V.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
COMMERZBANK AKTIENGESELLSCHAFT,
ATLANTA AGENCY
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
CREDIT LYONNAIS, NEW YORK BRANCH
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
BRANCH DEUTSCHE BANK, A.G., NEW YORK BRANCH
AND/OR CAYMAN ISLANDS BRANCH
By:
-------------------------------
Name:
-----------------------------
<PAGE>
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
FIRST AMERICAN NATIONAL BANK
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
THE FIRST NATIONAL BANK OF CHICAGO
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
SOCIETE GENERALE
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE>
CONSENTED AND AGREED TO BY EUROCURRENCY BORROWERS:
PELIKAN SCOTLAND LIMITED
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
PELIKAN PRODUKTIONS AG
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
PELIKAN HARDCOPY (INTERNATIONAL) AG
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE>
CONSENT
Each of the undersigned, as Guarantors under a "Subsidiary Guaranty" and as
grantors under one or more "Subsidiary Security Documents" (as such terms are
defined in the Credit Agreement referred to in the foregoing Amendment), each
hereby consents and agrees to the foregoing Amendment and agrees that (i) each
Subsidiary Guaranty and Subsidiary Security Document is and shall continue to be
in full force and effect and is hereby ratified and confirmed in all respects
except that, upon the effectiveness of and on and after the date of such
Amendment each reference to the Credit Agreement, "thereunder", "thereof" or
words of like import referring to the Credit Agreement shall mean and be a
reference to the Credit Agreement as amended by such Amendment, and (ii) the
collateral described in the Subsidiary Security Documents shall continue to
secure the payment of the indebtedness therein described.
FUTURE GRAPHICS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
INTERNATIONAL COMMUNICATION
MATERIALS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
NU-KOTE IMAGING INTERNATIONAL, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
NU-KOTE IMPERIAL, LTD.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE>
The undersigned Barclays Bank PLC executes this Amendment for the purpose
of agreeing to all provisions thereof save and except Section 2 thereof.
BARCLAYS BANK PLC
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE>
GENERAL RELEASE AND SETTLEMENT AGREEMENT
("AGREEMENT")
1. This AGREEMENT is entered into on this 6th day of May, 1998, by and
between Daniel M. Kerrane (Kerrane), his heirs, successors, administrators,
assigns, agents and representatives (collectively and singularly referred to as
"KERRANE") and Nu-kote Holding, Inc., and Nu-kote International, Inc., its
affiliates, shareholders, parents, officers, directors, agents, employees and
assigns (collectively and singularly "NU-KOTE").
2. This AGREEMENT is in full and final compromise and settlement of any
and all claims which were stated or could have been stated in the civil action
filed by KERRANE in the United States District Court for the Northern District
of Texas, and numbered Civil Action No. 3CV97-1368-P (hereinafter the
"LITIGATION").
3. The parties agree to fully and amicably settle the LITIGATION pursuant
to the following terms and conditions:
a. Upon execution of this AGREEMENT, NU-KOTE agrees to make 12 bi-
weekly severance payments to KERRANE in the amount of twelve thousand five
hundred dollars ($12,500) each, totaling one hundred and fifty thousand dollars
($150,000.00).
b. Upon execution of this AGREEMENT, NU-KOTE agrees to pay all of
Kerrane's current attorney's fees related to this dispute and the lawsuit, up to
a sum of forty thousand dollars ($ 40,000.00). Such amount shall include all
claims for costs and attorneys' fees associated with the LITIGATION.
c. Upon execution of this AGREEMENT, NU-KOTE agrees to waive any and
all payments on the Home Purchase Loan Agreement (HPL) dated March 22, 1994 and
revised January 2, 1996 regarding KERRANE'S house. In accordance with section
(iii) of the January 2, 1996 amendment, NU-KOTE and KERRANE agree that all
amounts formerly owed by KERRANE on the HPL were excused and rendered "paid in
full" on or about April 1, 1997. If necessary, NU-KOTE agrees to execute and
file all documents granting KERRANE clear and marketable title in this property
in fee simple upon reasonable request by Kerrane. To the extent such documents
refer to the date that Kerrane's obligations on the HPL were completed, all such
documents will list that date as April 1, 1997.
d. NU-KOTE releases and waives any claims or potential claims it has
on the Country Club membership to Stonebriar Country Club, currently in
KERRANE'S name and previously paid for by NU-KOTE. Additionally, NU-KOTE agrees
to sign a document addressed to Stonebriar, the contents of which are attached
to this Agreement as Exhibit "A", notifying Stonebriar Country Club that NU-KOTE
has waived any actual or potential ownership interest in the Country Club
membership.
<PAGE>
e. NU-KOTE agrees to indemnify and hold harmless KERRANE in regard to
the conduct of his former duties as an officer and director of NU-KOTE,
including the defense of Kerrane in regards to the current lawsuit filed against
KERRANE and NU-KOTE and others (the "Derivative Lawsuit") NU-KOTE agrees to
treat KERRANE up to the same manner and degree of indemnification and defense as
any other current or former officer or director in the Derivative Lawsuit and
any other lawsuit, claim or action filed against KERRANE or NU-KOTE relating to
KERRANE'S performance of duties or other conduct as an officer or director of
NU-KOTE.
f. NU-KOTE agrees to recognize KERRANE'S employment service
eligibility for pension purposes extends through October 10, 1997, and Kerrane
is eligible for the continuation of certain employment related medical insurance
benefits and other insurance benefits under the terms of COBRA in accordance
with the co-payment terms defined by COBRA, and that KERRANE has been eligible
for COBRA related rights since October 10, 1997.
g. NU-KOTE agrees to waive any right, claim or cause of action in
regards to salary, benefits co-payments, or other consideration paid to,
received by or given to KERRANE by NU-KOTE at any time prior to October 31,
1997.
h. KERRANE agrees that he will be liable for any income taxes which
may be due on any of the payments listed in a-g. NU-KOTE agrees it will pay
withholding taxes and withholding amounts for the Severance Payments included in
sub-paragraph a, above.
i. In exchange for the considerations described in sub-paragraphs j
below, NU-KOTE does hereby irrevocably and unconditionally release, acquit and
forever discharge KERRANE and his heirs, agent and assigns from any and all
claims, obligations, actions, liabilities, claims, actions and causes of action
of whatever kind or character, arising out of or in any way related to KERRANE'S
employment, association or contact with NU-KOTE, whether known or unknown,
including, but not limited to, claims based upon negligence, gross negligence,
fiduciary and agency law, tort law, express or implied contract, covenants of
fair dealing and good faith, and any local, state or federal law, regulation or
ordinance whatsoever, including without limitation, any matter, cause of action
and/or claims which could have been stated in the LITIGATION. It is the express
intent of NU-KOTE to enter into this full and final settlement and compromise of
any and all claims against KERRANE related to his employment whatsoever. NU-KOTE
will not permit any such claim to be filed on its behalf.
j. In exchange for the considerations described in paragraphs a-i
above, KERRANE does hereby irrevocably and unconditionally release, acquit and
forever discharge NU-KOTE and its affiliates, shareholders, parents, officers,
directors, employees, agent and assigns from any and all claims, obligations,
actions, liabilities, claims, actions and causes of action of whatever kind or
character, arising out of or in any way related to KERRANE'S employment,
association or contact with NU-KOTE, whether known or unknown, including, but
not limited to, claims based upon tort law, express or implied contract,
covenants of fair dealing and good faith, wrongful discharge, the Texas
Commission on Human Rights Act, the Civil Rights Act of 1964, as amended, the
Civil Rights Act of 1991, the Civil Rights Acts of 1878 and 1873, the Family
Medical Leave Act, the Americans with Disabilities Act, the Employee Retirement
Income
2
<PAGE>
Security Act, the Fair Labor Standards Act of 1938, as amended, and any local,
state or federal law, regulation or ordinance whatsoever, including without
limitation, any matter, cause of action and/or claims which could have been
stated in the LITIGATION. This release also includes any and all claims based
on, or relating to, the Supplemental Employment Agreement dated February 3, 1994
between Kerrane and Nu-kote ("SUPPLEMENTAL AGREEMENT"). It is the express intent
of KERRANE to enter into this full and final settlement and compromise of any
and all claims against NU-KOTE relating to his employment whatsoever. KERRANE
will not permit any such claim to be filed on his behalf.
k. KERRANE agrees that NU-KOTE has no obligation, contractual,
statutory or otherwise to reemploy or hire KERRANE in the future. KERRANE
expressly releases NU-KOTE from and waives any and all claims for reinstatement
or reemployment with NU-KOTE. KERRANE agrees to never apply for or seek re-
employment or reinstatement with NU-KOTE.
l. KERRANE agrees immediately upon execution of this AGREEMENT to
join with NU-KOTE in a motion to dismiss the LITIGATION with prejudice.
4. KERRANE and NU-KOTE stipulate and agree that neither will initiate,
join in, continue and/or institute any legal proceedings or process based upon
the released claims or causes of action before any administrative, judicial or
other form against the other. KERRANE and NU-KOTE further agree that neither
will file nor permit to be filed on its behalf and will not permit itself to be
a member of any potential or existing class seeking relief against the other for
any claim or cause of action covered by this AGREEMENT.
5. By entering this AGREEMENT, neither NU-KOTE nor KERRANE admit
liability in any way, and this AGREEMENT shall not be construed as an admission
of liability by either NU-KOTE or KERRANE.
6. KERRANE and NU-KOTE warrant and represent:
a. That they are fully entitled to give the consideration contained
in this AGREEMENT;
b. That there are no prior assignments or transfers of any portion of
or interest in any of the claims or causes of action covered by this AGREEMENT;
c. That there are no liens or assignments in law or equity against
any claim or cause of action covered by this AGREEMENT; and
d. That KERRANE and NU-KOTE are fully aware of all facts and rights
with regard to their potential claims and/or causes of action and are
represented by counsel with respect to these claims, and have had the
opportunity to review and approve the content and execution of this AGREEMENT
with counsel.
3
<PAGE>
e. That since October 10, 1997, KERRANE has performed no services,
work or other actions on behalf of NU-KOTE, has not performed any duties as an
officer or director of NU-KOTE and that KERRANE and NU-KOTE have been involved
in a dispute resulting in arms-length negotiations.
f. That the dispute involved in the LITIGATION involves disputed
issues and that this AGREEMENT is the result of valid compromises to purchase
peace and avoid the cost, expense and uncertainty of litigation.
g. That KERRANE has not received any compensation in the form of
wages from NU-KOTE since October 10, 1997, that KERRANE is no longer an officer
or director of NU-KOTE, and that KERRANE is not an "insider" of NU-KOTE as that
term is defined by 11 U.S.C. (S) 101(31).
7. Should any provision of this AGREEMENT be declared or be determined by
any Court to be illegal or invalid, the validity of the remaining terms or
provisions shall not be affected thereby, and said illegal or invalid provisions
shall be deemed not to be a part of this AGREEMENT.
8. This AGREEMENT contains the entire agreement and understanding between
the parties. It supersedes any and all prior negotiations, promises, agreements,
understandings or contracts between the parties hereto, or their agents,
pertaining to the subject matter of this AGREEMENT. The terms of this AGREEMENT
are contractual, not a mere recital. KERRANE has consulted with an attorney
about this AGREEMENT.
9. This AGREEMENT is made and signed in the state of Texas and it shall
be interpreted, enforced and governed under the laws of Texas.
10. KERRANE agrees that he has read and understands this AGREEMENT and
enters into it voluntarily.
WITNESS our signatures this ______ day of May, 1998.
FOR KERRANE:
-----------------------------------
Daniel M. Kerrane
4
<PAGE>
FOR NU-KOTE INTERNATIONAL INC.:
By:
--------------------------------
Its:
-------------------------------
FOR NU-KOTE HOLDING INC.:
By:
--------------------------------
Its:
-------------------------------
5
<PAGE>
SEVERANCE AGREEMENT
This SEVERANCE AGREEMENT ("Agreement"), effective as of March 9, 1998 (the
"Severance Date"), by and between Nu-kote Holding, Inc. and Nu-kote
International, Inc. (individually and collectively the "Company") on the one
hand and David F. Brigante ("Brigante") on the other hand;
W I T N E S S E T H
WHEREAS, Brigante currently serves as Chairman of the Board of Nu-kote
Holding, Inc.;
WHEREAS, the Company acknowledges certain prior existing agreements
respecting the employment of Brigante, and that the Company assumed obligations
first to pay salary and then severance payments, thereunder;
WHEREAS, upon the effective date of this Agreement, neither Brigante nor
the Company shall be deemed to owe any further obligations to the other party
under prior executed contracts and the only obligations owed shall be those
obligations set forth within this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth hereinafter, the Company and Brigante agree as follows:
1. DUTIES
Brigante shall remain as Chairman of the Board of Nu-kote Holding, Inc. (the
"Board") and agrees to serve in such capacity without compensation or Board fees
for such term or terms as he may be directed to such office by the Board, unless
Brigante shall earlier be removed from such office on the Board in accordance
with the By-laws of the Company or resign or decline to stand for reelection as
a director.
2. SEVERANCE
(a) The Company hereby agrees to pay Brigante the sum total of $262,500.00,
which represents six (6) months pay based upon Brigante's previous yearly salary
of $525,000.00. The Company shall pay the Severance Compensation over a twelve
(12) month period of time (the "Severance Period"), in accordance with current
payroll procedures, with the first payment commencing after March 9, 1998.
(i) Notwithstanding the foregoing provisions of this Section 2(a), if
Brigante is a Disqualified Individual (as the term "Disqualified
Individual" is defined in Section 280G of the Code or any successor
provisions thereto) and if any portion of the Severance Payment would
be an Excess Parachute Payment (as the term "Excess Parachute Payment"
is defined in Section 280 of the Code, or any successor
<PAGE>
provisions thereto) but for the application of this sentence, then the
amount of the Severance Payment otherwise payable to Brigante pursuant
to this Agreement shall be reduced to the minimum extent necessary
(but in no event to less than zero) so that no portion of the
Severance Payment, as so reduced, constitutes an Excess Parachute
Payment.
(ii) The determination of whether any reduction in the amount of the
Severance Payment is required shall be made, if requested by Brigante
or the Company, by tax counsel selected by the Company's independent
accountants and acceptable to Brigante. The fact that Brigante shall
have his right to the Severance Payment reduced as a result of the
existence of the limitations contained in this Section 2(a) shall not
of itself limit or otherwise affect any rights of Brigante to any
Employee Benefit, or any other right arising other than pursuant to
this Agreement.
3. BENEFITS
The Company agrees to continue until March 9, 1999, Brigante's group employee
benefits as same exist in the scope provided as of the effective date of this
Agreement. The Company further agrees to continue payments for monthly dues
reflecting Brigante's membership in Stonebriar Country Club as same is in effect
as of the effective date of this Agreement. After March 9, 1999, the Company's
obligation to provide Brigante with any continued benefits shall be limited to
its obligations under the Consolidated Omnibus Budget Reconciliation Act
("COBRA"). Likewise, at the end of the Severance Period, Brigante will assume
full responsibility for the payment of sums due respecting his membership in the
Stonebriar Country Club. The Company, therefore, acknowledges Brigante's
ownership rights in such membership for all purposes.
4. AUTOMOBILE
Brigante shall continue to use the automobile currently furnished by the Company
through and including March 31, 1999. Upon the expiration of this time period,
Brigante shall have the option to purchase the automobile he is then using at
its wholesale value or at its residual value if the automobile is under lease,
or to assume the lease of such automobile if the lease term has not expired.
5. NO MITIGATION OBLIGATION
The Company hereby acknowledges that it will be difficult, and may be
impossible, for Brigante to find reasonably comparable employment following the
Severance Date and that the non-compete covenant contained in Section 6 hereto
will further limit the employment opportunities for him. Accordingly, the
parties agree that Brigante shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
nor shall any profits, income, earnings or other benefits from any source
whatsoever create any mitigation, offset, reduction or any other obligation on
the part of Brigante.
2
<PAGE>
6. COMPETITIVE ACTIVITY
(a) During a period of one year following the execution of this Agreement, if
Brigante shall have received or shall be receiving benefits under Section 2(a)
hereof, Brigante shall not, without the prior written consent of the Company,
which consent may be obtained from either a majority of members of the Board of
Directors of the Company, other than Brigante, or by written agreement executed
by an authorized agent of the Company, other than Brigante, to be selected by
the Company, which consent shall not be unreasonably withheld, engage in any
Competitive Activity. Provided, however, that if the Company terminates payments
contemplated under this Agreement (for a reason other than Brigante's breach of
the Agreement as determined by law), this instant provision, which prohibits
Competitive Activity, shall be deemed to terminate contemporaneously with the
Company's termination of payments hereunder.
(b) For purposes of this Agreement, "Competitive Activity" shall mean
Brigante's participation, in the management of any business enterprise if such
enterprise engages in substantial and direct competition with the Company in any
state or country in which the Company does business and such enterprise's sales
of any product or service competitive with any product or service of the Company
amounted to 25% of such enterprise's net sales for its most recently completed
fiscal year and if the Company's net sales of said product or service amounted
to 25% of the Company's net sales for its most recently completed fiscal year.
"Competitive Activity" shall not include (i) the mere ownership of securities in
any such enterprise and the exercise of rights appurtenant thereto or (ii)
participation in the management of any such enterprise other than in connection
with the competitive operations of such enterprise.
7. WITHHOLDING OF TAXES
The Company may withhold from any amounts payable under this Agreement all
federal, state, city or other taxes as shall be required pursuant to any law or
government regulation or ruling.
8. INDEMNIFICATION
The Company agrees that it shall indemnify Brigante to the fullest extent
permitted by the Company's By-laws.
9. NON-DISPARAGEMENT
Brigante and the Company mutually agree that they will not make or cause to be
made any statement, observation or opinion, or communicate any information
(whether oral or written) that disparages or is likely in any way to harm the
reputation of the other party.
10. CONFIDENTIAL AND PROPRIETARY INFORMATION
Brigante agrees not to use or to impart to any other person, corporation or
entity any trade secrets, attorney-client privileged information, or other
proprietary information that he has acquired while an employee of the Company.
Brigante acknowledges that the Company is
3
<PAGE>
engaged in a highly competitive business, and that the trade secrets and
proprietary information are of great significance in the various markets in
which it is active. Accordingly, Brigante acknowledges and agrees that the
Company shall be authorized to obtain preliminary and injunctive relief, as well
as an equitable accounting of all profits and benefits arising out of such
violation.
11. SUCCESSORS AND BINDING AGREEMENT
(a) The Company shall require any successor (whether direct or indirect, by
purchase, merger, consolidation, reorganization or otherwise) to all or
substantially all of the business and/or assets of the Company by agreement in
form and substance satisfactory to Brigante, expressly to assume to the extent
allowed by applicable law, to agree to perform this Agreement in the same manner
and to the same extent the Company would be required to perform if no such
succession had taken place. This Agreement shall be binding upon and inure to
the benefit of the Company and any successor to the Company, including, without
limitation, any persons acquiring directly or indirectly all or substantially
all of the business and/or assets of the Company whether any purchase, merger,
consolidation, reorganization or otherwise (and such successor shall thereafter
be deemed the "Company" for the purposes of this Agreement), but shall not
otherwise be assignable, transferable or delegable by the Company.
(b) This Agreement shall inure to the benefit of and be enforceable to
Brigante's personal or legal representatives, executors, administrators,
successors, heirs, distributees and/or legatees.
(c) This Agreement is personal in nature and neither of the parties herein
shall, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
Section 11(a) hereof.
(d) The Company and Brigante recognize that each party will have no adequate
remedy at law for breach by the other of any of the agreements contained herein,
and, in the event of any such breach, the Company and Brigante hereby agree and
consent that the other shall be entitled to a decree of specific performance,
mandamus or other appropriate remedy to enforce performance of this Agreement.
12. NOTICE AND COOPERATION
Unless otherwise stated, all communications including, without limitation,
notices, consents, requests or approvals, provided for herein shall be in
writing and shall be deemed to have been duly given when delivered or five
business days after being mailed by United States registered or certified mail,
return receipt requested, postage prepaid, addressed to the Company (to the
attention of the Secretary of the Company) at its principal executive office,
200 Beasley Dr., Franklin, TN 37064, and to Brigante at his principal residence,
or to such other address as any party may have furnished to the other in writing
and in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
4
<PAGE>
Brigante agrees that if he is ordered or subpoenaed to testify or produce
information in connection with any claim against the Company, he will
immediately provide notice to the Company, by faxing and mailing a copy of the
subpoena, order, or other request for information, to the General Counsel for
the Company, 200 Beasley Dr., Franklin, TN 37064, 615/791-1000 [fax]. Brigante
also agrees to meet and confer with the Company (should Brigante so elect, with
the aid of counsel) before responding to such order or subpoena, interviewing
with, meeting, or giving a statement to any attorney or party who is adverse to
the Company in a pending or threatened claim or lawsuit.
13. LEGAL FEES AND EXPENSES
Should a court determine that either party has breached this Agreement, the
breaching party will be obligated to pay the reasonable attorneys' fees and
court costs incurred by the non-breaching party for having to institute and
pursue litigation or counsel to protect his or its rights under the Agreement.
14. GOVERNING LAW
The validity, interpretation, construction or performance of this Agreement
shall be governed by the substantive law of the State of Delaware, without
giving effect to the principles of conflict of laws of any state in which
litigation to enforce such Agreement may be commenced.
15. PRIOR AGREEMENTS
The terms of any and all prior severance agreements and employment agreements
are hereby superseded and no longer in effect.
16. NO ADMISSION OF LIABILITY
By entering this Agreement, the Company does not admit liability to Brigante in
any way, and this Agreement shall not be construed as an admission of liability
by either the Company or Brigante.
17. CONFIDENTIALITY
Brigante also agrees that this Agreement is a confidential document as are all
of its terms and conditions and that he will not disclose to any person the
terms of this Agreement except as otherwise required by law.
18. VALIDITY
If any provision of this Agreement or this application of any provision hereof
to any person or circumstance is held invalid, unenforceable or otherwise
illegal, the remainder of this Agreement and the application of such provision
to any other person or circumstances shall not be affected, and the provision so
held to be invalid, unenforceable or otherwise illegal shall be informed to the
extent (and only to the extent) necessary to make it enforceable, valid and
legal.
5
<PAGE>
19. LITIGATION
No provision set forth herein shall be deemed to constitute any limitation on
the rights of Brigante or the Company to defend his or its interests in that
certain litigation styled Lemmer v. Nu-kote Holding, Inc., et al, which action
is pending before the United States District Court for the Northern District of
Texas (the "Lemmer Litigation"), nor shall either be limited in his or its
efforts regarding voluntary compliance with any process served, discovery sought
or judicial proceedings conducted, either in the Lemmer Litigation or any
subsequent actions or proceedings as may be commenced regarding the Company,
Brigante's actions as an officer and/or director of the Company, and/or any
actions or proceedings subsequently commenced in which either Brigante or any
other historical or current officers or directors may be named or otherwise
involved as parties.
20. MISCELLANEOUS
No provision of this Agreement may be modified, waived or discharged unless such
waiver, modification, or discharge is agreed to in writing signed by Brigante
and the Company. No waiver by either party hereto at any time of any breach by
the other party hereto of compliance with any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, expressed
or implied with respect to the subject matter hereto have been made by either
party which are not set forth expressly in this Agreement.
21. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which shall
be deemed to be an original but all of which together will constitute one and
the same agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
_____________________________________
David F. Brigante
NU-KOTE HOLDING, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
NU-KOTE INTERNATIONAL, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
7
<PAGE>
RETENTION AGREEMENT
This RETENTION AGREEMENT ("Agreement") is made and entered into as of May
1, 1998, by and between Nu-kote Holding, Inc. (the "Company") on the one hand,
and for _________________ ("Employee") on the other hand.
WITNESSETH:
WHEREAS, the Company desires to retain Employee throughout its
Reorganization (as that term is defined herein) or to such time as the Company
determines that Employee's services are no longer required, and
WHEREAS, the Company desires to provide Employee with certain compensation
in connection with his agreement to remain with the Company throughout its
Reorganization, and
WHEREAS, Employee is willing to render services to the Company on the terms
and subject to the conditions set forth in this Agreement,
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth hereinafter, the Company and Employee agree as follows:
1. DEFINITIONS
(a) "Reorganization" refers to the Company's reorganization under Chapter
11 of the United States Bankruptcy Code and/or any re-negotiation of the secured
indebtedness that the Company and its subsidiaries have with the lending group
for which NationsBank - Texas, N.A. acts as Agent that results in a reduction of
the outstanding principal amount of such indebtedness.
(b) "Cause" shall mean the occurrence of any of the following acts:
i. any act of gross or willful neglect of duty or misconduct of
Employee in discharging his duties and responsibilities as defined in
Section 2;
ii. any conduct of Employee which is materially detrimental to the
Company, including, but not limited to, performance by Employee of
illegal or fraudulent acts;
iii. violation by Employee of any obligations to maintain
confidential or proprietary information of the Company.
(c) "Disability" shall mean that Employee has become permanently disabled
within the meaning of, and has begun actually to receive disability benefits
pursuant to, the long-term disability plan of the Company then in effect.
1.
<PAGE>
2. EMPLOYEE DUTIES
Employee shall perform those duties which are assigned to him by the chief
executive officer of the Company. Employee hereby represents that his
employment hereunder and compliance by him with the terms and conditions of this
Agreement will not conflict with or result in the breach of any agreement to
which he is a party or by which he may be bound.
3. COMPENSATION
(a) Salary. As compensation for the duties and services performed by
Employee, the Company will pay Employee a monthly base salary at the rate in
effect on the date of this Agreement.
(b) Retention Payment. If Employee remains with the Company until the
earlier of the following two events occurs, (a) completion of Reorganization or
(b) such time as the Company determines that Employee's services are no longer
required, then beginning on the first day of the first month after the
Employee's employment with the Company terminates, the Company will continue to
pay Employee each month, in accordance with its customary practice, an amount
equal to the Employee's monthly base salary at the rate in effect on the date of
this Agreement for a total of six (6) months.
i. In the event that the Company terminates Employee prior to the
completion of its Reorganization, Employee shall be entitled to receipt of
the compensation set forth in Section 3(b) only in the event that the
Company terminates him for any reason other than for Cause (as that term is
defined herein). Employee shall not be entitled to the compensation set
forth in 3(b) in the event his employment is terminated for Cause (as that
term is defined herein), or in the event of death, resignation, or
Disability (as defined herein) of Employee prior to the completion of the
Reorganization.
ii. Any termination by the Company pursuant to this Section shall be
communicated by a written notice of termination to Employee.
(c) Benefits. While the Employee is employed by the Company and during the
period that any amount is paid to the Employee under Section 3(b), Employee
shall be entitled to participate in all benefit plans and programs that are
available to the Employee as of the date of this Agreement. Additionally, the
Employee shall be entitled to receive all benefits which have accrued through
the date of termination of the Employee's employment with the Company.
4. WITHHOLDING OF TAXES
The Company may withhold from any amounts payable under this Agreement all
federal, state, city, or other taxes as shall be required pursuant to any law,
government regulation, or ruling.
2
<PAGE>
5. PRIOR AGREEMENTS
All prior salary continuation and/or severance agreements between Employee
and the Company, or any of its holdings or subsidiaries, are null and void.
6. NON-DISPARAGEMENT
Employee agrees that he will not make or cause to be made any statements,
observations, or opinions, or communicate any information (whether oral or
written) that disparages or is likely in any way to harm the reputation of the
Company.
7. NOTICE
For all purposes of this Agreement, all communications, including, without
limitation, notices, consents, requests or approvals, provided for herein shall
be in writing and shall be deemed to have been duly given when delivered or five
business days after having been mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed to the Company (to
the attention of the Secretary of the Company) at its principal executive office
or to the Employee at his principal residence set forth on the signature page
hereto or to such other address as any party may have furnished to the other in
writing and in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
8. GOVERNING LAW
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware, without giving
effect to the principles of conflict of laws of such State.
9. VALIDITY
If any provision of this Agreement or the application of any provision
hereof to any person or circumstance is held invalid, unenforceable, or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstances shall not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid, and legal.
10. MISCELLANEOUS
No provisions of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
Employee and the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of compliance with any condition or provision
of this Agreement to be performed by such other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representatives, oral or otherwise, expressed
or
3
<PAGE>
implied with respect to the subject matter hereof have been made by either party
which are not set forth expressly in this Agreement.
11. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
NU-KOTE HOLDING, INC.
By:
----------------------------------
Name: Shaun K. Donnellan
Title: Chief Executive Officer
EMPLOYEE
-------------------------------------
signature
Principal Address (required for notice provision):
_____________________________
_____________________________
_____________________________
4
<PAGE>
EXHIBIT 21.1
NU-KOTE HOLDING, INC. AND SUBSIDIARIES ORGANIZATION CHART
<TABLE>
<CAPTION>
Ownership Level Jurisdiction
--------------- ------------
<S> <C>
Nu-kote Holding, Inc. ..................................... Delaware
Nu-kote Imperial, Ltd. ................................ Delaware
Nu-kote International, Inc. ........................... Delaware
International Communications Materials, Inc. ...... Pennsylvania
Viro-kote, Inc. ................................... Delaware
Nu-kote Imaging International, Inc. ............... Delaware
Future Graphics, Inc. ............................. California
Nu-kote Latin America, Inc. ....................... Delaware
Nu-kote Internacional de Mexico, S.A. de C.V. (1).. Mexico
Nu-kote Quality Imaging GmbH....................... Germany
Interfas Holding, S.A. (2)......................... France
Interfas, S.A. (3)........................... France
Nu-kote de Colombia, S.A. (4)(5)................... Colombia
Mercantiles, S.A. (5)........................ Colombia
Compania Manufactura Onix, S.A. (5).......... Colombia
Greif-Werke GmbH................................... Germany
Pelikan Hardcopy Deutschland GmbH............ Germany
Pelikan Scotland, Ltd. ............................ United Kingdom
N-K International Holding, Ltd. (6).......... United Kingdom
N-K Interface, Ltd. (7)................. United Kingdom
N-K International, Ltd. (7)............. United Kingdom
Nu-kote Italia s.r.l. (8)............... Italy
Pelikan Produktions AG............................. Switzerland
Pelikan Handelsgeschaft mbH.................. Austria
Pelikan Hardcopy International AG............ Switzerland
Pelikan Hardcopy Nordic AB.............. Sweden
</TABLE>
(1) Nu-kote International, Inc. owns 65%, and Nu-kote Latin America, Inc. owns
35% of the stock of Nu-kote Internacional de Mexico, S.A. de C.V.
(2) Nu-kote International, Inc. owns 2,494 shares and 6 shares are held by
nominee shareholders.
(3) Interfas Holding S.A. owns 2,494 shares and 6 shares are held by nominee
shareholders.
(4) Nu-kote International, Inc. owns 24,604 shares and 1,296 shares are held by
nominee shareholders.
(5) Sold April 1, 1998.
(6) Pelikan Scotland, Ltd. owns 99 shares and 1 share is held by a nominee
shareholder.
(7) N-K International Holding, Ltd. owns 99 shares and 1 share is held by a
nominee shareholder.
(8) N-K International Holding, Ltd. owns 51%.
<PAGE>
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 June 26, 1998 on our
audits of the consolidated financial statements and financial statement schedule
of Nu-kote Holding, Inc. and Subsidiaries as of March 31, 1998 and 1997 and for
each of the three years in the period ended March 31, 1998, which reports are
included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Dallas, Texas
June 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
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