<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 SEPTEMBER 25, 1998
- - ------------------------------------------------------------------------------
Commission file number 0-20287
- - ------------------------------------------------------------------------------
NU-KOTE HOLDING, INC.
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1296153
- - ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 BEASLEY DRIVE, FRANKLIN, TENNESSEE 37064
- - ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(615) 794-9000
- - ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Number of shares of common stock of registrant outstanding at November 13, 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
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 25, 1998 and March 31, 1998.................. 3
Consolidated Statements of Operations, Accumulated Deficit and Comprehensive Loss for
the Three Month Periods Ended September 25, 1998 and September 26, 1997................ 4
Consolidated Statements of Operations, Accumulated Deficit and Comprehensive Loss for
the Six Month Periods Ended September 25, 1998 and September 26, 1997.................. 5
Consolidated Statements of Cash Flows for the Six Month Periods Ended September 25, 1998
and September 26, 1997................................................................. 6
Notes to Consolidated Financial Statements............................................... 7
Management's Discussion and Analysis of Financial Condition and Results of Operations.... 15
PART II - OTHER INFORMATION
Other Information........................................................................ 20
Signature Page........................................................................... 22
</TABLE>
2
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 25, MARCH 31,
1998 1998
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 4,414 $ 9,488
Accounts receivable, net............................. 38,493 46,412
Receivables from related party....................... 2,663 2,674
Inventories, net..................................... 71,439 73,651
Prepaid expenses..................................... 7,662 6,907
Deferred income taxes................................ 3,420 3,457
-------- --------
Total current assets............................... 128,091 142,589
Property, plant and equipment, net..................... 66,062 66,652
Other assets and deferred charges...................... 2,046 4,344
Assets held for sale................................... 231 1,806
Intangibles, net....................................... 11,989 12,712
-------- --------
Total assets....................................... $208,419 $228,103
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Bank loans and current portion of long-term debt..... $141,592 $142,009
Accounts payable..................................... 37,195 40,730
Compensation related liabilities..................... 7,531 8,031
Other accrued liabilities............................ 28,037 29,357
-------- --------
Total current liabilities.......................... 214,355 220,127
Long-term debt, net of current maturities.............. 760 760
Other liabilities...................................... 7,817 7,079
Deferred income taxes.................................. 9,258 9,265
-------- --------
Total liabilities.................................. 232,190 237,231
======== ========
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.................................. (106,301) (88,977)
Foreign currency translation adjustments............. (7,668) (10,349)
Excess pension liability............................. (2,409) (2,409)
Treasury stock, at cost, 550,000 shares.............. (226) (226)
-------- --------
Total shareholders' deficit........................ (23,771) (9,128)
-------- --------
Total liabilities and shareholders' deficit...... $208,419 $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 September 25, 1998 and September 26, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
------------- -------------
<S> <C> <C>
Net sales................................. $ 55,085 $ 72,688
Cost of sales............................. 44,924 60,140
----------- -----------
Gross margin............................ 10,161 12,548
Selling, general and administrative
expenses................................. 12,975 14,084
Research and development expenses......... 1,314 1,830
Restructuring expense..................... 77 1,194
----------- -----------
Operating loss.......................... (4,205) (4,560)
Interest expense.......................... 4,773 3,612
Other expense (income) items, net......... 1,018 (496)
----------- -----------
Loss before income taxes and
extraordinary items...................... (9,996) (7,676)
Provision for income taxes................ - 342
----------- -----------
Loss before extraordinary item.......... (9,996) (8,018)
Extraordinary loss arising from early
extinguishment of indebtedness........... - 2,550
----------- -----------
Net loss................................ (9,996) (10,568)
Accumulated deficit - Beginning of
period................................... (96,305) (42,582)
----------- -----------
Accumulated deficit - End of period....... $ (106,301) $ (53,150)
=========== ===========
Net loss per share of common stock
(basic and diluted):
Loss before extraordinary item.......... $(0.46) $(0.37)
Extraordinary loss...................... - (0.12)
----------- -----------
Net loss................................ $ (0.46) $ (0.49)
----------- -----------
Weighted average shares outstanding....... 21,775,302 21,775,302
=========== ===========
Comprehensive loss:
Net loss................................ $ (9,996) $ (10,568)
Foreign currency translation gain
(loss) adjustments..................... 1,198 (843)
----------- -----------
Comprehensive loss...................... $ (8,798) $ (11,411)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS,
ACCUMULATED DEFICIT AND COMPREHENSIVE LOSS
FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
------------- -------------
<S> <C> <C>
Net sales..................................................... $ 119,266 $ 152,415
Cost of sales................................................. 97,228 124,084
----------- -----------
Gross margin.............................................. 22,038 28,331
Selling, general and administrative expenses.................. 25,725 28,774
Research and development expenses............................. 2,803 3,618
Gain on sale of business...................................... (462) -
Restructuring expenses........................................ 153 2,817
----------- -----------
Operating loss............................................ (6,181) (6,878)
Interest expense.............................................. 10,060 6,577
Other expense items, net...................................... 1,083 193
----------- -----------
Loss before income taxes and extraordinary item............... (17,324) (13,648)
Provision for income taxes.................................... - 342
----------- -----------
Loss before extraordinary item................................ (17,324) (13,990)
Extraordinary loss arising from early extinguishment
of indebtedness.............................................. - 2,550
----------- -----------
Net loss.................................................. (17,324) (16,540)
Accumulated deficit-Beginning of Period....................... (88,977) (36,610)
----------- -----------
Accumulated deficit-End of Period............................. $ (106,301) $ (53,150)
=========== ===========
Net loss per share of common stock (basic and diluted):
Loss before extraordinary item............................ $(0.80) $(0.64)
Extraordinary loss........................................ - (0.12)
----------- -----------
Net loss.................................................. $(0.80) $(0.76)
----------- -----------
Weighted average shares outstanding........................... 21,775,302 21,775,302
----------- -----------
Comprehensive loss:
Net loss...................................................... $ (17,324) $ (16,540)
Foreign currency translation gain (loss) adjustments.......... 2,681 (1,709)
----------- -----------
Comprehensive loss............................................ $ (14,643) $ (18,249)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended September 25, 1998 and September 26, 1997
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $(17,324) $(16,540)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Extraordinary loss from early extinguishment of debt....................... - 2,550
Exchange (gains) losses.................................................... (462) 203
Depreciation and amortization.............................................. 8,842 7,009
Deferred income taxes...................................................... - (1,369)
Other...................................................................... 513 (56)
Changes in working capital:
Accounts receivable........................................................ 17,537 4,724
Inventories................................................................ 5,081 892
Prepaid expenses........................................................... (665) 2,125
Accounts payable........................................................... (6,279) (9,173)
Compensation related liabilities........................................... (817) (564)
Other accrued liabilities.................................................. (9,018) 9,261
Cash paid for restructuring................................................ (301) (2,882)
-------- --------
Net cash used in operating activities................................... (2,893) (3,820)
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment.................................... (3,108) (2,817)
Sale of property, plant and equipment........................................ 1,405 50
-------- --------
Net cash used in investing activities................................... (1,703) (2,767)
-------- --------
Cash flows from financing activities:
Borrowings on long-term debt and other loans................................. 500 15,463
Payments on long-term debt and other loans................................... (4,445) (11,483)
Payments of financing costs.................................................. - (2,559)
-------- --------
Net cash provided by financing activities............................... (3,945) 1,421
-------- --------
Effect of exchange rate changes on cash........................................ 3,467 (1,763)
-------- --------
Net decrease in cash........................................................... (5,074) (6,929)
Cash and cash equivalents at beginning of period............................... 9,488 12,275
-------- --------
Cash and cash equivalents at end of period..................................... $ 4,414 $ 5,346
-------- --------
Excluded from the consolidated statements of cash flows was the effect on
non-cash financing activities related to the issuance of stock warrants...... $ - $ 1,005
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
1. THE COMPANY
Nu-kote Holding, Inc. ("Nu-kote") and its wholly owned subsidiaries are
referred to collectively as "the Company". The Company is 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 September 25, 1998 and the related
consolidated statements of operations, accumulated deficit and comprehensive
loss and consolidated statements of cash flows for the three and six month
periods ended September 25, 1998 and September 26, 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.
Because of the net losses, potentially dilutive securities are excluded from the
calculation of EPS and, therefore, basic and dilutive EPS calculations are the
same. Shares excluded from such calculations that related to potentially
dilutive securities amounted to 2,526,888 and 3,531,280 for the three month
periods and the six-month periods ended September 25, 1998, and September 26,
1997, respectively.
3. ACCOUNTS RECEIVABLE
Accounts receivable are reflected net of allowances for doubtful accounts
of $5,835 and $5,473 at September 25, 1998 and March 31, 1998, respectively.
7
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 25, March 31,
1998 1998
------------- ---------
<S> <C> <C>
Raw material................ $26,915 $31,000
Work-in-process............. 11,377 11,539
Finished goods.............. 33,147 31,112
------- -------
Total..................... $71,439 $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 September 25, 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>
September 25, March 31,
1998 1998
------------- ---------
<S> <C> <C>
Land............................... $ 4,608 $ 4,312
Buildings and improvements......... 20,356 19,413
Machinery and equipment............ 83,624 80,194
-------- --------
108,588 103,919
Less accumulated depreciation...... (42,526) (37,267)
-------- --------
Total.......................... $ 66,062 $ 66,652
======== ========
</TABLE>
Depreciation expense amounted to $2,460 and $2,584 for the three-month
periods and $4,910 and $5,429 for the six-month periods ended September 25, 1998
and September 26, 1997, respectively.
8
<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 September 25, 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............ (6,892) (6,169)
------- -------
Total............................... $11,989 $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>
September 25, March 31,
1998 1998
------------- ---------
<S> <C> <C>
Revolving lines of credit.................... $ 141,364 $ 141,456
Other items.................................. 988 1,313
---------- ---------
142,352 142,769
Less current portion......................... (141,592) (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 three months and six months ended September 25, 1998, 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. However, during the quarter ended September 26, 1997, a
provision was made in the amount of $342 for income taxes in certain foreign
jurisdictions.
9
<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.
However, all pending litigation matters are subject to the automatic stay which
resulted when the Company and certain of its subsidiaries filed a voluntary
petition for protection under Chapter 11 of the U.S. Bankruptcy Code.
In the opinion of management, all matters discussed above are covered by
insurance or are without merit or the disposition is not anticipated to have a
material effect on the Company's financial position; however, one or more of
these matters could have a material effect on future quarterly or annual results
of operations or cash flow when resolved.
10
<PAGE>
In connection with 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 three months and six months ended
September 25, 1998 related to severance and were a continuation of the fiscal
1998 restructuring plan (the "1998 Restructuring") 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.
Relative to the 1998 Restructuring initiatives indicated above, the Company
has accruals remaining at September 25, 1998 of $47 and $119 respectively, of
which the former is related to severance costs and the latter to lease
cancellations.
11
<PAGE>
Activity related to accrued restructuring costs for the 1997 Restructuring
during the three months and six months ended September 26, 1997 is as follows:
<TABLE>
<CAPTION>
AMOUNT AMOUNT
ACCRUED AT AMOUNT ACCRUED AT
BEGINNING PAID IN ADDITIONAL END OF
DESCRIPTION OF RESTRUCTURING EXPENSE OF QUARTER PERIOD PROVISION PERIOD
- - ----------------------------------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Three months ended September 26, 1997:
Severance............................ $1,426 $ 737 $ 464 $1,153
Lease cancellations.................. 430 - - 430
Facility maintenance and other....... 233 730 730 233
------ ------ ------ ------
$2,089 $1,467 $1,194 $1,816
====== ====== ====== ======
AMOUNT AMOUNT
ACCRUED AT AMOUNT ACCRUED AT
BEGINNING PAID IN ADDITIONAL END OF
DESCRIPTION OF RESTRUCTURING EXPENSE OF QUARTER PERIOD PROVISION PERIOD
- - ------------------------------------ ---------- ------- ---------- ----------
Six months ended September 26, 1997:
Severance............................. $1,204 $1,455 $1,404 $1,153
Lease cancellations................... 430 - - 430
Facility maintenance and other........ 247 1,427 1,413 233
------ ------ ------ ------
$1,881 $2,882 $2,817 $1,816
====== ====== ====== ======
</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.
12
<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 and six months ended September 25, 1998 and September
26, 1997 for the Company's North American and European Operations.
<TABLE>
<CAPTION>
North European Corporate
Quarter Ended September 25, 1998 America Operations (a) & Other (b) Consolidated
- - -------------------------------- ------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales....................... $ 26,542 $28,543 $ - $ 55,085
Gross margin.................... 4,119 6,042 - 10,161
Operating income (loss)......... 267 (2,254) (2,218) (4,205)
Quarter Ended September 26, 1997
- - --------------------------------
Income Statement Data:
Net sales....................... $ 39,392 $33,296 $ - $ 72,688
Gross margin.................... 5,012 7,536 - 12,548
Operating income (loss)......... (410) (2,216) (1,934) (4,560)
North European Corporate
Six Months Ended September 25, 1998.... America Operations (a) & Other (b) Consolidated
- - -----------------------------------.... ------- -------------- ----------- ------------
Income Statement Data:
Net sales....................... $ 58,510 $60,756 $ - $119,266
Gross margin.................... 9,441 12,597 - 22,038
Operating income (loss)......... 2,592 (4,562) (4,211) (6,181)
Balance Sheet Data:
Current assets.................. $ 52,691 $70,995 $ 4,405 $128,091
Current liabilities............. 124,193 83,077 7,085 214,355
Long-term assets................ 29,959 41,196 9,173 80,328
Long-term liabilities.......... 5,793 12,042 0 17,835
Equity (deficit)................ (46,864) 16,600 6,493 (23,771)
Six Months Ended September 26, 1997
- - -----------------------------------
Income Statement Data:
Net sales....................... $ 81,481 $70,934 $ - $152,415
Gross margin.................... 11,991 16,340 - 28,331
Operating income (loss)......... 1,036 (3,945) (3,969) (6,878)
Balance Sheet Data:
Current assets.................. $ 86,694 $86,042 $ 6,856 $179,592
Current liabilities (c)......... 132,922 89,088 10,029 232,039
Long-term assets................ 39,307 46,182 17,701 103,190
Long-term liabilities........... 2,446 16,114 - 18,560
Equity (deficit)................ (9,367) 27,022 14,528 32,183
</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 that 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 September 25, 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 during the first
quarter of fiscal 1999. The subsidiary's financial statements were not
significant to the consolidated financial statements.
13
<PAGE>
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.
14. SUBSEQUENT EVENT
Subsequent to the close of the current fiscal quarter, on November 6, 1998,
the Company and certain of its subsidiaries filed voluntary petitions for
protection under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the Middle District of Tennessee in Nashville.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 25, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 26, 1997
Net sales for the quarter ended September 25, 1998 were $55.1 million, a
decline of $17.6 million or 24.2% over the quarter ended September 26, 1997. For
the quarter ended September 25, 1998, sales by North American entities were
$26.5 million, a decline of $12.9 million or 32.8%, as compared to sales in the
previous year period. Sales by European entities were $28.5 million, a decline
of $4.7 million or 14.3%, as compared to the previous year period. Nearly all of
the decline in sales by the North American entities was due to a $6.3 million,
or 34.6%, decline in ribbon sales and a $3.6 million, or 52.9% decline in the
sale of toner products. Approximately $0.6 million of the decline in the
European sales was due to exchange rate fluctuations. The balance of the decline
in sales in Europe was due largely to a decline in sales of non-impact products
of $7.5 million.
Worldwide sales of non-impact supplies accounted for approximately 55% of
total sales for the quarter ended September 25, 1998, compared to 61% of total
sales in the quarter ended September 26, 1997.
In North America, sales of non-impact supplies amounted to $14.7 million
in the quarter ended September 25, 1998, down $6.5 million or 30.7% as compared
to the previous year period, and represented 55.3% of total North American
sales. As previously noted, this was largely due to a decline in sales of toner
products. Sales of non-impact supplies in Europe were $15.6 million in the
quarter ended September 25, 1998 as compared to $23.1 million in the previous
year period.
Cost of sales were $44.9 million (81.5% of net sales) for the quarter
ended September 25, 1998, compared to $60.1 million (82.7% of net sales) in the
previous year period. The lower cost of sales as a percentage of net sales is
associated with the company's continued effort to reduce its inventories and
related infrastructure in response to the lower sales volume and price pressures
which it is experiencing.
For the quarter ended September 25, 1998, research and development
expenses amounted to $1.3 million, (2.4% of net sales), as compared to $1.8
million (2.5% of net sales) in the previous year period. All of the decline in
this expense category occurred in Europe where the company has implemented an
expense reduction program to maintain research and development expenses at
approximately 2% of net sales.
Selling, general and administrative expenses were $13.0 million in the
quarter ended September 25, 1998 as compared to $14.1 million in the previous
year period. All of the reduction in these expenses resulted from the Company's
continued implementation of worldwide expense reduction programs.
15
<PAGE>
Interest expense for the quarter ended September 25, 1998 was $4.8
million, compared to $3.6 million for the previous year period. The increase is
the result of higher outstanding borrowings and higher interest rates.
For the quarter ended September 25, 1998, the Company recognized a net
loss of $10.0 million, which was favorable to the net loss of $10.6 million
reported in the previous year period. The decrease in net loss is directly
attributable to: (1) improvement in gross margins; (2) lower selling, general
and administrative spending; (3) reduced restructuring expenses; and (4) the
extraordinary loss of $2.5 million realized in the prior year relative to the
early extinquishment of debt. These favorable items were almost entirely offset
by increased interest expense.
SIX MONTHS ENDED SEPTEMBER 25, 1998 COMPARED TO SIX MONTHS ENDED SEPTEMBER 26,
1997
Net sales for the six months ended September 25, 1998 were $119.3
million, a decline of $33.1 million (21.7%) over the six months ended September
26, 1997. For the six months ended September 25, 1998, sales by North American
entities were $58.5 million, a decline of $23.0 million or 28.2%, as compared to
sales in the previous year period. Sales by European entities declined $10.2
million, or 14.3%, as compared to the previous year period and were $60.7
million. Sales of toner products in North America declined $6.8 million or
47.2% as a result of a continued deterioration of opportunities in the market.
Sales of impact products and laser cartridges in North America were $9.4 million
and $3.0 million lower, respectively, as compared to the previous year period.
Approximately $1.9 million of the decline in sales in Europe was due to exchange
rate fluctuations. The balance of the decline in sales in Europe was due
largely to a decline in sales of non-impact products of $12.4 million and a
slight across the board decline in sales of impact products.
Worldwide sales of non-impact supplies accounted for approximately 55% of
total sales for the six months ended September 25, 1998, compared to 60% of
total sales in the six months ended September 26, 1997.
In North America, sales of non-impact supplies amounted to $32.3 million
in the six months ended September 25, 1998, down $13.3 million or 29.2% as
compared to the previous year period, and represented 55.3% of total North
American sales. Sales of non-impact supplies in Europe were $33.7 million on
the current period versus $46.1 million in the prior year period.
Cost of sales were $97.2 million (81.5% of net sales) for the six months
ended September 25, 1998, compared to $124.1 million (81.4% of net sales) in the
previous year period.
For the six months ended September 25, 1998, research and development
expenses amounted to $2.8 million, (2.4% of net sales), as compared to $3.6
million (also 2.4% of net sales) in the previous year period. Approximately,
two-thirds of this decline occurred in Europe where a program to maintain
research and development expenses at 2% of net sales has been implemented.
Selling, general and administrative expenses were $25.7 million in the
six months ended September 25, 1998 as compared to $28.8 million in the previous
year period. The benefits of a
16
<PAGE>
worldwide expense reduction program, implemented over the past year are inherent
in this $3.1 million reduction.
Interest expense for the current fiscal period was $10.1 million,
compared to $6.6 million for the previous year period. The increase is the
result of higher outstanding borrowings and higher interest rates.
For the six months ended September 25, 1998, the company recognized a net
loss of $17.3 million, compared to the net loss of $16.5 million realized in the
previous year period. This comparable performance on substantially lower sales
is attributable to the following favorable items: (1) significantly reduced
selling, general and administrative spending, and research and development
expenses; (2) restructuring costs of $2.8 million incurred in the prior year's
period and (3) the extraordinary loss of $2.5 million realized in the second
quarter of the prior year relative to the early extinguishment of debt. The
above were partially offset by greater interest costs incurred during the six
months ended September 25, 1998.
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
three months and six months ended September 25, 1998. The Company realized
exchange losses of $0.2 million in the six months ended September 25, 1998 as
compared to $0.2 million in exchange losses in the previous year period.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended September 25, 1998 cash used by operating
activities amounted to $2.9 million. The net loss incurred by operations during
the period 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 $3.1 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.
Subsequent to the close of the current fiscal quarter, on November 6, 1998,
the Company and certain of its subsidiaries filed voluntary petitions for
protection under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the Middle District of Tennessee in Nashville.
17
<PAGE>
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 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 is currently utilizing both internal and external resources to
reprogram, replace and test software and embedded technologies for the year 2000
modifications. Additionally, the Company is communicating with customers,
vendors and others to ensure that their systems are year 2000 compliant. With
regard to these communications, the Company is finding that a majority of third
parties are either already year 2000 compliant or currently undertaking similar
steps to ensure their compliance. 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 Company has incurred year-to-date costs of $1.0 million, which
the majority was incurred in the quarter ended September 25, 1998. The cost to
the Company of the year 2000 compliance is currently estimated to approximate
$1.7 million. The time of completion for year 2000 compliance is currently
estimated at June 1999.
Based on available information, the Company does not believe any material
exposure to significant business interruption exists as a result of year 2000
compliance issues. Accordingly, the Company has not adopted any formal
contingency plan in the event its year 2000 project is not completed in a timely
manner. These costs and the timing in which the Company plans to complete its
year 2000 modification and testing processes are based on management's best
estimates. However, there can be no assurance that the Company will timely
identify and remediate all significant year 2000 problems, that remedial efforts
will not involve significant time and expense, or that such problems will not
have a material adverse effect on the Company's business, results of operations
or financial position.
18
<PAGE>
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 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.
19
<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 and six month periods
ended September 25, 1998 and September 26, 1997 included elsewhere in this
report.
Subsequent to the close of the current fiscal quarter, on November 6, 1998,
the Company and certain of its subsidiaries filed voluntary petitions for
projection under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the Middle District of Tennessee in Nashville.
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. On November 6, 1998, the Company and certain of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court for the Middle District of Tennessee
in Nashville. Such filing constituted a default under the Second Amended and
Restated Credit Agreements.
20
<PAGE>
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 September 25, 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 16, 1998 /s/ Patrick E. Howard
----------------- ----------------------
Patrick E. Howard
Chief Executive Officer
Date November 16, 1998 /s/ Phillip L. Theodore
----------------- ------------------------
Phillip L. Theodore
Senior Vice President,
Chief Financial Officer, Treasurer
and Assistant Secretary
22
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