<PAGE>
FORM 10-Q
SECURITIES EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended JUNE 26, 1998
- --------------------------------------------------------------------------------
Commission file number 0-20287
- --------------------------------------------------------------------------------
NU-KOTE HOLDING, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1296153
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 BEASLEY DRIVE, FRANKLIN, TENNESSEE 37064
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(Address of principal executive offices) (Zip Code)
(615) 794-9000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock of registrant outstanding at August 7, 1998:
Class Outstanding
----- -----------
Class A common stock $.01 par value 21,775,302
<PAGE>
NU-KOTE HOLDING, INC.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
------------------------------
<S> <C>
Consolidated Balance Sheets as of June 26, 1998 and March 31, 1998...... 3
Consolidated Statements of Operations, Accumulated Deficit and
Comprehensive Loss for the Three Month Periods Ended June 26, 1998 and
June 27, 1997......................................................... 4
Consolidated Statements of Cash Flows for the Three Month Periods Ended
June 26, 1998 and June 27, 1997....................................... 5
Notes to Consolidated Financial Statements.............................. 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 13
PART II - OTHER INFORMATION
---------------------------
Other Information....................................................... 17
Signature Page.......................................................... 18
</TABLE>
2
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
June 26, March 31,
1998 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 5,357 $ 9,488
Accounts receivable, net............................................... 45,032 46,412
Receivables from related party......................................... 2,800 2,674
Inventories, net....................................................... 72,203 73,651
Prepaid expenses....................................................... 8,194 6,907
Deferred income taxes.................................................. 3,457 3,457
-------- --------
Total current assets................................................ 137,043 142,589
Property, plant, and equipment, net.................................... 64,402 66,652
Other assets and deferred charges...................................... 3,285 4,344
Assets held for sale................................................... 621 1,806
Intangibles, net....................................................... 12,343 12,712
-------- --------
Total assets........................................................ $217,694 $228,103
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Bank loans and current portion of long-term debt....................... $139,265 $142,009
Accounts payable....................................................... 37,299 40,730
Compensation related liabilities....................................... 7,677 8,031
Other accrued liabilities.............................................. 31,001 29,357
-------- --------
Total current liabilities........................................... 215,242 220,127
Long-term debt, net of current maturities.............................. 760 760
Other liabilities...................................................... 7,400 7,079
Deferred income taxes.................................................. 9,265 9,265
-------- --------
Total liabilities................................................... 232,667 237,231
======== ========
Shareholders' deficit:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
none issued.......................................................... - -
Class A common stock, $.01 par value, 40,000,000 shares
authorized; 22,325,302 issued and 21,775,302 shares
outstanding........................................................... 223 223
Class B common stock, $.01 par value, 15,000,000 shares authorized;
none issued........................................................... - -
Additional paid-in capital.............................................. 92,610 92,610
Accumulated deficit..................................................... (96,305) (88,977)
Foreign currency translation adjustments................................ (8,866) (10,349)
Excess pension liability................................................ (2,409) (2,409)
Treasury stock, at cost, 550,000 shares................................. (226) (226)
-------- --------
Total shareholders' deficit.......................................... (14,973) (9,128)
-------- --------
Total liabilities and shareholders' deficit..................... $217,694 $228,103
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS,
ACCUMULATED DEFICIT AND COMPREHENSIVE LOSS
FOR THE THREE MONTH PERIODS ENDED JUNE 26, 1998 AND JUNE 27, 1997
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
<TABLE>
<CAPTION>
June 26, June 27,
1998 1997
---------- ----------
<S> <C> <C>
Net sales............................................................... $ 64,181 $ 79,727
Cost of sales .......................................................... 52,304 63,944
---------- ----------
Gross margin ...................................................... 11,877 15,783
Selling, general and administrative expenses ........................... 12,750 14,690
Research and development expenses ...................................... 1,489 1,788
Gain on sale of business ............................................... (462) -
Restructuring expense .................................................. 76 1,623
---------- ----------
Operating loss .................................................... (1,976) (2,318)
Interest expense ....................................................... 5,288 2,965
Other expense items, net ............................................... 64 689
---------- ----------
Loss before income taxes ............................................... (7,328) (5,972)
Benefit for income taxes ............................................... - -
---------- ----------
Net loss .......................................................... (7,328) (5,972)
Accumulated deficit - Beginning of period .............................. (88,977) (36,610)
---------- ----------
Accumulated deficit - End of period .................................... $ (96,305) $ (42,582)
========== ==========
Net loss per share of common stock (basic and diluted) ................. $ (0.34) $ (0.27)
========== ==========
Weighted average shares outstanding .................................... 21,775,302 21,775,302
========== ==========
Comprehensive loss:
Net loss .......................................................... $ (7,328) $ (5,972)
Foreign currency translation adjustments .......................... 1,483 (866)
---------- ----------
Comprehensive loss ................................................ $ (5,845) $ (6,838)
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED JUNE 26, 1998 AND JUNE 27, 1997
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
June 26, June 27,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $(7,328) $(5,972)
Adjustments to reconcile net loss to net cash used in
operating activities:
Exchange losses............................................ - 200
Depreciation and amortization.............................. 3,984 3,480
Gain on sale of business................................... (462) -
Other...................................................... 808 (11)
Changes in working capital:
Accounts receivable........................................ 1,076 (815)
Inventories................................................ 1,630 (6,125)
Prepaid expenses........................................... (1,256) 1,385
Accounts payable........................................... (3,155) 1,931
Compensation related liabilities........................... (457) (94)
Other accrued liabilities.................................. 3,206 2,256
Cash paid for restructuring................................ (158) (1,415)
---------- ----------
Net cash used in operating activities................ (2,112) (5,180)
---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment........................ (772) (1,449)
Sale of property, plant and equipment............................ 1,267 -
---------- ----------
Net cash used in investing activities...................... 495 (1,449)
---------- ----------
Cash flows from financing activities:
Borrowings on long-term debt and other loans..................... 500 7,868
Payments on long-term debt and other loans....................... (3,220) (5,149)
---------- ----------
Net cash used in financing activities...................... (2,720) 2,719
---------- ----------
Effect of exchange rate changes on cash............................... 206 (809)
---------- ----------
Net decrease in cash.................................................. (4,131) (4,719)
Cash and cash equivalents at beginning of period...................... 9,488 12,275
---------- ----------
Cash and cash equivalents at end of period............................ $ 5,357 $ 7,556
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
1. THE COMPANY
Nu-kote Holding, Inc. ("Nu-kote") and its wholly-owned subsidiaries are
referred to collectively as "the Company". The Company is 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 rolls, and carbon paper.
The Company sells products primarily in the United States and Europe,
directly to wholesale and retail markets, and also to original equipment
manufacturers and distributors for resale under their brand names or private
labels. The Company distributes through 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 consolidated balance sheet as of June 26, 1998 and the related
consolidated statements of operations, accumulated deficit and comprehensive
loss and consolidated statements of cash flows for the three month periods ended
June 26, 1998 and June 27, 1997 are unaudited. However, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of such financial statements have been
included. Interim results are not necessarily indicative of results for a full
year.
The financial statements and notes are presented as permitted by Form 10-Q,
and do not contain certain information included in the Company's annual
financial statements and notes.
2. NET LOSS PER SHARE OF COMMON STOCK
During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earnings per share. Per share data presented for the
prior period has been restated to reflect the adoption of the statement. Basic
and diluted net loss per share of common stock are the same and, therefor, are
not shown separately.
3. ACCOUNTS RECEIVABLE
Accounts receivable are reflected net of allowances for doubtful accounts
of $5,462 and $5,473 at June 26, 1998 and March 31, 1998, respectively.
6
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 26, MARCH 31,
1998 1998
---------- ----------
<S> <C> <C>
Raw materials....................... $ 29,308 $ 31,000
Work-in-process..................... 10,793 11,539
Finished goods...................... 32,102 31,112
-------- --------
Total........................... $ 72,203 $ 73,651
======== ========
</TABLE>
Since physical inventories taken during the year do not necessarily
coincide with the end of a quarter, management has estimated the composition of
inventories with respect to raw materials, work-in-process and finished goods.
It is management's opinion that this estimate represents a reasonable
approximation of the inventory level at June 26, 1998. The amounts at March 31,
1998 are based upon the audited balance sheet at that date.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consist of the
following components:
<TABLE>
<CAPTION>
JUNE 26, MARCH 31,
1998 1998
------------- ------------
<S> <C> <C>
Land............................... $ 4,322 $ 4,312
Buildings and improvements......... 19,594 19,413
Machinery and equipment............ 80,035 80,194
-------- --------
103,951 103,919
Less accumulated depreciation...... (39,549) (37,267)
-------- --------
Total......................... $ 64,402 $ 66,652
======== ========
</TABLE>
Depreciation expense amounted to $2,450 and $2,845 for the three month
periods ended June 26, 1998 and June 27, 1997, respectively.
7
<PAGE>
6. INTANGIBLE ASSETS
Intangible assets consist of amounts allocated as a result of purchases of
existing businesses and are summarized as follows:
<TABLE>
<CAPTION>
Amortization June 26, March 31,
Period 1998 1998
------------ -------- ---------
<S> <C> <C> <C>
Goodwill.............................. 20 years $ 6,184 $ 6,184
Covenants-not-to-compete.............. 3 - 5 years 4,556 4,556
Trademark............................. 40 years 6,869 6,869
Technology license.................... 8 years 1,272 1,272
------- -------
18,881 18,881
Less accumulated amortization......... (6,538) (6,169)
------- -------
Total............................ $12,343 $12,712
======= =======
</TABLE>
Covenant-not-to-compete agreements have been recorded at their net present
value using estimated discount rates of 7% and 16%. The trademark has been
recorded at its estimated value based upon royalty rates charged for its use,
discounted at an estimated rate of return of 35%. The technology license has
been recorded at its estimated fair value based on forecasted discounted cash
flows using a 16% discount rate.
7. LONG-TERM DEBT
Long-term debt of the Company consists of the following:
<TABLE>
<CAPTION>
June 26, March 31,
1998 1998
---------- ---------
<S> <C> <C>
Revolving lines of credit....................... $139,003 $141,456
Other items..................................... 1,022 1,313
-------- --------
140,025 142,769
Less current portion............................ (139,265) (142,009)
--------- ---------
Long-term debt, net of current portion.......... $ 760 $ 760
========= =========
</TABLE>
8. INCOME TAXES
Following are the approximate effective blended tax rates for significant
jurisdictions:
<TABLE>
<S> <C>
North America.................................. 40%
Switzerland.................................... 27%
Germany........................................ 56%
United Kingdom................................. 33%
</TABLE>
For the quarters ended June 26, 1998 and June 27, 1997, no tax benefit has
been provided with respect to any tax jurisdiction as it is currently not
considered more likely than not that resulting deferred tax assets will be
realized.
8
<PAGE>
9. CONTINGENCIES
On January 23, 1998 a suit seeking class action status was filed by a
shareholder against the Company, 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 the Company 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. The Company 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, and court costs and attorney's fees. The complaint in one of the cases
has been amended to name the Company 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 estimable. All
of the cases are being vigorously contested, and in each case the Company or NII
has asserted affirmative defenses and counterclaims and has requested damages
and affirmative injunctive relief. In one of the cases NII's Motion for Summary
Judgement of the 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 the Company and a subsidiary
accusing the Company of infringing on the plaintiff's patent with respect to
certain printer heads manufactured by Nu-kote's Swedish subsidiary. The lawsuit
is in a very preliminary stage. The Company denies the plaintiff's allegations
and intends to vigorously defend the suit.
In June 1998, the Company 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. The Company 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.
9
<PAGE>
In connection with the Company'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 and Macedon, New York and Bardstown, Kentucky 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 the Company's acquisition of Pelikan, the seller,
Pelikan Holding AG, agreed to indemnify the Company 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.
This note contains various "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934, which represent the Company's expectations or beliefs
concerning the possible outcome of the various litigation matters described
herein and estimates of the Company's liabilities associated with identified
environmental matters. The Company cautions that the actual outcome of the
various litigation matters could be affected by a number of factors beyond its
control, including, without limitation, judicial interpretations of applicable
laws, rules and regulations, the uncertainties and risks inherent in any
litigation, particularly a jury trial, the nature and extent of any counter
claims, and the scope of insurance coverage, and that the final resolution of
such matters could differ materially from the Company's current evaluation of
such matters. The Company further cautions that the statements regarding
identified environmental matters are qualified by important factors that could
cause the Company's actual liabilities to differ materially from those in the
forward looking statements, including, without limitation, the following: (i)
the actual nature and extent of contamination, if any; (ii) the remedial action
selected; (iii) the actual cleanup level required; (iv) changes in regulatory
requirements; (v) the ability of other responsible parties, if any, to pay their
respective shares; and (vi) any insurance recoveries.
10. RESTRUCTURING EXPENSE
Restructuring expenses incurred in the first quarter of fiscal 1999 related
to severance and were a continuation of the fiscal 1998 restructuring plan which
primarily related to the centralization of sales and distribution into Franklin,
Tennessee and the closure of the Dallas, Texas headquarters. Restructuring
activities commenced during fiscal 1997 (the "1997 Restructuring") related
primarily to the consolidation of impact product production into Scotland,
Mexico and China; centralization of distribution primarily into Franklin,
Tennessee and Duren, Germany; and the closure of one toner facility, and
consolidation of toner manufacturing into Connellsville, Pennsylvania and Egg,
Switzerland.
10
<PAGE>
Relative to the two restructuring initiatives indicated above, the Company
has accruals remaining at June 26, 1998 of $52 and $180 respectively, of which
the former is related to severance costs and the latter to lease cancellations.
Activity related to accrued restructuring costs for the 1997 Restructuring
during the quarter ended June 27, 1997 is as follows:
<TABLE>
<CAPTION>
AMOUNT AMOUNT
ACCRUED AT AMOUNT CURRENT ACCRUED AT
BEGINNING PAID IN PERIOD END OF
DESCRIPTION OF RESTRUCTURING EXPENSE OF QUARTER QUARTER ACCRUAL QUARTER
- ------------------------------------ ------------ ----------- --------- ------------
<S> <C> <C> <C> <C>
Quarter Ended June 27, 1997:
Severance.......................................... $ 1,204 $ 718 $ 940 $ 1,426
Lease cancellations................................ 430 - - 430
Facility maintenance and other..................... 247 697 683 233
---------- -------- ---------- ----------
$ 1,881 $ 1,415 $ 1,623 $ 2,089
========== ======== ========== ==========
</TABLE>
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 in fiscal 1999.
11
<PAGE>
11. BUSINESS UNITS HELD FOR SALE
The Company has engaged BT Alex Brown Incorporated to assist it in the sale
of all or part of the Company's business. Shown below is selected financial
data for the three months ended June 26, 1998 and June 27, 1997 for the
Company's North American and European Operations.
<TABLE>
<CAPTION>
NORTH EUROPEAN CORPORATE
QUARTER ENDED JUNE 26, 1998 AMERICA OPERATIONS (A) & OTHER (B) CONSOLIDATED
- --------------------------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales.......................... $ 31,968 $ 32,213 $ - $ 64,181
Gross margin....................... 5,322 6,555 - 11,877
Operating income (loss)............ 1,864 (1,846) (1,994) (1,976)
Balance Sheet Data:
Current assets..................... $ 59,564 $ 73,213 $ 4,266 $ 137,043
Current liabilities................ 126,163 81,947 7,132 215,242
Long-term assets................... 30,059 39,724 10,868 80,651
Long-term liabilities.............. 5,792 11,633 - 17,425
Equity (deficit)................... (42,332) 19,357 8,002 (14,973)
QUARTER ENDED JUNE 27, 1997
- ---------------------------
Income Statement Data:
Net sales.......................... $ 42,089 $ 37,638 $ - $ 79,727
Gross margin....................... 6,979 8,804 - 15,783
Operating income (loss)............ 1,446 (1,729) (2,035) (2,318)
Balance Sheet Data:
Current assets..................... $ 94,989 $ 93,727 $ 5,737 $ 194,453
Current liabilities (c)............ 132,278 96,487 6,946 235,711
Long-term assets................... 39,995 47,002 15,485 102,482
Long-term liabilities.............. 2,408 16,226 - 18,634
Equity (deficit)................... 298 28,015 14,277 42,590
</TABLE>
- ---------------
(a) Includes the Company's MIT, Interfas and the recently-sold Latin American
Operations.
(b) Includes Nu-kote Imperial, Inc., the North American subsidiary which holds
the Company's patents and trademarks.
(c) For comparative purposes, current liabilities in the prior year have been
restated to reflect the Company's long-term debt which is classified as a
current liability in the June 26, 1998 balance sheet.
12. SALE OF BUSINESS
On April 1, 1998 the Company sold its Colombian subsidiary, Nu-kote de
Colombia, to local management recognizing a gain of $462. The subsidiary's
financial statements were not significant to the consolidated financial
statements.
13. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" and Statement of Financial Accounting
Standards No. 132, "Employer's Disclosure about Pension and Other Postretirement
Benefits", both of which are effective for financial statements for fiscal years
beginning after December 15, 1997. During 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" was also issued, 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 statement but has not yet
determined the full impact.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended June 26, 1998 Compared to Quarter ended June 27, 1997
- -------------------------------------------------------------------
Net revenue for the quarter ended June 26, 1998 was $64.2 million, a
decline of $15.5 million (19.5%) over the quarter ended June 27, 1997. Worldwide
sales of non-impact supplies accounted for approximately 55.8% of total sales
for the quarter ended June 26, 1998 compared to 59.0% of total sales for the
quarter ended June 27, 1997.
Total North American net sales decreased $10.2 million versus the
comparable quarter of the prior fiscal year. The primary contributor to this
decline was a $6.9 million decrease in non-impact sales. This decrease resulted
from a $2.0 million decline due to the sale of the components division in
December 1997 and a decline in toner revenues of $3.3 million due to the loss of
certain customers resulting from poor performance deliveries throughout fiscal
year 1998. Current performance deliveries have improved significantly which
should favorably impact toner sales prospectively. Additionally, inkjet sales
declined $1.5 million attributable to the reconfiguration of inkjet products
which has reduced the average unit sales price but are projected to increase
sales in the future and the loss of a certain customer. Laser cartridge sales
also declined $1.6 million resulting from an overall industry slowdown in demand
in the quarter ended June 26, 1998. Partially offsetting the above were thermal
ribbon sales which increased $1.5 million due to new product introductions into
existing channels of distribution. Also contributing to the overall North
American sales decline were impact ribbon sales which were $3.3 million lower in
the quarter ended June 26, 1998 as compared to the corresponding period of the
preceding year.
European net sales declined $4.4 million of which $1.3 million was
attributable to exchange rate fluctuations. The remaining decline of $3.1
million was due to modest declines in unit sales across all product categories.
The remaining decline of $0.9 million in net sales for the quarter ended
June 26, 1998 resulted from the sale of the Company's Latin American subsidiary,
Nu-kote de Colombia, which occurred on April 1, 1998.
Cost of sales were $52.3 million (81.5% of net sales) for the quarter
ended June 26, 1998 as compared to $63.9 million (80.2%). The 1.3% decline in
gross margins is due to overall lower sale volumes and continued price
pressures. The Company has reduced inventories approximately $1.4 million
during the quarter and $27.7 million since a year ago and its related
infrastructure in an effort to offset lower sales volume and price pressures.
Selling, general and administrative expenses were $12.8 million as
compared to $14.7 million in the previous corresponding quarter. The decrease
of $1.9 million (3.0% of net sales)
13
<PAGE>
resulted from the Company's implementation of worldwide expense reduction
programs, which included significant reductions in headcount. Research and
development expenses decreased $0.3 million which occurred primarily in Europe
as the Company continues to manage such costs.
Interest expense amounted to $5.3 million compared to $3.0 million for
the quarters ended June 26, 1998 and June 27, 1997, respectively. The increase
is the result of higher outstanding borrowings, higher interest rates and
amortization of bank fees related to the July 31, 1997 refinancing of
indebtedness with its lenders.
For the quarter ended June 26, 1998, the Company recognized a net loss of
$7.3 million, compared to a net loss of $6.0 million for the quarter ended
June 27, 1997. The greater net loss is directly attributable to: (1) a $15.5
million decrease in sales and a 1.3% increase in cost of sales; and (2) a net
increase in interest and other expenses of $1.7 million. The increase in net
loss was offset by a $2.2 million reduction in selling, general and
administrative costs, including research and development costs and a $1.6
million decline in restructuring costs.
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
- -------------------------------------------------------------------
Because the Company conducts business in many countries, fluctuations in
foreign currency exchange rates affect the Company's financial position and
results of operations. It is the Company's policy to monitor currency exposures
and enter into hedging arrangements to manage the company's exposure to currency
fluctuations, however, hedging contracts were unavailable to the Company during
the first quarter of fiscal 1999. The Company did not realize any exchange
gains or losses in the quarter ended June 26, 1998 as compared to $0.2 million
in exchange losses in the previous year period.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the three month period ended June 26, 1998 cash used by operating
activities amounted to $2.1 million. The net loss incurred by operations during
the quarter was only partially offset by favorable changes in working capital.
Capital expenditures primarily for the purchase of manufacturing equipment
related to non-impact product lines were $0.7 million.
The Company's cash requirements are related to funding working capital
for operations, research and development costs, capital expenditures, principal
payments 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.
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,
14
<PAGE>
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.
NEW ACCOUNTING STANDARDS
- ------------------------
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" and Statement of Financial Accounting
Standards No. 132, "Employer's Disclosure about Pension and Other Postretirement
Benefits", both of which are effective for financial statements for fiscal years
beginning after December 15, 1997. During 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" was also issued, 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 statement but has not yet
determined the full impact.
Year 2000 Computer Issues
- -------------------------
The Company has completed its initial assessment of the year 2000 issues
facing its information systems. Certain of the Company's information systems
are not currently in compliance with the modifications necessary for the year
2000. It is believed that through modifications or conversions to new hardware,
software and embedded technologies that the year 2000 issues can be mitigated.
The Company expects to utilize both internal and external resources to
reprogram, replace and test software and embedded technologies for the year 2000
modifications. Additionally, the Company also plans to communicate with
customers, vendors and others to ensure that their systems are year 2000
compliant. However, there can be no guarantee that the systems of other
companies on which the Company's systems 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
15
<PAGE>
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 firm 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, which represent the
Company's expectations or beliefs concerning, among other things, future
operations to provide sufficient liquidity. The Company cautions that such
matters necessarily involve significant risks and uncertainties that could cause
actual operating results and liquidity needs to differ materially from such
statements, including, without limitation, general economic conditions, product
demand and industry capacity, competitive products and pricing, projected sales
improvements, manufacturing efficiencies, new product development, availability
of raw materials and critical manufacturing equipment, new plant startups, the
impact of the formation of the EMU, the effect of the year 2000 compliance
issues and the regulatory and trade environment.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
-----------------
See "Item 3 - Legal Proceedings" in the registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998 and Note 9 of Notes to
Consolidated Financial Statements for the three month periods ended June 26,
1998 and June 27, 1997 included elsewhere in this report.
ITEM 3- DEFAULTS UPON SENIOR SECURITIES
-------------------------------
On July 31, 1997 the Registrant entered into the Second Amended and
Restated Credit Agreements, as described in Note 8 of Notes to Consolidated
Financial Statements in its Annual Report on Form 10-K for the fiscal year ended
March 31, 1998. 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 and Restated Credit Agreements. Since that time, the Company and
its lenders have entered into a series of amendments and waivers to the Second
and Restated 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 26, 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 revolving credit commitment under the Second
Amended and Restated Credit Agreements; and
. Required monthly principal reductions of $500 commencing May 1998 through
July 1998.
In the absence of the amendment and various waivers, the Company would have
been in default under its credit agreement.
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarterly
period ended June 26, 1998.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date August 7, 1998 /s/ Shaun K. Donnellan
-------------- -----------------------
Shaun K. Donnellan
President and Chief Executive Officer
Date August 7, 1998 /s/ Phillip L. Theodore
-------------- ------------------------
Phillip L. Theodore
Senior Vice President,
Chief Financial Officer, Treasurer
and Assistant Secretary
18
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