<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 DECEMBER 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 February 5, 1999:
Class Outstanding
----- -----------
Class A common stock $.01 par value 21,775,302
<PAGE>
NU-KOTE HOLDING, INC.
(Debtor-In-Possession-Note 2)
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
PAGE
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of December 25, 1998
and March 31, 1998 .............................................. 3
Consolidated Statements of Operations, Accumulated Deficit and
Comprehensive Loss for the Three Month Periods Ended
December 25, 1998 and December 26, 1997.......................... 4
Consolidated Statements of Operations, Accumulated Deficit and
Comprehensive Loss for the Nine Month Periods Ended
December 25, 1998 and December 26, 1997.......................... 5
Consolidated Statements of Cash Flows for the Nine Month Periods
Ended December 25, 1998 and December 26, 1997.................... 6
Notes to Consolidated Financial Statements........................ 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 18
PART II OTHER INFORMATION
Other Information.................................................. 23
Signature Page..................................................... 24
2
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(Debtor-In-Possession-Note 2)
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 25, March 31,
1998 1998
------------ ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,597 $ 9,488
Accounts receivable, net 40,790 46,412
Receivables from related party 2,904 2,674
Inventories, net 66,066 73,651
Prepaid expenses 7,661 6,907
Deferred income taxes 3,420 3,457
--------- --------
Total current assets 132,438 142,589
Property, plant and equipment, net 63,048 66,652
Other assets and deferred charges 1,451 4,344
Assets held for sale 231 1,806
Intangibles, net 11,621 12,712
--------- --------
Total assets $ 208,789 $ 228,103
========= ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
DIP facility advances $ 7,500 $ -
Bank loans and current portion of long-term debt 46,665 142,009
Accounts payable 22,878 40,730
Compensation related liabilities 2,986 8,031
Other accrued liabilities 11,483 29,357
--------- --------
Total current liabilities 91,512 220,127
Pre-petition liabilities subject to compromise 134,216 -
Long-term debt, net of current maturities - 760
Other liabilities 6,180 7,079
Deferred income taxes 9,771 9,265
--------- --------
Total liabilities 241,679 237,231
--------- --------
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 (116,096) (88,977)
Foreign currency translation adjustments (6,992) (10,349)
Excess pension liability (2,409) (2,409)
Treasury stock, at cost, 550,000 shares (226) (226)
--------- --------
Total shareholders' deficit (32,890) (9,128)
--------- --------
Total liabilities and shareholders' deficit $ 208,789 $ 228,103
========= ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(Debtor-In-Possession-Note 2)
CONSOLIDATED STATEMENTS OF OPERATIONS,
ACCUMULATED DEFICIT AND COMPREHENSIVE LOSS
For the Three Month Periods Ended December 25, 1998 and December 26, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 25, December 26,
1998 1997
------------ -----------
<S> <C> <C>
Net sales $ 59,197 $ 70,755
Cost of sales 48,941 61,140
----------- ----------
Gross margin 10,256 9,615
Selling, general and administrative expenses 13,797 14,158
Research and development expenses 1,459 1,505
Provision for loss on sale of business - 4,061
Restructuring expense 221 488
----------- ----------
Operating loss (5,221) (10,597)
Interest expense (contractual interest $5,216) 3,688 3,513
Other expense items, net 631 85
----------- ----------
Loss before reorganization items and income taxes (9,540) (14,195)
Reorganization items 255 -
----------- ----------
Loss before income taxes (9,795) (14,195)
Provision for income taxes - 785
----------- ----------
Net loss (9,795) (14,980)
Accumulated deficit -- Beginning of period (106,301) (53,150)
----------- ----------
Accumulated deficit -- End of period $ (116,096) $ (68,130)
=========== ==========
Net loss per share of common stock (basic and diluted) $ (0.45) $ (0.69)
=========== ==========
Weighted average shares outstanding 21,775,302 21,775,302
=========== ==========
Comprehensive loss:
Net loss $ (9,795) $ (14,980)
Foreign currency translation gain (loss) adjustments 676 (1,698)
----------- ----------
Comprehensive loss $ (9,119) $ (16,678)
=========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(Debtor-In-Possession-Note 2)
CONSOLIDATED STATEMENTS OF OPERATIONS,
ACCUMULATED DEFICIT AND COMPREHENSIVE LOSS
FOR THE NINE MONTH PERIODS ENDED DECEMBER 25, 1998 AND DECEMBER 26, 1997
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
<TABLE>
<CAPTION>
December 25, December 26,
1998 1997
------------- ------------
<S> <C> <C>
Net sales $ 178,464 $ 223,170
Cost of sales 146,170 185,224
------------- ------------
Gross margin 32,294 37,946
Selling, general and administrative expenses 39,522 42,932
Research and development expenses 4,262 5,123
Provision for loss (gain) on sale of business (462) 4,061
Restructuring expense 374 3,305
------------- ------------
Operating loss (11,402) (17,475)
Interest expense (contractual interest $15,277) 13,749 10,090
Other expense items, net 1,713 278
------------- ------------
Loss before reorganization items, extraordinary item and income taxes (26,864) (27,843)
Reorganization items 255 -
------------- ------------
Loss before income taxes and extraordinary item (27,119) (27,843)
Provision for income taxes - 1,127
------------- ------------
Loss before extraordinary item (27,119) (28,970)
Extraordinary loss arising from early extinguishment of indebtedness - (2,550)
------------- ------------
Net loss (27,119) (31,520)
Accumulated deficit -- Beginning of period (88,977) (36,610)
------------- ------------
Accumulated deficit -- End of period $ (116,096) $ (68,130)
============= ============
Net loss per share of common stock (basic and diluted):
Loss before extraordinary item $ (1.25) $ (1.33)
Extraordinary loss - (0.12)
------------- ------------
Net loss $ (1.25) $ (1.45)
============= ============
Weighted average shares outstanding 21,775,302 21,775,302
============= ============
Comprehensive loss:
Net loss $ (27,119) $ (31,520)
Foreign currency translation gain (loss) adjustments 3,357 (3,407)
------------- ------------
Comprehensive loss $ (23,762) $ (34,927)
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(Debtor-In Possession-Note 2)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ended December 25, 1998 and December 26, 1997
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
<TABLE>
<CAPTION>
December 25, December 26,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss before reorganization items $ (26,864) $ (31,520)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Extraordinary loss from early extinguishment of debt - 2,550
Provision for loss (gain) on sale of business (462) 4,061
Exchange (gain) losses 522 (204)
Depreciation and amortization 13,038 10,459
Deferred income taxes - 1,159
Other 1,540 (3,547)
Changes in working capital:
Accounts receivable 15,280 14,288
Inventories 10,675 4,638
Prepaid expenses (337) 1,470
Accounts payable (2,021) (10,300)
Compensation related liabilities (2,792) (1,766)
Other accrued liabilities (9,419) 10,197
Cash paid for restructuring (269) (3,742)
--------- ---------
Net cash used in operating activities before reorganization items (1,109) (2,257)
--------- ---------
Reorganization items (255) -
Add increase in prepaid reorganization items (315) -
--------- ---------
Cash paid for reorganization items (570) -
--------- ---------
Net cash used in operating activities (1,679) (2,257)
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (4,757) (4,381)
Sale of property, plant and equipment 3,006 2,699
--------- ---------
Net cash used in investing activities (1,751) (1,682)
--------- ---------
Cash flows from financing activities:
DIP facility advances 7,500 -
Borrowings on long-term debt and other loans 500 21,463
Payments on long-term debt and other loans (4,472) (13,290)
Payments of financing costs - (2,559)
--------- ---------
Net cash provided by financing activities 3,528 5,614
--------- ---------
Effect of exchange rate changes on cash 2,011 (2,267)
--------- ---------
Net increase (decrease) in cash 2,109 (592)
Cash and cash equivalents at beginning of period 9,488 12,275
--------- ---------
Cash and cash equivalents at end of period $ 11,597 $ 11,683
========= =========
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
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
<PAGE>
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(Debtor-In Possession-Note 2)
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 December 25, 1998 and the related
consolidated statements of operations, accumulated deficit and comprehensive
loss and consolidated statements of cash flows for the three and nine month
periods ended December 25, 1998 and December 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. PETITION FOR REORGANIZATION UNDER CHAPTER 11
On November 6, 1998, (the "Petition Date"), Nu-kote and its U.S.
operating subsidiaries filed voluntary petitions for protection under Chapter 11
of the U.S. Bankruptcy Code (the "Bankruptcy Proceedings") in the United States
Bankruptcy Court in the Middle District of Tennessee in Nashville (the
"Bankruptcy Court") (Case No. 98-10600-10606-KL3-11). The Bankruptcy
Proceedings primarily relate to all U.S. assets and operations and did not
include the Company's international subsidiaries. The Bankruptcy Proceedings are
being jointly administered by the existing directors and officers of the company
in the ordinary course of business and under the supervision of the Bankruptcy
Court. Condensed consolidating financial information for the entities included
in the Bankruptcy Proceedings is presented in Note 11.
7
<PAGE>
The consolidated financial statements are presented in accordance with the
guidelines established by Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," as issued by the American
Institute of Certified Public Accountants in November 1990.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Accordingly, the consolidated financial
statements do not reflect adjustments or provide for the potential consequences
of the Bankruptcy Proceedings on the Company. In particular, the financial
statements do not purport to show (a) the realizable value of assets on a
liquidation basis or their availability to satisfy liabilities; (b) prepetition
liability amounts that may be allowed for claims or contingencies or the status
and priority thereof; (c) the effect of any changes that may be made to the
capitalization of the Company; or (d) the effect of any changes that may be made
in the Company's business operations. The outcome of these matters is not
presently determinable.
Under the Bankruptcy Proceedings, substantially all claims against Nu-kote
and its U.S. operating subsidiaries, prior to the petition date, are subject to
the automatic stay provision under the Bankruptcy Code while the Company
continues business operations as a debtor-in-possession ("DIP"). Additionally,
all litigation and actions by creditors to collect claims existing at the
Petition Date are stayed, without specific Bankruptcy Court authorization to pay
such claims. The Company has received authorization, pursuant to first day
orders, to pay certain claims related to wages, salaries, benefits, expense
reports, and other claims. As a debtor-in-possession, the Company has the right,
subject to Bankruptcy court approval, to assume or reject certain executory
contracts, including unexpired leases. Any claim for damages resulting from the
rejection of an executory contract or an unexpired lease is treated as a general
unsecured claim in the Bankruptcy Proceedings. Additionally, the Company has
also received approval from the Bankruptcy Court to use the Company's current
cash management system and the retention of certain legal and financial
professionals.
The Company obtained DIP financing from Norwest Business Credit, Inc.
providing for a $7,500 DIP Credit Facility (the "DIP Facility") which was
approved by the Bankruptcy Court on December 17, 1998. This DIP Facility is in
the form of a line of credit which will help fund the Company's working capital
requirements as it reorganizes under the Bankruptcy Code (see Note 9).
The Company intends to present a plan of reorganization to the Bankruptcy
Court to reorganize the Company's core business, and restructure the Company's
long-term debt and trade obligations. Under provisions of the Bankruptcy Code,
the Company has the exclusive right to file a plan at any time during the 120
day period following the Petition Date, which time period may be extended by the
Bankruptcy Court at the Company's request.
8
<PAGE>
3. 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 earnings per share ("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 nine-month periods ended December 25, 1998, and December
26, 1997, respectively. Prospectively, the number of shares utilized in the
calculation of EPS could change significantly based upon the yet-to-be presented
plan of reorganization.
4. ACCOUNTS RECEIVABLE
Accounts receivable are reflected net of allowances for doubtful accounts
of $5,686 and $5,473 at December 25, 1998 and March 31, 1998, respectively.
5. INVENTORIES
Inventories consist of the following:
DECEMBER 25, MARCH 31,
1998 1998
----------- ----------
Raw materials $ 25,150 $ 31,000
Work-in-process 10,832 11,539
Finished goods 30,084 31,112
----------- ----------
Total $ 66,066 $ 73,651
=========== ==========
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 December 25, 1998. The amounts at March
31, 1998 are based upon the audited balance sheet at that date.
9
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consist of the
following components:
December 25, March 31,
1998 1998
----------- ---------
Land $ 4,227 $ 4,312
Building and improvements 19,186 19,413
Machinery and equipment 84,573 80,194
----------- ---------
107,986 103,919
Less accumulated depreciation (44,938) (37,267)
----------- ---------
Total $ 63,048 $ 66,652
=========== =========
Depreciation expense amounted to $2,614 and $2,855 for the three-month
periods and $7,524 and $8,284 for the nine-month periods ended December 25,
1998 and December 26, 1997, respectively.
7. INTANGIBLE ASSETS
Intangible assets consist of amounts allocated as a result of purchases of
existing businesses and are summarized as follows:
Amortization December 25, March 31,
Period 1998 1998
------------ ----------- ----------
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 (7,260) (6,169)
------- -------
Total $ 11,621 $ 12,712
======= =======
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.
10
<PAGE>
8. PREPETITION LIABILITIES
Prepetition liabilities at December 25, 1998 include the following:
Subject to
Compromise
----------
Accounts payable $ 18,611
Compensation related liabilities 2,559
Other accrued liabilities 15,432
Long-term debt 96,000
Other long-term liabilities 1,614
----------
Total $ 134,216
==========
The Company anticipates that it will not be required to pay post petition
interest on certain of its prepetition debt obligations, and accordingly
effective with the filing, discontinued accruing interest on those debt
obligations. Contractual interest not accrued and not reflected in the
Consolidated Statement of Operations with respect to those obligations amounted
to $1,528 during the three months and nine months ended December 25, 1998.
9. LONG-TERM DEBT
The filing of the petition under Chapter 11 of the Bankruptcy Code
constituted default under the Company's Second Amended and Restated Credit
Agreement, which provided revolving credit facilities comprised of a $100
million U.S. facility, a 50,000 CHF Swiss facility and a 6,275 (Pounds) U.K.
facility. Amounts borrowed and outstanding under the U.S. facility have been
classified for balance sheet presentation purposes as prepetition liabilities
subject to compromise (see Note 8).
The Company has obtained debtor-in-possession financing from Norwest
Business Credit, Inc. which provides for a $7,500 DIP credit facility, in the
form of a line of credit, from which revolving advances may be made on an as
needed basis, not to exceed the Company's borrowing base (as defined) to help
fund the Company's working capital requirements as it reorganizes under the
Bankruptcy Code. The facility bears interest at a floating rate which is
currently at 9.75%. The facility provides for various affirmative and negative
covenants that among other things restrict indebtedness, liens, investments,
dividend payment, sale or transfer of assets, suspension of business operations
and consolidation or merger of the business. Various financial covenants also
exist which include the maintenance of a minimum EBITDAR (as defined) and net
income and a maximum number of days in inventory. Additionally, the Company is
restricted to $400 of capital expenditures for the remainder of fiscal 1999, and
to $300 per fiscal quarter thereafter. The facility is collatoralized by
substantially all of the assets of Nu-kote and its U.S. subsidiaries.
11
<PAGE>
10. INCOME TAXES
Following are the approximate effective blended tax rates for significant
jurisdictions:
North America 40%
Switzerland 27%
Germany 56%
United Kingdom 33%
For the three months and nine months ended December 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 three months and nine months ended
December 26, 1997, provisions in the amount of $785 and $1,127, respectively,
were made for income taxes in certain foreign jurisdictions.
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed consolidating balance sheets as of December 25,
1998, and the condensed consolidated statements of operations and cash flows for
the three months then ended, are presented for those entities that are included
in the Bankruptcy Proceedings and those that are not.
Condensed Consolidating Balance Sheets
DEBTOR-IN-
POSSESSION OTHER
ENTITIES ENTITIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ -----------
Current assets $ 62,040 $ 70,398 $ - $ 132,438
Intercompany with
affiliates 594,947 12,380 (607,327) -
Property, plant and
equipment, net 24,936 38,112 - 63,048
Other long-term
assets 11,960 1,343 13,303
Investment in
subsidiaries 107,655 - (107,655) -
--------- ---------- ------------ -----------
Total assets $ 801,538 $ 122,233 $ (714,982) $ 208,789
========= ========== ============ ===========
DIP facility advances $ 7,500 $ - $ - $ 7,500
Bank loans and
current portion
of long-term debt - 46,665 - 46,665
Other current
liabilities 740 36,607 - 37,347
Intercompany with
affiliates 601,501 5,826 (607,327) -
Other long-term
liabilities 3,419 12,532 - 15,951
Pre-petition liabilities
subject to compromise 134,216 - - 134,216
Shareholder's equity 54,162 20,603 (107,655) (32,890)
--------- ---------- ------------ -----------
Total liabilities
and Shareholder's
equity $ 801,538 $ 122,233 $ (714,982) $ 208,789
========= ========== ============ ===========
12
<PAGE>
Condensed Consolidating Statements of Operations
<TABLE>
<CAPTION>
Debtor-in-Possession
Entities Other Entities Eliminations Consolidated
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 25,192 $ 34,005 $ $ 59,197
Net sales to affiliates 204 1,079 (1,283) -
Cost of sales 22,456 26,485 48,941
Cost of sales sold to affiliates 204 1,079 (1,283) -
-------------- ------------- ------------- ------------
Gross margin 2,736 7,520 - 10,256
Selling, general and administrative
and research and development expenses 4,613 10,643 15,256
Restructuring expense 221 - 221
-------------- ------------- ------------- ------------
Operating loss (2,098) (3,123) (5,221)
Interest expense 3,028 660 3,688
Other expense items, net (122) 753 631
-------------- ------------- ------------- ------------
Loss before reorganization items and income taxes (5,004) (4,536) (9,540)
Reorganization items 255 - - 255
-------------- ------------- ------------- ------------
Loss before income taxes (5,259) (4,536) (9,795)
Provision for income taxes - - -
-------------- ------------- ------------- ------------
Net loss $ (5,259) $ (4,536) $ - $ (9,795)
============== ============= ============= ============
Condensed Consolidating Statements of Cash Flows
Debtor-in-Possession
Entities Other Entities Eliminations Consolidated
----------------- ---------------- ---------------- ---------------
Cash flows from operating activities:
Net loss before reorganization items $ (5,004) $ (4,536) $ $ (9,540)
Adjustments to reconcile net loss to net
cash provided by operating activities 911 3,113 4,024
Noncash items and changes in
operating assets and liabilities 4,535 2,929 - 7,464
Cash paid for reorganization items (570) - - (570)
-------------- ------------- ------------- ------------
Net cash flow provided by (used in)
operating activities (128) 1,506 - 1,378
Cash flows from investing activities:
Capital expenditures (493) 445 - (48)
-------------- ------------- ------------- ------------
Net cash provided by (used in) investing
activities (493) 445 - (48)
Cash flows from financing activities:
Bank loans, (repayments) net 7,500 (27) - 7,473
-------------- ------------- ------------- ------------
Net cash provided by (used in) financing
activities 7,500 (27) - 7,473
Effect of exchange rate changes on cash - (1,620) - (1,620)
-------------- ------------- ------------- ------------
Net increase in cash and cash equivalents 6,879 304 - 7,183
Cash and cash equivalents at beginning of period 98 4,316 - 4,414
-------------- ------------- ------------- ------------
Cash and cash equivalents at end of period $ 6,977 $ 4,620 $ - $ 11,597
============== ============= ============= ============
</TABLE>
13
<PAGE>
12. CONTINGENCIES
On January 23, 1998 a suit seeking class action status was filed by a
shareholder against Nu-kote, its current directors, certain of its current
officers and certain former officers and directors in the United States District
Court for the Northern District of Texas, Dallas Division, case number 3-
98CV0161-T. The complaint alleges that Nu-kote and the specified individuals
violated the Securities Exchange Act of 1934 by knowingly making false and
misleading statements about Nu-kote's business and issued false and misleading
financial statements between July 28, 1995 and May 29, 1997. The plaintiff is
seeking, on behalf of the purported class, compensatory damages and
reimbursement of fees and expenses. Nu-kote denies the plaintiff's allegations
and intends to vigorously defend the suit.
Three original equipment manufacturers ("OEMs") filed lawsuits against Nu-kote
International, Inc. ("NII") alleging that certain NII ink jet replacement
cartridges, refill inks and packaging infringe their trademarks, tradedress and
patents and alleging, among other things, unfair competition and misleading
representations. The plaintiffs are seeking injunctive relief, monetary
damages, and court costs and attorney's fees. The complaint in one of the cases
has been amended to name Nu-kote and Pelikan Produktions AG as defendants. None
of the lawsuits have been concluded or settled and in management's opinion the
potential losses related to these cases are not reasonably 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 Nu-kote 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, Nu-kote received a letter from the licensor of the Pelikan
trademark license purporting to terminate this license based upon the failure to
cure alleged defaults under the license. Nu-kote believes that, to the extent
there were any breaches under the license, they were properly cured and it is
unaware of any grounds that could allow the licensor to terminate such license.
In addition, the Company is involved in various routine legal matters.
All pending litigation matters were subject to the automatic stay which
resulted when the Company and certain of its U.S. operating subsidiaries filed
voluntary petitions for protection under Chapter 11 of the U.S. Bankruptcy Code.
Subsequent to the Bankruptcy Filing, the court lifted the stay with respect to
one of the OEM lawsuits and a trial date has been set for May 1999.
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.
14
<PAGE>
In connection with Nu-kote's acquisition of the Office Supplies Division and
the International Business Forms Division of Unisys Corporation ("Unisys"),
Unisys agreed to retain all liabilities resulting from or arising out of any
environmental conditions existing on or before January 16, 1987 at the Company's
Rochester 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 Nu-kote's acquisition of Pelikan, the seller, Pelikan Holding
AG, agreed to indemnify Nu-kote for certain pre-closing environmental
liabilities. The Company has found environmental contamination at former
Pelikan facilities in Derry, Pennsylvania and Franklin, Tennessee, and has
asserted a claim for indemnification. As a result of the indemnification from
Unisys and Pelikan, in the opinion of management, the ultimate cost to resolve
these environmental matters will not have a material adverse effect on the
Company's financial position, results of future operations or liquidity.
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.
13. RESTRUCTURING EXPENSE
Restructuring expenses incurred in the three months and nine months ended
December 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.
15
<PAGE>
Relative to the 1998 Restructuring, the Company has accruals remaining at
December 25, 1998 of $119 related to lease cancellations.
Activity related to accrued restructuring costs for the 1997 Restructuring
during the three months and nine months ended December 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 December 26, 1997:
Severance $ 1,153 $ 506 $ 134 $ 781
Lease cancellations 430 - - 430
Facility maintenance and other 233 354 354 233
----------- ----------- ----------- ------------
$ 1,816 $ 860 $ 488 $ 1,444
=========== =========== =========== ============
AMOUNT AMOUNT
ACCRUED AT AMOUNT ACCRUED AT
BEGINNING PAID IN ADDITIONAL END OF
DESCRIPTION OF RESTRUCTURING EXPENSE OF QUARTER PERIOD PROVISION PERIOD
--------------------------------------------------- ----------- ----------- ----------- ------------
Nine months ended December 26, 1997:
Severance $ 1,204 $ 1,961 $ 1,538 $ 781
Lease cancellations 430 - - 430
Facility maintenance and other 247 1,781 1,767 233
----------- ----------- ----------- ------------
$ 1,881 $ 3,742 $ 3,305 $ 1,444
=========== =========== =========== ============
</TABLE>
The Company estimates that an additional $325 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.
Additionally, the Company anticipates that in conjunction with the
implementation of its yet-to-be presented reorganization plan, additional
reorganization costs will be incurred, the amount of which is not presently
determinable.
14. SELECTED FINANCIAL DATA
Shown below is selected financial data for the three months and nine months
ended December 25, 1998 and December 26, 1997 for the Company's North American,
European and other operations.
<TABLE>
<CAPTION>
NORTH EUROPEAN CORPORATE
QUARTER ENDED DECEMBER 25, 1998 AMERICA OPERATIONS (A) & OTHER (B) CONSOLIDATED
------------------------------------- ------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 25,192 $ 34,005 $ - $ 59,197
Gross margin 2,736 7,520 - 10,256
Operating loss (1,230) (3,123) (868) (5,221)
Quarter Ended December 26, 1997
-------------------------------------
Income Statement Data:
Net sales $ 33,649 $ 37,106 $ - $ 70,755
Gross margin 2,282 7,333 - 9,615
Operating loss (c) (2,183) (2,326) (2,027) (6,536)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NORTH EUROPEAN CORPORATE
NINE MONTHS ENDED DECEMBER 25, 1998 AMERICA OPERATIONS (A) & OTHER (B) CONSOLIDATED
------------------------------------- ------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 83,703 $ 94,761 $ - $ 178,464
Gross margin 12,177 20,117 - 32,294
Operating income (loss)(c) 900 (7,685) (5,079) (11,864)
Balance Sheet Data:
Current assets $ 60,103 $ 70,396 $ 1,939 $ 132,438
Current liabilities 8,729 83,271 (488) 91,512
Long-term assets 26,994 39,455 9,902 76,351
Long-term liabilities 130,695 12,533 6,939 150,167
Equity (deficit) (52,327) 14,047 5,390 (32,890)
Nine Months Ended December 26, 1997
------------------------------------------
Income Statement Data:
Net sales $ 115,130 $ 108,040 $ - $ 223,170
Gross margin 14,273 23,673 - 37,946
Operating loss (c) (1,147) (6,271) (5,996) (13,414)
</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) Operating income (loss), for purposes of this presentation, excludes the
gain of $462 on the sale of the Colombian subsidiary and the provision for
the loss of $4,061 on the sale of the North American Operations Components
business.
15. 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.
16. NEW ACCOUNTING STANDARDS
During 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivatives and Hedging Activities" was 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 statements but has not yet determined the full impact.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DEBTOR-IN POSSESSION-NOTE 2)
RESULTS OF OPERATIONS
Quarter ended December 25, 1998 Compared to Quarter ended December 26, 1997
Net sales for the quarter ended December 25, 1998 were $59.2 million, a
decline of $11.6 million or 16.3% over the quarter ended December 26, 1997. For
the quarter ended December 25, 1998, sales by North American entities were $25.2
million, a decline of $8.4 million or 25.0%, as compared to sales in the
previous year period. Sales by European entities were $34.0 million, a decline
of $3.2 million or 8.6%, as compared to the previous year period. Nearly all of
the decline in sales by the North American entities was due to a $5.1 million,
or 33.3%, decline in ribbon sales and a $2.7 million, or 48.2% decline in the
sale of toner products. Ribbon sales declines are due to the continued shift of
the market from impact printing devices to non-impact printing devices. Toner
sales declines are due to quality and delivery performance issues in the
previous fiscal year. Such performance issues have been resolved and the
Company does not expect to see further deterioration. In Europe, a positive
effect of $0.8 million due to exchange rate fluctuation was offset by a decline
in sales volume across all product lines.
Worldwide sales of non-impact supplies accounted for 56.8% of total sales
for the quarter ended December 25, 1998, compared to 58.8% of total sales in the
quarter ended December 26, 1997.
In North America, sales of non-impact supplies amounted to $15.1 million
in the quarter ended December 25, 1998, down $3.2 million or 17.5% as compared
to the previous year period, and represented 59.9% 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 $18.6 million in the
quarter ended December 25, 1998 as compared to $23.1 million in the previous
year period.
Cost of sales were $48.9 million (82.7% of net sales) for the quarter
ended December 25, 1998, compared to $61.1 million (86.4% 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 December 25, 1998, research and development
expenses amounted to $1.5 million, (2.5% of net sales), as compared to $1.5
million (2.1% of net sales) in the previous year period.
Selling, general and administrative expenses were $13.8 million in the
quarter ended December 25, 1998 as compared to $14.2 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.
Interest expense for the quarter ended December 25, 1998 was $3.7
million, compared to $3.5 million for the previous year period. Included in
interest expense for the quarter ended December 25, 1998 was $1.1 million of
deferred loan cost amortization, compared to $0.2 million for the previous year
period. These deferred loan costs have been fully amortized at December 25,
1998.
18
<PAGE>
The Company anticipates that it will not be required to pay post-petition
interest on certain of its pre-petition debt obligation, and accordingly,
effective with the filing, discontinued accruing interest on those debt
obligations. Contractual interest not accrued and not reflected in the
Consolidated Statements of Operations with respect to those obligations amounted
to $1.5 million during the three months ended December 25, 1998.
For the quarter ended December 25, 1998, the Company recognized a net
loss of $9.8 million, which was favorable to the net loss of $15.0 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
non-recurring loss of $4.1 million realized in the prior year relative to the
sale of the Company's Components business.
NINE MONTHS ENDED DECEMBER 25, 1998 COMPARED TO NINE MONTHS ENDED DECEMBER 26,
1997
Net sales for the nine months ended December 25, 1998 were $178.5
million, a decline of $44.7 million (20.0%) over the nine months ended December
26, 1997. For the nine months ended December 25, 1998, sales by North American
entities were $83.7 million, a decline of $31.4 million or 27.3%, as compared to
sales in the previous year period. Sales by European entities declined $13.4
million, or 12.4%, as compared to the previous year period and were $94.8
million. Sales of toner products in North America declined $9.6 million or 48.0%
as a result of quality and delivery performance issues in the previous fiscal
year. Such performance issues have been resolved and the Company does not expect
to see further deterioration. Sales of impact supplies in North America declined
$14.7 million from the previous year period due to the continued shift of the
market from impact printing devices to non-impact printing devices. Sales of
laser cartridges in North America declined by $4.2 million as compared to the
previous year period. This loss in sales is due primarily to the Company's sale
of its components line in December of 1997. North American sales of inkjet
products declined $2.4 million as compared to the previous year period due to
the lack of sell-through of certain of the Company's products introduced in
fiscal year 1997 and fiscal year 1998. The decline in sales in Europe was due
largely to a decline in sales of non-impact products of $16.8 million which
offset an increase in impact sales of $5.5 million. The decline in sales in
Europe was due largely to continued price pressures from competition as well as
some major customers not attaining their own financial goals.
Worldwide sales of non-impact supplies accounted for approximately 55.9%
of total sales for the nine months ended December 25, 1998, compared to 59.7% of
total sales in the nine months ended December 26, 1997.
In North America, sales of non-impact supplies amounted to $47.5 million
in the nine months ended December 25, 1998, down $16.6 million or 25.9% as
compared to the previous year period, and represented 56.8% of total North
American sales. Sales of non-impact supplies in Europe were $52.3 million on
the current period versus $69.1 million in the prior year period.
Cost of sales were $146.2 million (82.0% of net sales) for the nine
months ended December 25, 1998, compared to $185.2 million (83.0% of net sales)
in the previous year period.
For the nine months ended December 25, 1998, research and development
expenses amounted to $4.3 million, (2.4% of net sales), as compared to $5.1
million (2.3% 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 $39.5 million in the
nine months ended December 25, 1998 as compared to $42.9 million in the previous
year period. The benefits of a
19
<PAGE>
worldwide expense reduction program, implemented over the past year as well as
variable costs associated with the overall decline in sales resulted in this
$3.4 million reduction.
Interest expense for the current fiscal period was $13.7 million,
compared to $10.1 million for the previous year period. Included in interest
expense for the current fiscal period was $3.4 million of deferred loan cost
amortization, compared to $0.7 million for the previous year period. These
deferred loan costs have been fully amortized at December 25, 1998. The Company
anticipates that it will not be required to pay post-petition interest on
certain of its pre-petition debt obligations, and accordingly, effective with
the filing, discontinued accruing interest on those debt obligations.
Contractual interest not accrued and not reflected in the Consolidated
Statements of Operations with respect to those obligations amounts to $1.5
million during the nine months ended December 25, 1998.
For the nine months ended December 25, 1998, the company recognized a net
loss of $27.1 million, compared to the net loss of $31.5 million realized in the
previous year period. This improvement on substantially lower sales is
attributable to the following favorable items: (1) reduced selling, general and
administrative spending, and research and development expenses; (2)
restructuring costs of $3.3 million incurred in the prior year period as
compared to $.4 million in the current year period; (3) the non-recurring
extraordinary loss of $2.5 million realized in the second quarter of the prior
year relative to the early extinguishment of debt; and (4) the loss of $4.1
million realized in the prior year relative to the sale of the Company's
components business. The above were partially offset by greater interest costs
incurred during the nine months ended December 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 formerly, the Company entered into hedging arrangements to manage
the company's exposure to currency fluctuations. The Company realized exchange
gains of $0.5 million in the nine months ended December 25, 1998 as compared to
$0.2 million in exchange losses in the previous year period.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended December 25, 1998 cash used by operating
activities amounted to $1.7 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 and computer hardware were $4.8 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 its Debtor-in-Possession Credit Agreements previously
described and open account trade terms from vendors are the primary sources of
liquidity and capital for the Company.
20
<PAGE>
NEW ACCOUNTING STANDARDS
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 statements 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 $1.2 million for
year 2000 compliance, the majority of which 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.
21
<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 had implemented a new system to address the changes required and
believes that all areas of the firm were successful in this implementation
process 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.
22
<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 12 of Notes to
Consolidated Financial Statements for the three month and nine month periods
ended December 25, 1998 and December 26, 1997 included elsewhere in this report.
On November 6, 1998, the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code for the
Middle District of Tennessee in Nashville (Case No. 98-10600-10606-KL3-11). The
Chapter 11 proceedings are being jointly administered, with the Company managing
the business in the ordinary course, as a debtor-in-possession under the
supervision of the Bankruptcy Court.
ITEM 3- DEFAULTS UPON SENIOR SECURITIES
The filing of the petition under Chapter 11 of the Bankruptcy Code resulted in
an occurrence of default under the Second Amended and Restated Credit Agreement
of the Company with various lending banks. The Company has entered into a $7.5
million revolving line of credit facility with Norwest Business Credit, Inc.
which will provide debtor-in-possession financing while the Company reorganizes
under the Bankruptcy Code.
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 December 25, 1998.
23
<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 February 16, 1999 /s/ Patrick E. Howard
----------------- ----------------------
Patrick E. Howard
Chief Executive Officer
Date February 16, 1999 /s/ Phillip L. Theodore
----------------- ------------------------
Phillip L. Theodore
Senior Vice President,
Chief Financial Officer, Treasurer
and Assistant Secretary
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> SEP-26-1998
<PERIOD-END> DEC-25-1998
<CASH> 11,597
<SECURITIES> 0
<RECEIVABLES> 43,694
<ALLOWANCES> 5,686
<INVENTORY> 66,066
<CURRENT-ASSETS> 132,438
<PP&E> 63,048
<DEPRECIATION> 2,614
<TOTAL-ASSETS> 208,789
<CURRENT-LIABILITIES> 91,512
<BONDS> 0
0
0
<COMMON> 223
<OTHER-SE> (33,113)
<TOTAL-LIABILITY-AND-EQUITY> 208,789
<SALES> 59,197
<TOTAL-REVENUES> 59,197
<CGS> 48,941
<TOTAL-COSTS> 15,477
<OTHER-EXPENSES> 631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,688
<INCOME-PRETAX> (9,795)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,795)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
