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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number 0-20287
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NU-KOTE HOLDING, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-1296153
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Beasley Drive, Franklin, Tennessee 37064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 794-9000
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.01 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
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(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 17, 2000 there were 21,775,302 shares of Class A Common
Stock outstanding (with one Preferred Share Right attached to each) and the
aggregate market value of the voting stock held by non-affiliates of the
registrant was $626,467. Solely for purposes of computing the aggregate market
value of the Class A Common Stock, the share ownership of all directors and
executive officers, and their family members, and of all persons holding more
that 10% of the Registrant's outstanding shares has been excluded.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ITEM 1. BUSINESS
GENERAL
Nu-kote Holding, Inc. (the "Company" or "Registrant"), through its
wholly owned subsidiaries, is a manufacturer and distributor of impact and
non-impact imaging supplies for office and home printing devices. The Registrant
acquired International Communication Materials, Inc. ("ICMI") in February 1992
(the "ICMI Acquisition"), Future Graphics, Inc. ("Future Graphics") in February
1993 (the "Future Graphics Acquisition"), and the worldwide hardcopy supplies
business (the "Pelikan Hardcopy Division") of Pelikan Holding AG of Zug,
Switzerland ("Pelikan") in February 1995 (the "Pelikan Acquisition"). Also, in
July 1995, the Company acquired certain assets and assumed certain liabilities
from the bankruptcy estate of Jarfalla Industry Competence Center, AB. The
assets were contributed to, and the liabilities assumed by, Modular Ink
Technology AB ("MIT"). ICMI is an independent manufacturer of toner for
non-impact printers and copiers and Future Graphics is a remanufacturer of laser
printer cartridges. Both are located in the United States. The Company's Pelikan
Hardcopy Division is both a European and U.S. manufacturer of supplies for
impact and non-impact printers. In December 1997, the Company disposed of the
Future Graphics cartridge components division. As part of its ongoing corporate
restructuring, on March 31, 1999, the Company sold MIT. Additionally, in
September, 1999, Nu-kote International, Inc., a wholly owned subsidiary of the
Company, sold certain of its subsidiaries to Pelikan Hardcopy Europe Limited, a
Scottish corporation (the "Pelikan Disposition"). The subsidiaries sold include
Pelikan Produktions A.G., Pelikan Scotland Limited, Greif-Werke GmbH, Pelikan
Hardcopy Asia Pacific Limited, and Dongguan Pelikan Hardcopy Limited (See Note
4).
On November 6, 1998 (the "Petition Date"), the Company and six of its
subsidiaries filed for protection under Chapter 11 of Title II of the United
States Code in the United States Bankruptcy Court for the Middle District of
Tennessee. The Company sought protection in part due to a historical
proliferation of customer accounts, products, and packaging which in retrospect
generated relatively little unit volume, were marginally profitable and resulted
in unwarranted infrastructure cost. A series of strategically sound,
conceptually correct but disappointing acquisitions also contributed to the
decision to seek bankruptcy protection. However, primary among the reasons for
the filing of the bankruptcy was the Company's worsening financial condition and
need for additional financing and to recapitalize. This was in large part due to
the continued litigation between Nu-kote International, Inc. ("International")
and the Hewlett-Packard Company ("HP"), Seiko-Epson Corporation, and Epson
America, Inc. (collectively "Epson"), Canon Computer Systems, Inc., Canon USA,
Inc., and Canon Inc, collectively the OEM's. See "Item 3 - Legal Proceedings",
below. Additionally, there was a negative cumulative effect on the Company's
cash position of customers taking rebates in the fall of 1998. Historically, in
the Company's business, certain customers were entitled to rebates based on
their purchases throughout the calendar year. Immediately prior to the Petition
Date, the Company's cash situation became critical due to an increase in COD
requirements imposed by vendors, cash requirements incident to servicing
continuing sales, and certain customers setting-off their rebate requirements
imposed by vendors against receivables owed to the Company. Nu-kote was further
concerned that if default under its existing credit facilities occurred, its
lenders would attempt to foreclose on the stock of the Company's subsidiaries.
Faced with the litigation with the above-mentioned OEM's, the mounting
prospective costs of a debt workout and restructuring, and the threat of
foreclosure by its lenders, all compounded by the rebate issue and the impending
interest payment to the Lenders, the Company determined that it had no
alternative but to file for protection under Chapter 11 of the Bankruptcy Code.
On March 2, 2000, Nu-kote, its secured lenders and the official
committees for Nu-kote's unsecured creditors filed a Joint Plan of
Reorganization for Nu-kote (the "Plan") and a Second Amended Disclosure
Statement for Second Amended Joint Plan of Reorganization for Nu-kote (the
"Disclosure Statement"). Under the terms of the Plan and a separate motion, a
bidding procedure was established pursuant to which interested parties may make
a bid for the stock or assets of Nu-kote. An initial bid has been submitted by
Richmont Capital Partners I, L.P ("Richmont"). Richmont is an affiliate of
Nu-kote. The deadline for submitting bids passed without any other party
submitting a bid. The Plan provides for (i) payment to the secured lenders of
$20,550,000, (ii) payment to the unsecured creditors of $600,000, (iii) payment
of priority and administrative claims of up to $3,000,000, and (iv) the
assumption of certain other debts outlined in the Plan, contingent upon certain
conditions being satisfied prior to closing. The Plan also
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provides for mutual releases between and among Nu-kote, its secured lenders, the
committees and Richmont and is subject to certain conditions being satisfied,
including the resolution of litigation with certain printer manufacturers and
the resolution of administrative claims at a cost of no more than $3,000,000. As
part of the Plan, the existing stock of Nu-kote, will be extinguished and
Nu-kote's stockholders will receive nothing in respect of their stockholdings.
The Registrant's operations involve a single industry segment - the
manufacture and distribution of typewriter and printer ribbons, thermal fax
ribbons, cartridges and toners for laser printers, facsimile machines and
copiers, cartridges and ink for ink jet printers, specialty papers, calculator
ink rollers, and carbon paper. For financial information relating to foreign and
domestic operations, see Note 17 of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS."
The Registrant's principal executive offices are located at 200 Beasley
Drive, Franklin, Tennessee 37064, telephone number (615) 794-9000. All
references herein to the "Company" or "Registrant" include the Company and its
subsidiaries, unless the context otherwise requires.
PRODUCTS
Prior to the Pelikan Disposition, the Registrant manufactured and/or
distributed over 650 products in more than 1,600 different packaging
configurations through its North American operations and over 1,400 products in
more than 4,300 different packaging configurations through its European
operations. Additionally, the Registrant introduced 31 new products into the
North American market and 16 new products into the European market in fiscal
1999, all of which were non-impact products. The Registrant discontinued selling
approximately 1,400 packaging configurations in the U.S. and 500 in Europe in
fiscal 1999. The Registrant's products are used in over 30,000 different models
of impact and non-impact printing mechanisms. Impact printer products include
printer, typewriter, point of sale and calculator ribbons, calculator and cash
register ink rollers, and other supplies for use in impact printing mechanisms.
The Registrant is a manufacturer and distributor of magnetic ink character
recognition ("MICR") ribbons for check encoding printers. The Registrant's
non-impact printing products include monochrome and color toner for laser
printers, copiers, and plain paper facsimile machines, supplies for ink jet
printers and facsimile machines, and remanufactured cartridges for laser
printers. In addition, the Registrant manufactures and/or distributes thermal
wax products for bar code and facsimile machines, and specialty papers and films
for use in ink jet printers.
The Registrant also manufactures and distributes a variety of
compatible ink jet cartridges for use in Canon, Epson and HP ink jet printers,
as well as a line of HP compatible cartridge refill kits designed for the home
or small business user. The Registrant offers an inkjet cartridge
remanufacturing service similar to the one employed for remanufactured laser
toner cartridges. The Registrant also sells intermediate products such as rolls
of coated film and containers of bulk laser and copier toner.
MARKETS AND DISTRIBUTION
The Registrant currently sells its products directly to wholesale,
retail and manufacturing markets under the Nu-kote(R), Pelikan(R), and ICMI(R)
brand names, and also to original equipment manufacturers ("OEMs") and
distributors for resale under their brand names or private labels. Nu-kote(R)
and Pelikan(R) branded products are distributed through major office supply
marketing channels, including wholesale distributors, office products dealers,
direct mail catalogs, office supply "superstores", information processing
specialists, value added resellers and mass market retailers. ICMI(R) brand
laser toners are marketed to distributors serving the laser cartridge
remanufacturing market. Nu-kote(R) and Pelikan(R) brand products are compatible
with substantially all impact printing devices currently in use and the
Registrant's laser products are compatible with over 90% of the low to mid-range
laser printers now on the market. OEM products are manufactured to the OEMs
specifications and sold both with the original hardware and in the aftermarket.
The Registrant sells its products subject to limited warranties. Historically,
product liability and warranty claims have been insignificant.
The market for supplies for typewriters and other impact printers has
been declining in recent years and is expected to continue to decline as
non-impact printing devices become more popular and
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replace many of the impact printers now in service. During fiscal 1999, the
Registrant experienced a decline of approximately 15.9% in its sales from impact
products. While the Registrant expects the market for supplies for typewriters
and other impact printers to continue to decline as a whole, the Registrant
believes there will continue to be an important market for its ribbon products
for the foreseeable future. The selling prices for the Registrant's impact
products have come under pressure as competitors have reduced prices in an
attempt to preserve their portion of a declining market.
MATERIALS
The principal raw materials used in the production of the Registrant's
impact and non-impact products are polymer film and fabric, packaging materials,
polypropylene pellets, wax, carbon and ink. These materials generally are
readily available. The Registrant has not historically experienced difficulties
obtaining an adequate supply of raw materials from outside sources and does not
currently anticipate that it will experience any such shortage in the
foreseeable future. The Registrant obtains certain materials from single
suppliers, but believes that such supplies could be obtained from alternative
sources if required without creating any material shortage for the Registrant.
To a large extent, the Registrant relies on its ability to obtain used
laser printer cartridges and ink jet heads for remanufacturing. While used
cartridges and ink jet heads are currently readily available, potential entry
into the markets for such products by OEMs could adversely affect the
Registrant's ability to obtain used cartridges or ink jet heads for
remanufacturing.
CUSTOMERS
No one customer accounted for more than 10% of the Registrant's sales
in fiscal 1999. Order backlogs were $17.7 million and $29.4 million as of March
31, 1999 and March 31, 1998, respectively and are anticipated to be satisfied
within the succeeding fiscal year.
BUSINESS STRATEGY
The Registrant intends to maintain its current market position in the
impact and non-impact printer supplies market by continuing to capitalize on its
quality reputation, research and development capabilities, customer service and
marketing innovations, as well as its ability to offer wholesalers, catalog
merchandisers and retailers a complete line of impact and non-impact printing
supplies ("one-stop shopping").
COMPETITION
The printing supplies market is extremely competitive. In both the
impact and non-impact markets, the Registrant's biggest competitors are the
OEMs, most of which are substantially larger and have greater financial
resources than the Registrant. In the impact supplies business, some OEMs
manufacture their own ribbon products. Other OEMs buy ribbons from outside
suppliers. In addition, there are currently estimated to be over 100 independent
ribbon manufacturers in the United States and more than 200 worldwide, ranging
from small local producers to national and international companies.
OEMs currently dominate the market for the majority of toner products
and ink jet supplies. However, the market for compatible toner supplies is still
developing, and there are currently several independent competitors in this
market. The willingness of OEMs to offer ink jet products at very low prices,
and the possibility of substantial price reductions by one or more OEMs, could
have a material adverse effect on the portion of the Registrant's business
affected thereby. The remanufactured laser printer cartridge market and the
cartridge remanufacturing and refilling market have historically consisted of
numerous small independent producers. Recently, however, various OEMs have
entered these markets resulting in a significant increase in competition.
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TRADEMARK, PATENTS AND LICENSES
The NU-KOTE trademark is registered in the United States and many other
countries. The ICMI trademark is also registered in the United States and is
likewise registered in several other countries. The Company also holds an
exclusive, fifty-year, royalty free, fully paid up, U.S. license, directly and
through its subsidiaries, to use the "PELIKAN" name and /or trademark and
Pelikan BIRD LOGO. This agreement is maintained after the sale of the Pelikan
Produktions AG, (which closed September 30, 1999) and will encompass the U.S.,
Canadian and Mexican geographic territories. The Company considers the NU-KOTE
and ICMI trademarks material to its business. As of August 31, 1999, the Company
holds 29 patents in the United States and numerous foreign equivalents. In
addition, the Company has approximately 18 U.S. patent applications pending. All
of such patents and applications are for products or production methods.
The Company has obtained licenses to use certain intellectual
property rights of other companies, including a royalty free, fully paid-up,
non-exclusive, non-cancelable, U.S. license, directly and through its
subsidiaries, to over 40 U.S. patents (plus numerous foreign equivalents) and
approximately 20 U.S. applications (plus numerous foreign equivalents) relating
to hardcopy supplies products and production methods, form Pelikan Produktions
AG, in Switzerland. This license became effective on the same date as the
closing of the sale of the Pelikan business in Europe, September 30, 1999.
RESEARCH AND DEVELOPMENT
The Registrant incurred $5.6 million, $6.6 million, and $9.6 million in
research and development costs in fiscal years 1999, 1998, and 1997,
respectively. These costs are primarily related to non-impact product research
conducted by the Registrant's European subsidiaries. The Registrant's European
subsidiaries that conducted this research and development were sold as part of
the Pelikan Disposition. The Registrant expects to incur approximately $2.0
million in fiscal 2000 in research and development activities.
ENVIRONMENTAL AND REGULATORY MATTERS
The Registrant is subject to regulation at the federal, state and local
levels, as well as outside of the U.S., including, in particular, regulations
relating to environmental matters. Such regulations are often complex and are
subject to change. The Registrant is required to obtain permits from a number of
governmental agencies in order to conduct various aspects of its business. Such
permits are subject to modification and revocation, which could impair the
Registrant's ability to conduct its business in the manner and at the places it
is presently conducted. Regulatory or legislative changes may cause future
increases in the Registrant's operating costs or otherwise affect its
operations.
In connection with the acquisition by the Registrant in 1986 of the
Worldwide Office Supplies Division and the International Business Forms Division
(the "Unisys Divisions") of Unisys Corporation ("Unisys"), Unisys agreed to
indemnify the Registrant for liabilities resulting from or arising out of any
environmental conditions existing on or before January 16, 1987 at the
Registrant's Rochester, New York facility and at facilities located in Macedon,
New York and Bardstown, Kentucky, which have been sold by the Registrant. The
New York Department of Environmental Conservation ("DEC"), with respect to the
Rochester and Macedon facilities, and the Kentucky Environmental Protection
Agency, with respect to the Bardstown facility, have alleged that environmental
contamination exists at such sites. The Registrant has been advised that Unisys
is working with these state environmental agencies in connection with the
testing for and investigation of contamination and, with respect to the
Rochester and Bardstown sites, is implementing measures to complete remediation.
The Registrant has been informed that Unisys is undertaking three years of
groundwater monitoring at the Macedon facility pursuant to a consent order with
the DEC, to demonstrate that the site requires no further remediation or
monitoring. As a result of the indemnification from Unisys, in the opinion of
the Registrant's management, the ultimate cost to resolve these environmental
matters will not have a material adverse effect on the Registrant's financial
position, results of future operations or liquidity.
In connection with the Pelikan Acquisition, Pelikan agreed to indemnify
the Registrant for all losses, liabilities and costs resulting from or arising
out of environmental conditions existing on or prior to
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the closing on February 24, 1995 at the facilities acquired from Pelikan, such
as Registrant's Derry, Pennsylvania, Franklin, Tennessee and Turiff, Scotland
facilities. With respect to certain potential pre-closing environmental
liabilities and costs identified on a schedule agreed to by the Registrant and
Pelikan, Pelikan's liability is limited to $2.5 million, which is collateralized
by a letter of credit. Pelikan's liability for all other pre-closing
environmental liabilities and costs is unlimited in amount but expired on the
third anniversary of the closing, except as to the certain claims that were
asserted by the Registrant before the 30th day following the third anniversary
of the closing. The Registrant has undertaken limited environmental
investigations at Registrant's Derry, Pennsylvania and Franklin, Tennessee
facilities due to reports of certain environmentally suspect activities having
taken place pre-closing at those facilities. The investigation of the
environmental condition of the soil at the Derry facility detected material
contamination in excess of applicable or relevant and appropriate standards. The
investigation of the environmental condition of the soil and groundwater at the
Franklin facility also detected material contamination in excess of applicable
or relevant and appropriate standards. Registrant notified Pelikan of the
existence of the detected contamination at these sites as well as at certain
European facilities before the 30th day following the third anniversary of the
closing. With the assistance of an environmental consultant, the Company has
developed a remediation plan which estimated future cash payments for the
remediation plan of $2.5 million. These undiscounted future cash payments have
been accrued for as of March 31, 1999 since it represents the Company's best
estimate of the remediation costs, but the payments are not considered to be
fixed and reliably determinable. The Company has established a receivable, that
will be paid from the environmental escrow funds, equal to the amount of the
accrued remediation costs. The Registrant has asserted claims for
indemnification and reimbursement against Pelikan with respect to the costs of
the environmental investigations at Registrant's Derry, Pennsylvania, Franklin,
Tennessee and Turiff, Scotland facilities.
With regard to the Derry facility the Registrant has been cooperating
with the Pennsylvania Department of Environmental Protection ("PA-DEP") to
determine the minimum further investigation and remediation required to bring
this facility into compliance with Pennsylvania law and to allow the Registrant
to receive a release from further liability under Pennsylvania law. After
completion of the site characterization activities now being conducted with the
concurrence of PA-DEP, the Registrant expects to enter into an administrative
agreement for the remediation of this facility.
With regard to the Franklin facility, the Registrant has entered into a
voluntary administrative Consent Order and Agreement, Index No. 94-511, with the
Tennessee Department of Environment and Conservation ("T-DEC") to facilitate the
investigation, removal and remediation of the hazardous substances detected at
the Franklin facility in excess of applicable or relevant and appropriate
standards, and to reimburse the T-DEC for certain costs incurred by T-DEC at or
in connection with the Franklin facility. Registrant has implemented the initial
remedial investigation work plan approved by T-DEC and submitted a report
documenting the findings of that investigation and recommending certain remedial
measures. Registrant and T-DEC are in the process of negotiating, the terms of a
work plan for the remediation and/or further investigation of the site.
With regard to the Derry, Franklin and Turiff facilities, the
Registrant has not been able to estimate the potential cleanup costs with any
degree of certainty. The Registrant, nevertheless, has obtained and notified
Pelikan of very preliminary cost estimates for the cleanup associated with these
facilities. Based on the indemnification obligation of Pelikan, environmental
surveys conducted by environmental consultants in connection with the Pelikan
Acquisition, and the notice of the existence of environmental contamination
given by the Company prior to the 30th day following the third anniversary of
the closing, management of the Registrant nevertheless does not believe that any
environmental costs incurred in connection with the environmental matters
identified on the pre-closing schedule or during the limited environmental
investigations of Registrant's Derry, Franklin and Turiff facilities will have a
material impact on the Registrant's financial condition, results of operations
or liquidity.
Management of the Registrant believes that costs incurred to comply
with current environmental discharge and emission regulations will not have a
material impact on future recurring operating costs. A number of raw materials
used to manufacture toners and inks in the Pelikan Hardcopy Division's products
are subject to frequent scientific and regulatory reevaluation to determine the
potential environmental hazards, and may be subjected to changing regulations.
Management believes that in the U.S., where office
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supply "superstores" comprise a larger portion of the customer base, it is also
unlikely that it will be able to pass on to such customers future increases, if
any, in environmental compliance costs.
Federal, state and local agencies regulate the disposal, handling and
storage of waste, and air and water discharges from the Registrant's facilities.
Based on current regulations and the condition of its facilities, the Registrant
does not currently anticipate a material amount of environmental capital
expenditures in excess of the amounts for which the Company is indemnified by
third parties.
The Registrant's Secretary functioned as an environmental compliance
officer until his resignation from the Company on October 31, 1999. This person
was charged with formulating policies for the Registrant's North American
facilities to promote compliance with environmental laws. The Registrant intends
to and has initiated the process of electing a new environment compliance
officer. Over the past three years, the Registrant has taken measures to assess,
maintain and improve its regulatory environmental compliance audit of
Registrant's Franklin, Tennessee, Connellsville, Pennsylvania, Derry,
Pennsylvania and Chatsworth, California facilities. These measures also help the
Registrant to comply with its reporting and record keeping obligations under
applicable environmental laws.
The foregoing "Environmental and Regulatory Matters" section and Note
14 of "Notes to Consolidated Financial Statements", insofar as it relates to
such matters, contain various "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E
of the Securities and Exchange Act of 1934 (the "Exchange Act"), which represent
the Registrant's expectations or beliefs concerning future events, including
statements regarding estimates of the Company's liabilities associated with
identified environmental matters and the likelihood that any liability in excess
of expected indemnification payments and reserves for such matters will not
materially affect the Company's financial position or results of future
operations or liquidity. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including, without
limitation, the following: (i) the actual nature and extent of contamination, if
any, which exists at the Company's facilities, (ii) the remedial action required
by governmental agencies being different from the remedial action selected by
the Company, (iii) the cleanup level required, (iv) changes in regulatory
requirements, (v) the ability of other responsible parties, if any, to pay their
respective shares of remediation costs and meet their indemnification
obligations, and (vi) whether any insurance recoveries are available or
realized. Results actually achieved thus may differ materially from expected
results included in these and any other forward looking statements contained
herein.
EMPLOYEES
During the fiscal year ended March 31, 1999, the Registrant employed
approximately 1,600 persons worldwide. Except for approximately 70 employees who
are covered by a collective bargaining agreement with the United Steel Workers
at the Registrant's Connellsville, Pennsylvania facility, none of the
Registrant's other North American employees are represented by a labor union.
Approximately 300 of the employees at the Registrant's Turriff (Scotland), Greif
(Germany) and MIT (Sweden) facilities were also governed by various union
agreements, but these facilities have been sold and the Company no longer
employs such employees. The Registrant considers its employee relations to be
good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Registrant, their positions, offices,
ages and years of service with the Registrant (and its predecessors) are set
forth below.
<TABLE>
<CAPTION>
Years With the
Registrant and
Name of Individual Age Position(s) Held its Predecessors
- ------------------ --- ---------------- ----------------
<S> <C> <C> <C>
Patrick E. Howard 52 President, Chief Executive Officer, and Director 3
Richard A. Larsen 50 Senior Vice President, General Counsel and 4
Secretary
Phillip L. Theodore 32 Senior Vice President, Chief Financial Officer, 5
Treasurer and Assistant Secretary
</TABLE>
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Mr. Howard has been the Chief Executive Officer of the Company since
October 1998. Previously, Mr. Howard served as Chief Operating Officer and Chief
Executive Officer of the Company from February 1997 and August 1997,
respectively, until December 1997. Mr. Howard has been a director of the Company
continuously since August 1997. Mr. Howard has been the Chief Executive Officer
of the Richmont Group since January 1996. Prior to joining the Company, Mr.
Howard served as Executive Vice President of Mary Kay, Inc. from December 1985
until January 1996.
Mr. Larsen has been Senior Vice President and General Counsel of the
Registrant since June 1995 and has also been Secretary of the Company since
March 1998. Prior to joining Nu-kote, Mr. Larsen was Vice President, General
Counsel and Secretary of Harris Adacom Corporation for five years. Mr. Larsen
resigned from the Company on October 31, 1999.
Mr. Theodore has been Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary since March 1998. He joined the Registrant in
June 1994 to serve as Controller of the North American Operations. Prior to
joining the Registrant, Mr. Theodore was a manager at Coopers & Lybrand L.L.P.
and worked in the business assurance group where he specialized in mergers and
acquisitions. Mr. Theodore is a Certified Public Accountant.
CERTAIN SIGNIFICANT EMPLOYEES
The following individuals are not Executive Officers of the Registrant,
but have significant management roles.
<TABLE>
<CAPTION>
Years With the
Registrant and
Name of Individual Age Position(s) Held its Predecessors
- ------------------ --- ---------------- ----------------
<S> <C> <C> <C>
Hans Paffhausen 49 Managing Director, European Operations 21
C. Ronald Baiocchi 55 Senior Vice President and General Manager, 22
North American Operations
Ian Elliott 41 Senior Vice President - Business Development 21
Gerald Gigliotti 43 Senior Vice President, Sales & Marketing 19
</TABLE>
Mr. Paffhausen has been Managing Director of the Registrant's European
Operations since the Pelikan Acquisition in February 1995. Mr. Paffhausen's
employment with the Company terminated on September 30, 1999 when the Pelikan
Disposition was consummated. He joined Pelikan in 1977 and served in positions
of increasing responsibility in research and development, engineering,
production and operations, including three years as the General Manager of
Pelikan Scotland (formerly Caribonum) and two and one-half years as Director of
Pelikan's U.S. Operations in Franklin, Tennessee. Mr. Paffhausen was appointed
Managing Director of the Pelikan Hardcopy Division in January 1994. From January
1994 until the Pelikan Acquisition he also served as Chief Director of
Operations of Pelikan for the worldwide Pelikan organization.
Mr. Baiocchi has been Senior Vice President and General Manager of the
Nu-kote International, Inc.'s North American Operations since November 1998.
Prior to that Mr. Baiocchi had been Vice President, Nu-kote International, Inc.
since January 1987. Mr. Baiocchi joined Burroughs Corporation
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(now Unisys) in October 1978 and has held a number of executive positions in
manufacturing, product management, sales and marketing and business planning.
Mr. Elliott has been Senior Vice President, Business Development of
Nu-kote International, Inc., since November 1998. He joined Burroughs
Corporation (now Unisys) in the United Kingdom in 1978 and has served in
positions of increasing responsibility primarily in sales, product management,
and business development roles within both Europe and the U.S. From October 1996
to October 1998 he served as Vice President, Product Development and from 1994
to September 1996 as Vice President, Business Development.
Mr. Gigliotti has been Senior Vice President of Sales and Marketing
since January 1999. Mr. Gigliotti began his career with Burroughs Corporation
(now Unisys) in September 1980 as an account manager and since that time held
positions of increasing responsibility, most recently as Director of Sales and
National Accounts and Vice President of Sales.
ITEM 2. PROPERTIES
The Registrant has fee or leasehold interests in each of the facilities
listed below:
<TABLE>
<CAPTION>
Location Square Feet Activities Status
- -------- ----------- ---------- ------
<S> <C> <C> <C>
Rochester, New York 70,232 Manufacturing, research and development Leased(1)
and distribution
Rochester, New York 10,952 Manufacturing Leased(2)
Connellsville, Pennsylvania 61,154 Manufacturing, research and development Owned
and distribution
Chatsworth, California 46,600 Manufacturing, research and development Leased(2)
and distribution
Chatsworth, California 17,000 Warehouse Leased(3)
Nogales, Sonora, Mexico 75,000 Warehouse Held for Sublet(4)
Nogales, Sonora, Mexico 62,775 Manufacturing Leased(4)
Franklin, Tennessee 136,703 Distribution and headquarters Owned
administration
Franklin, Tennessee 31,600 Manufacturing, research and development Leased(1)
Derry, Pennsylvania 133,022 Warehouse Held for Sale
Bardstown, Kentucky 7,200 Administration Leased(5)
Uniontown, Pennsylvania 33,600 Manufacturing, distribution Leased(3)(6)
Uniontown, Pennsylvania 6,000 Warehouse Leased(3)(6)
Turriff, Scotland 137,779 Manufacturing, administration, research Leased(7)
and development
Goslar, Germany 172,224 Manufacturing, administration Held for Sale(7)
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Location Square Feet Activities Status
- -------- ----------- ---------- ------
<S> <C> <C> <C>
Egg Lee, Switzerland 146,390 Manufacturing, research and development Owned(7)
Egg, Rietweis, Switzerland 17,750 Office, sales and administration Leased(7)
Monchaltorf, Switzerland 37,674 Manufacturing, research and development Owned(7)
Lenglow, China 25,092 Manufacturing Leased(7)
Jarfalla, Sweden 58,400 Manufacturing, research and development Leased(8)
Hong Kong 4,300 Warehouse Leased(7)
Duren, Germany 103,620 Logistics center Leased(7)
Louviers, France 6,150 Manufacturing Owned
</TABLE>
- ----------
(1) Lease expires 2002
(2) Lease expires 2000
(3) Month to month lease
(4) Lease terminated in July 1999
(5) Lease expires 2002
(6) Lease terminated in October 1999
(7) Property sold or transferred as part of the Registrant's sale of its
European Operations in September 1999.
(8) Property sold or transferred as part of the Registrant's sale of
Modular Ink Technology, Stockholm, AB ("MIT") in April 1999.
In addition, the Registrant maintains sales offices in various
locations throughout the United States and Europe.
The Registrant believes its facilities are in good operating condition,
suitable for their intended purposes and provide sufficient production capacity
for the foreseeable future.
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<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS
On November 6, 1998 Nu-kote filed a voluntary petition for protection
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court (the "Bankruptcy Court") for the Middle
District of Tennessee, Nashville Division (Case No. 98-10600-10606-KL3-11). Six
subsidiaries of the Company, Nu-kote International, Inc., Future Graphic, Inc.,
Nu-kote Imperial, Inc., Nu-kote Latin America, Inc., Nu-kote Imaging
International, Inc. and International Communication Materials, Inc., also filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code
on November 6, 1998 in the same court as Nu-kote. Nu-kote is managing its
business as a debtor-in-possession under the supervision of the bankruptcy
court.
In March 2, 2000, Nu-kote, its secured lenders and the official
committees for Nu-kote's unsecured creditors filed a Joint Plan of
Reorganization for Nu-kote (the "Plan") and a Second Amended Disclosure
Statement for Second Amended Joint Plan of Reorganization for Nu-kote (the
"Disclosure Statement"). Under the terms of the Plan and a separate motion, a
bidding procedure was established pursuant to which interested parties may make
a bid for the stock or assets of Nu-kote. An initial bid has been submitted by
Richmont Capital Partners I, L.P ("Richmont"). Richmont is an affiliate of
Nu-kote. The deadline for submitting bids passed without any other party
submitting a bid. The Plan provides for (i) payment to the secured lenders of
$20,550,000, (ii) payment to the unsecured creditors of $600,000, (iii) payment
of priority and administrative claims of up to $3,000,000, and (iv) the
assumption of certain other debts outlined in the Plan, contingent upon certain
conditions being satisfied prior to closing. The Plan also provides for mutual
releases between and among Nu-kote, its secured lenders, the committees and
Richmont. As part of the Plan, the existing stock of Nu-kote will be
extinguished and Nu-kote's stockholders will receive nothing in respect of their
stockholdings.
On March 17, 2000 Nu-kote's secured lenders filed a motion to convert
the case to a Chapter 7 proceeding. This motion was opposed by Nu-kote, and
Richmont and Nu-kote's secured lenders have now reached an agreement in
principle pursuant to which Richmont will purchase the debt, security interests
and all claims held by the secured lenders. The agreement is subject to
completion of final documentation which is still being drafted. Upon completion
of the documentation, the motion to convert the case to a Chapter 7 proceeding
will be withdrawn, and management of Nu-kote believes it will then be possible
to confirm a plan of reorganization. It is still expected that any plan of
reorganization that is confirmed will provide that the stock of Nu-kote will be
extinguished and Nu-kote's stockholders will receive nothing in respect of their
stock.
On September 19, 1994, Hewlett Packard Co. filed a lawsuit against
Nu-kote International, Inc. in the United States District Court for the Northern
District of California (the "California District Court"), San Jose Division,
Case No. C94-20647 JW (EIA), (the "HP Litigation") alleging patent and trademark
infringement, unfair competition and false advertising. Nu-kote International
asserted affirmative defenses to claims brought by HP, and asserted seven
counterclaims against HP, including inter alia: violations of the Lanham Act,
Sherman and Clayton Antitrust Acts. Nu-kote International sought compensatory,
punitive and treble damages, court costs and attorneys' fees, as well as
injunctive relief.
On November 13, 1998, Nu-kote International filed a motion for relief
from stay to allow the HP Litigation to continue despite the pendency of the
bankruptcy cases. The Bankruptcy Court found that "cause" under ss. 362 of the
Bankruptcy Code existed to lift the automatic stay to allow the HP Litigation to
proceed to trial.
Prior to trial the California District Court dismissed certain of HP's
patent claims and certain of Nu-kote International's antitrust and other claims.
The remaining claims in the HP Litigation went to trial on May 17, 1999. On July
22, 1999, the jury rendered its verdict. The jury found that Nu-kote
International infringed three HP patents and certain of HP's trademarks, and
engaged in false advertising. The jury found that Nu-kote International's
conduct was willful. The jury awarded HP damages in the amounts of $456,937.80,
$434,120.00 and $1,138,394.00 for damages suffered by HP for patent infringement
claims, trademark/unfair competition claims and false advertising claims,
respectively. The jury found in Nu-kote International's favor on one of HP's
patent claims and certain of HP's trademark claims. The jury also found that
Nu-kote International's use of its current green and white packaging does
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<PAGE> 12
not violate HP's trademarks. The jury rejected all of Nu-kote International's
remaining antitrust claims and awarded Nu-kote International no damages. There
remain before the California District Court issues not addressed by the jury
including those concerning HP's claims for attorneys' fees, enhanced damages,
costs and injunctive relief, and Nu-kote's equitable defenses, claims for
attorneys' fees and other relief. The California District Court must resolve
certain issues before entering judgment on the jury verdict.
Subsequent to the rendition of the jury verdict in the HP Litigation,
the Company's management and general bankruptcy counsel entered into extensive
arms-length negotiations seeking settlement and resolution of the litigation
between the parties. As a result of these negotiations, an agreement (the
"Settlement Agreement") was reached and approved by the Court. Due to the
confidential and proprietary nature of certain portions of the Settlement
Agreement, a redacted version of same is attached to the Motion to Approve
Compromise and Settlement Agreement as proposed by and between Nu-kote
International and Hewlett-Packard Company, filed of record with the Bankruptcy
Court.
The principal material terms of the proposed Settlement Agreement which
have not been redacted due to concerns of confidentiality include:
(a) Judgments: HP shall be granted judgments and claims in its
favor dismissing Nu-kote International's antitrust claims and
awarding damages on HP's claims on trademark infringement,
unfair competition, false advertising, attorneys' fees and
costs in the following amounts: $1,500,000.00 for awardable
costs incurred by HP in the HP Litigation, plus $456,937.80
for damages suffered by HP on HP's patent infringement claims,
plus $434,120.00 and $1,138,394.00 for damages suffered by HP
on HP's patent infringement claims, plus $434,120.00 and
$1,138,394.00 for damages suffered by HP on HP's
trademark/unfair competition claims and false advertising
claims, plus $2,000,000.00 for HP's awardable attorney's fees
in the HP Litigation, for a sum total of $5,529,451.80. The
judgments and claims shall be treated as allowed liquidated,
undisputed, non-contingent, unsecured pre-petition claims in
the Bankruptcy Case. The judgments will not be entered until
the Patent Covenants described below become effective.
(b) Injunctions: Subject to the Patent Covenants granted by HP
that are described below, Nu-kote International agrees to the
entry of certain injunctions against further patent
infringement, trademark infringement, and false advertising.
The injunctions will not be entered until after the Patent
Covenants become effective.
(c) Vacatur of Patent Rulings and Findings: The parties agree to
the vacatur of certain of the District Court's orders and
certain of the jury's findings regarding the validity,
invalidity or infringement of certain of HP's patents. In
addition, Nu-kote International acknowledges the validity,
enforceability and infringement of certain HP patents.
(d) Patent Covenants: HP grants to Nu-kote International Patent
Covenants, which are covenants not to sue for infringement of
certain patents as set forth in the confidential portions of
the Settlement Agreement, which shall become effective upon
receipt by HP of the duly executed Certificates of Compliance
relating to the Document Escrow contemplated by the Settlement
Agreement. The Patent Covenants will allow Nu-kote
International to continue to market its line of HP compatible
inkjet products.
(e) Document Escrow: Placement in escrow under seal, as agreed by
Nu-kote International and HP, and the persons and entities
defined as "Nu-kote Persons" under the Settlement Agreement of
all Discovery Materials, including but not limited to HP
Discovery Materials and Nu-kote Discovery Materials,
Deposition Materials, and Privileged Materials (all as defined
by the Settlement Agreement) that are in the possession,
custody or control of Nu-kote International or any Nu-kote
Persons or that Nu-kote International or any Nu-kote Persons
known to be in possession, custody or control of service
providers involved in the litigation. Nu-kote Persons will be
enjoined to turn over all Discovery Materials that are
currently in their possession or that come into their
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<PAGE> 13
possession in the future. These Discovery Materials shall be
placed in a storage facility mutually acceptable to the
parties to be held under seal for the Retention Period as
defined in the Settlement Agreement, and verification of the
placement of such Discovery Materials by Nu-kote International
by execution of Certificates of Compliance as contemplated in
the Settlement Agreement. Interested parties will have access
to the Discovery Materials only pursuant to Bankruptcy Court
Order after notice and a hearing, and only under the
conditions set forth in the Settlement Agreement as specified
by the applicable Bankruptcy Court Order. All Discovery
Materials must be returned to the escrow within the Retention
Period, and at the end of the Retention Period the Discovery
Materials will be destroyed.
(f) Mutual Releases: Mutual releases executed by and between
Nu-kote International for itself and for any and all
Subsidiaries, predecessors, successors, assigns, and, to the
extent permitted by law, for its related companies, officers,
directors, employees, agents, shareholders, customers,
attorneys and consultants and HP for itself and for any and
all Subsidiaries, predecessors, successors, assigns, and, to
the extent permitted by law, for its related companies,
officers, directors, employees, agents, shareholders,
customers, attorneys and consultants.
(g) Future Disputes: An agreement between HP and Nu-kote
International that each will give the other written notice of
and endeavor to resolve any potential future disputes between
themselves prior to resorting to litigation, unless such
issues or questions have immediate adverse legal implications
relative to the trademark or trade dress rights of the
offended party. The Bankruptcy court will retain exclusive
jurisdiction to enforce the Settlement Agreement and to
resolve any disputes that might arise under the Settlement
Agreement.
(h) Restriction on Transfer. The agreement restricts who can
benefit from the Patent covenants and requires HP's consent if
more than 20% of the stock or assets of Nu-kote are to be sold
to a third party.
This summary is not intended to supercede or replace any of the terms
of the Settlement Agreement and shall not be used to interpret the Settlement
Agreement.
Seiko Epson Corp. and Epson America, Inc. have filed suits against
Nu-kote International, Inc. and Pelikan Produktions, A.G. SEIKO EPSON CORP. AND
EPSON AMERICA, INC., PLAINTIFFS AND COUNTER-DEFENDANTS VS. NU-KOTE
INTERNATIONAL, INC. AND PELIKAN PRODUKTIONS, A.G., DEFENDANTS AND
COUNTER-CLAIMANTS, Case No. CV95-2734RTJH ("Epson I") and SEIKO-EPSON CORP. AND
EPSON AMERICAN, INC., PLAINTIFFS AND COUNTER-DEFENDANTS VS. NU-KOTE
INTERNATIONAL, INC., AND PELIKAN PRODUKTIONS, A.G., DEFENDANTS AND
COUNTER-CLAIMANTS, pending in the U.S. District for Central District of
California under Case No. CV97-9587TJH ("Epson II") (consolidated); SEIKO EPSON
CORP. AND EPSON AMERICAN, INC., PLAINTIFFS/APPELLANTS VS. NU-KOTE INTERNATIONAL,
INC., AND PELIKAN PRODUKTIONS, A.G., DEFENDANTS/APPELLEES, Appeal from Orders of
U.S. District Court for Central District of California to the U.S. Court of
Appeals for the Federal Circuit under Docket Nos. 97-1313-1548-1566-1588- and
98-1015 ("Appeal").
On April 25, 1995, Epson commenced Epson I (which involves actions
which were included in the Appeal) alleging patent infringement trademark
infringement, false advertising and unfair competition. Nu-kote International
and Pelikan Produktions, A.G. ("PPAG") filed answers that assert nine
affirmative defenses to the claims alleged in Epson's complaint. Both Nu-kote
International and PPAG asserted counterclaims involving invalidity,
unenforceability and noninfringement of patent rights, together with violations
of the Sherman and Lanham Acts. Nu-kote International seeks damages and an
injunction for false advertising, trade libel, disparagement of goods,
defamation, and unfair competition. Epson II was filed on October 15, 1997
involving a second action for patent infringement and has now been consolidated
with Epson I by stipulation. Little or no action has taken place regarding the
pertinent matters involved in Epson II.
Nu-kote International and PPAG were initially successful in disposing
of six out of seven patents alleged to be infringed through summary judgment
action. In a series of rulings in 1997, the District Court
13
<PAGE> 14
held six (6) out of seven (7) of Epson's patents-in-suit in Epson I to be either
invalid or unenforceable. The District Court also held Nu-kote International and
PPAG in contempt for violating a preliminary injunction which the Court had
entered against them. The District Court's contempt ruling is memorialized in
two written orders. The first order directs Nu-kote International and PPAG to
pay Epson's lost profits of $1,050,849 and attorneys' fees of $31,413. The
second order does not quantify a monetary award. The District Court also issued
an amended preliminary injunction (the API"), which enjoins Nu-kote
International and PPAG from, among other things, infringing certain patents that
were not part of the preliminary injunction. On or about September 28, 1998,
Epson filed a motion to hold Nu-kote International and PPAG in contempt for
violation of the API. The motion had not been decided by the District Court
prior to the filing of the action in the Bankruptcy Court.
Epson appealed the District Court's invalidity and unenforceability
rulings. Nu-kote International and PPAG appealed the District Court's contempt
rulings. The Appeal was fully briefed and oral argument was conducted before the
Federal Circuit on November 2, 1998, prior to the filing of the action in the
Bankruptcy Court.
Following the filing of the bankruptcy, the California District Court
has stayed all further proceedings in the Epson Litigation. On April 1, 1999,
the California District Court entered an Order Deferring Decision on Application
of Bankruptcy Stay to the United States Bankruptcy Court for the Middle District
of Tennessee, and Deferring Any Further Proceedings in this Matter Pending
Decision on that Issue. The California District Court held "that there shall be
no further proceedings in this action until a decision on whether the bankruptcy
stay applies to Pelikan Produktions, A.G. issues from the United States
Bankruptcy Court for the Middle District of Tennessee."
Nu-kote International and Epson reached an agreement to certain limited
relief regarding the appeal as sought in the Motion for Relief from Stay filed
by Epson. Nu-kote International and Epson agreed to relief from the automatic
stay only to the extent necessary to allow the Appeal to continue as and to the
extent determined appropriate by the United States Court of Appeals for the
Federal Circuit. On September 8, 1999, the Federal Circuit Court issued its
opinion remanding the issues concerning the contempt orders to the California
District Court for further consideration, reversing the invalidity and
unenforceability summary judgment rulings on certain Epson patents placing those
patents back into the Epson Litigation, and stating that Court's opinion that
the automatic stay did not apply to PPAG. On October 29, 1999, the Federal
Circuit issued an additional decision stating that Court's opinion that its
prior decision as to all issues including vacatur and remand of the assessment
of sanctions, is fully applicable to Nu-kote as to Pelikan. No trial date for
the Epson Litigation has been set by the California District Court.
On April 3, 1995, Canon, Inc., a Japan corporation, and its U.S.
Affiliates, Canon Computer Systems, Inc. and Canon USA, Inc. (collectively
"Canon") filed a lawsuit in the United States District Court for the Central
District of California (Case No. SACV 95-288, the "Canon Litigation") styled
CANON COMPUTER SYSTEMS, INC. V. NU-KOTE INTERNATIONAL, INC. seeking, among other
things, to have the Court enjoin Nu-kote International and its affiliates from
infringing its patents and from making false designations or origin or false
descriptions regarding Nu-kote International's cartridges and kits, and, seeking
compensatory, punitive and treble damages, court costs and attorney's fees. In
July 1996 Canon filed a second and related lawsuit, alleging infringement of an
additional patent, bringing the total number of patents at issue in the Canon
case to six.
Nu-kote International filed an answer asserting twelve affirmative
defenses to the claims alleged in Canon's complaint. These include, among
others, defenses that Canon's patents are invalid, unenforceable and/or not
infringed by Nu-kote International, that Canon has defrauded the U.S. Patent and
Trademark Office and trademark misuse. Additionally, Nu-kote International has
alleged counterclaims which include claims of monopolization and attempted
monopolization of the aftermarket for replacement cartridges for Canon printers.
Nu-kote International is also seeking declaratory relief asking the Court to
find that it has not infringed any valid claim of Canon's right in the six
patents in the suits, cancellation of Canon's patents because of fraud on the
U.S. Patent and Trademark Office, damages and an injunction for intentional
interference with business relations, trade liable, disparagement of goods,
defamation and unfair competition.
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<PAGE> 15
By order dated April 18, 1997, the Court construed the claims of the
'994 patent as requested by Nu-kote International, not as requested by Canon.
Nu-kote International filed a Motion for Summary Judgment on the basis that the
'994 Patent is anticipated by prior art. Canon also filed a Motion for Summary
Judgment on the '994 Patent. On May 26, 1998, the Court held the claims of the
'994 Patent invalid because they are anticipated by the prior art. This was a
significant victory for Nu-kote International, and Canon has appealed this
ruling, Appeals Nos. 98-1445-1453. This appeal is also pending in the United
States District Court of Appeals for the Federal Circuit.
On June 16, 1997, the Court granted Canon's Motion for Summary Judgment
("MSJ") on the issues of inventorship, obviousness and enforceability of the
'928 patent, but denied Canon's MSJ with respect to the key issue of whether
patented features of that same patent are primarily ornamental or functional. A
design patent is invalid if the patented features are primarily functional
rather than primarily ornamental. Because it denied Canon's Motion as to that
issue, the Court ruled that it was premature to rule on whether this particular
patent has been infringed. The Court granted Canon's motion for Summary Judgment
on the '140 patent, but only as to two discontinued versions of Nu-kote
International's products. The Court confirmed that the current version of the
Nu-kote International cartridge, which is a design around introduced by Nu-kote
International on receiving notice of this subject patent, does not infringe the
patent.
On May 9, 1997, Daniel M. Kerrane filed suit against the Company in
Texas State District Court in Dallas County, Texas. Mr. Kerrane alleges he and
the Company entered into a Supplemental Employment Agreement in February 1994
(the "Agreement") which was to become operative upon a "Change in Control" as
defined by the Agreement. He alleged the Company breached the agreement by
substantially diminishing his responsibilities with the Company. This case was
settled on May 6, 1998 with the Company agreeing to pay Mr. Kerrane $213,000 and
release claims against Mr. Kerrane totaling $315,000.
On June 10, 1997, Financial Business Information System, Ltd., a South
African corporation, filed suit against Nu-kote International and the Registrant
in U.S. District Court for the Northern District of Texas. The plaintiff alleged
that it was the exclusive distributor of Nu-kote products in South Africa, but
that Nu-kote breached the terms of its distributorship agreement. This case was
settled and dismissed by the District Court in May 1998 with the Company
agreeing to pay the plaintiff $75,000 on the date of the settlement and to pay
the plaintiff $4,166 a month for twelve months and a balloon payment of $54,178
on May 1, 1999. All payments accruing after the Company filed for protection
under Chapter 11 of the U.S. Bankruptcy Code are unsecured claims against the
Company.
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, LORI LEMMER, ET AL.
V. NU-KOTE HOLDING, INC., Case No. 3:98-CV-0161-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, an unspecified amount of compensatory damages and reimbursement of fees
and expenses. Nu-kote denies the plaintiff's allegations and intends to defend
the suit vigorously. All proceedings in this case have been stayed as a result
of Nu-kote's filing for protection under Chapter 11 of the U.S. Bankruptcy Code
described above. On September 28, 1999, Nu-kote's lead bankruptcy counsel was
notified by the United States District Court for the Northern District of Texas
that this case was to be administratively closed.
On March 10, 1998, Spectra, Inc. ("Spectra") filed suit in the United
States District Court of New Hampshire alleging Patent Infringement Claims
against Nu-kote International and Modular Ink Technology i Stockholm AB ("MIT"),
a company duly organized and validly existing under the laws of Sweden, SPECTRA,
INC. V. NU-KOTE INTERNATIONAL, INC. & MODULAR INK I STOCKHOLM AB, Case No.
98-CV-130-JD. Pelikan Produktions A.G. ("PPAG"), a company duly formed under the
laws of Switzerland, and formerly a wholly owned subsidiary of Nu-kote
International, holds all of the outstanding shares in MIT. Nu-kote International
and MIT additionally filed suit against Spectra, NU-KOTE INTERNATIONAL, INC. &
MODULAR INK I STOCKHOLM, AB V. SPECTRA, INC., Case No. 98-213-JJF, in the United
States District Court for the District of
15
<PAGE> 16
Delaware (collectively, these two cases are referred to herein as the "Spectra
Litigation"). In the Spectra Litigation, Nu-kote International has asserted a
claim and counterclaim against Spectra for tortious interference with business
relations. In connection with the Bankruptcy Court approved sale of the stock of
MIT to Xaar, Ltd. ("Xaar"), Nu-kote International assigned to Xaar any and all
of its rights in respect of its tortious interference claim and counterclaim
against Spectra. Xaar has, however, agreed not to release or settle the claim or
counterclaim without any such release or settlement in connection therewith
containing a dismissal by Spectra of its pending infringement claims against
Nu-kote International. Any and all other claims and causes of action of Nu-kote
International in connection with the Spectra Litigation are retained by Nu-kote
International. The Bankruptcy Court approved the terms of the sale of MIT on
March 30, 1999, and the sale was closed on March 31, 1999.
Abdirahman A. Aden filed suit against Nu-kote International in the
United States District Court for the Middle District of Tennessee alleging
employment discrimination and seeking $600,000 in compensatory damages, punitive
damages, back pay and benefits and attorney's fees, ABDIRAHMAN A. ADEN V.
NU-KOTE INTERNATIONAL, INC., Case No. 398-0365. On December 4, 1998, Aden filed
a Motion for Relief of Stay requesting the Bankruptcy Court to lift the
automatic stay to allow this litigation to proceed. Upon agreement with the
Debtors, at the final hearing on this Motion for Relief of Stay, Aden was
granted relief from the stay to proceed against parties other than Nu-kote
International, without prejudice to any of Nu-kote International's rights or
defenses to the action or rights against any other party.
In October of 1994, Robert W. Blair and John Ridenour filed suit in the
Court of Common Pleas, Fayette County, PA. ROBERT W. BLAIR & JOHN RIDENOUR V.
NU-KOTE HOLDING, INC., ET AL, Civ. Div. No. 1887 of 1994, for payments allegedly
due on promissory notes executed in connection with, and breach of contract
purportedly arising from, indemnity agreements and the sale contract from the
transaction when Nu-kote International purchased the stock of International
Communication Materials, Inc. ("ICMI"). Nu-kote International and ICMI likewise
filed claims against Blair and Ridenour for breach of contract in the Court of
Common Pleas, Allegheny County, PA., NU-KOTE INTERNATIONAL, INC. V. ROBERT W.
BLAIR AND JOHN RIDENOUR, Case No. CV No. 98-1462. On the Petition Date, these
suits were, pursuant to provisions in the relevant documents mandating
arbitration, pending before the American Arbitration Association, styled NU-KOTE
INTERNATIONAL, INC. V. ROBERT W. BLAIR AND JOHN RIDENOUR, Case No. CV No.
98-1462. On the Petition Date, these suits were, pursuant to provisions in the
relevant documents mandating arbitration, pending before the American
Arbitration Association, styled NU-KOTE INTERNATIONAL, INC. V. ROBERT W. BLAIR
AND JOHN RIDENOUR, Case No. 16-199-00375-94.
Nu-kote International's management and bankruptcy counsel entered into
settlement negotiations seeking resolution of all the outstanding matters
between the parties. As a result of these negotiations, an agreed settlement was
reached and approved by the Bankruptcy Court. The settlement provided for a
joint and mutual release between the parties, dismissal with prejudice of all
pending lawsuits and the arbitration proceedings and the withdrawal of all
Claims filed by Blair and Ridenour against the Estate. The consideration for
this settlement was the payment of two-thirds of the amount in the escrow
account to Blair and Ridenour and one-third of the amount to the Debtors. At the
time settlement of the Blair and Ridenour litigation and claims was presented to
the Bankruptcy Court for approval, there was approximately $783,000 in the
escrow account representing the original amount plus continually accruing
interest.
In addition, the Registrant is involved in various routine legal
matters, all of which have been stayed as a result of Nu-kote's filing for
protection under Chapter 11 of the U.S. Bankruptcy Code described above.
In the opinion of management, all matters discussed above are covered
by insurance or are without merit or the disposition is not anticipated to have
a material effect on the Registrant's financial position; however, one or more
of these matters could have a material effect on future quarterly or annual
results of operations or cash flows when resolved.
The foregoing "Legal Proceedings" section and Note 14 of "Notes to
Consolidated Financial Statements", insofar as it relates to pending litigation
matters, contain various "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E
of
16
<PAGE> 17
the Securities Exchange Act of 1934 (the "Exchange Act), which represent the
Registrant's expectations or beliefs concerning the possible outcome of the
various litigation matters described herein. The Registrant cautions that the
actual outcome of such matters could be affected by a number of factors,
including, without limitation, judicial interpretations of applicable laws,
rules and regulations, the uncertainties and risks inherent in any litigation,
particularly a jury trial, the nature and extent of any counter claims, and the
scope and collectability of insurance coverage. A decision in any of the
foregoing lawsuits that is adverse to the Company could have an adverse effect
on the Company's business and financial condition, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Registrant during the fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Registrant had received notification of its delisting by the NASDAQ
National Market System as of June 12, 1998. Prior to its delisting, the Common
Stock was quoted on the NASDAQ National Market System under the symbol "NKOT".
It is expected that all outstanding shares of Registrant's Common Stock will be
cancelled in connection with the Company's bankruptcy proceedings. The following
table sets forth the high and low reported sales prices for the Common Stock for
the periods indicated.
Market Price
-----------------
Fiscal Year High Low
----------- ----- -----
1998
First Quarter 3 1/2 2 3/8
Second Quarter 2 5/8 13/16
Third Quarter 1 22/32 1/2
Fourth Quarter 26/32 5/32
1999
First Quarter 5/8 3/16
Second Quarter 13/32 5/32
Third Quarter 1/4 1/32
Fourth Quarter 11/32 1/32
2000
First Quarter 7/32 1/32
Second Quarter 1/16 1/32
Third Quarter 1/16 1/64
The last reported sales price per share of the Common Stock as quoted
on OTC Bulletin Board on April 17, 2000 was $.05. As of the date hereof, the
Registrant had 21,775,302 shares of Common Stock outstanding.
The Registrant has never declared or paid any cash dividends on its
Common Stock and has no current plans to pay cash dividends on the Common Stock.
The Registrant's credit agreement and bankruptcy status also restrict the
payment of dividends.
As of April 17, 2000, the Registrant had in excess of 3,000
stockholders.
17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of
the Registrant on a consolidated basis. The statement of operations data for the
fiscal years ended, and the balance sheet data as of March 31, 1999, 1998, 1997,
1996, and 1995 were derived from the Consolidated Financial Statements of the
Registrant.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------------------
1999(1) 1998(1) 1997(1) 1996(1) 1995(1)
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................................. $ 240,529 $ 295,703 $ 342,302 $ 424,070 $ 193,562
Cost of sales .............................. 204,991(2) 252,888(2) 283,422(2) 298,817 146,200
------------ ------------ ------------ ------------ ------------
Gross margin ............................... 35,538 42,815 58,880 125,253 47,362
Selling, general and administrative
expenses ................................. 53,928 59,756 66,602 78,100 29,421
Research and development expenses .......... 5,609 6,645 9,646 9,560 1,800
Other operating expenses ................... -- -- 1,064 -- 2,500
Loss on sales of businesses(7) ............. 911 4,061 -- -- --
Impairment of assets(6) .................... 7,967 -- -- -- --
Restructuring expenses ..................... 8,785(7) 3,349(7) 15,139(7) 13,825 28,449
------------ ------------ ------------ ------------ ------------
Operating income (loss) .................... (41,662) (30,996) (33,571) 23,768 (14,808)
Interest expense, net ...................... 11,158 15,474 8,444 7,435 3,239
Other (income) expense, net ................ 1,269 1,296 714 (557) (245)
------------ ------------ ------------ ------------ ------------
Income (loss) before reorganization items,
income taxes and extraordinary item......... (54,089) (47,766) (42,729) 16,890 (17,802)
Reorganization items ....................... 1,398 -- -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary items ..................... (55,487) (47,766) (42,729) 16,890 (17,802)
Provision (benefit) for income taxes ....... (515) (329) 5,201 7,590 (2,392)
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary loss .... (54,972) (47,437) (47,930) 9,300 (15,410)
Extraordinary loss(3) ...................... -- (2,550) -- -- (281)
------------ ------------ ------------ ------------ ------------
Net income (loss) .......................... $ (54,972) $ (49,987) $ (47,930) $ 9,300 $ (15,691)
============ ============ ============ ============ ============
Net income (loss) per common share (basic &
diluted):(4)
Income (loss) before extraordinary
loss .................................. $ (2.52) $ (2.18) $ (2.20) $ 0.61 $ (0.69)
Extraordinary loss ...................... -- $ (0.12) -- -- $ (0.02)
============ ============ ============ ============ ============
Net income (loss) ....................... $ (2.52) $ (2.30) $ (2.20) $ 0.61 $ (0.71)
============ ============ ============ ============ ============
Weighted average shares outstanding ........ 21,775,302 21,775,302 21,770,445 22,492,343 17,462,254
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Working capital (deficit)(5) ............... $ 25,128 $ (83,065) $ 92,384 $ 109,095 $ 95,541
Total assets ............................... 152,449 222,576 293,029 356,786 320,725
Short-term debt ............................ 45,024 142,009 1,135 6,358 927
Pre-petition liabilities subject to
compromise ............................... 129,339 -- -- -- --
Total long-term debt ....................... -- 760 134,677 111,843 90,131
Shareholders' equity (deficit) ............. (65,614) (14,655) 41,521 95,280 84,622
</TABLE>
(1) The Registrant's financial statements for the years ended March 31,
1999, 1998, 1997, 1996, and 1995 reflect the Pelikan Acquisition, which
occurred on February 24, 1995, as well as the restatement associated
with the accounting change from the last-in, first-out method of
costing inventories to the first-in, first-out method. The results of
operations do not reflect the results of the Pelikan Disposition which
occurred in September 1999.
(2) Includes a $6,707, $5,190 and $7,034 charge associated with excess and
obsolete inventory provisions in North America in fiscal 1999, 1998 and
1997, respectively and $7,724 of costs associated with the startup of
manufacturing of the Company's MIT piezoelectric ink jet printhead in
fiscal 1997. Additionally, a $2,184 write-off of an APB16 inventory
purchase price adjustment, relative to the European operation is
included in fiscal 1999.
(3) Represents extraordinary loss from early extinguishment of indebtedness
in fiscal 1998 and 1995.
(4) Per share information has also been restated to reflect the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share".
(5) Excludes $129,339 of pre-petition liabilities subject to comprise
existing on the bankruptcy filing date of November 6, 1998.
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<PAGE> 19
(6) Represents a $3,993 charge for a write-down of goodwill associated with
the ICMI acquisition and a $3,974 charge to write-off the value of the
trademark and covenants-not-to-compete acquired in conjunction with the
1995 acquisition of Pelikan.
(7) See footnotes No. 4 and 20 to the Notes to the Consolidated Financial
Statements for a discussion of the loss on sales of businesses and
restructuring expenses, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The results of operations described below do not reflect the results of
the Pelikan Disposition which occurred in September 1999.
TRENDS
During the last few fiscal years, there has been significant
consolidation in the office supplies distribution industry. As a result of such
consolidation, the purchasing power of the Company's customer base has increased
significantly, which compounded with intense price competition, has resulted in
significantly lower margins across all product lines. In response to these
developments, the Company is continuing to aggressively pursue cost reduction
initiative, and organizing itself into product focused business units that can
provide the value added savings demanded by larger customers.
Worldwide sales of non-impact products have declined significantly
($35.4 million) due largely to a substantial decline in North American toner
sales. Worldwide sales of impact products continue to decline as non-impact
printing devices become more popular and replace impact printers now in service.
This trend is expected to continue.
The Company expects to continue to reduce costs through reductions in
overall inventory and infrastructure related thereto and by implementing supply
chain management initiatives such as order scheduling and freight and inventory
management. The Company has organized itself into product focus units, which is
expected to result in better quality, cost control and overall service to the
customer.
The following table sets forth certain historical data from the
Company's Consolidated Statements of Operations for the fiscal years ended March
31, 1999, 1998, and 1997 and the percentage change in such data from year to
year. The data for the historical year-end periods is derived from the
Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
Percentage Increase
(Decrease) From Prior
Year Ended March 31, Period
----------------------------------------- ---------------------------
(In Thousands)
1999 1998 1997 1999 v. 1998 1998 v. 1997
--------- --------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 240,529 $ 295,703 $ 342,302 (18.7)% (13.6)%
Cost of sales 204,991 252,888 283,422 (18.9)% (10.8)%
Gross margin 35,538 42,815 58,880 (17.0)% (27.3)%
Selling, general and administrative expenses 53,928 59,756 66,602 (9.7)% (10.3)%
Research and development expenses 5,609 6,645 9,646 (15.6)% (31.1)%
Other operating expenses -- -- 1,064 N/A N/A
Impairment of assets 7,967 -- -- N/A N/A
Net loss on sales of businesses 911 4,061 -- (77.6)% N/A
Restructuring expense 8,785 3,349 15,139 162.3% (77.9)%
Operating loss (41,662) (30,996) (33,571) 34.4% (7.7)%
</TABLE>
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<PAGE> 20
The following table sets forth certain data from the Company's
Consolidated Statements of Operations for fiscal years ended March 31, 1999,
1998, and 1997, expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1999 1998 1997
------------ --------- ----------
<S> <C> <C> <C>
Net sales ........................................ 100.0 % 100.0 % 100.0 %
Cost of sales .................................... 85.2 85.5 82.8
----- ----- -----
Gross margin ..................................... 14.8 14.5 17.2
Selling, general and administrative expenses ..... 22.4 20.2 19.5
Research and development expenses ................ 2.3 2.2 2.8
Other operating expenses ......................... -- -- 0.3
Loss on sale of division ......................... 0.4 1.4 --
Impairment of assets ............................. 3.3 -- --
Restructuring expenses ........................... 3.7 1.1 4.4
----- ----- -----
Operating loss ................................... (17.3) (10.4) (9.8)
Other (income) expense ........................... 0.5 0.4 0.2
Interest expense ................................. 4.6 5.2 2.5
----- ----- -----
Loss before reorganization items, income taxes and
extraordinary items ......................... (22.4) (16.1) (12.5)
Reorganization items ............................. 0.6 -- --
----- ----- -----
Loss before income taxes and extraordinary items . (23.0) (16.1) (12.5)
Provision (benefit) for income taxes ............. (.2) (0.1) 1.5
----- ----- -----
Net loss before extraordinary items .............. (22.8)% (16.0 % (14.0)%
===== ===== =====
</TABLE>
The following table sets forth certain historical revenue data for the
fiscal years ended March 31, 1999 and 1998 and the dollar and percentage changes
in such data from year to year.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999 V. 1998
--------------------------- ------------------------
1999 1998 DOLLARS PERCENTAGE
------------- ------------ ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
North America:
Impact ......... $ 46.1 $ 66.6 $ (20.5) (30.8)%
Non-Impact ..... 64.9 81.8 (16.9) (20.7)
Total .......... $ 111.0 $ 148.4 $ (37.4) (25.2)%
Percent of total 46.2% 50.2%
Europe and Other:
Impact ......... $ 58.4 $ 57.7 $ 0.7 1.2 %
Non-Impact ..... 71.1 89.6 (18.5) (20.6)
Total .......... $ 129.5 $ 147.3 $ (17.8) (12.1)%
Percent of total 53.8% 49.8%
Net sales:
Impact ......... $ 104.5 $ 124.3 $ (19.8) (15.9)%
Non-Impact ..... 136.0 171.4 (35.4) (20.6)
Total .......... $ 240.5 $ 295.7 $ (55.2) (18.7)%
Percent of total 100.0% 100.0%
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales for fiscal 1999 were $240.5 million, a decline of $55.2
million (18.7%) from fiscal 1998. For the year ended March 31, 1999, sales by
North American entities were $111.0 million, a decline of $37.4 million or
25.2%, as compared to sales in the previous fiscal year. Sales by international
entities declined $17.8 million, or 12.1% as compared to the previous fiscal
20
<PAGE> 21
year and were $129.5 million. Sales of toner products in North America declined
$12.0 million, or 46.9%, as a result of quality and delivery performance issues
in the previous fiscal year. Sales of impact supplies in North America declined
$20.5 million from the previous year due to the continued shift of the market
from impact printing devices to non-impact printing devices. Sales of laser
cartridges in North America also declined by $4.7 million as compared to the
previous year. This loss of sales is due primarily to the Company's sale of its
components line in December 1997 (See Note 4 in Notes to Consolidated Financial
Statements). North America sales of inkjet products declined $2.0 million as
compared to the previous year due to the lack of sell-through of certain of the
Company's products introduced in fiscal years 1997 and 1998. The decline in
sales in Europe was due largely to a significant decline in sales of non-impact
products of $18.5 million and to dual-sourcing programs recently initiated by
many of the European customers. Currency rates generally were broadly similar to
the previous year and, as such had little influence on the sales decline.
Worldwide sales of non-impact supplies accounted for approximately
56.5% of total sales for fiscal 1999, compared to 58.0% of total sales in fiscal
year 1998.
In North America, current year sales of non-impact supplies amounted to
$64.9 million, down $16.9 million or 20.7% as compared to the previous year, and
represented 58.5% of total North America sales. Sales of non-impact supplies
internationally were $71.1 million in the current year versus $89.6 million in
fiscal year 1998.
Cost of sales were $205.0 (85.2% of net sales) for fiscal year 1999,
comparing favorably to $252.9 million (85.5% of net sales) in fiscal year 1998.
Included in cost of sales for fiscal 1999 and fiscal 1998, respectively, were
$3.3 million (1.4% of net sales) and $5.5 million (1.9% of net sales) of expense
associated with increased inventory excess and obsolescence reserves in North
America. Additionally, a $2.2 million (0.9% of net sales) write-off of an APB16
inventory purchase price adjustment, relative to the European operations, is
included in cost of sales for fiscal 1999. Also included in fiscal 1998 was a
favorable impact of $2.4 million related to the effect of changing from the LIFO
basis to the FIFO basis of accounting for inventories.
Selling, general & administrative expenses were $53.9 million for
fiscal year 1999, $5.8 million lower than the previous year. The benefits of a
significant worldwide cost reduction program, which included the savings derived
from the closing of the Company's Dallas, Texas headquarters, are reflected in
this reduction.
Research and development expenses were $5.6 million (2.3% of net sales)
during fiscal 1999, compared to $6.6 million (2.2% of net sales) in fiscal 1998.
Approximately $3.6 million of these expenditures occurred in Europe where a $0.8
million decline in spending was realized on a year-over-year basis, largely
associated with an overall cost consciousness.
Losses on sales of businesses of $0.9 million for fiscal 1999, compares
to a $4.1 million loss recognized in fiscal 1998. Comprising the current year
loss was a $1.4 million loss on the sale of the Company's MIT subsidiary,
partially offset by a $0.5 million gain on the sale of Nu-kote de Columbia. The
prior year loss was associated with the sale of the components division.
During fiscal 1999, the Company incurred impairment charges totaling
$7,967. This was comprised of $3,993 recognized for the write-down of goodwill
recorded upon the acquisition of ICMI and a $3,974 impairment charge associated
with the write-off of the value of the trademark and covenants-not-to-compete
acquired in conjunction with the 1995 acquisition of Pelikan, related to the
domestic operations.
Restructuring expenses amounted to $8.8 million in the current fiscal
year. These expenses related primarily to the reduction of the carrying value of
fixed assets associated with the aftermarket ribbon production and a warehouse
utilized by ICMI.
Interest expense for fiscal 1999 amounted to $11.2 million, $4.3
million less than the previous year. Included in interest expense for fiscal
1999 was $3.4 million of deferred loan cost amortization compared to $5.7
million in the previous year. These deferred loan costs were fully amortized at
the end of the third quarter of the current fiscal year. The Company anticipates
21
<PAGE> 22
that it will not be required to pay post-petition interest on certain of its
pre-petition debt obligations, and accordingly, effective with the Bankruptcy
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 $3.6 million during
fiscal 1999.
For fiscal year 1999, the Company recognized a net loss of $55.0
million, comparable to a net loss of $50.0 million in fiscal 1998. The increased
net loss is associated with (1) a $55.2 million decrease in net sales, partially
offset by a 1.2% improvement in gross margins as a percentage of sales; (2) the
recognition of a $8.0 million charge associated with the impairment of various
intangible assets; (3) $8.8 million in restructuring expenses, primarily related
to the write-down of the carrying value of fixed assets; and (4) a $0.9 million
net charge related to the sale of two of the Company's businesses during the
fiscal year. All of the above were partially offset by a $6.9 million reduction
in selling, general, administrative and research and development costs; a $1.6
million decrease in interest expense and $3.0 million in other income, largely
attributable to the reversal of a corporate accrual which was no longer
required.
FISCAL 1998 COMPARED TO FISCAL 1997
Net revenue for fiscal 1998 was $295.7 million, a decline of $46.6
million (13.6%) over fiscal 1997. Worldwide sales of non-impact supplies
accounted for approximately 58.0% of total sales for fiscal 1998 compared to
57.3% of total sales in fiscal 1997.
The North American non-impact sales decline of $17.5 million resulted
from a $6.5 million or 26.3% decrease in inkjet sales due to lack of
sell-through of certain of the Company's products introduced in fiscal year 1997
and fiscal year 1998. Toner sales in North America declined $8.4 million, or
25.1%, as compared to fiscal 1997. North American toner sales were adversely
impacted by quality issues and poor delivery performance resulting from the
relocation of certain of the manufacturing operations from its toner facility in
Connellsville, Pennsylvania to the Company's facility in Nogales, Mexico. During
the fourth quarter of fiscal year 1998 and subsequent to the year then ended the
Company relocated all of its toner related production in Nogales, Mexico back to
its toner facility in Connellsville, Pennsylvania. Other non-impact revenues
decreased a net $2.6 million due to the sale of its components division in
December 1997.
The European non-impact sales decline of $7.2 million resulted from a
$2.9 million decline in inkjet, primarily in the "Easy Click" product line.
Compatable inkjet products were up slightly over fiscal year 1997. Approximately
$7.9 million of the decline was due to exchange rate fluctuations, prior to any
hedging arrangements. MIT printhead and ink sales increased by $5.4 million in
fiscal year 1998. The remaining decline of $1.8 million resulted from the
Company's French Forms division.
Worldwide sales of impact supplies accounted for approximately 42.0% of
total sales in fiscal 1998 compared to 42.7% or total sales in fiscal 1997.
Impact sales declined $7.2 million (9.8%) in North America and $14.9
million (21.6%) in Europe between fiscal 1997 and fiscal 1998. Approximately
$6.0 million of the decline in Europe was due to exchange rate fluctuations,
prior to any hedging arrangements. The decrease is directly related to the shift
to non-impact printing devices that are slowly rendering impact printing devices
obsolete for many applications. The overall 10.9% decline in impact products for
the market outperformed the overall industry decline in impact products, which
is estimated to have declined 15%.
Cost of sales were $252.9 million (85.5% of net sales) for fiscal 1998,
compared to $283.4 million (82.8% of net sales) in fiscal 1997. Included in cost
of sales for fiscal 1998 were $5.5 million (1.9% of net sales) of expenses
associated with increased inventory excess and obsolescence reserves in North
America. Poor inventory management and the introduction of unprofitable low
volume products in prior years that were subsequently discontinued in fiscal
year 1998 caused such charges. The Company has implemented certain controls over
the forecasting and purchasing of inventory, as well as controls over the
introduction of new products in North America. In addition, in North America,
gross margin was adversely impacted during the current fiscal year by $6.7
million (2.3% of net sales), associated with increased customer allowances, due
to competition and price pressures in the market place. Pricing pressures are
22
<PAGE> 23
expected to continue across all product lines in North America and Europe. Also
included in fiscal 1998 and 1997 were $2.4 million and $1.7 million,
respectively of a favorable impact related to the effect of changing from the
LIFO basis to the FIFO basis of accounting for inventories.
For fiscal 1998, research and development expenses amounted to $6.6
million, (2.2% of net sales), as compared to $9.6 million (2.8% of net sales) in
fiscal 1997. Approximately $2.2, or 73%, of the decline in this expense category
occurred in Europe where the Company has implemented an expense reduction
program to maintain research and development expenses at approximately 2.0% of
net sales.
Selling, general and administrative expenses were $59.7 million for
fiscal 1998 as compared to $66.6 million in the previous year. The reduction in
these expenses resulted primarily from the Company's implementation of worldwide
expense reduction programs, which included significant reductions in headcount.
Restructuring expenses amounted to $3.3 million in the current fiscal
year. These expenses related primarily to: (1) closure of the Dallas, Texas
headquarters; (2) centralization of sales and distribution into Franklin,
Tennessee; and (3) closing one toner facility and consolidating toner
manufacturing into Connellsville, Pennsylvania.
Interest expense for fiscal 1998 was $15.5 million, compared to $8.4
million for the previous year. The increase is the result of higher outstanding
borrowings, higher interest rates and the amortization of bank fees related to
the July 31, 1997 refinancing of indebtedness with its lender.
For fiscal 1998, the Company received minimum tax benefits from its
losses because of an increase in its tax valuation allowance of approximately
$14.2 million against certain deferred tax assets, particularly its net
operating loss carryforwards. Pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" the Company will recognize an
income tax benefit when the deferred tax assets are actually realized or at such
time as it is determined that realization of the deferred tax assets is more
likely than not. The Company reported an income tax benefit of $0.3 million in
fiscal 1998 and an income tax expense of $5.2 million in the previous year.
For fiscal 1998, the Company recognized a net loss of $50.0 million
compared to a net loss of $47.9 million in fiscal 1997. The greater net loss is
directly attributable to: (1) a $46.6 million decrease in sales and a 2.7%
increase in cost of goods sold as a percentage of sales; (2) the recognition of
an extraordinary charge resulting from the early extinguishment of debt of $2.6
million; (3) higher interest expense of $7.0 million; and (4) a $4.1 million
loss on the sale of division of the Company. The increase in net loss was offset
by a $6.8 million reduction in selling, general and administrative costs, $3.0
million reduction in research and development costs and $11.8 million decline in
restructuring costs.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal years ended March 31, 1999, 1998 and 1997, cash used by
operating activities amounted to $1.7 million, $5.8 million and $4.9 million,
respectively. In each of the three fiscal years, the net loss incurred by
operations was only partially offset by significant reductions in working
capital, primarily accounts receivable and inventories.
Capital expenditures, primarily for the purchase of manufacturing
equipment related to non-impact product lines, and computer hardware were $5.4,
$5.6 and $12.3 million, in fiscal 1999, 1998 and 1997, respectively. The Company
expects that capital expenditures in fiscal 2000 and beyond will approximate
$3.0 million annually.
The Company's cash requirements are related to funding working capital
for operations, research and development costs, capital expenditures and
restructuring and reorganization costs. Cash provided by operating activities
and through borrowings under its Debtor-in-Possession Credit Agreement, and open
account trade terms from vendors are the primary sources of liquidity and
capital for the Company.
On December 17, 1998, the Bankruptcy Court entered an order approving
debtor-in-possession ("DIP") financing from Norwest Business Credit, Inc. which
provides for a $7.5 million 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
23
<PAGE> 24
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 was 9.75% at March 31, 1999.
The Company is responsible, under the DIP credit facility, for the payment of a
minimum quarterly commitment fee of $50. 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 was originally restricted to $400 of
capital expenditures for the last four months of fiscal 1999, and to $300 per
fiscal quarter thereafter. However, with an amendment which was approved by the
Bankruptcy Court on October 28, 1999, the quarterly capital expenditure
limitation was increased to $500. The facility is collateralized by
substantially all of the assets of the Company and its U.S. subsidiaries.
Based upon the above arrangements, the Company believes that it will
have adequate sources of working capital to provide it with sufficient liquidity
to meet its near-term obligations while in bankruptcy.
EFFECTS OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
Because the Company conducted business in many countries prior to the
Pelikan Disposition, fluctuations in foreign currency exchange rates affected
the Company's financial position and results of operations. It is the Company's
policy to monitor currency exposures and enter into hedging arrangements to
manage the Company's exposure to currency fluctuations. As a result, the Company
reported a $0.6 million exchange loss in fiscal 1999, a $0.2 million exchange
loss in fiscal 1998 and a $0.4 million exchange gain in fiscal 1997. The five
most significant foreign currencies in which the Company transacts include
German Deutschmarks, Swiss Francs, British Pounds Sterling, French Francs, and
Swedish Krona. As a result of the Pelikan Disposition, fluctuations in foreign
currency exchange rates are expected to have a minimal impact on the Company in
the future.
ENVIRONMENTAL MATTERS; RESEARCH AND DEVELOPMENT
The Company is subject to regulation at the federal, state and local
levels in the U.S., including in particular, regulation pertaining to
environmental matters. To date these matters have not resulted in significant
cost to the Company. Based on indemnification obligations of third parties to
the Company, current regulations and the condition of its facilities, the
Company does not currently anticipate a material amount of environmental
expenditures. See also Item 1 - Environmental and Regulatory Matters.
Research and development expenses, were $5.6 million, $6.6 million and
$9.6 million in fiscal 1999, 1998 and 1997, respectively. Research and
development expenses beginning in fiscal 2000 are expected to approximate $2.0
million and will increase or decrease each year thereafter proportionately as
revenues increase or decrease.
MARKET RISK
The Company is exposed to foreign currency exchange rate risk inherent
in its sales commitments, anticipated sales, and assets and liabilities
denominated in currencies other than the U.S. dollar. The Company is also
exposed to interest rate risk inherent in its debt and investment portfolios. As
a result of the Pelikan Disposition, fluctuations in foreign currency exchange
rates are expected to have a minimal impact on the Company in the future.
The Company's primary market risk exposure is to changes in interest
rates obtainable on its borrowings. At March 31, 1999, all of the Company's
total capitalization consisted of borrowings. All of the Company's outstanding
debt was subject to variable rates with a weighted average of 7.37% at March 31,
1999. The Company does not enter into derivative or interest rate transactions
for speculative purposes. The Company does not have any other material
market-sensitive financial instruments.
24
<PAGE> 25
The Company has performed a sensitivity analysis assuming a
hypothetical 10% adverse movement in interest rates applied to its debt and
investment portfolios. As of March 31, 1999, the analysis indicated that these
hypothetical market movements would increase the Company's interest cost by $0.3
million. Actual gains and losses in the future may differ materially from that
analysis however, based on changes in the timing and amount of interest rate and
foreign currency exchange rate movements and the Company's actual exposures and
hedges.
INFLATION
The Company is subject to the effects of changing prices. Prices for
the Company's impact products have generally declined over the past three years.
Because of the declining market for impact printing supplies, the Company
expects prices for these products to continue to decrease. As a result of its
general inability to pass along cost increases, with respect to its impact
printing supplies, future increases in production costs or raw material prices
could have an adverse effect on the Company's business. Management currently
believes that inflation will have less impact on the Company's non-impact
operations because of the expanding market for non-impact printing supplies.
NEW ACCOUNTING STANDARDS
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and the display of comprehensive income
(loss) and its components. Comprehensive income (loss) consists of net income
(loss) and foreign currency translation and excess pension liability adjustments
as presented in the consolidated statement of stockholders' equity. The adoption
of SFAS No. 130 had no impact on total stockholders' equity or net income
(loss).
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS No.
14. SFAS No. 131 requires the Company to report segment information based on the
"management," or operating segment, approach rather than the "industry segment"
approach required under SFAS No. 14. Additionally, SFAS No. 131 requires
disclosures about the Company's products and services, geographic areas and
major customers. The adoption of SFAS No. 131 had no impact on the results of
operations or financial position of the Company.
In fiscal 1999, the Company adopted SFAS No. 132, "Employer's
Disclosures about Pension and Other Postretirement Benefits." SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. SFAS No. 132 does not change the method of accounting for such plans.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of Effective Date of SFAS No. 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133, requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Management of the Company anticipates that, due to its
limited use of derivative instruments, the adoption of SFAS No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. SOP
98-1 provides guidance for accounting for the costs of computer software
developed or obtained for internal use. Management of the Company anticipates
that the adoption of SOP 98-1 will not have a significant effect on the
Company's results of operations or its financial position.
25
<PAGE> 26
YEAR 2000 COMPLIANCE
The Company recognizes that without appropriate modification, some
computer programs may not operate properly when asked to recognize the Year
2000. Upon reaching the Year 2000, these computer programs may inaccurately
interpret the "00" used in two-digit calculations as the year 1900.
The Company's state of readiness
Internal Systems:
In anticipation of the need to correct and otherwise prepare for any
potential Year 2000 computer problems, the Company completed an evaluation of
its level of exposure to the risks and costs associated with Year 2000 issues
and as a result, had substantially updated its business critical information
systems with systems that are designed to be Year 2000 compliant. This was
achieved by completing a multiphase project plan that included the installation
of new hardware and the implementation of fully integrated software. As a result
of this updating process, the Company did not experience any significant
internal computer issues or problems with respect to the Year 2000. The Company
will be conducting additional, integrated tests throughout the remainder of the
Year 2000 and beyond to provide added assurance that it is adequately prepared
for the Year 2000 and that its internal systems are Year 2000 compliant. The
Company has not experienced any Year 2000 problems to date which would have a
material effect on the financial condition or liquidity of the Company. There
can be, however, no assurance that future unforeseen Year 2000 problems will not
cause disruptions to the Company's internal business systems.
External Systems:
Although the Company has assessed whether its internal software systems
are Year 2000 compliant, it cannot provide assurance that the systems of all its
vendors and suppliers will be compliant. The Company has sent inquiries to all
critical business vendors and suppliers but has not performed adequate follow-up
procedures. Although the Company currently knows of no material vendor or
supplier system that was not Year 2000 ready, or had experienced Year 2000
problems, failure of systems maintained by these third parties to operate
properly with regard to Year 2000 and thereafter could have a material adverse
effect on the Company's business, financial condition, results of operations and
liquidity.
The Costs to address the Company's Year 2000 issues:
The total costs incurred by the Company with respect to its Year 2000
remediation efforts were approximately $2.8 million. These costs were expensed
as incurred, with approximately $1.2 million included in the fiscal 1999
results.
The Company's contingency plans:
The Company will continue to closely monitor the Year 2000 compliance
readiness of its vendors and suppliers and, where appropriate, will replace
those who appear to be unable to meet compliance deadlines. Additionally, the
Year 2000 compliance costs incurred by the Company provided the latest,
"state-of-the-art" hardware and software available, which the Company believes
to be Year 2000 compliant. However, although it is impossible to accurately
predict and prepare for all risks associated with the Year 2000 issue, the
Company will continue to evaluate and make appropriate modification to address
those risks which it believes are reasonably foreseeable.
26
<PAGE> 27
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.
EMU will affect the European Pelikan Hardcopy businesses. 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 the
firm was 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. As a result of the Pelikan Disposition, the
EMU will not have a significant impact on the Company's operations in the
future.
CAUTIONARY STATEMENT
The foregoing "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section contains various "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, in particular those
statements which represent the Company's expectations or beliefs concerning,
among other things: the ability of the Company to successfully reorganize in the
Bankruptcy Proceedings; the Company's ability to mitigate the effect of the
reduction in the impact market by realizing cost savings as a result of
transferring production to lower cost facilities and by expanding into
additional markets; the introduction of new products and reversal of the overall
decline in its revenues; ability of the Company to obtain credit facilities in
the future which will provide sufficient cash flow to meet its obligations;
future capital expenditure levels; indemnification obligations of third parties
and other assumptions regarding environmental matters and the effect of
inflation on future operations. The Company cautions that such matters
necessarily involve significant risks and uncertainties that could cause actual
operating results and liquidity needs to differ materially from such statements,
including, without limitation, general economic conditions, product demand and
industry capacity, competitive products and pricing, particularly the
possibility of increased competition from OEMs, manufacturing efficiencies, new
product development, consumer acceptance of new products developed by the
Company, particularly non-impact supplies, availability of raw materials and
critical manufacturing equipment, and the regulatory and trade environment.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKS
For quantitative and qualitative disclosures about market risk
affecting the Company see "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" in Item 7 above, which is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is hereby made to the Consolidated Financial Statements and
notes thereto appearing at pages F-1 to F-40 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On January 22, 1999 the Company filed a motion with the Bankruptcy
Court to employ PricewaterhouseCoopers LLP (formerly Coopers & Lybrand L.L.P.)
as the principal accountants to audit its consolidated financial statements.
Such firm had been engaged in that capacity prior to the filing by the Company
for protection under Chapter 11 of the Bankruptcy Code on November 6, 1998.
27
<PAGE> 28
The U.S. Trustee's office objected to the engagement of
PricewaterhouseCoopers LLP, and on March 16, 1999 a hearing was held in the
Bankruptcy Court to determine whether the Company would be permitted to engage
such firm. At that hearing, the Bankruptcy Court denied the motion to employ
PricewaterhouseCoopers LLP. The Bankruptcy Court ruled that such firm was
disqualified from acting in such capacity due to a conflict of interest. Such
conflict resulted from the merger of Coopers & Lybrand ("C&L") and Price
Waterhouse ("PW") on July 1, 1998. Prior to the merger, C&L was the principal
accountant to audit the Company's consolidated financial statements. Also, prior
to the merger, PW acted, and continues to act, as a financial advisor to the
Company's secured bank lending group. As a result of the Bankruptcy Court's
ruling, the Company was without an auditing firm.
The report of PricewaterhouseCoopers LLP included in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998 stated that,
because of various factors, there was substantial doubt about the Company's
ability to continue as a going concern. Otherwise, the reports of
PricewaterhouseCoopers LLP for the fiscal years ended March 31, 1998 and 1997
contained no adverse opinion or disclaimer of opinion and were not modified as
to uncertainty, audit scope or accounting principle.
The decision to change accountants was not recommended or approved by
the Company's Board of Directors. However, the engagement of KPMG LLP was
authorized by the Company's Board following the Bankruptcy Courts' Ruling that
PricewaterhouseCoopers LLP was disqualified from acting as the Company's
auditors. During the two most recent fiscal years and through March 16, 1999
there had not been any disagreements between the Company and
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused them to make reference thereto in their report on the
consolidated financial statements for such years.
As of result of the above, the Company subsequently engaged KPMG LLP as
its principal accountants to audit its consolidated financial statements for the
fiscal year ended March 31, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following information with respect to other principal occupations
or employment and other affiliations and business experience of each director
during the last five years has been furnished to the Company by such director.
Except as otherwise indicated, each of the directors has had the same principal
occupation for the last five years.
JOHN P. ROCHON, AGE 48, DIRECTOR OF THE COMPANY SINCE 1994
Mr. Rochon has been a director of the Company since 1994. Mr. Rochon
has been Chairman of the Richmont Corporation since 1990 and Chief Executive
Officer of Mary Kay Holding Corporation since 1991. Previously, Mr. Rochon
served in positions of increasing responsibility with Mary Kay Holding
Corporation, including Vice Chairman from 1987 to 1991. Through Richmont
Corporation and its predecessor and affiliated companies, Mr. Rochon has built a
large, diversified portfolio of companies and investments strongly focused on
consumer goods and services. Mr. Rochon also serves as a director of Royal
Appliance Manufacturing Company.
PATRICK E. HOWARD, AGE 52, PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR OF
THE COMPANY
Mr. Howard has been the Chief Executive Officer of the Company since
October 1998. Previously, Mr. Howard served as Chief Operating Officer and Chief
Executive Officer of the Company from February 1997 and August 1997,
respectively, until December 1997. Mr. Howard has been a director of the Company
28
<PAGE> 29
continuously since August 1997. Mr. Howard has been the Chief Executive Officer
of the Richmont Group since January 1996. Prior to joining the Company, Mr.
Howard served as Executive Vice President of Mary Kay, Inc. from December 1985
until January 1996.
MEETINGS OF THE BOARD
The Company's Board held three meetings during the fiscal year ended
March 31, 1999 and acted by unanimous consent 6 times. The entire Board acts as
the Audit Committee and Stock Option Committee.
COMPENSATION OF DIRECTORS
Directors are not compensated for their services as directors.
Non-employee directors of the Company formerly received $20,000 per year, plus
$2,000 per year per committee membership and $2,000 per year per committee
Chairmanship. The directors waived all fees due to them for fiscal 1999. In
addition, under the Nu-kote Holding, Inc. 1992 Stock Option Plan, as amended and
restated (the "1992 Plan"), the Company provided non-employee directors one-time
grants of non-qualified stock options for 30,000 shares of Common Stock upon his
or her initial election or appointment to the Board.
Under the terms of the Nu-kote Holding, Inc. Deferred Stock
Compensation Plan (the "Deferred Stock Plan"), non-employee directors may elect
to defer all or a portion of their director's fees, including fees for
attendance at regular and special Board and committee meetings, for any calendar
year (the "Deferred Amount"). Each Deferred Amount is credited by the Company to
a book keeping account (the "Stock Account") and is converted into a stock
equivalent (a "Stock Equivalent") on the date the amount is credited. The number
of Stock Equivalents is based on the closing price of the Company's Common
Stock. Distributions are only made from a director's Stock Account upon
termination of the director's service through death, retirement or otherwise.
COMMITTEES OF THE BOARD
By resolution and vote of the Company's Board of Directors, the
Executive Committee, Compensation and Benefits Committee, Audit Committee and
Stock Option Committee were eliminated during the fiscal years ended March 31,
1999 and March 31, 1998, due to the reduction of the number of directors
constituting the Board of Directors. The entire Board of Directors is
administering responsibilities normally associated with these Committees.
EXECUTIVE OFFICERS
Information about the current Officers of the Company appears above
under the caption "Executive Officers of the Registrant".
KEY EMPLOYEE RETENTION AGREEMENTS
In connection with the Company's Joint Plan of Reorganization as
amended by Nu-kote, the Company entered into Key Employee Retention Agreements
with certain senior management employees of the Company. These agreements, dated
June 10, 1999, were extended on the basis that the applicable key employees were
vital to the improvement of the financial performance of the Company, the
formulation and execution of the Company's plan of Reorganization and to the
success of the OEM litigation. The agreements, offered to seven key employees in
total, included retention payment amounts ranging from six months to one year's
salary. The amounts would only be payable upon confirmation of a reorganization
plan, a sale of substantially all of the assets of the Company or a termination
of the key employee without cause.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange act of 1934 requires the
Company's executive officers and directors, and persons who own more than 10% of
a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and the NASDAQ National Market System. Executive officers, directors and
29
<PAGE> 30
greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) reports they file. Based solely on a
review of the copies of such reports furnished to the Company and written
representations that no Forms 5 were required for the Fiscal Year, the Company
believes that during the Fiscal Year no executive officer, director or greater
than 10% stockholder was delinquent in filing any reports.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Company's
Chief Executive Officer and certain of the Company's other executive officers
and significant employees whose total salary and bonus for the Fiscal Year
exceeded $100,000 (the "Named Executives") with respect to all services rendered
to the Company during the previous three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------------- ----------------
FISCAL SECURITIES
YEAR OTHER ANNUAL UNDERLYING ALL OTHER
ENDED SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION MARCH 31 ($)(1) ($)(2) ($)(3) (2) ($)(4)
- ----------------------------- ---------- --------- ---------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Patrick E. Howard (5) 1999 -- -- -- -- --
President, Chief Executive 1998 -- -- -- -- --
Officer, and Director 1997 -- -- -- -- --
Hans Paffhausen 1999 $215,750 -- $ 13,919 -- --
Managing Director, 1998 $220,409 -- $ 13,690 -- --
European Operations 1997 $249,730 -- $ 15,511 -- --
C. Ronald Baiocchi 1999 $225,000 -- $ 8,657 -- $ 4,000
Sr. Vice President and General 1998 $226,733 -- $ 9,321 -- $ 3,800
Manager, North American Operations 1997 $205,000 -- $ 9,012 -- $ 3,674
Richard A. Larsen 1999 $160,000 -- $ 7,200 -- $ 3,800
Sr. Vice President, General 1998 $160,000 -- $ 7,200 -- $ 3,800
Counsel and Secretary 1997 $160,000 -- $ 7,200 -- $ 2,806
Ian Elliott 1999 $140,000 -- $ 4,800 -- $ 3,360
Sr. Vice President - Business 1998 $140,000 -- $ 4,800 -- $ 3,360
Development Nu-kote 1997 $124,039 -- $ 4,355 -- $ 2,977
International, Inc.
Phillip L. Theodore 1999 $138,462 -- $ 32,500 -- $ 2,873
Sr. Vice President, Chief 1998 $ 96,154 -- $ 17,400 -- $ 2,308
Financial Officer, Treasurer 1997 $ 86,923 $ 35,500 $ 17,700 -- $ 2,086
and Assistant Secretary
Shaun K. Donnellan (6) 1999 -- -- -- -- --
Former Chief Executive Officer 1998 -- -- -- -- --
1997 -- -- -- -- --
</TABLE>
- -----------------------------
(1) Includes, where applicable, amounts electively deferred by each Named
Executive under the Nu-kote International, Inc. Employee Savings Plan (the
"Savings Plan)
(2) No bonuses or stock appreciation rights awards were granted in any of
fiscal years 1999, 1998 or 1997 with the exception of $35,500 paid to Mr.
Theodore in 1997.
(3) Amounts listed in this column for fiscal 1999 include (a) automobile
allowances in the amounts of $13,919, $6,000, $7,200, $4,800 and $5,450,
for Messrs. Paffhausen, Baiocchi, Larsen, Elliott and Theodore,
respectively; and (b) club dues of $2,657, for Mr. Baiocchi; and (c)
reimbursement of $27,050 of executive MBA program expenses for Mr.
Theodore.
(4) Amounts listed in this column for fiscal 1999 include (a) the Company's
contributions to the Savings Plan (exclusive of amounts deferred at the
election of the Named Executive) on behalf of each of the Named Executives,
in the amount of $4,000, $3,800, $3,360, and $2,873, for Messrs. Baiocchi,
Larsen, Elliott, and Theodore, respectively.
30
<PAGE> 31
(5) The services of Mr. Howard are made available to the Company pursuant to a
consulting agreement between Richmont Corporation and the Company. The
Company does not compensate Mr. Howard directly for his services. The
Company received the services of the Richmont Corporation free of charge
during fiscal 1999 and 1998, which included operational, sales, financial,
marketing and management consulting services provided by Mr. Howard and
other employees of Richmont Corporation. Richmont Corporation is an
affiliate of Richmont Capital Partners I, L.P., see: Security Ownership of
Principal Stockholders and Management.
(6) The services of Mr. Donnellan, until his resignation on October 8, 1998,
were made available to the Company pursuant to a consulting agreement
between Glass & Associates, Inc. and the Company. While the Company did not
compensate Mr. Donnellan directly for his services, the Company had paid
Glass & Associates, Inc. $1,018,268 and $648,270 during fiscal 1999 and
1998, respectively for operational, sales, financial, marketing and
management consulting services provided by Mr. Donnellan and other
associates of Glass & Associates, Inc. Additionally, Mr. Donnellan and
other associates of Glass & Associates, Inc. had been reimbursed actual and
reasonable expenses incurred by them in performing services for the
Company. Glass & Associates, Inc. is a third-party consulting firm,
independent of the Company.
There were no stock appreciation rights granted during fiscal year 1999
to any of the named executives.
The following table sets forth the number of and value realized on
shares acquired on exercise of stock options during the Fiscal Year and the
number of shares covered by exercisable and unexercisable options and stock
appreciation rights held, and the dollar values which would have been realized
on exercise of such options and stock appreciation rights, on March 31, 1999 by
each of the Named Executives.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE MONEY"
OPTIONS/SARS OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)(1)
ACQUIRED VALUE ---------------------------- ---------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------- --------------- --------------- ----------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Patrick E. Howard -- -- 40,000 160,000 -- --
Hans Paffhausen -- -- 80,000 20,000 -- --
C. Ronald Baiocchi -- -- 33,823 5,379 -- --
Richard A. Larsen -- -- 32,000 28,000 -- --
Ian Elliott -- -- 40,748 12,802 -- --
Phillip L. Theodore -- -- 15,600 12,400 -- --
Shaun K. Donnellan -- -- - - -- --
</TABLE>
- ----------------------------
(1) Based upon the closing price of the Common Stock ($0.16) on the NASDAQ
National Market System on March 31, 1999.
31
<PAGE> 32
PENSION PLAN TABLE
The following table sets forth the estimated annual benefits payable to
hypothetical participants who are entitled to the maximum benefits under the
tax-qualified non-contributory defined benefit plan maintained by the Company
(the "Pension Plan") in the compensation and years-of-service categories
indicated in the table upon retirement at normal retirement age (65 years of
age). The amounts shown are based upon the assumption that such benefits will be
paid in the form of a single life annuity and assume offset for social security
benefits.
<TABLE>
<CAPTION>
ANNUALIZED
AVERAGE 10 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
FINAL PAY OF SERVICE OF SERVICE OF SERVICE OF SERVICE OF SERVICE
------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 6,777 $ 10,818 $ 12,073 $ 13,551 $ 14,951
75,000 9,438 15,644 18,845 21,918 24,318
100,000 12,563 21,894 26,658 31,293 34,693
125,000 15,688 28,144 34,470 40,668 45,068
150,000 18,813 34,394 42,283 50,043 55,443
175,000 18,813 34,394 42,283 50,043 55,443
200,000 18,813 34,394 42,283 50,043 55,443
225,000 18,813 34,394 42,283 50,043 55,443
250,000 18,813 34,394 42,283 50,043 55,443
</TABLE>
The Pension Plan provides retirement benefits related to an employee's
years of service and such employee's average annual earnings (subject to a
maximum of $150,000 annually, as adjusted by the Internal Revenue Service for
cost of living increases after 1995) for the 60 highest consecutive months'
compensation during the 120 months prior to retirement (and if the employee has
been employed less than five years, the average of compensation during all
months employed.) Compensation includes all salary or wages, including
commission, shift premiums, tax deferred contributions made to the Nu-kote
International, Inc. Employees Savings Plan on an employee's behalf and payments
for non-work periods during active employment, but does not include any other
form of remuneration.
At March 31, 1999, the credited years of service and the compensation
covered under the Pension Plan of the participating Named Executives were as
follows:
<TABLE>
<CAPTION>
YEARS OF
SERVICE COVERED COMPENSATION
---------------- ----------------------
<S> <C> <C>
C. Ronald Baiocchi 22 $150,000
Richard A. Larsen 4 $150,000
Ian Elliott 21 $150,000
Phillip L. Theodore 5 $150,000
</TABLE>
Mr. Hans Paffhausen is not covered by the above referenced Pension
Plan, but is covered by a separate plan in Switzerland.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board currently acts as the Stock Option Committee and
Compensation Committee. No report on executive compensation is expected to be
issued.
32
<PAGE> 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth certain information regarding each
person known to the Company to own beneficially more than 5% of the outstanding
Common Stock of the Company as of April 17, 2000. Such information has been
obtained from the most recent public filings submitted or other information made
available to the Company by such holders.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
NAME AND ADDRESS OF OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP (1) CLASS
---------------------- ------------------- -----------
<S> <C> <C>
Ligapart AG....................................... 4,600,000 21.1%
Neuhofstrasse 4
6340 Bear, Switzerland
Richmont Capital Partners I, L.P.................. 2,559,360 11.8%
4300 Westgrove
Dallas, Texas 75428
Oppenheimer Group, Inc............................ 2,062,600 (2) 9.5%
Oppenheimer Tower
World Financial Center
New York, New York 10281
</TABLE>
---------------------
(1) Unless otherwise indicated, such shares of Common Stock are owned with sole
voting and investment powers.
(2) Represents the aggregate shares held by the Oppenheimer Group, Inc. and its
subsidiaries and affiliates, including Oppenheimer Financial Corp.,
Oppenheimer Equities Inc., Oppenheimer Holding, Inc., Oppenheimer & Co.,
Inc. and Oppenheimer Capital, L.P. Oppenheimer Group, Inc. is a parent
holding company and disclaims beneficial ownership and voting and
dispositive power over the shares held by its subsidiaries and their
clients.
33
<PAGE> 34
MANAGEMENT
The following table sets forth, as of April 17, 2000, certain
information as to the shares of Common Stock beneficially owned by each director
and nominee as director of the Company, by each Named Executive, as defined
herein, and by all directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
NAME AND ADDRESS OF OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP (1) CLASS
- ------------------- -------------------- ------------
<S> <C> <C>
John P. Rochon ............................................ 2,583,360(2)(3) 11.9%
Patrick E. Howard ......................................... 40,000(4) *
Hans Paffhausen(6) ........................................ 80,000(4) *
C. Ronald Baiocchi ........................................ 33,823(4) *
Richard A. Larsen(6) ...................................... 32,000(4) *
Ian Elliott ............................................... 40,748(4) *
Phillip L. Theodore ....................................... 15,600(4) *
All directors and executive officers as a group (7 persons) 2,825,531(5) 13.0%
</TABLE>
- -------------------------------
* less than 1% of class
(1) Unless otherwise indicated, such shares of Common Stock are owned directly
with sole voting and sole investment power.
(2) Includes 2,559,360 shares owned by Richmont Capital Partners L.P., as to
which shares Mr. Rochon has shared voting and investment power.
(3) Includes 24,000 shares that may be acquired through the exercise of stock
options, which are exercisable within 60 days of April 17, 2000.
(4) Represents shares that may be acquired through the exercise of stock
options, which are exercisable within 60 days of April 17, 2000.
(5) Includes 250,571 shares which may be acquired through the exercise of stock
options exercisable within 60 days of April 17, 2000 and other shares
deemed beneficially owned by the Company's directors as described in the
preceding notes.
(6) Resigned from the Company on September 30, 1999 and October 31, 1999,
respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
There were no reportable relationships or related transactions in
effect during the fiscal year ended March 31, 1999.
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<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, AND REPORTS ON
FORM 8-K
(a)(1) Reference is made to the Index to Consolidated Financial Statements
appearing at page F-1 of this report.
(2) Reference is made to the Index to Financial Statement Schedules
appearing at page S-1 of this report.
(3) Exhibits.
<TABLE>
<CAPTION>
- ----------- ----------------------------------------------------------------------------- ------------
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------- ------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of Nu-kote
Holding, Inc. ("Holding") (incorporated herein by reference to
Exhibit 3(a) of Amendment No. 1, as filed with the Commission
on August 24, 1992 ("Amendment No. 1") to Holding's
Registration Statement on Form S-1 (File No. 33-481012); as
filed with the Commission on May 22, 1992 ("Holding's 1992
Form S-1")).
3.2 Certificate of Amendment to Amended and Restated Certificate
of Incorporation, dated August 4, 1994 (incorporated herein by
reference to Exhibit 3(a) to Holding's Annual Report on Form
10-K for the year ended March 31, 1995 (File No. 0-20287)
("Holding's 1995 Form 10-K")).
3.3 Certificate of Designations of Holding, dated May 19, 1994
(incorporated herein by reference to Exhibit 3.1(b) to
Holding's 1995 Form 10-K).
3.4 Certificate of Increase of Holding, dated February 10, 1995
(incorporated herein by reference to Exhibit 3.1(c) to
Holding's 1995 Form 10-K).
3.5 By-Laws of Holding (incorporated herein by reference to
Exhibit 3.2 to Holding's 1995 Form 10-K).
4.1 Form of Stock Certificate for Class B Common Stock, par value
$.01 per share (incorporated herein by reference to Exhibit
4(d) to Amendment No. 2 to Holding's 1992 Form S-1).
4.2 Rights Agreement, dated as of May 19, 1994 between Holding and
Chemical Bank (incorporated herein by reference to Exhibit 1
of Holding's Form 8-A, as filed with the Commission on May 20,
1994).
4.3 Amendment No. 1 to Rights Agreement, dated as of November 15,
1994, between Holding and Chemical Bank (incorporated herein
by reference to Exhibit 2 of Holding's Form 8-A/A, as filed
with the Commission on February 24, 1995).
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
- ----------- ----------------------------------------------------------------------------- ------------
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------- ------------
<S> <C> <C>
10.1 Second Amended and Restated Credit Agreement dated as of July
31, 1997 by and among Nu-kote International, Inc. as borrower,
Nu-kote Holding, Inc. as Guarantor, the lenders listed on the
signature page thereto as Lenders, and NationsBank of Texas,
N.A. as Administrative Agent and Collateral Agent
(incorporated herein by reference to Exhibit 10.1 of Holding's
June 1997 Form 10-Q).
10.2 (pound)6,275,000 - Third Amended and Restated Revolving Credit
Agreement dated July 31, 1997 between Pelikan Scotland Limited
as borrower, Barclays Bank PLC as Agent, NationsBank of Texas,
N.A. as Collateral Agent and NationsBank of Texas, N.A. as
Documentation Agent and Others (incorporated herein by
reference to Exhibit 10.2 of Holding's June 1997 Form 10-Q).
10.3 Patent Assignment and License Agreement dated as of January
16, 1987, between Unisys and NKI (incorporated herein by
reference to Exhibit 10(c) of Holding's 1992 Form S-1).
10.4 CHF50,000,000 - Third Amended and Restated Revolving Credit
Agreement dated July 31, 1997 between Pelikan Produktions AG
and Pelikan Hardcopy (International) AG as borrower, Barclay
Bank PLC as Agent, NationsBank of Texas, N.A. as Collateral
Agent and NationsBank of Texas, N.A. as Documentation Agent
and Others (incorporated herein by reference to Exhibit 10.3
of Holding's June 1997 Form 10-Q).
10.5 Trademark and Service Mark Assignment, dated as of January 16,
1987, between Unisys and NKI (incorporated herein by reference
to Exhibit 10(d) of Holding's 1992 Form S-1).
10.6 IBM Cross License, dated as of April 8, 1988, between
International Business Machines Corporation and NKI
(incorporated herein by reference to Exhibit 10(rrr) of
Holding's 1992 Form S-1).
10.7 Technical Information and License Agreements, dated as of June
23, 1987, between NKI and each of Interfas S.A. and N-K
International Limited (incorporated herein by reference to
Exhibit 10(sss) of Holding's 1992 Form S-1).
10.8 Indemnification Agreement, dated as of May 18, 1992, among
NKI, Holding, Clayton, Dubilier & Rice, Inc., Fund II and
Clayton & Dubilier Associates II Limited Partnership, a
Connecticut limited partnership (incorporated herein by
reference to Exhibit 10(dddd) of Holding's 1992 Form S-1).
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
- ----------- ----------------------------------------------------------------------------- ------------
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------- ------------
<S> <C> <C>
10.9 Nu-kote International, Inc. Retirement Income Plan
(incorporated herein by reference to Exhibit 10(eeee) of
Holding's 1992 Form S-1).
10.10 Nu-kote International, Inc. Employee Savings Plan
(incorporated herein by reference to Exhibit 10(iiii) of
Holding's 1992 Form S-1).
10.11 Lease, dated as of February 18, 1993, between Frank DiMino, as
Lessor and NKI, as Lessee, (incorporated herein by reference
to Exhibit 10.56 to Amendment No. 1, as filed with the
Commission on May 18, 1993 ("Amendment No. 1"), to Holding's
1993 Form S-1).
10.12 Asset and Stock Purchase Agreement, dated as of November 15,
1994, between Holding and Pelikan Holding AG ("Pelikan")
(incorporated herein by reference to Annex A to Holding's
February 1995 Proxy Statement).
10.13 Amendment to Asset and Stock Purchase Agreement, dated as of
February 6, 1995, between Holding and Pelikan (incorporated
herein by reference to Annex C to Holding's February 1995
Proxy Statement).
10.14 Trademark License Agreement, dated as of February 24, 1995
between Pelikan, PIH and Pelikan GmbH (Hannover), on the one
hand, and Holding, on the other hand (incorporated herein by
reference to Exhibit B to Annex A to Holding's February 1995
Proxy Statement).
10.15 Nu-kote Holding, Inc. Senior Management Stock Appreciation
Rights Plan, effective June 22, 1995 (incorporated herein by
reference to Exhibit 10.46 to Holding's 1995 Form 10-K).
10.16 Form of Appreciation Right Notification (relating to Exhibit
10.43) (incorporated herein by reference to Exhibit 10.47 to
Holding's 1995 Form 10-K).
10.17 Nu-kote Holding 1992 Stock Option Plan, as amended and
restated on August 1, 1995 (incorporated herein by reference
to Exhibit 10.43 to Holding's Annual Report on Form 10-K for
the year ended March 31, 1996 (File No. 0-20287) ("Holding's
1996 Form 10-K")).
10.18 First Amendment to Trademark License Agreement, dated
September 30, 1999, between Pelikan Holding AG, Pelikan
Vertriebgsellschaft mbH & Co., Pelikan GmbH and Nu-kote
Holding, Inc.
10.19 Amendment to Non-Competition Agreement, dated September 30,
1999 between Nu-kote Holding, Inc., Pelikan Produktion AG,
Grief-Werke GmbH, Pelikan Scotland Ltd., and Pelikan Holding
AG
10.20 Credit and Security Agreement By and Between Norwest Business
Credit, Inc. and Nu-kote Holding, Inc., Nu-kote Imperial,
Ltd., Nu-kote International, Inc., International Communication
Materials, Inc., Future Graphics, Inc. and Nu-kote Latin
America, Inc. dated December 14, 1998.
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
- ----------- ----------------------------------------------------------------------------- ------------
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------- ------------
<S> <C> <C>
10.21 First Amendment to Credit and Security Agreement By and
Between Norwest Business Credit, Inc. and Nu-kote Holding,
Inc., Nu-kote Imperial, Ltd., Nu-kote International, Inc.,
International Communication Materials, Inc., Future Graphics,
Inc. and Nu-kote Latin America, Inc. dated September 15,1999.
10.22 Retention Agreements between Nu-kote Holding, Inc. and various
key employees, including C. Ronald Baiocchi, Phillip L.
Theodore, Ian Elliott, Michael V. Ducey, Faxon Learner, Gerald
Gigliotti, and Cindy Hutchins dated June 10, 1999.
10.23 Consulting Agreement, dated December 10,1997, between Glass &
Associates and Nu-kote Holding, Inc.
18 Preferability letter dated January 7, 2000 from KPMG LLP
regarding change in accounting principle
21.1 Subsidiaries of Holding.
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
99.1 Disclosure Statement for Joint Plan of Reorganization for
Nu-kote dated November 30, 1999
99.2 Second Amended Disclosure Statement for Second Amended Joint
Plan of Reorganization dated March 2, 2000
</TABLE>
- ----------------------------
(b) The Registrant filed no reports on Form 8-K during the quarterly period
ended March 31, 1999.
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 19, 2000
NU-KOTE HOLDING, INC.
By: /s/ PATRICK E. HOWARD
------------------------------------
Patrick E. Howard
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
the following persons in the capacities and on the dates indicated have signed
this Report.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ PATRICK E. HOWARD President, Chief Executive Officer, and Director April 19, 2000
- -------------------------------------
Patrick E. Howard
/s/ JOHN P. ROCHON Director April 19, 2000
- -------------------------------------
John P. Rochon
/s/ PHILLIP L. THEODORE Senior Vice President - Chief Financial April 19, 2000
- ------------------------------------- Officer/Treasurer/Assistant Secretary/
Phillip L. Theodore Principal Accounting Officer/ Principal
Financial Officer
</TABLE>
39
<PAGE> 40
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
-----------
<S> <C>
Independent Auditors' Report ........................................... F-2
Report of Independent Accountants ...................................... F-3
Consolidated Balance Sheets at March 31, 1999 and 1998 ................. F-4
Consolidated Statements of Operations for the Years Ended
March 31, 1999, 1998 and 1997 .......................................... F-5
Consolidated Statements of Changes in Shareholders' Equity (Deficit) and
Comprehensive Income (Loss) for the Years Ended
March 31, 1999, 1998 and 1997 .......................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998 and 1997 .......................................... F-7
Notes to Consolidated Financial Statements ............................. F-8 - F-40
</TABLE>
F-1
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Nu-kote Holding, Inc.:
We have audited the accompanying consolidated balance sheets of Nu-kote Holding,
Inc. and subsidiaries as of March 31, 1999 and the related consolidated
statements of operations, changes in shareholders' equity (deficit) and
comprehensive income (loss) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nu-kote Holding,
Inc. and subsidiaries as of March 31, 1999 and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
As discussed in Note 2, on November 6, 1998, the Company filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. The accompanying
consolidated financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such consolidated
financial statements do not purport to show (a) as to assets, their realizable
value on a liquidation basis or their availability to satisfy liabilities; (b)
as to pre-petition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to shareholder
amounts, the effect of any changes that may be made in the capitalization of the
Company; or (d) as to operations the effect of any changes that may be made in
its business.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, is operating under the protection of Chapter 11 of the U.S.
Bankruptcy Code, has material uncertainties related to pending litigation and
other claims and has a shareholders' deficit. These issues raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its inventory valuation method from the lower of cost on a last-in,
first-out basis or market, to the lower of cost, on a first-in, first-out basis
or market. The change has been applied retroactively by restating the
consolidated financial statements for prior years.
KPMG LLP
Nashville, Tennessee
January 7, 2000
F-2
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Nu-kote Holding, Inc.:
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, cash flows and changes in shareholders' equity
(deficit) prior to (1) the restatement for the change in accounting for
inventories from the last-in, first-out method to the first-in, first-out method
and (2) the additional disclosures and reclassifications made for the adoption
of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," and SFAS No. 132, "Employer's Disclosure
about Pension and Other Postretirement Benefits" (not separately presented
herein), present fairly, in all material respects, the financial position,
results of operations and cash flows of Nu-kote Holding, Inc. and its
subsidiaries as of and for each of the two years in the period ended March 31,
1998, in conformity with generally accepted accounting principles. These
consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluation the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Nu-kote
Holding, Inc. and its subsidiaries for any period subsequent to March 31, 1998
nor have we examined any adjustments, additional disclosures and
reclassifications applied to the fiscal 1998 and 1997 consolidated financial
statements.
The aforementioned consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has suffered recurring
operating losses, violated certain financial covenants related to its bank
indebtedness, has had recurring net cash outflows from operations, has negative
working capital and a shareholders' deficit. In addition, the Company's credit
facilities expire January 4, 1999 and there is no assurance that the facilities
will be extended or that alternative financing can be obtained. All of these
matters raise substantial doubt about the Company's ability to continue as a
going concern. The aforementioned consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Dallas, Texas
June 26, 1998
F-3
<PAGE> 43
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 7,272 $ 9,488
Accounts receivable less allowances of $5,542 and $5,473, respectively ......... 37,127 46,412
Receivables from related party ................................................. 2,688 2,674
Inventories, net ............................................................... 47,310 68,124
Prepaid expenses ............................................................... 5,128 6,907
Deferred income taxes .......................................................... -- 3,457
--------- ---------
Total current assets ......................................................... 99,525 137,062
Property, plant and equipment, net .................................................. 46,032 66,652
Other assets and deferred charges, net .............................................. 3,856 4,344
Assets held for sale ................................................................ 431 1,806
Intangibles, net .................................................................... 2,605 12,712
--------- ---------
Total assets ................................................................. $ 152,449 $ 222,576
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
DIP facility advances .......................................................... $ 1,445 $ --
Bank loans and current portion of long-term debt ............................... 43,579 142,009
Accounts payable ............................................................... 20,816 40,730
Compensation related liabilities ............................................... 3,537 8,031
Other current liabilities ...................................................... 5,020 29,357
--------- ---------
Total current liabilities .................................................... 74,397 220,127
Pre-petition liabilities subject to compromise ...................................... 129,339 --
Long-term debt, net of current portion .............................................. -- 760
Other liabilities ................................................................... 8,842 7,079
Deferred income taxes ............................................................... 5,485 9,265
--------- ---------
Total liabilities ............................................................ 218,063 237,231
--------- ---------
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 shares 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 ..................................................... 94,110 92,610
Accumulated deficit ............................................................ (149,476) (94,504)
Accumulated other comprehensive income:
Foreign currency translation adjustments ................................... (8,202) (10,349)
Excess pension liability ................................................... (2,043) (2,409)
Treasury stock, 550,000 shares at cost ......................................... (226) (226)
--------- ---------
Total shareholders' deficit .................................................. (65,614) (14,655)
========= =========
Commitments and contingencies (Notes 3, 10, 11, 14, 15, and 16) ............... -- --
--------- ---------
Total liabilities and shareholders' deficit .................................. $ 152,449 $ 222,576
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 44
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales ..................................................... $ 240,529 $ 295,703 $ 342,302
Cost of sales ................................................. 204,991 252,888 283,422
------------ ------------ ------------
Gross margin ............................................ 35,538 42,815 58,880
Selling, general and administrative expenses .................. 53,928 59,756 66,602
Research and development expenses ............................. 5,609 6,645 9,646
Other operating expenses ...................................... -- -- 1,064
Provisions for loss on sales of businesses .................... 911 4,061 --
Impairment of assets .......................................... 7,967 -- --
Restructuring expense ......................................... 8,785 3,349 15,139
------------ ------------ ------------
Operating loss .......................................... (41,662) (30,996) (33,571)
Interest expense, net (fiscal 1999 contractual interest $14,802) 11,158 15,474 8,444
Other expense items, net ...................................... 1,269 1,296 714
------------ ------------ ------------
Loss before reorganization items, income taxes and
extraordinary item ...................................... (54,089) (47,766) (42,729)
Reorganization items .......................................... 1,398 -- --
------------ ------------ ------------
Loss before income taxes and extraordinary item ......... (55,487) (47,766) (42,729)
Provision (benefit) for income taxes .......................... (515) (329) 5,201
------------ ------------ ------------
Loss before extraordinary item .......................... (54,972) (47,437) (47,930)
Extraordinary loss from early extinguishment of indebtedness .. -- (2,550) --
------------ ------------ ------------
Net loss ...................................................... $ (54,972) $ (49,987) $ (47,930)
============ ============ ============
Net loss per share of common stock (basic and diluted):
Loss before extraordinary item .......................... $ (2.52) $ (2.18) $ (2.20)
Extraordinary loss ...................................... -- (0.12) --
------------ ------------ ------------
Net loss ................................................ $ (2.52) $ (2.30) $ (2.20)
------------ ------------ ------------
Weighted average shares outstanding ........................... 21,775,302 21,775,302 21,770,445
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 45
NU-KOTE HOLDINGS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
SHARES ----------------------------- ACCUMULATED RETAINED
----------------------------------- ADDITIONAL OTHER EARNINGS
HELD IN PAR PAID-IN TREASURY COMPREHENSIVE (ACCUMULATED
ISSUED TREASURY OUTSTANDING VALUE CAPITAL STOCK INCOME (LOSS) DEFICIT)
---------- -------- ----------- ----- ---------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999 as
previously reported........... 22,292,008 (550,000) 21,742,008 $223 $91,178 $(226) $ 692 $ 13,042
Adjustment for the cumulative
effect on prior years of
retroactively applying the
change in inventory valuation
from LIFO to FIFO............. -- -- -- -- -- -- -- (9,629)
Balance at March 31, 1996, as
restated...................... 22,292,008 (550,000) 21,742,008 223 91,178 (226) 692 3,413
Comprehensive income:
Net loss.................... -- -- -- -- -- -- -- (47,930)
Translation adjustments..... -- -- -- -- -- -- (6,256) --
Total comprehensive
loss....................
Exercise of common stock
options..................... 33,294 -- 33,294 -- 427 -- -- --
---------- -------- ---------- ---- ------- ----- -------- ---------
Balance at March 31, 1997...... 22,325,302 (550,000) 21,775,302 223 91,605 (226) (5,564) (44,517)
Comprehensive income:
Net loss.................... -- -- -- -- -- -- -- (49,987)
Translation adjustments..... -- -- -- -- -- -- (4,785) --
Excess pension liability.... -- -- -- -- -- -- (2,409) --
Total comprehensive
loss....................
Issuance of stock warrants.... -- -- -- -- 1,005 -- -- --
---------- -------- ---------- ---- ------- ----- -------- ---------
Balance at March 31, 1998...... 22,325,302 (550,000) 21,775,302 223 92,610 (226) (12,758) (94,504)
Comprehensive income:
Net loss.................... -- -- -- -- -- -- -- (54,972)
Translation adjustments..... -- -- -- -- -- -- 2,147 --
Excess pension liability.... -- -- -- -- -- -- 366 --
Total comprehensive
loss....................
Reversal of registration
rights expense accrual
(note 2).................... -- -- -- -- 1,500 -- -- --
---------- -------- ---------- ---- ------- ----- -------- ---------
Balance at March 31, 1999...... 22,325,302 (550,000) 21,775,302 $223 $94,110 $(226) $(10,245) $(149,476)
========== ======== ========== ==== ======= ===== ======== =========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Balance at March 31, 1999 as
previously reported........... $104,909
Adjustment for the cumulative
effect on prior years of
retroactively applying the
change in inventory valuation
from LIFO to FIFO............. (9,629)
Balance at March 31, 1996, as
restated...................... 95,280
Comprehensive income:
Net loss.................... (47,930)
Translation adjustments..... (6,256)
--------
Total comprehensive
loss.................... (54,186)
Exercise of common stock
options..................... 427
--------
Balance at March 31, 1997...... 41,521
Comprehensive income:
Net loss.................... (49,987)
Translation adjustments..... (4,785)
Excess pension liability.... (2,409)
--------
Total comprehensive
loss.................... (57,181)
Issuance of stock warrants.... 1,005
--------
Balance at March 31, 1998...... (14,655)
Comprehensive income:
Net loss.................... (54,972)
Translation adjustments..... 2,147
Excess pension liability.... 366
--------
Total comprehensive
loss.................... (52,459)
Reversal of registration
rights expense accrual
(note 2).................... 1,500
--------
Balance at March 31, 1999...... $(65,614)
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 46
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $(54,972) $(49,987) $(47,930)
Adjustments to reconcile net loss to net cash used in operating activities:
Extraordinary loss from early extinguishment of debt ................. -- 2,550 --
Inventory provisions and other write-offs ............................ 8,503 5,488 11,454
Provision for loss on sales of businesses ............................ 911 4,061 --
Foreign exchange (gains) losses ...................................... -- 181 (417)
Impairment losses .................................................... 7,967 -- --
Depreciation and amortization ........................................ 9,809 15,183 13,545
Provisions for bad debts ............................................. 1,517 2,740 1,786
Deferred income tax and changes in tax valuation allowances .......... (515) 405 6,219
Tax benefit from exercise of stock options ........................... -- -- 91
Restructuring provisions ............................................. 7,675 1,327 8,567
Other ................................................................ 3,846 (2,303) (2,387)
Changes in operating assets and liabilities:
Accounts receivable ..................................................... 4,042 16,245 14,978
Inventories ............................................................. 14,114 8,355 5,455
Prepaid expenses ........................................................ 1,721 3,409 (1,706)
Accounts payable ........................................................ (2,011) (5,853) 4,511
Compensation related liabilities ........................................ (1,530) 1,839 (5,622)
Other accrued liabilities ............................................... (1,326) (5,940) (8,177)
Cash paid for restructuring costs ..................................... (1,440) (3,459) (5,287)
-------- -------- --------
Net cash used in operating activities ................................... (1,689) (5,759) (4,920)
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment ............................... (5,409) (5,629) (12,283)
Sales of property, plant and equipment .................................. 5,826 3,081 996
-------- -------- --------
Net cash provided by (used in) investing activities ................... 417 (2,548) (11,287)
-------- -------- --------
Cash flows from financing activities:
DIP facility advances ................................................... 1,445 -- --
Borrowings on long-term debt and other loans ............................ 500 21,626 97,032
Payments on long-term debt and other loans .............................. (4,110) (12,410) (73,541)
Payments of financing costs ............................................. -- (2,559) --
Exercise of stock options ............................................... -- -- 337
-------- -------- --------
Net cash provided by (used in) financing activities ................... (2,165) 6,657 23,828
-------- -------- --------
Effect of exchange rate changes on cash ...................................... 1,221 (1,137) (1,886)
-------- -------- --------
Net decrease in cash ......................................................... (2,216) (2,787) 5,735
Cash and cash equivalents at beginning of year ............................... 9,488 12,275 6,540
-------- -------- --------
Cash and cash equivalents at end of year ..................................... $ 7,272 $ 9,488 $ 12,275
======== ======== ========
Supplementary disclosure of cash flow information:
Cash paid during the year for interest ................................. $ 5,590 $ 14,690 $ 7,276
Cash paid during the year for income taxes ............................. -- 359 1,978
Cash paid for debt issuance costs ...................................... 1,753 2,582 781
Excluded from the consolidated statements of cash flows was the effect
on non-cash financing activities of the following various items:
Issuance of stock warrants ............................................. $ -- $ 1,005 $ --
Elimination of certain financing obligations related to the registration
of restricted shares and the issuance of debt ........................ 4,250 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 47
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. THE COMPANY
Nu-kote Holding, Inc. ("Nu-kote") and its wholly-owned subsidiaries are
referred to collectively as the "Company". The Company is an independent
manufacturer and distributor of impact and non-impact imaging supplies for
office and home printing devices, including the manufacture and distribution of
typewriter and printer ribbons, thermal fax ribbons, cartridges and toners for
laser printers, facsimile machines and copiers, cartridges and ink for ink jet
printers, specialty papers, calculator ink rollers and carbon paper.
The Company sells products primarily in the United States and Europe,
directly to wholesale and retail markets, and also to original equipment
manufacturers and distributors for resale under their brand names or private
labels. The Company distributes through major office supply marketing channels,
including wholesale distributors, office products dealers, direct mail catalogs,
office supply "super stores", information processing specialists, value added
resellers, and mass market retailers.
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. 398-10600) and began operating its businesses as
debtors-in-possession ("DIP") under the supervision of the Bankruptcy Court. The
Bankruptcy Proceedings primarily relate to all U.S. assets and operations and
did not include the Company's European 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 13.
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 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
had 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
F-8
<PAGE> 48
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. PETITION FOR REORGANIZATION UNDER CHAPTER 11 (CONTINUED)
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.
Under the Bankruptcy Code, the Company may elect to assume or reject
real estate leases, employment contracts, personal property leases, service
contracts and other executory pre-petition contracts, subject to Bankruptcy
Court review. The Company cannot presently determine or reasonably estimate the
ultimate liability that may result from rejecting leases or from the filing of
claims for any rejected contracts, and no provisions have been made for these
items.
In 1995, the Company provided registration rights to a shareholder who
acquired common stock in connection with a private placement. The Company
estimated the costs of registering such shares at $1.5 million, which had been
accrued and charged to additional paid-in-capital. In connection with the
Company's Bankruptcy Proceedings, the Company has terminated the registration
rights with this shareholder. As discussed in Note 22, the Company's Joint Plan
of Reorganization specifies the extinguishment of the existing common shares of
Nu-kote. Accordingly, the accrued registration costs have been reversed with a
corresponding credit to additional paid-in-capital.
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 10). The DIP
facility and the Company's bankruptcy status restrict the Company from declaring
or paying dividends.
On March 2, 2000, Nu-kote, its secured lenders and the official
committees for Nu-kote's unsecured creditors filed a Joint Plan of
Reorganization for Nu-kote (the "Plan") and a Second Amended Disclosure
Statement for Second Amended Joint Plan of Reorganization for Nu-kote (the
"Disclosure Statement"). See Note 22 for further discussion of the Joint Plan of
Reorganization filed on March 2, 2000.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared on a going
concern basis. The Company has experienced recurring net losses applicable to
common shares of $54,972, $49,987 and $47,930 during the years ended March 31,
1999, 1998 and 1997 respectively. The Company is operating under the protection
of Chapter 11 of the U.S. Bankruptcy Code and has material uncertainties related
to pending litigation and other claims. Additionally, as a result of market
conditions and increased competition, the Company may suffer a significant net
loss applicable to common shares in the year ended March 31, 2000. Market
conditions and their effect on the Company's liquidity may restrict the
Company's use of cash. These matters raise substantial doubt about the entity's
ability to continue as a going concern. The Company's continued existence is
dependent upon several factors including confirmation of the Joint Plan of
Reorganization, successful resolution of pending litigation and the ability to
continue to conduct business in the non-impact products market.
F-9
<PAGE> 49
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nu-kote
and its wholly-owned subsidiaries. All material intercompany transactions have
been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment, if
terms are F.O.B. shipping point or upon delivery, if terms are F.O.B.
destination point. The majority of the Company's sales are F.O.B. shipping
point. The Company estimates and records provisions for cash discounts, quantity
rebates, sales returns, allowances and original warranties in the period the
sale is reported, based on its experience.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity
date at time of purchase of three months or less to be cash equivalents. The
Company had no cash equivalents as of March 31, 1999 or March 31, 1998.
INVENTORIES
Inventories are valued at the lower of cost or market using the
first-in, first-out method of accounting to determine cost. During fiscal 1999,
the Company changed its inventory valuation method from the lower of cost on a
last-in, first-out ("LIFO") basis or market, to the lower of cost, on a
first-in, first-out ("FIFO") basis or market. The change has been applied
retroactively by restating the financial statements for prior years. There have
been declines in the price of raw materials utilized by the Company and these
declines in prices would create LIFO liquidations resulting in a poor matching
of current costs with current revenues. As a result, the Company believes that
the FIFO method is preferable as it will provide a more appropriate and
consistent matching of costs against revenues and will provide a financial
statement reader with more appropriate information. The cumulative effect of the
change (reported as a decrease in retained earnings as of April 1, 1996) of
$9,629 represents the effect on net earnings of the reversal of the LIFO reserve
at that date. The effect of this accounting change on net earnings as previously
reported for the years ended March 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Net loss before extraordinary item and cumulative
effect of accounting change as previously reported $(49,817) $(49,652)
Effect of accounting change, net of income taxes 2,380 1,722
-------------- ---------------
As restated $(47,437) $(47,930)
============== ===============
Per share amounts as previously reported $(2.28) $(2.28)
Effect of accounting change, net of income taxes 0.10 0.08
-------------- ---------------
As restated $(2.18) $(2.20)
============== ===============
Net loss as previously reported $(52,367) $(49,652)
Effect of accounting change, net of income taxes 2,380 1,722
-------------- ---------------
As restated $(49,987) $(47,930)
============== ===============
Per share amounts as previously reported $(2.40) $(2.28)
Effect of accounting change, net of income taxes 0.10 0.08
-------------- ---------------
As restated $(2.30) $(2.20)
============== ===============
</TABLE>
F-10
<PAGE> 50
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and depreciated using
the straight-line method over the estimated useful lives of the assets (33 years
for building and improvements and 3 to 10 years for machinery and equipment).
Leasehold improvements are amortized over the shorter of the estimated useful
life of the asset or the terms of the lease.
FINANCIAL INSTRUMENTS
The carrying value of investments in cash, cash equivalents,
receivables and obligations under accounts payable are reported in the balance
sheet at approximately fair value because of the short maturity of these
financial instruments. Pre-petition liabilities subject to compromise are
reported at the amounts expected to be allowed by the Bankruptcy Court, even
though amounts may not be paid in full. The Company's debt is variable rate,
which approximates market rates and whose carrying value approximates fair
value.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
INTANGIBLES
Goodwill arose from the excess of cost over the fair value of the net
underlying assets of International Communications Materials, Inc. ("ICMI") and
Future Graphics, Inc. ("Future Graphics"). Covenant-not-to-compete agreements
had been entered into with sellers and key employees of businesses acquired. The
unamortized goodwill associated with the ICMI transaction was written off in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of," during the year ended March 31, 1999 (See Note 8). As
discussed in Note 8, a technology license acquired as part of the acquisition of
certain assets of Jarfalla Industry Competence Center, AB, was written off upon
the sale of the Company's modular ink subsidiary in Sweden on March 31, 1999.
Additionally, the unamortized goodwill associated with the acquisition of Future
Graphics, Inc. was written off upon the sale of the components division on
December 31, 1997. A trademark license was acquired in connection with the
Pelikan Hardcopy Division acquisition and remains in effect for 50 years. The
license was amended in connection with the sale of substantially all of the
Company's European operations. See note 4. The trademark license related to the
North American Operations was written-off during the year ended March 31, 1999
(See Note 8).
All intangibles are being amortized on the straight-line method over
the lesser of their estimated life or contract term, but not in excess of forty
years. The Company evaluates any possibility of impairment of intangibles using
estimates of undiscounted cash flows of the related investment. An impairment
provision is made at the time that projected future undiscounted cash flows of
the related investment are less than the carrying value of the intangible asset.
The primary indicators of recoverability
F-11
<PAGE> 51
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are current or forecasted profitability of the related operations, measured as
profit before interest and amortization of the related intangible assets
compared to their carrying value.
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency for substantially all of
Nu-kote's foreign subsidiaries. Therefore, all assets and liabilities of the
foreign subsidiaries are translated at exchange rates in effect at the balance
sheet dates. Translation gains and losses are not included in determining net
income or loss, but are accumulated in a separate component of shareholders'
deficit as other comprehensive income. Foreign currency transaction gains and
losses are included in determining net income or loss, and amounted to losses of
$572 and $181 in fiscal 1999 and 1998, respectively and gains of $417 in fiscal
1997.
FOREIGN CURRENCY HEDGING
The Company operates internationally, giving rise to market risks from
changes in foreign exchange rates. The Company had utilized derivative financial
instruments to reduce those risks, and does not hold or issue financial
instruments for trading purposes. The Company enters into various types of
foreign exchange contracts in managing its foreign exchange risk. Forward
contracts and purchased options are used to hedge foreign currency risks,
primarily with respect to accounts receivable and accounts payable. These
instruments generally have terms of three months or less. Gains and losses
receiving hedge accounting treatment are recognized in earnings in the same
period as the underlying hedged transactions. As of March 31, 1999, 1998 and
1997, there were no open forward contracts or outstanding options. During fiscal
1998 and 1997 hedging transactions resulted in losses amounting to $29 and
$1,397, respectively, and are included in foreign currency transaction gains and
losses. The Company was not involved in any foreign currency hedging activities
during the year ended March 31, 1999.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs expensed
were approximately $2,260, $3,046, and $5,134 during fiscal 1999, 1998 and 1997,
respectively.
NET INCOME (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. All per share data presented
for prior years and periods has been restated to reflect the adoption of the
statement. Due to the Company's stock price causing its stock options to be
antidilutive, 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 calculation that related to potentially dilutive
securities amounted to 2,566,888, 2,849,364, and 1,923,463 for the years ended
March 31, 1999, 1998, and
F-12
<PAGE> 52
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1997, respectively. Prospectively, the number of shares utilized in the
calculation of EPS could change significantly based upon the various plans of
reorganization presented to the Bankruptcy court.
ENVIRONMENTAL REMEDIATION COSTS
Liabilities for loss contingencies, including environmental remediation
costs, arising from claims, assessments, litigation, fines and penalties, and
other sources are recorded when it is probable that a liability has been
incurred and the amount of the assessment and/or remediation can be reasonably
estimated. Recoveries from third parties are separately recorded and are not
offset against the related environmental liability, in accordance with Financial
Accounting Standards Board Interpretation No. 39, Offsetting of Amounts Related
to Certain Contracts.
Accruals for estimated losses from environmental remediation
obligations generally are recognized no later than completion of the remedial
feasibility study. Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environment remediation
obligations are not discounted to their present value. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1999 presentation.
NEW ACCOUNTING STANDARDS
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income (loss)
and its components. Comprehensive income (loss) consists of net income (loss),
foreign currency translation adjustments and excess pension liabilities as
presented in the consolidated statement of changes in shareholders' equity
(deficit) and comprehensive income (loss). The adoption of SFAS No. 130 had no
impact on total shareholders' deficit or net loss.
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS No.
14. SFAS No. 131 requires the Company to report segment information based on the
"management," or "operating segment", approach rather than the "industry
segment" approach required under SFAS No. 14. Additionally, SFAS No. 131
requires disclosures about the Company's products and services, geographic areas
and major customers. The adoption of SFAS No. 131 had no impact on the results
of operations or financial position of the Company.
In fiscal 1999, the Company adopted SFAS No. 132, "Employer's
Disclosures about Pension and Other Postretirement Benefits." SFAS No. 132
revises employer's disclosures about pension and other postretirement benefit
plans. SFAS No. 132 does not change the method of accounting for such plans.
During 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivatives and Hedging Activity." SFAS No. 133, as amended
by SFAS No. 137, is effective for
F-13
<PAGE> 53
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statements for all fiscal quarters of all fiscal years beginning after
June 15, 2000. Management of the Company anticipates that the adoption of SFAS
No. 133 will not have a significant effect on the Company's results of
operations or its financial position.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998 (Fiscal
2000 for the Company). SOP 98-1 provides guidance for accounting for the costs
of computer software developed or obtained for internal use. Management of the
Company anticipates that the adoption of SOP 98-1 will not have a significant
effect on the Company's results of operations or its financial position.
4. SALES OF BUSINESSES
Subsequent to the close of the current fiscal year, on September 30,
1999, Nu-kote International, Inc., a wholly owned subsidiary of the Company,
sold certain of its subsidiaries to Pelikan Hardcopy Europe Limited ("Pelikan"),
a Scottish corporation (the "Pelikan Disposition"). The subsidiaries sold
include Pelikan Productions A.G., Pelikan Scotland Limited, Greif-Werke GmbH,
Pelikan Hardcopy Asia Pacific Limited, and Dongguan Pelikan Hardcopy Limited
("Pelikan Subsidiaries"). See Note 22 for further discussion of the Pelikan
Disposition.
As part of its ongoing corporate restructuring, on March 31, 1999, the
Company sold Modular Ink Technology Stockholm AB, one of its indirect
subsidiaries, to Xaar PLC. The consideration for the sale was $4,700 in cash and
the forgiveness of royalties owed to Xaar of approximately $800. As part of the
transaction, the Company also assigned certain trademarks and rights in the
Company's counterclaim brought against Spectra, Inc. in litigation which is
pending in federal district court. A loss of $1,373 was recognized on the sale
during the fiscal year ended March 31, 1999. Additionally, on April 1, 1998, the
Company sold its Columbian subsidiary, Nu-kote de Columbia, to local management,
recognizing a gain of $462 during the first quarter of fiscal 1999. Both of the
sold subsidiaries' financial statements were immaterial to the consolidated
financial statements.
The Company sold the assets of the components division of Future
Graphics, Inc. on December 31, 1997, for approximately $3,700 in a combination
of cash and assumed liabilities. The division was sold as part of the Company's
continuing effort to exit non-core businesses. The sale of the components
division resulted in a loss of $4,061, which includes the write-off of $2,826 of
related unamortized goodwill.
5. INVENTORIES
Inventories are valued at the lower of cost or market using the
first-in, first-out method and consist of the following at March 31:
1999 1998
--------- --------
Raw materials ........... $ 23,932 $ 36,775
Work-in-process ......... 9,107 11,516
Finished goods .......... 23,572 32,417
-------- --------
56,611 80,708
Less: Inventory reserves (9,301) (12,584)
-------- --------
Total ............. $ 47,310 $ 68,124
======== ========
F-14
<PAGE> 54
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consist of the
following at March 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land ............................................................ $ 3,950 $ 4,312
Buildings and improvements ...................................... 16,279 19,413
Machinery and equipment ......................................... 60,802 80,194
--------- ---------
81,031 103,919
Less: accumulated depreciation .................................. (34,999) (37,267)
--------- ---------
Total .................................................... $ 46,032 $ 66,652
========= =========
</TABLE>
Depreciation expense amounted to $8,350, $10,620, and $10,662 in fiscal
1999, 1998 and 1997, respectively.
In connection with the restructuring of the Company's business (See
Note 20), the Company is selling certain of its property, plant and equipment.
The aggregate net book value of facilities held for sale is $431 and $1,806 at
March 31, 1999 and 1998, respectively, and has been excluded from property,
plant and equipment and included in assets held for sale.
7. ASSETS HELD FOR SALE
During the fiscal year, the Company made the decision to begin
outsourcing certain of the manufacturing of its aftermarket ribbon products.
Consequently, at March 31, 1999 various assets related to aftermarket ribbon
production were no longer in service and the carrying value of the assets was
reduced to fair value based on the estimated selling price less costs to sell. A
loss of $6,891 was included in the impairment of assets in the consolidated
statement of operations. Additionally, the Company has elected to sell a
warehouse used by ICMI. At March 31, 1999, the warehouse was no longer in use
and the carrying value of the asset was reduced to fair value based on the
estimated selling price less costs to sell. This resulted in a loss of $298
which is included in the impairment of assets in the consolidated statement of
operations. Assets held for sale consisted of property, plant, and equipment at
March 31, 1999 and were included in domestic assets.
F-15
<PAGE> 55
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. INTANGIBLE ASSETS
Intangible assets consist of amounts allocated as a result of purchases
of existing businesses and are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
AMOTYIZATION ------------------------
PERIOD 1999 1998
--------------- ----------- -----------
<S> <C> <C> <C>
Goodwill ..................... 20 years $ -- $ 6,184
Covenants-not-to-compete ..... 3 - 5 years -- 4,556
Trademark .................... 40 years 3,637 6,869
Technology license ........... 8 years -- 1,272
-------- --------
3,637 18,881
Less: accumulated amortization (1,032) (6,169)
-------- --------
Total ........................ $ 2,605 $ 12,712
======== ========
</TABLE>
Covenant-not-to-compete agreements were recorded at their net present
value using estimated discount rates of 7% and 16%. The trademark, which was
acquired in connection with the Pelikan acquisition, has been recorded at its
estimated value based upon royalty rates charged for its use, discounted at an
estimated rate of return of 35%. The technology license was recorded at its
estimated fair value on the date of acquisition, which was based on forecasted
discounted cash flows using a 16% discount rate.
As a result of the Company's inability to achieve operating
improvements, including product orders, (notably at its ICMI toner division),
cost reductions and attraction and retention of critical personnel, the toner
division continued operating at a loss in 1999. The Company calculated the
expected cash flows of ICMI's product lines, which identified an impairment of
its long-lived assets. Accordingly, in the fourth quarter of 1999, the Company
recorded an impairment charge based on the present value of expected cash flows
of $3,993 for the write-down of remaining goodwill recorded upon the acquisition
of ICMI and impairments of property, plant and equipment as further discussed at
Note 20.
The Company also recorded a $3,974 million impairment charge in 1999 to
write off the value of the trademark and covenants-not-to-compete acquired in
conjunction with the 1995 acquisition of Pelikan, related to the domestic
operations. The Company calculated the present value of expected cash flows of
sales of Pelikan products in North America to determine the impairment charge.
As described in Note 4, the Company sold its Pelikan Subsidiaries effective
September 30, 1999.
In conjunction with the sale of MIT (See Note 4), the technology
license associated with the subsidiary was written off. Included in the
calculation of the gain on the sale of the subsidiary was the write off of this
$1,272 asset, net of accumulated amortization of $584.
During fiscal 1998, the Company determined that the liabilities
established for certain employee termination and relocation costs to be incurred
in connection with the Pelikan acquisition were $2,400 in excess of the amount
required. Accordingly, the Company reduced the liability and trademarks by
$2,400.
As described in Note 4, the Company sold the components division of
Future Graphics, Inc. As a result, the net unamortized goodwill associated with
the original acquisition of Future Graphics, Inc., amounting to $2,826, was
written off during fiscal 1998.
Amortization expense amounted to $1,459, $1,532, $1,932 in fiscal 1999,
1998 and 1997, respectively.
F-16
<PAGE> 56
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. PREPETITION LIABILITIES
Prepetition liabilities subject to compromise at March 31, 1999 include
the following:
Accounts payable ............... $ 18,611
Compensation related liabilities 2,559
Long-term debt ................. 96,000
Other long-term liabilities .... 12,169
--------
Total ..................... $129,339
========
10. LONG-TERM DEBT
Long-term debt of the Company consists of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revolving lines of credit ............ $ 43,579 $ 141,456
Other items .......................... -- 1,313
--------- ---------
43,579 142,769
Less: current portion ................ (43,579) (142,009)
--------- ---------
Long-term debt, net of current portion $ -- $ 760
========= =========
</TABLE>
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 $96 million
U.S. facility, a 50,000 CHF Swiss facility and a 6,275 (pound) 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 9).
On December 17, 1998, the Bankruptcy Court entered an order approving
debtor-in-possession ("DIP") 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 was 9.75% at March 31, 1999. The Company is
responsible, under the DIP credit facility, for the payment of a minimum
quarterly commitment fee of $50. The facility provides for various affirmative
and negative covenants that among other things restrict indebtedness, liens,
investments, dividend payments by the Company or its subsidiaries, 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 was originally restricted
to $400 of capital expenditures for the last four months of fiscal 1999, and to
$300 per fiscal quarter thereafter. However, with an amendment which was
approved by the Bankruptcy Court on October 28, 1999, the quarterly capital
expenditure limitation was increased to $500. The facility is collateralized by
substantially all of the assets of the Company and its U.S. subsidiaries.
At March 31, 1999, the Company was in violation of various
financial covenants, specifically, the maintenance of a minimum EBITDAR, net
income, and capital expenditures. Waivers relative to these violations were
obtained from the DIP creditors on September 15, 1999.
F-17
<PAGE> 57
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. LONG-TERM DEBT (CONTINUED)
Unamortized deferred loan costs related to the First Amended Agreement
amounting to $2,550, were written off at the closing date and were reported as
an extraordinary loss in the Company's fiscal 1998 financial statements.
In conjunction with the Second Amended and Restated Credit Agreements
entered into by the Company on July 31, 1997, its overseas facilities have
various revolving lines of credit available. These revolving credit facilities
are comprised of a 50,000 CHF Swiss facility and a 6,275 (pound) U.K. facility,
both of which provide for multi-currency borrowings in U.S. dollars,
Deutschmarks and Pounds Sterling up to certain limits, in addition to Swiss
Francs and Pounds Sterling, respectively.
The Swiss and U.K. facilities bear interest at LIBOR (as defined) plus
5%. At March 31, 1999 and 1998, the weighted average interest rate on the Swiss
facility and U.K. facility was 7.6 % and 5.5%, respectively. The Swiss and U.K.
facilities are guaranteed by Nu-Kote Holdings, Inc. and all of its significant
U.S. subsidiaries. The facilities are collateralized by substantially all of the
assets of the Company including the capital stock of all subsidiaries and
intercompany advances.
Borrowings under the revolving lines of credit at March 31, 1999 and
1998 and classified as current long-term debt are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
LOCAL LOCAL
CURRENCY DOLLARS CURRENCY DOLLARS
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Facility................. $ -- $ -- $ 98,000 $ 98,100
======== ========
Swiss Facility................ CHF 50,000 34,194 CHF 50,000 32,832
======== ========
U.K. Facility................. (pound) 5,817 9,385 (pound) 6,275 10,524
======== ----------- ======== -----------
$ 43,579 $ 141,456
=========== ===========
</TABLE>
11. LEASES
The Company has operating leases which expire at various dates through
2012 and, in some instances, the leases contain certain renewal privileges.
Certain leases provide for escalation of the rentals primarily for increases in
maintenance costs and property taxes.
At March 31, 1999 minimum annual rental commitments under long-term,
non-cancelable operating leases were as follows:
2000........................ $ 2,468
2001........................ 2,253
2002........................ 1,767
2003........................ 1,299
2004 and thereafter......... 6,565
-------
$14,352
=======
Total rental expense incurred in fiscal 1999, 1998 and 1997 was $4,961,
$4,481, and $4,700 respectively. Under certain provisions of the U.S. Bankruptcy
code, the Company has the right to reject executory contracts, which include
leases, prior to final confirmation of the Plan of Reorganization, as described
in Note 2.
F-18
<PAGE> 58
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws.
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities at March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- --------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current:
Reserves and accruals ........................ $ 4,033 $ 763 $ 8,056 $ 499
Inventory basis difference ................... 2,895 622 1,729 --
Other ........................................ -- 531 2 727
-------- -------- -------- --------
6,928 1,916 9,787 1,226
Less valuation allowance ..................... (6,928) -- (6,632) --
-------- -------- -------- --------
Subtotal - current ......................... -- 1,916 3,155 1,226
-------- -------- -------- --------
Non-current:
Net operating loss carryforwards ............. 43,566 -- 35,563 --
Postretirement and benefits .................. 2,414 420 2,419 436
Other basis differences principally related to
property, plant equipment ................... 4,845 4,929 3,309 8,607
Other ........................................ 3 651 19 222
-------- -------- -------- --------
50,828 6,000 41,310 9,265
Less valuation allowance ..................... (50,313) -- (41,310) --
-------- -------- -------- --------
Subtotal - non-current ..................... 515 6,000 -- 9,265
-------- -------- -------- --------
Total ...................................... $ 515 $ 7,916 $ 3,155 $ 10,491
======== ======== ======== ========
Net current asset ................................ $ -- $ 3,457
======== ========
Net current liability ............................ $ 1,916 $ 1,528
======== ========
Net non-current liability ........................ $ 5,485 $ 9,265
======== ========
</TABLE>
The net current deferred tax liability of $1,916 and $1,528 is included
in other accrued liabilities at March 31, 1999 and 1998, respectively.
No U.S. provision for income taxes has been made for unremitted
earnings of the Company's foreign subsidiaries as of March 31, 1999, in that the
Company's foreign subsidiaries have accumulated losses.
During fiscal 1999, 1998 and 1997 increases in the valuation allowances
for all jurisdictions increased income tax provisions or reduced income tax
benefits $9,299, $13,273 and $22,709, respectively.
F-19
<PAGE> 59
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. INCOME TAXES (CONTINUED)
The components of loss before income taxes and extraordinary item are
as follows for fiscal years ended March 31:
1999 1998 1997
---------- --------- --------
Domestic ...... $(37,429) $(37,091) $(29,653)
Foreign ....... (18,058) (10,675) (13,076)
-------- -------- --------
$(55,487) $(47,766) $(42,729)
======== ======== ========
The provisions (benefit) for income tax consist of the following for
fiscal years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Domestic ........................................ $ -- (771) $ --
Foreign ......................................... -- 37 (1,109)
------- ------- -------
-- (734) (1,109)
------- ------- -------
Deferred:
Domestic ........................................ -- -- 4,210
Foreign ......................................... (515) 405 (954)
------- ------- -------
(515) 405 3,256
------- ------- -------
Change in beginning of the year valuation allowances:
Credited directly to intangibles ................ -- -- 2,996
Debited to income tax expense ................... -- -- 228
Utilization of foreign tax credits .................. -- -- (261)
Tax benefits from exercise of stock options credited
to additional paid-in capital ................... -- -- 91
------- ------- -------
Total provision (benefit) for income tax ............ $ (515) $ (329) $ 5,201
======= ======= =======
</TABLE>
F-20
<PAGE> 60
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. INCOME TAXES (CONTINUED)
The factors accounting for the difference between the total provision
(benefit) for income taxes and the amount computed by applying the U.S.
statutory income tax rate are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Computed expected tax expense (benefit) based on
U.S. rates .................................. $(12,726) $(12,611) $(10,082)
Changes in tax expense (benefit) resulting from:
Amortization of goodwill .................... 1,464 1,111 165
State income tax effect ..................... -- 664 656
Valuation allowance changes ................. 11,976 8,854 13,406
Other ....................................... (714) 1,211 156
-------- -------- --------
Total provision (benefit) for U.S. income
taxes ..................................... -- (771) 4,301
Provision for foreign income taxes ............. (515) 442 900
-------- -------- --------
Total provision (benefit) for income
taxes ..................................... $ (515) $ (329) $ 5,201
======== ======== ========
</TABLE>
At March 31, 1999 the Company had domestic net operating loss
carryforwards that amount to approximately $73,786 which begin to expire in
2010. Foreign net operating loss carryforwards amount to approximately $52,000.
Should the Company have an "ownership change" as defined by the
Internal Revenue Code of 1986, the Company's use of its domestic net operating
loss carryforwards after such ownership change will be subject to an annual
limitation. In addition, the domestic net operating loss carryforwards may be
reduced due to the requirements of the Internal Revenue Code related to
companies which experience debt discharge under the provisions of Title 11.
F-21
<PAGE> 61
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed consolidating balance sheet as of March 31,
1999, and the condensed consolidating statements of operations and cash flows
for the year then ended, are presented for those entities that are included in
the Bankruptcy Proceedings and those that are not.
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------------------------------------
DEBTOR-IN-
POSSESSION
ENTITIES OTHER ENTITIES ELIMINATIONS CONSOLIDATED
----------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Current assets .................... $ 37,074 $ 62,451 $ -- $ 99,525
Intercompany accounts ............. 380,233 11,778 (392,011) --
Property, plant and equipment, net 16,389 29,643 -- 46,032
Other long-term assets ............ 5,641 1,251 -- 6,892
Investment in subsidiaries ........ 13,719 -- (13,719) --
--------- --------- --------- ---------
Total assets ................. $ 453,056 $ 105,123 $(405,730) $ 152,449
========= ========= ========= =========
DIP facility advances ............. $ 1,445 $ -- $ -- $ 1,445
Bank loans and current portion
of long-term debt .............. -- 43,579 -- 43,579
Other current liabilities ......... (799) 30,172 -- 29,373
--------- --------- --------- ---------
Total current liabilities ......... 646 73,751 -- 74,397
--------- --------- --------- ---------
Inter-company accounts ............ 386,029 5,982 (392,011) --
Other long-term liabilities ....... 2,656 11,671 -- 14,327
Pre-petition liabilities
subject to compromise .......... 129,339 -- -- 129,339
--------- --------- --------- ---------
Total liabilities ........... 518,670 91,404 (392,011) 218,063
--------- --------- --------- ---------
Shareholders' equity (deficit) .... (65,614) 13,719 (13,719) (65,614)
--------- --------- --------- ---------
Total liabilities and
shareholders' equity (deficit) $ 453,056 $ 105,123 $(405,730) $ 152,449
========= ========= ========= =========
</TABLE>
F-22
<PAGE> 62
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
----------------------------------------------------------------
DEBTOR-IN-
POSSESSION
ENTITIES OTHER ENTITIES ELIMINATIONS CONSOLIDATED
---------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales ....................................... $ 111,056 $ 129,473 $ -- $ 240,529
Cost of sales ................................... 101,954 103,037 204,991
--------- --------- --------- ---------
Gross margin .................................... 9,102 26,436 -- 35,538
Selling, general and administrative
and research and development expenses ........ 21,851 37,686 -- 59,537
Provision for (gain) loss on sale of business ... (98) 1,009 911
Impairment losses ............................... 7,967 -- 7,967
Restructuring expense ........................... 8,785 -- -- 8,785
--------- --------- --------- ---------
Operating loss .................................. (29,403) (12,259) -- (41,662)
Interest expense ................................ 8,649 2,509 -- 11,158
Other expense items, net ........................ (2,021) 3,290 -- 1,269
--------- --------- --------- ---------
Loss before reorganization items and income
taxes ..................................... (36,031) (18,058) -- (54,089)
Reorganization items ............................ 1,398 -- -- 1,398
--------- --------- --------- ---------
Loss before income taxes .................... (37,429) (18,058) -- (55,487)
Provision (benefit) for income taxes ............ -- (515) -- (515)
--------- --------- --------- ---------
Net loss .................................... $ (37,429) $ (17,543) $ -- $ (54,972)
========= ========= ========= =========
</TABLE>
F-23
<PAGE> 63
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1999
-----------------------------------------------------------------------
DEBTOR-IN-
POSSESSION
ENTITIES OTHER ENTITIES ELIMINATIONS CONSOLIDATED
----------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................ $(37,430) $(17,542) $ -- $(54,972)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities .... 31,269 8,444 -- 39,713
Noncash items and changes in operating assets and
liabilities ................................... 6,974 6,596 -- 13,570
-------- -------- -------- --------
Net cash provided by (used in) operating
activities ................................. 813 (2,502) -- (1,689)
-------- -------- -------- --------
Cash flows from investing activities:
Net capital expenditures ..................... (134) 551 -- 417
-------- -------- -------- --------
Net cash provided by (used in) investing
activities .................................. (134) 551 -- 417
-------- -------- -------- --------
Cash flows from financing activities:
Bank loans, (repayments) net .................... (1,415) (750) -- (2,165)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities ................................ (1,415) (750) -- (2,165)
-------- -------- -------- --------
Effect of exchange rate changes on cash ............ -- 1,221 -- 1,221
-------- -------- -------- --------
Net decrease in cash and cash equivalents .......... (736) (1,480) -- (2,216)
Cash and cash equivalents at beginning of
period .......................................... 3,951 5,537 -- 9,488
-------- -------- -------- --------
Cash and cash equivalents at end of period ......... $ 3,215 $ 4,057 -- $ 7,272
======== ======== ======== ========
</TABLE>
14. CONTINGENCIES
BANKRUPTCY PROCEEDINGS
On November 6, 1998 Nu-kote filed a voluntary petition for protection
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court (the "Bankruptcy Court") for the Middle
District of Tennessee, Nashville, Division (Case No. 98-10600-10606-KL3-11). Six
subsidiaries of the Company, Nu-kote International, Inc., Future Graphics Inc.,
Nu-kote Imperial, Inc., Nu-kote Latin America, Inc., Nu-kote Imaging
International, Inc. and International Communication Materials, Inc., also filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code
on November 6, 1998 in the same court as Nu-kote. Nu-kote is managing its
business as a debtor-in-possession under the supervision of the bankruptcy
court.
On March 2, 2000 Nu-kote, its secured lenders and the official
committees for Nu-kote's unsecured creditors filed a Joint Plan of
Reorganization for Nu-kote (the "Plan") and a Second Amended Disclosure
Statement for Second Amended Joint Plan of Reorganization for Nu-kote (the
"Disclosure Statement"). See Note 22 for further discussion of the Joint Plan of
Reorganization filed on March 2, 2000. As part of the Plan, the existing stock
of Nu-kote will be extinguished and Nu-kote's stockholders will receive nothing
in respect of their stockholdings.
On March 17, 2000 Nu-kote's secured lenders filed a motion to convert
the case to a Chapter 7 proceeding. This motion was opposed by Nu-kote, and
Richmont and Nu-kote's secured lenders have now reached an agreement in
principle pursuant to which Richmont will purchase the debt, security interests
and all claims held by the secured lenders. The agreement is subject to
completion of final documentation which is still being drafted. Upon completion
of the documentation, the motion to convert the case to a
F-24
<PAGE> 64
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. CONTINGENCIES (CONTINUED)
Chapter 7 proceeding will be withdrawn, and management of Nu-kote believes it
will then be possible to confirm a plan of reorganization. It is still expected
that any plan of reorganization that is confirmed will provide that the stock of
Nu-kote will be extinguished and Nu-kote's stockholders will receive nothing in
respect of their stock.
LEGAL PROCEEDINGS - PATENT INFRINGEMENT
On September 19, 1994, Hewlett Packard Co. ("HP") filed a lawsuit
against Nu-kote International, Inc. in the United States District Court for the
Northern District of California (the "California District Court"), San Jose
Division, Case No. C94-20647 JW (EIA), (the "HP Litigation") alleging patent and
trademark infringement, unfair competition and false advertising. Nu-kote
International asserted affirmative defenses to claims brought by HP, and
asserted seven counterclaims against HP, including inter alia: violations of the
Lanham Act, Sherman and Clayton Antitrust Acts. Nu-kote International sought
compensatory, punitive and treble damages, court costs and attorneys' fees, as
well as injunctive relief.
On November 13, 1998, Nu-kote International filed a motion for relief
from stay to allow the HP Litigation to continue despite the pendency of the
bankruptcy cases. The Bankruptcy Court found that "cause" under ss. 362 of the
Bankruptcy Code existed to lift the automatic stay to allow the HP Litigation to
proceed to trial. Prior to trial the California District Court dismissed certain
of HP's patent claims and certain of Nu-kote International's antitrust and other
claims. The remaining claims in the HP Litigation went to trial on May 17, 1999.
On July 22, 1999, the jury rendered its verdict. See Note 22 for further
discussion of the July 22, 1999 HP litigation verdict.
On April 3, 1995, Canon, Inc., a Japanese corporation, and its U.S.
affiliates, Canon Computer Systems, Inc. and Canon USA, Inc. (collectively
"Canon"), filed a lawsuit against Nu-kote International in the United States
District Court for the Central District of California seeking, among other
things, to have the Court enjoin Nu-kote International and its affiliates from
infringing its patents and from making false designations of origin or false
descriptions regarding Nu-kote International's cartridges and kits, and, also
seeks compensatory, punitive and treble damages, court costs and attorney's
fees. Nu-kote International has filed an answer asserting twelve affirmative
defenses to the claims alleged in Canon's complaint. These include, among
others, defenses that Canon's patents are invalid, unenforceable and/or not
infringed by Nu-kote International, that Canon has defrauded the U.S. Patent and
Trademark office and trademark misuse. Additionally, Nu-kote International has
alleged counterclaims which include claims of monopolization and attempted
monopolization of the aftermarket for replacement cartridges for Canon printers.
Nu-kote International is also seeking declaratory relief asking the Court to
find that it has not infringed any valid claim of Canon's right in the six
patents in the suits, cancellation of Canon's patents because of fraud on the
U.S. Patent and Trademark Office, damages and an injunction for intentional
interference with business relations, trade liable, disparagement of goods,
defamation and unfair competition. In July 1996 Canon filed a second and related
lawsuit, alleging infringement of its 5,509,140 utility patent (the "140"
patent).
The Court granted Canon's motion for summary judgement on validity and
infringement on the 140 patent. By order dated April 18, 1997, the Court also
construed the claims of an additional patent (the "994 patent") as requested by
Nu-kote International, not as requested by Canon. Nu-kote International filed a
Motion for Summary Judgment on the basis that the 994 Patent is anticipated by
prior art. Canon also filed a Motion for Summary Judgment on the '994 Patent. On
May 26, 1998, the Court held the claims of
F-25
<PAGE> 65
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. CONTINGENCIES (CONTINUED)
the 994 Patent invalid because they are anticipated by the prior art. Canon has
appealed this ruling under Appeals Nos. 98-1445-1453.
On June 16, 1997, the Court granted Canon's Motion for Summary Judgment
("MSJ") on the issues of investorship, obviousness and enforceability of
Cannon's 928 patent, but denied Canon's MSJ with respect to the key issue of
whether patented features of that same patent are primarily ornamental or
functional. A design patent is invalid if the patented features are primarily
functional rather than primarily ornamental. Because it denied Canon's Motion as
to that issue, the Court ruled that it was premature to rule on whether this
particular patent has been infringed. The Court granted Canon's motion for
Summary Judgment on the 140 patent, but only as to two discontinued versions of
Nu-kote International's products. The Court confirmed that the current version
of the Nu-kote International cartridge, which is a design around introduced by
Nu-kote International on receiving notice of this subject patent, does not
infringe the patent. Nu-kote International believes the current designs of its
Canon compatible ink jet cartridges do not infringe any Canon patent and is
vigorously defending its position. However, all proceedings in this case have
been stayed as a result of Nu-kote's filing for protection under Chapter 11 of
the U.S. Bankruptcy Code on November 6, 1998 described above.
Seiko Epson Corporation, a Japan corporation, and its U.S. affiliate,
Epson America Inc. (collectively "Epson"), filed a lawsuit against the
Registrant, Nu-kote International and Pelikan Productions, A.G. in the U.S.
District Court for the Central District of California. Epson seeks to have the
court enjoin Nu-kote International and its affiliates from selling replacement
Epson compatible ink jet cartridges and from using Epson's registered trademarks
in a manner likely to cause confusion or mistake, or to deceive, and from making
any false and misleading representations regarding replacement Epson compatible
ink jet cartridges, and, also seeks compensatory and treble damages, court costs
and attorney's fees. Nu-kote International and Pelikan have filed answers that
assert nine affirmative defenses to the claims alleged in Epson's complaint.
These include, among others, that Epson's patents are invalid, unenforceable and
are not infringed and trademark misuse. Nu-kote International and Pelikan also
allege various counterclaims against Epson, including claims for monopolization
and attempted monopolization of the aftermarket for certain replacement
cartridges and violation of the Lanham Act. Additionally, Nu-kote International
seeks damages and an injunction for false advertising, trade libel,
disparagement of goods, defamation, and unfair competition.
Nu-kote International and PPAG were initially successful in disposing
of six out of seven patents alleged to be infringed through summary judgment
action. In a series of rulings in 1997, the District Court held six (6) out of
seven (7) of Epson's patents-in-suit in Epson I to be either invalid or
unenforceable. The District Court also held Nu-kote International and PPAG in
contempt for violating a preliminary injunction which the Court had entered
against them. The District Court's contempt ruling is memorialized in two
written orders. The first order directs Nu-kote International and PPAG to pay
Epson's lost profits of $1,050,849 and attorneys' fees of $31,413. The second
order does not quantify a monetary award. The District Court also issued an
amended preliminary injunction (the API"), which enjoins Nu-kote International
and PPAG from, among other things, infringing certain patents that were not part
of the preliminary injunction. On or about September 28, 1998, Epson filed a
motion to hold Nu-kote International and PPAG in contempt for violation of the
API. The motion had not been decided by the District Court prior to the filing
of the action in the Bankruptcy Court.
Epson appealed the District Court's invalidity and unenforceability
rulings. Nu-kote International and PPAG appealed the District Court's contempt
rulings. The Appeal was fully briefed and oral argument was conducted before the
Federal Circuit on November 2, 1998, prior to the filing of the action in the
Bankruptcy Court. Following the filing of the bankruptcy, the California
District Court has stayed all further proceedings in the Epson Litigation. See
Note 22 for discussion of the Epson litigation proceedings subsequent to March
31,1999.
F-26
<PAGE> 66
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. CONTINGENCIES (CONTINUED)
On March 10, 1998, Spectra, Inc. ("Spectra") of Hanover, New Hampshire,
filed a complaint against the Company and Modular Ink Technology in Stockholm,
AB ("MIT"), an indirect subsidiary of the Company, in the U.S. District Court
for the District of New Hampshire. In this action, Case No. 98-CV-130-JD,
Spectra accused the Company and MIT of infringing Spectra's U.S. Patent No.
4,825,227 (the `227 patent), which issued on April 25, 1989. The complaint
specifically alleged that claims 10 and 11 of the `227 patent were infringed by
products identified as PiezoJet(TM) 64 and PiezoJet(TM) 128. On April 28, 1998,
the Company filed a motion to dismiss the New Hampshire action against it for
lack of personal jurisdiction. At that time, MIT had not been served with the
complaint and a summons. Also on April 28, 1998, Nu-kote International, Inc.
("International") and MIT filed an action against Spectra in U.S. District Court
for the District of Delaware. In this action, Civil Acton No. 98-213-JJF,
International and MIT seek a declaratory judgment that the `227 patent is
invalid and not infringed, and asserts state law claims for tortious
interference with prospective contractual relations and common law unfair
competition. On June 11, 1998, Spectra amended its pleadings in the New
Hampshire action to add International as a defendant and dismiss the Company
from the suit. Also on May 22, 1998, Spectra filed a motion to dismiss the
Delaware action or transfer it to the District of New Hampshire. International
and MIT opposed the motion to dismiss or transfer, which is still pending.
International and MIT intend to file a motion to transfer the New Hampshire
action to Delaware in part on the ground that the Delaware action was the
first-filed action that brought together the proper parties to the dispute. They
also intend to proceed with substantive discovery of Spectra. International and
MIT have and will assert various defenses. At the same time, however, they are
proceeding with negotiations intended to settle the dispute. As discussed at
Note 4, the Company sold MIT to Xaar PLC and has assigned certain trademarks and
rights in a counterclaim lawsuit against Spectra to Xaar PLC in connection with
the sale transaction.
LEGAL PROCEEDINGS - CLASS ACTION LAWSUIT
On January 23, 1998, a lawsuit was filed against the Company and
certain of its officers and directors seeking class action status on behalf of
purchasers of the Company's common stock between July 2, 1995 and May 29, 1997.
The complaint alleges that the defendants violated Sections 10(b) and 20 of the
Securities Exchange Act of 1934 (including Rule 10b-5) based upon purported
misstatements and/or omissions of material facts. Among other things, the
plaintiff alleges that misstatements and omissions by defendants relating to (1)
the Company's acquisition of Pelikan; (2) the transition from sales of impact
products to non-impact products, and (3) prospects for strong earnings per share
growth resulted in an inflation of the price of the Company's common stock. The
plaintiff seeks, on behalf of the purported class, an unspecified amount of
compensatory damages and reimbursement for fees and expenses. The Company denies
the allegations and intends to defend the lawsuit vigorously. All proceedings in
this case have been stayed as a result of Nu-kote's filing for protection under
Chapter 11 of the U.S. Bankruptcy Code on November 6, 1998 described above, and
on September 28, 1999, Nu-kote's lead bankruptcy counsel was notified by the
United States District Court for the Northern District of Texas that this was to
be administratively closed.
In addition, the Company is involved in various routine legal matters,
all of which have been stayed as a result of Nu-kote's filing for protection
under Chapter 11 of the U.S. Bankruptcy Code described above.
F-27
<PAGE> 67
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. CONTINGENCIES (CONTINUED)
ENVIRONMENTAL REMEDIATION COSTS
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 indemnification has been limited to $2.5 million,
the amount that Pelikan Holdings AG had deposited in environmental escrow funds.
The Company has found environmental contamination at former Pelikan facilities
in Derry, Pennsylvania and Franklin, Tennessee, and has asserted a claim for
indemnification. With the assistance of an environmental consultant, the Company
has developed a remediation plan which estimated future cash payments for the
remediation plan of $2.5 million. These undiscounted future cash payments have
been accrued for as of March 31, 1999 since it represents the Company's best
estimate of the remediation costs, but the payments are not considered to be
fixed and reliably determinable. The Company has established a receivable, that
will be paid from the environmental escrow funds, equal to the amount of the
accrued remediation costs. 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.
KEY EMPLOYEE RETENTION AGREEMENTS
In connection with the Company's Joint Plan of Reorganization as
amended by Nu-kote, the Company entered into a Key Employee Retention Agreement
with certain senior management employees of the Company. These agreements, dated
June 10, 1999, were extended on the basis that the applicable key employees were
vital to the improvement of the financial performance of the Company, the
formulation and execution of the Company's plan of Reorganization and to the
success of the OEM litigation. The agreements, offered to seven key employees in
total, included retention payment amounts ranging from six months to one year's
salary. The amounts would only be payable upon confirmation of a reorganization
plan, a sale of substantially all of the assets of the Company or a termination
of the key employee without cause. The aggregate amount of all retention
payments anticipated to be made, should all seven key employees receive a
payment, is approximately $738,000.
F-28
<PAGE> 68
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. EMPLOYEE BENEFIT PLANS
The Company has non-contributory and contributory defined-benefit
pension plans covering nearly all of its employees at Nu-kote International,
Inc. and its domestic subsidiaries, Pelikan Scotland Ltd. and Greif-Werke GmbH.
The Company's funding policy in the United States is to fund amounts as
are necessary on an actuarial basis to provide for benefits in accordance with
the Employee Retirement Income Security Act. The Nu-kote International, Inc.
plan's assets consist primarily of investments in Treasury obligations, federal
agency bonds and corporate bonds. The Pelikan Scotland Ltd. Plan assets comprise
a portfolio of equities and bonds. The Greif-Werke GmbH plan is unfunded.
Net periodic pension expense recognized by the Company for the
defined-benefit plans for fiscal 1999, 1998 and 1997 included the following
components:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 1,093 $ 959 $ 856
Interest cost on the projected benefit
obligations .............................. 2,564 2,573 2,309
Expected return on plan assets ............. (2,730) (5,876) (1,850)
Net amortization and deferral .............. 217 3,591 (288)
Curtailment gain ........................... -- (77) --
Effect of changes in actuarial assumptions . -- -- --
------- ------- -------
Net periodic pension cost .................. $ 1,144 $ 1,170 $ 1,027
======= ======= =======
</TABLE>
F-29
<PAGE> 69
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following tables set forth the funded status of the defined-benefit plans
and amounts recognized in the Company's consolidated balance sheets at March 31:
<TABLE>
<CAPTION>
NU-KOTE PELIKAN GRIEF-WERKE
INTERNATIONAL SCOTLAND GMBH
------------------ ------------------ ------------------
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
RECONCILIATION OF FUNDED STATUS
Funded Status at End of Year........................ $(2,333) $(2,584) $ 384 $ 813 $(5,309) $(4,818)
Unrecognized Net Transition Obligation (Asset)...... (37) (45) -- -- -- --
Unrecognized Prior Service Cost..................... (13) (14) 217 243 -- --
Unrecognized Net Loss (Gain)........................ 3,238 3,648 638 207 235 (174)
------- ------- ------- ------- ------- -------
NET AMOUNT RECOGNIZED............................. $ 855 $ 1,005 $ 1,239 $ 1,263 $(5,074) $(4,992)
======= ======= ======= ======= ======= =======
AMOUNT RECOGNIZED IN STATEMENT OF FINANCIAL POSITION
Prepaid Benefit Cost................................ $ -- $ -- $ 1,239 $ 1,263 $ -- $ --
Accrued Benefit Liability........................... (1,188) (1,404) -- -- (5,074) (4,992)
Intangible Asset.................................... -- -- -- -- -- --
Accumulated Other Comprehensive Income.............. 2,043 2,409 -- -- -- --
------- ------- ------- ------- ------- -------
NET AMOUNT RECOGNIZED............................. $ 855 $ 1,005 $ 1,239 $ 1,263 $(5,074) $(4,992)
======= ======= ======= ======= ======= =======
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year............. $11,604 $ 8,988 $23,719 $19,329 $ 4,818 $ 4,936
Service Cost........................................ 209 238 877 707 7 14
Interest Cost....................................... 799 735 1,444 1,513 321 325
Participant Contributions........................... -- -- 255 238 -- --
Plan Curtailments................................... -- -- -- -- (101) (77)
Actuarial (Gain) Loss............................... (343) 1,993 344 2,717 592 (69)
Benefits Paid....................................... (524) (350) (840) (785) (328) (315)
------- ------- ------- ------- ------- -------
BENEFIT OBLIGATION AT END OF YEAR................. $11,745 $11,604 $25,799 $23,719 $ 5,309 $ 4,814
======= ======= ======= ======= ======= =======
CHANGE IN ASSET VALUE
Plan Assets at Beginning of Year.................... $ 9,020 $ 8,019 $24,530 $20,016 $ -- $ --
Actual Return on Plan Assets........................ 675 1,345 1,813 4,641 -- --
Employer Contributions.............................. 241 6 443 420 -- --
Participant Contributions........................... -- -- 255 238 -- --
Benefits Paid to Plan Participants.................. (524) (350) (840) (785) -- --
------- ------- ------- ------- ------- -------
PLAN ASSETS AT END OF YEAR........................ $ 9,412 $ 9,020 $26,201 $24,530 $ -- $ --
======= ======= ======= ======= ======= =======
Weighted average discount rates....................... 7.0% 7.0% 5.8% 6.0% 6.0% 6.5%
Expected long-term rate of return on assets........... 9.0% 9.0% 7.5% 8.0% N/A N/A
Assumed rate of increase in future compensation....... 4.0% 4.0% 3.5% 4.0% 2.0% 2.5%
</TABLE>
F-30
<PAGE> 70
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has a defined contribution 401(k) plan that covers all of
the employees in the U.S. Under this plan, eligible employees are allowed to
contribute up to 15% of their pay (up to federally mandated maximums), and the
Company will contribute an amount equal to 40% of the initial 6% of the
employee's contribution. The Company recognized an expense of $229, $276 and
$343 in fiscal 1999, 1998 and 1997, respectively, as its contribution to this
plan.
The Company has other defined contribution plans, the contributions to
which are based on a percentage of the employee's salary. Contributions to these
plans amounted to $1,055, $1,563 and $1,236 in fiscal 1999, 1998 and 1997,
respectively.
16. POSTRETIREMENT BENEFITS
The Company sponsors an unfunded postretirement medical and life
insurance plan that covers certain employees who were employed by the Company
prior to January 1987. The Company sponsors no other postretirement benefit
plans.
Cash payments made by the Company for retiree benefits during the years
ended March 31, 1999, 1998 and 1997 amounted to $171, $160 and $103,
respectively. The Company's policy had been to fund these obligations as
incurred until July 1998 when it became fully insured. The components of net
periodic expense for this postretirement benefit are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the year ....... $ -- $ -- $ --
Interest cost on accumulated post retirement benefit
obligation ....................................... 149 83 125
---- ---- ----
Net periodic postretirement benefit cost ........... $149 $ 83 $125
==== ==== ====
</TABLE>
The actuarial and recorded liabilities for this postretirement benefit,
none of which have been funded, are as follows at March 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees .................................. $2,288 $1,347 $1,266
Fully eligible active plan participants ... -- 85 80
------ ------ ------
Total accumulated postretirement benefit 2,288 1,432 1,346
Unrecognized actuarial gain .................. -- 170 279
------ ------ ------
Accrued benefit liability .................... $2,288 $1,602 $1,625
====== ====== ======
</TABLE>
The accumulated postretirement benefit obligation was determined using
a discount rate of 7.0%, 6.75% and 7.75% in fiscal 1999, 1998 and 1997,
respectively, and a health care cost trend rate of 8.0% for the first year
decreasing to 5.0% in the year 2005 and thereafter.
The effect on the accumulated postretirement obligation projected as of
March 31, 1999, of a 1% increase each year in the health cost trend rate used,
would result in an increase of 8.7% in the obligation and of 9.4% in the
aggregate interest and service components of the fiscal 1999 expense.
F-31
<PAGE> 71
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. INTERNATIONAL OPERATIONS AND SEGMENT DATA
The Company has two reportable segments: Domestic and International.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes not
including nonrecurring gains and losses and foreign exchange gains and losses.
The Company accounts for intersegment sales and transfers as if the
sales or transfers were to third parties.
The Company's reportable segments are strategic business units which
serve different markets. They are managed separately because each business
requires different technology and marketing strategies. Most of the businesses
were acquired as a unit, and the management at the time of the acquisition was
retained.
Information concerning the Company's segments is summarized as follows
for the fiscal years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales to unconsolidated customers:
Domestic .......................... $ 111,056 $ 148,341 $ 173,069
International ..................... 129,473 147,362 169,233
--------- --------- ---------
$ 240,529 $ 295,703 $ 342,302
========= ========= =========
Operating loss:
Domestic .......................... $ (29,404) $ (23,882) $ (21,800)
International ..................... (12,258) (7,114) (11,771)
--------- --------- ---------
$ (41,662) $ (30,996) $ (33,571)
========= ========= =========
Total assets:
Domestic .......................... $ 59,190 $ 93,078 $ 133,656
International ..................... 92,828 127,692 154,891
--------- --------- ---------
$ 152,018 $ 220,770 $ 288,547
========= ========= =========
</TABLE>
The above information does not include assets held for sale of $431,
$1,806 and $4,482 for the years ended March 31, 1999, 1998 and 1997,
respectively.
Intercompany sales by domestic operations to international operations
amounted to $674, $740 and $5,692 in fiscal 1999, 1998 and 1997, respectively,
and intercompany sales by international operations to domestic operations
amounted to $5,579, $10,660 and $19,232 in fiscal 1999, 1998 and 1997,
respectively. Sales to customers located in Germany, which exceeded 10% of net
sales, were $43,106, $48,958 and $64,665 in fiscal 1999, 1998 and 1997,
respectively.
Sales by product line are summarized as follows for the fiscal years
ended March 31:
1999 1998 1997
-------- -------- --------
Impact ....... $104,529 $124,303 $146,200
Non-Impact.... 136,000 171,400 196,102
-------- -------- --------
$240,529 $295,703 $342,302
======== ======== ========
F-32
<PAGE> 72
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
18. EMPLOYEE STOCK BASED COMPENSATION PLANS
The Company sponsors the Nu-kote Holding, Inc. Stock Option Plan and
the Nu-kote Holding, Inc. 1992 Stock Option Plan (the "Stock Option Plans"). The
Company also sponsors the Nu-kote Holding, Inc. Senior Management Stock
Appreciation Rights Plan (the "Plan").
STOCK OPTIONS
Under the Stock Option Plan, the Company is authorized to issue shares
of Class A Common Stock pursuant to "Awards" granted to officers, key employees
and directors in the form of non-qualified stock options, not qualified under
Section 422 of the Internal Revenue Code of 1986, as amended. As of March 31,
1999, 1998 and 1997, there were 1,688,350, 1,405,876 and 631,775 shares
available for grant, respectively.
All stock options granted in fiscal 1998 and 1997 have exercise prices
of $2.75, and contractual terms of 10 years. All options vest on a graded
schedule, 20% per year over 5 years, beginning on the first anniversary of the
date of grant.
A summary of the status of the Company's stock options as of March 31,
1999, 1998 and 1997 and the changes during the years then ended is present
below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ---------- ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............ 1,149,364 $ 8.12 1,923,463 $ 10.62 1,908,940 $ 10.53
Granted..................................... -- $ -- 455,000 $ 2.75 145,000 $ 12.06
Exercised................................... -- $ -- -- $ -- (33,294) $ 10.13
Forfeited................................... (282,476) $ 8.42 (1,229,099) $ 10.04 (97,183) $ 11.10
------------- ------------- -----------
Outstanding at end of year.................. 866,888 $ 10.15 1,149,364 $ 8.12 1,923,463 $ 10.62
============= ============= ===========
Exercisable at end of year.................. 443,583 $ 11.23 532,862 $ 10.03 878,054 $ 10.04
Weighted average fair value of all options
granted during year...................... $ -- $1.62 $5.94
======== ======== =========
</TABLE>
The fair value of each stock option granted in fiscal 1998 and 1997 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: dividend yield of 0.00%; expected
volatility of 45.75%; a weighted risk-free interest rate of 6.26%, and expected
lives of 6 years.
The following table summarizes information about stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
-------------------------- ------------------------------
REMAINING
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 3/31/99 LIFE PRICE AT 3/31/99 EXERCISE PRICE
---------------------- ------------ --------------- ---------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$2.75 275,000 8.14 $ 2.75 55,000 $ 2.75
$7.375 to $11.00 316,888 5.39 $ 10.28 267,583 $ 10.22
$11.01 to $17.00 70,000 6.46 $ 16.18 38,000 $ 16.13
$17.01 to $20.875 205,000 7.13 $ 17.83 83,000 $ 17.86
---------------------- ------------ --------------- ---------- ----------- -----------------
$2.75 to $20.875 866,888 6.76 $ 10.15 443,583 $ 11.23
====================== ============ =============== ========== =========== =================
</TABLE>
F-33
<PAGE> 73
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
18. EMPLOYEE STOCK BASED COMPENSATION PLANS (CONTINUED)
STOCK APPRECIATION RIGHTS
Under the Plan, the Company is authorized to grant awards to
participants of appreciation rights with respect to a specified number of shares
of Class A Common Stock. Stock appreciation rights ("SAR") permit a participant
to receive, upon exercise of each SAR, an amount equal to a percentage, as
defined in the Plan, of the difference between the grant price and the fair
market value per share of the Company's Class A Common Stock at the exercise
date. The Company granted 1,520,000 SARs and canceled 240,000 SARs during the
year ended March 31, 1996. No additional grants have since occurred. During
fiscal 1999 and 1998 the Company canceled 880,000 and 240,000 SARs,
respectively, resulting in a total of 160,000 SARs that were outstanding on
March 31, 1999.
The SARs granted during the year ended March 31, 1996 are exercisable
five years subsequent to the grant date and only in 20% installments per year
for each year thereafter. As of March 31, 1999 these SARs had no intrinsic
value.
Under the provisions of the Plan, liability to any participant ceases
once the Company's Class A Common Stock price falls below $15.43 per share. At
March 31, 1999, the Class A Common Stock had a market value of $0.16.
Accordingly, no liability for the Plan has been recorded.
PRO FORMA NET LOSS AND NET LOSS PER COMMON SHARE
The Company applies Accounting Principles Board Opinion 25 ("APB 25")
and related interpretations in accounting for employee compensation costs
related to its plans. APB 25 is an intrinsic value approach for measuring
compensation costs. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") is a fair value approach
for measuring compensation costs. Had employee compensation cost for the
Company's employee stock-based compensation plans been determined consistent
with SFAS 123, the Company's net loss and net loss per common share for fiscal
1999, 1998 and 1997 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 compensation cost...... $ -- $ 99 $ -- $ 99 $ -- $ 308
APB 25 compensation cost........ $ -- $ -- $ -- $ -- $ -- $ --
Net loss........................ $ (54,972) $ (55,071) $ (49,987) $ (50,086) $ (47,930) $ (48,238)
Net loss per common share: $ -- $ -- $ -- $ -- $ -- $ --
Basic....................... $ (2.52) $ (2.53) $ (2.30) $ (2.31) $ (2.20) $ (2.21)
Diluted..................... $ (2.52) $ (2.53) $ (2.30) $ (2.31) $ (2.20) $ (2.21)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
necessarily indicative of future results.
F-34
<PAGE> 74
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
19. RELATED PARTY AND OTHER TRANSACTIONS
As a result of the Pelikan acquisition, Ligapart AG ("Ligapart"), which
owned the majority of Pelikan, became a major shareholder of the Company. In
connection with the acquisition, the Company entered into various management and
lease agreements with Ligapart related entities. The net expense incurred by the
Company under these agreements amounted to $772, $782 and $2,423 in fiscal 1999,
1998 and 1997, respectively. In addition, sales to Ligapart related entities
amounted to $7,675, $7,936 and $12,600 and purchases amounted to $0, $0 and $71
in fiscal 1999, 1998 and 1997, respectively.
20. RESTRUCTURING EXPENSES
Restructuring expenses for the fiscal years ended March 31, 1999, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Severance ............................................................ $ 908 $ 814 $ 4,461
Impairment provisions for duplicate or incompatible property, plant
and equipment and foreign operations ............................. 7,675 1,327 8,567
Relocation of employees, equipment and inventory, lease cancellations,
termination of contracts, facility maintenance and
other ............................................................ 202 1,208 2,111
------- ------- -------
$ 8,785 $ 3,349 $15,139
======= ======= =======
</TABLE>
The fiscal 1999 restructuring expenses relates primarily to the
impairment of assets associated with the Company's aftermarket ribbon
production. As a result of the Company's decision to begin outsourcing the
manufacturing of its aftermarket ribbon products, the carrying value of the
related manufacturing assets in both the Company's Franklin, TN and Nogales,
Mexico locations was considered to be impaired and a write-down of $6,892 was
recorded. These manufacturing assets were held and used by the Company as of
year-end. Severance costs recognized as part of the restructuring expense for
fiscal 1999 are associated with approximately 260 employees at the above
mentioned aftermarket ribbon producing facilities. Severance payments of $428
were made in fiscal 1999. The remaining exit costs associated with the
outsourcing of aftermarket ribbon manufacturing, including severance payments,
lease cancellations and facility maintenance, are expect to be complete during
fiscal 2000.
In connection with decision to outsource the aftermarket ribbon
manufacturing, certain product lines are being discontinued. The Company
recorded inventory write-downs of $1,670, which have been classified as a
component of cost of goods sold.
The fiscal 1998 restructuring expenses related primarily to the
centralization of sales and distribution into Franklin, Tennessee, and the
closure of the Dallas, Texas headquarters. The charge for severance was
approximately $1,242 representing the severance of approximately 70 people in
manufacturing, sales and administration, of which virtually all had been
terminated by March 31, 1998. This charge was offset by changes in estimates of
$428 related to fiscal 1997 severance accruals. Approximately $1,014 of the
fiscal 1998 severance had been paid by March 31, 1998. Other restructuring
expenses of $1,208, net of fiscal 1997 changes in estimates of $353, related
primarily to relocation of employees and outplacement counseling and were
expensed as incurred. The asset write-downs were related to property, plant and
equipment at the Company's Derry, Pennsylvania facility, and were written down
to their estimated net realizable value as a result of the Company's decision to
dispose of these assets as part of its consolidation effort. A significant
portion of the machinery and equipment at the Derry, Pennsylvania facility was
sold in fiscal 2000.
F-35
<PAGE> 75
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
20. RESTRUCTURING EXPENSES (CONTINUED)
The Company estimates that an additional $750 of restructuring expenses
will be recognized in fiscal 2000. Most of this amount relates to expected
severance and relocation costs related to continuing consolidation efforts in
Europe. Management currently anticipates completion of its restructuring efforts
in fiscal 2000.
During fiscal 1997, restructuring expenses amounted to $15,139 relating
primarily to the consolidation of impact product production into Scotland,
Mexico, and China; centralization of distribution primarily into Franklin,
Tennessee and Duren, Germany; and the closure of one toner facility, and
consolidation of toner manufacturing into Connellsville, Pennsylvania and
Monchaltorf, Switzerland. The charge for severance costs represents the
severance of approximately 110 people in manufacturing and administration, of
which virtually all had been terminated by March 31, 1997. Of this charge,
$3,257 was paid in fiscal 1997. Of the $2,111 in fiscal 1997 relating to lease
cancellations, facility maintenance and other, $1,434 was paid in fiscal 1997.
The assets written down were comprised of property, plant and equipment at the
Company's Macedon, New York and Derry, Pennsylvania facilities, and were written
down as a result of the Company's decision to dispose of these assets as part of
its consolidation effort. Activity related to these accrued restructuring costs
is as follows:
<TABLE>
<CAPTION>
AMOUNT
AMOUNT AMOUNT AMOUNT
ACCRUED PAID IN CHANGES AMOUNT PAID IN CHANGES AMOUNT
DESCRIPTION OF RESTRUCTURING AT FISCAL IN ACCRUED AT FISCAL IN ACCRUED AT
EXPENSE 3/31/97 1998 ESTIMATES 3/31/98 1999 ESTIMATES 3/31/99
- ---------------------------- ---------- ---------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Severance costs $ 1,204 (776) $ (428) $ -- $ (428) $ 908 $ 480
Lease cancellations 430 (139) (111) 180 (161) 100 119
Facility maintenance and other 247 (5) (242) -- -- 283 283
---------- ---------- --------- ----------- ----------- ----------- -----------
$ 1,881 (920) $ (781) $ 180 $ (589) $ 1,291 $ 882
========== ========== ========= =========== =========== =========== ===========
</TABLE>
F-36
<PAGE> 76
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended March 31, 1999 and
1998:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
JUNE 26 SEPTEMBER 25 DECEMBER 25 MARCH 31
------------ -------------- --------------- ------------
<S> <C> <C> <C> <C>
Fiscal 1999:
Net sales ...................... $ 64,181 $ 55,085 $ 59,197 $ 62,066
Gross margin ................... 11,877 10,161 10,256 3,244 (a)
Gain (loss) on sale of divisions 462 -- -- (1,373)
Impairment of assets ........... -- -- -- (7,967)
Restructuring expense .......... (76) (77) (221) (8,411)
Operating loss ................. (1,976) (4,205) (5,221) (30,260)
Net loss ....................... (7,328) (9,996) (9,795) (27,853)
Net loss per share ............. $ (0.34) $ (0.46) $ (0.45) $ (1.27)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
JUNE 27 SEPTEMBER 26 DECEMBER 26 MARCH 31
----------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Fiscal 1998:
Net sales ............... $ 79,727 $ 72,688 $ 70,755 $ 72,533
Gross margin (c) ........ 15,783 12,548 9,615 4,869 (a)
Restructuring expense ... (1,623) (1,194) (488) (44)
Operating loss (c) ...... (2,318) (4,560) (10,597) (13,521)
Extraordinary loss ...... -- (2,550) -- --
Net loss (c) ............ (5,972) (10,568) (14,980) (18,467)
Net loss per share (b)(c) $ (0.27) $ (0.37) $ (0.69) $ (0.85)
</TABLE>
(a) Includes a provision for excess and obsolete inventories of $3,300 and
$5,488 in North America for fiscal 1999 and 1998, respectively.
(b) Per share information has been restated to reflect the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share".
(c) Restated for fiscal 1998 to reflect the change in accounting principle for
the accounting for cost of inventory from the last-in, first-out basis to
the first-in, first-out method.
F-37
<PAGE> 77
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
22. SUBSEQUENT EVENTS-(UNAUDITED)
JOINT PLAN OF REORGANIZATION
On March 2, 2000, Nu-kote, its secured lenders and the official
committees for Nu-kote's unsecured creditors filed a Joint Plan of
Reorganization for Nu-kote (the "Plan") and a Second Amended Disclosure
Statement for Second Amended Joint Plan of Reorganization for Nu-kote (the
"Disclosure Statement"). Under the terms of the Plan and a separate motion, a
bidding procedure was established pursuant to which interested parties may make
a bid for the stock or assets of Nu-kote. An initial bid has been submitted by
Richmont Capital Partners I, L.P ("Richmont"). Richmont is an affiliate of
Nu-kote. The deadline for submitting bids passed without any other party
submitting a bid. The Plan provides for (i) payment to the secured lenders of
$20,550,000, (ii) payment to the unsecured creditors of $600,000, (iii) payment
of priority and administrative claims of up to $3,000,000, and (iv) the
assumption of certain other debts outlined in the Plan, contingent upon certain
conditions being satisfied prior to closing. The Plan also provides for mutual
releases between and among Nu-kote, its secured lenders, the committees and
Richmont and is subject to certain conditions being satisfied, including the
resolution of litigation with certain printer manufacturers and the resolution
of administrative claims at a cost of no more than $3,000,000. As part of the
Plan, the existing stock of Nu-kote will be extinguished and Nu-kote's
stockholders will receive nothing in respect of their stockholdings.
On March 17, 2000 Nu-kote's secured lenders filed a motion to convert
the case to a Chapter 7 proceeding. This motion was opposed by Nu-kote, and
Richmont and Nu-kote's secured lenders have now reached an agreement in
principle pursuant to which Richmont will purchase the debt, security interests
and all claims held by the secured lenders. The agreement is subject to
completion of final documentation which is still being drafted. Upon completion
of the documentation, the motion to convert the case to a Chapter 7 proceeding
will be withdrawn, and management of Nu-kote believes it will then be possible
to confirm a plan of reorganization. It is still expected that any plan of
reorganization that is confirmed will provide that the stock of Nu-kote will be
extinguished and Nu-kote's stockholders will receive nothing in respect of their
stock.
SALE OF EUROPEAN BUSINESS
Subsequent to the close of the current fiscal year, on September 30,
1999, Nu-kote International, Inc., a wholly owned subsidiary of the Company,
sold certain of its subsidiaries to Pelikan Hardcopy Europe Limited ("Pelikan"),
a Scottish corporation (the "Pelikan Disposition"). The subsidiaries sold
include Pelikan Productions A.G., Pelikan Scotland Limited, Greif-Werke GmbH,
Pelikan Hardcopy Asia Pacific Limited, and Dongguan Pelikan Hardcopy Limited
("Pelikan Subsidiaries").
Under the terms of the agreement, proceeds of $16.5 million were
received at the close of the transaction in exchange for all of the capital
stock or equity interests of the Pelikan Subsidiaries. Additionally, in
connection with obtaining their consent to the amendment of the Pelikan
trademark license, $3.5 million was paid to Pelikan Holding, AG. Previously, the
Company had filed a motion in the United States Bankruptcy Court for the Middle
District of Tennessee and received approval for the sale. The Pelikan
Disposition is part of the Company's efforts to dispose of non-essential assets
and focus on the restructuring of its core business in North America. A net gain
of approximately $12.4 million is anticipated to be recognized in fiscal 2000
relative to this sale.
The Company's North American Operations will retain the rights to
market its products under the Pelikan brand name in the United States, Canada
and Mexico, with the purchaser having the right to market its products under the
Pelikan brand name throughout the rest of the world. In addition, the Company
will continue to market its products under the "Nu-kote" brand name anywhere in
the world.
F-38
<PAGE> 78
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
22. SUBSEQUENT EVENTS (CONTINUED)
SETTLEMENT OF HEWLETT-PACKARD LITIGATION
On September 19, 1994, Hewlett Packard Co. filed a lawsuit against
Nu-kote International, Inc. in the United States District Court for the Northern
District of California (the "California District Court"), San Jose Division,
Case No. C94-20647 JW (EIA), (the "HP Litigation") alleging patent and trademark
infringement, unfair competition and false advertising. Nu-kote International
asserted affirmative defenses to claims brought by HP, and asserted seven
counterclaims against HP, including inter alia: violations of the Lanham Act,
Sherman and Clayton Antitrust Acts. Nu-kote International sought compensatory,
punitive and treble damages, court costs and attorneys' fees, as well as
injunctive relief.
On November 13, 1998, Nu-kote International filed a motion for relief
from stay to allow the HP Litigation to continue despite the pendency of the
bankruptcy cases. The Bankruptcy Court found that "cause" under ss. 362 of the
Bankruptcy Code existed to lift the automatic stay to allow the HP Litigation to
proceed to trial.
Prior to trial the California District Court dismissed certain of HP's
patent claims and certain of Nu-kote International's antitrust and other claims.
The remaining claims in the HP Litigation went to trial on May 17, 1999. On July
22, 1999, the jury rendered its verdict. The jury found that Nu-kote
International infringed three HP patents and certain of HP's trademarks, and
engaged in false advertising. The jury found that Nu-kote International's
conduct was willful. The jury awarded HP damages in the amounts of $456,937.80,
$434,120.00 and $1,138,394.00 for damages suffered by HP for patent infringement
claims, trademark/unfair competition claims and false advertising claims,
respectively. The jury found in Nu-kote International's favor on one of HP's
patent claims and certain of HP's trademark claims. The jury also found that
Nu-kote International's use of its current green and white packaging does not
violate HP's trademarks. The jury rejected all of Nu-kote International's
remaining antitrust claims and awarded Nu-kote International no damages. There
remain before the California District Court issues not addressed by the jury
including those concerning HP's claims for attorneys' fees, enhanced damages,
costs and injunctive relief, and Nu-kote's equitable defenses, claims for
attorneys' fees and other relief. The California District Court must resolve
certain issues before entering judgment on the jury verdict.
Subsequent to the rendition of the jury verdict in the HP Litigation,
the Company's management and general bankruptcy counsel entered into extensive
arms-length negotiations seeking settlement and resolution of the litigation
between the parties. As a result of these negotiations, an agreement (the
"Settlement Agreement") was reached and approved by the Court. Due to the
confidential and proprietary nature of certain portions of the Settlement
Agreement, a redacted version of same is attached to the Motion to Approve
Compromise and Settlement Agreement as proposed by and between Nu-kote
International and Hewlett-Packard Company, filed of record with the Bankruptcy
Court.
The principal material terms of the proposed Settlement Agreement include:
(a) Judgments: HP shall be granted judgments and claims in its
favor dismissing Nu-kote International's antitrust claims and
awarding damages on HP's claims on trademark infringement,
unfair competition, false advertising, attorneys' fees and
costs in the following amounts: $1,500,000.00 for awardable
costs incurred by HP in the HP Litigation, plus $456,937.80
for damages suffered by HP on HP's patent infringement claims,
plus $434,120.00 and $1,138,394.00 for damages suffered by HP
on HP's patent infringement claims, plus $434,120.00 and
$1,138,394.00 for damages suffered by HP on HP's
trademark/unfair competition claims and false advertising
claims, plus $2,000,000.00 for HP's awardable attorney's fees
in the HP Litigation, for a sum total of $5,529,451.80. The
judgments and claims shall be treated as allowed liquidated,
undisputed, non-contingent, unsecured pre-petition claims in
the Bankruptcy Case. The judgments will not be entered until
the Patent Covenants described below become effective.
F-39
<PAGE> 79
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN POSSESSION-NOTE 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
22. SUBSEQUENT EVENTS (CONTINUED)
(b) Injunctions: Subject to the Patent Covenants granted by HP
that are described below, Nu-kote International agrees to the
entry of certain injunctions against further patent
infringement, trademark infringement, and false advertising.
The injunctions will not be entered until after the Patent
Covenants become effective.
(c) Vacatur of Patent Rulings and Findings: The parties agree to
the vacatur of certain of the District Court's orders and
certain of the jury's findings regarding the validity,
invalidity or infringement of certain of HP's patents. In
addition, Nu-kote International acknowledges the validity,
enforceability and infringement of certain HP patents.
(d) Patent Covenants: HP grants to Nu-kote International Patent
Covenants, which are covenants not to sue for infringement of
certain patents as set forth in the confidential portions of
the Settlement Agreement, which shall become effective upon
receipt by HP of the duly executed Certificates of Compliance
relating to the Document Escrow contemplated by the Settlement
Agreement. The Patent Covenants will allow Nu-kote
International to continue to market its line of HP compatible
inkjet products.
(e) Mutual Releases: Mutual releases executed by and between
Nu-kote International for itself and for any and all
Subsidiaries, predecessors, successors, assigns, and, to the
extent permitted by law, for its related companies, officers,
directors, employees, agents, shareholders, customers,
attorneys and consultants and HP for itself and for any and
all Subsidiaries, predecessors, successors, assigns, and, to
the extent permitted by law, for its related companies,
officers, directors, employees, agents, shareholders,
customers, attorneys and consultants.
This summary is not intended to supercede or replace any of the terms
of the Settlement Agreement and shall not be used to interpret the Settlement
Agreement.
Following the filing of the Petition of Reorganization under Chapter 11
on November 6, 1998, the California District Court has stayed all further
proceedings in the Epson Litigation. On April 1, 1999, the California District
Court entered an Order Deferring Decision on Application of Bankruptcy Stay to
the United States Bankruptcy Court for the Middle District of Tennessee, and
Deferring Any Further Proceedings in this Matter Pending Decision on that Issue.
The California District Court held "that there shall be no further proceedings
in this action until a decision on whether the bankruptcy stay applies to
Pelikan Producktions, A.G. issues from the United States Bankruptcy Court for
the Middle District of Tennessee."
Nu-kote International and Epson reached an agreement to certain limited
relief regarding the appeal as sought in the Motion for Relief from Stay file by
Epson. Nu-kote International and Epson agreed to relief from the automatic stay
only to the extent necessary to allow the Appeal to continue as and to the
extent determined appropriate by the United States Court of Appeals for the
Federal Circuit. On September 8, 1999, the Federal circuit court issued its
opinion remanding the issues concerning the contempt orders to the California
District Court for further consideration, reversing the invalidity and
unenforceability summary judgement ruling on certain Epson patents placing those
patents back into the Epson Litigation, and stating that Court's opinion that
the automatic stay did not apply to PPAG. On October 29,1999, the Federal
Circuit issued an additional decision stating that Court's opinion that its
prior decision as to all issues including vacatur and remand of the assessment
of sanctions, is fully applicable to Nu-kote as to Pelikan. No trial date for
the Epson Litigation has been set by the California District Court.
F-40
<PAGE> 80
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report on Financial Statement Schedules ............. S-2
Report of Independent Accountants on Financial Statement Schedules ........ S-3
Schedule II - Valuation and Qualifying Accounts and Reserves for the fiscal
years ended March 31, 1999, 1998 and 1997............................... S-4
</TABLE>
The separate combined financial statements of Nu-kote Holding, Inc.
("Nu-kote") required by Rule 12-04 of Regulation S-X are not presented as
Nu-kote has no operations and its balance sheet consists of only equity in and
advances to subsidiaries and shareholders' equity (deficit) as reflected in the
consolidated financial statements.
All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated financial
statements, related notes or other schedules.
S-1
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
Under date of January 7, 2000, we reported on the consolidated
balance sheets of Nu-kote Holdings, Inc. and subsidiaries as of March 31, 1999,
and the related consolidated statements of operations, changes in shareholders'
equity (deficit) and comprehensive income (loss) and cash flows for the year
then ended, which report is included on Page F-2 of the Form 10-K. In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule for the fiscal year ended March 31, 1999 on Page S-3 of the Form 10-K.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audit.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
The audit report on the consolidated financial statements of Nu-kote
Holdings, Inc. and subsidiaries referred to above contains an explanatory
paragraph that states the consolidated financial statements do not purport to
reflect or provide for the consequences of the Company's filing for
reorganization under Chapter 11 of the U.S. Bankruptcy Code and the bankruptcy
proceedings. The above referenced audit report on the consolidated financial
statements of the Company also contains an explanatory paragraph that states
that the Company's recurring losses from operations, material uncertainties
related to pending litigation and other claims and shareholders' deficit raise
substantial doubt about the entity's ability to continue as a going concern. The
financial statement schedule referred to above does not include any adjustments
that might result from the outcome of the bankruptcy proceedings and the
uncertainty relating to the Company's ability to continue as a going concern.
Our report to the consolidated financial statements of the Company
refers to a change to the first-in, first-out method of valuing inventory.
KPMG LLP
Nashville, Tennessee
January 7, 2000
S-2
<PAGE> 82
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Nu-kote Holding,
Inc. and Subsidiaries is included on page F-3 of this Form 10-K. In connection
with our audits of such financial statements we have also audited the related
financial statement schedule listed in the index on Page S-1 of the Form 10-K as
it relates to the fiscal years ended March 31, 1998 and 1997.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Dallas, Texas
June 26, 1998
S-3
<PAGE> 83
SCHEDULE II
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(IN THOUSANDS)
RESERVE FOR SALES RETURNS, ALLOWANCES AND DOUBTFUL RECEIVABLES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES WRITE-OFFS OTHER (a) PERIOD
- ------------------ ---------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
March 31, 1997 ............... 3,933 $1,786 $(1,523) $(455) $3,741
March 31, 1998 ............... 3,741 2,740 (897) (111) 5,473
March 31, 1999 ............... 5,473 1,517 (1,448) -- 5,542
</TABLE>
EXCESS AND OBSOLETE INVENTORY RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES WRITE-OFFS OTHER (a) PERIOD
- ------------------ ---------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
March 31, 1997 ............... $10,966 $7,034 $ (2,756) $(1,436) $13,808
March 31, 1998 ............... 13,808 5,190 (5,799) (615) 12,584
March 31, 1999 ............... 12,584 6,707 (10,007) 17 9,301
</TABLE>
RESTRUCTURING RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES WRITE-OFFS OTHER (a) PERIOD
- ------------------ ---------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
March 31, 1997 ............... $ -- $ 15,139 $(13,258) $ -- $1,881
March 31, 1998 ............... 1,881 (738) (920) (43) 180
March 31, 1999 ............... 180 1,291 (589) -- 882
</TABLE>
(a) Other deductions relate primarily to exchange rate adjustments.
S-4
<PAGE> 1
EXHIBIT 10.18
Execution Copy
FIRST AMENDMENT TO TRADEMARK LICENSE AGREEMENT
This First Amendment to Trademark License Agreement (the "Amendment")
dated as of this ___ day of __________, 1999, between (a) Pelikan Holding AG, a
company organized under the laws of Switzerland ("Pelikan Holding"); Pelikan
Vertriebsgesellschaft mbH & Co. KG ("PVG"), (formerly known as Pelikan
International Handelsgesellschaft mbH & Co. KG (Hannover)), a company
organized under the laws of Germany; and Pelikan GmbH (Hannover), a company
organized under the laws of Germany (collectively, "Licensors"), on the one
hand, and (b) Nu-kote Holding, Inc., a Delaware corporation ("Licensee"), on the
other hand.
WITNESSETH:
WHEREAS, pursuant to the Asset and Stock Purchase Agreement, dated as
of November 15, 1994, as amended, between Pelikan Holding and Licensee (the
"Purchase Agreement"; capitalized terms used herein without definition being
used as defined therein), the Licensee purchased or acquired, directly or
indirectly through Subsidiaries, from Pelikan Holding or the Selling
Subsidiaries, and Pelikan Holding and such Selling Subsidiaries sold, assigned
or transferred to the Licensee, the Hardcopy Business, and executed and
delivered the Trademark License;
WHEREAS, at the time of the Closing, PIH was the owner of the Licensed
Mark;
WHEREAS, PVG changed its name from Pelikan International
Handelsgesellschaft mbH & Co. KG (Hannover) effective January 1, 1996 and is the
owner of the Licensed Mark;
WHEREAS, Pelikan GmbH is the successor of Pelikan AG which transferred
all of its ownership rights in the Licensed Mark to PIH but retains for fiscal
reasons an option of retransfer at first demand; and
WHEREAS, on February 13, 1998 Licensors sent a Notice of Breach in
accordance with the provisions of the Trademark License, and on both June 9,
1998 and June 22, 1998, and again on October 9, 1998, Licensors sent Notices of
Termination pursuant to Section 11(b) of the Trademark License giving 30 days
notice of termination of the Trademark License;
WHEREAS thereafter Nu-kote and certain of its subsidiaries commenced
cases under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Middle District of Tennessee designated numbers
98-10600 through 98-10606 on the docket of said Court, which cases said Court
has ordered substantively consolidated for certain purposes under Case No.
98-10600;
WHEREAS, Nu-kote desires to sell a portion of the Hardcopy Business,
including Produktions, indirectly to Pelikan Hardcopy Europe Limited, a
corporation organized under the laws of Scotland ("PHE"), and thereby to cause
Produktions to cease to be an Affiliate of Nu-kote, and, in connection
therewith, desires to induce Pelikan
<PAGE> 2
Holding to grant to PHE a license to use the Licensed Marks and to rescind
Licensors' termination of the above Notices of Termination of the Trademark
License;
WHEREAS, Licensors are willing, in connection with Nu-kote's sale of a
portion of the Hardcopy Business to PHE, to grant to Produktions a license to
use the Licensed Mark upon terms that are mutually agreeable to Licensors and
PHE, subject to the condition that the Trademark License is amended as provided
herein and that the Non-Competition Agreement is amended to limit the geographic
scope of the Non-Competition Agreement to the United States of America
(including the District of Columbia, the Commonwealths of Puerto Rico, the
Northern Mariana Islands, and the Virgin Islands of the United States, and the
unincorporated United States territories of American Samoa and Guam), Mexico and
Canada;
NOW, THEREFORE, in consideration of the covenants contained herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Amendment of Section 1a. Section l(a) of the Trademark license
shall be amended to read as follows:
"1. Licensed Grant. (a) From and after the Effective Date, Licensors
hereby grant an exclusive, royalty-free, fully paid-up, license, during
the Term (as defined in Section 11), to Licensee: (i) to use the Licensed
Mark, but only within United States of America (including the District of
Columbia, the Commonwealths of Puerto Rico, the Northern Mariana Islands,
and the Virgin Islands of the United States, and the unincorporated United
States territories of American Samoa and Guam), Mexico and Canada within
the field of use of the Hardcopy Venture (including but not limited to the
development, manufacture, procurement, distribution and sale of goods
relating thereto); and (ii) to permit any existing or future Subsidiary of
Licensee to use, but only within the United States of America (including
the District of Columbia, the Commonwealths of Puerto Rico, the Northern
Mariana Islands, and the Virgin Islands of the United States, and the
unincorporated United States territories of American Samoa and Guam),
Mexico and Canada, the name and mark "PELIKAN" as part of the trade name
"PELIKAN IMAGING SUPPLIES" and "PELIKAN HARDCOPY" (and appropriate
translations thereof) (or such other trade name as Licensor may consent,
such consent not to be unreasonably withheld or derivations thereof).
2. Adjustment to Maintenance Expense Share. Section 5(a) of the
Trademark License shall be amended to substitute "25%" for "50%."
2
<PAGE> 3
3. Effectiveness of Trademark License. It shall be a condition
precedent to the effectiveness of this Amendment that:
(i) PHE shall pay to Pelikan Holding the sum of Three Million
Five Hundred Thousand U.S. Dollars (US$3,500,000) by wire transfer to an
account in Zurich, Switzerland, designated by Pelikan Holding; and
(ii) the United States Bankruptcy Court for the Middle District
of Tennessee shall have entered an order in Case No. 398-10600
(Consolidated) after due notice approving this amendment and the
amendments referred to in clause (iii) hereof, and the other transactions
contemplated in connection herewith, said order shall have become a Final
Order (the date of the last of the foregoing to occur being hereinafter
referred to as the "Effective Date").
(iii) Nu-kote and Pelikan Holding shall have executed and
delivered an amendment to the Non-Competition Agreement among Nu-kote,
Pelikan Holding and certain other parties thereto dated as of February 24,
1995 to change the word "world" at the end of paragraph 1(a) thereof to
"United States of America, (including the District of Columbia, the
Commonwealths of Puerto Rico, the Northern Mariana Islands, and the Virgin
Islands of the United States, and the unincorporated United States
territories of American Samoa and Guam), Mexico and Canada;"
(iv) The existing sublicense from Nu-kote to Produktions under
the Nu-kote License referred to in the second recital to this First
Amendment to Trademark License Agreement shall have been terminated by
written agreement of the parties thereto, and a copy of such termination
shall have been delivered to Pelikan Holding;
(v) PHE (or a Subsidiary of PHE acceptable to PVG) and PVG shall
have executed a distribution agreement providing for PHE and its
Subsidiaries to sell to PVG, and PVG to purchase from PHE and its
Subsidiaries and to distribute to certain customers in Germany, certain
Pelikan brand Hardcopy Products.
For purposes of this Agreement, the term "Final Order" shall mean an order or
judgment that has not been modified, vacated or stayed, and as to which (a) the
time to appeal or seek review, rehearing, reargument or certiorari has expired
and as to which no appeal or petition for review, rehearing, reargument or
certiorari proceeding is pending, or (b) an order or judgment which has been
appealed, has been affirmed on appeal or certiorari and as to which appeal or
certiorari the time for further appeal or certiorari has expired, provided, such
an order shall be a "Final Order" whenever (i) a period of ten days after the
entry thereof on the Clerk's docket shall have expired (ii) no stay of the order
shall be in effect, and (iii) Pelikan shall so elect by written notice to
Nu-kote.
4. Release of Certain Claims. If this Amendment becomes effective, then
Licensors hereby expressly waive and release any claims against Nu-kote or any
of
3
<PAGE> 4
Nu-kote's Subsidiaries or sublicensess that Licensors may have by reason of the
Notices of Termination referred to above or the matters referred to in said
Notices of Termination, and the Trademark License shall continue in full force
and effect, notwithstanding any and all Notices of Termination or Notices of
Breach that Licensors may have given to Licensee at any time prior to the date
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers on the day and year first above
written.
Licensors: Licensee:
PELIKAN HOLDING AG NU-KOTE HOLDING, INC.
By: By:
------------------------------ ----------------------------
Name: Benno Zehnder Name:
Title: Director ----------------------------
Title:
----------------------------
PELIKAN VERTRIEBSGESELLSCHAFT
MBH & CO. KG
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
PELIKAN GMBH (HANNOVER)
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
4
<PAGE> 1
EXHIBIT 10.19
Execution Copy
AMENDMENT TO NON-COMPETITION AGREEMENT
AMENDMENT dated as of __________ ____, 1999 (the "Amendment") to the
Non-Competition Agreement, dated as of February 24, 1995 (the "Non-Competition
Agreement"), among Nu-kote Holding, Inc., a Delaware corporation ("Nu-kote"),
Pelikan Produktion AG, a Swiss stock company ("Produktions"), Greif-Werke GmbH,
a German limited liability company ("Greif"), Pelikan Scotland Ltd., a limited
liability company organized under the laws of Scotland ("Pelikan Scotland") and
Pelikan Holding AG, a Swiss stock corporation ("Pelikan").
W I T N E S S E T H:
WHEREAS, Nu-kote desires to induce Pelikan to amend the Trademark
License Agreement dated as of February 24, 1995 among Nu-kote, Pelikan and
certain of Pelikan's Affiliates and to enter into a new trademark license
agreement with the purchaser from Nu-kote of certain of Nu-kote's assets and
business outside of the United States of America (including the District of
Columbia, the Commonwealths of Puerto Rico, the Northern Mariana Islands, and
the Virgin Islands of the United States, and the unincorporated United States
territories of American Samoa and Guam), Mexico and Canada, and Pelikan is
unwilling to do so unless Nu-kote and the other parties hereto enter into this
Amendment; and
WHEREAS, Nu-kote, along with one or more of its Affiliates, to whom
Nu-kote has assigned certain rights under the Non-Competition Agreement,
Produktions, Greif, Pelikan Scotland and Pelikan have agreed to amend the
Non-Competition Agreement, subject to the terms and conditions of this
Amendment;
NOW, THEREFORE, NOW, THEREFORE, in consideration of the mutual
covenants made herein and in the First Amendment to Trademark License among
Nu-kote, Pelikan and certain of Pelikan's Affiliates, and in order to induce and
in consideration of the execution and delivery by Pelikan and certain of its
Affiliates of a Trademark License Agreement with Produktions, and of the mutual
benefits to be derived hereby and thereby, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. Capitalized terms used herein without definition are
used as defined in the Non-Competition Agreement or in the Asset and Stock
Purchase Agreement, as amended, dated as of November 15, 1994 (the "Purchase
Agreement"), between Nu-kote and Pelikan.
2. AMENDMENT TO NON-COMPETE COVENANT. Section 1, paragraph (a) of the
Non-Competition Agreement is hereby amended by replacing "world" where it
appears in the thirteenth line of such paragraph and substituting therefor
"United States of America (including the District of Columbia, the Commonwealths
of Puerto Rico, the Northern Mariana Islands, and the Virgin Islands of the
United States, and the unincorporated United States territories of American
Samoa and Guam), Mexico and Canada."
3. APPROVAL OF BANKRUPTCY COURT. This Amendment shall be effective
immediately, without further action by the parties, when an order approving
Nu-kote's agreement hereto has been entered by the United States Bankruptcy
Court for the Middle District of Tennessee, Nashville Division, in the matter of
In Re: Nu-kote Holding, Inc., Nu-kote
<PAGE> 2
Imperial, Ltd., Nu-kote International, Inc., Nu-kote Imaging International,
Inc., International Communication Materials, Inc., Future Graphics, Inc., and
Nu-kote Latin America, Inc., substantively consolidated under BK. NO.
98-10600-KL3-11 and has become a Final Order. The term "Final Order" shall mean
an order or judgment that has not been modified, vacated or stayed, and as to
which (a) the time to appeal or seek review, rehearing, reargument or certiorari
has expired and as to which no appeal or petition for review, rehearing,
reargument or certiorari proceeding is pending, or (b) an order or judgment
which has been appealed, has been affirmed on appeal or certiorari and as to
which appeal or certiorari the time for further appeal or certiorari has
expired, provided, such an order shall be a "Final Order" whenever (i) a period
of ten days after the entry thereof on the Clerk's docket shall have expired
(ii) no stay of the order shall be in effect, and (iii) Pelikan shall so elect
by written notice to Nu-kote. In the event such approval is not received, for
any reason, on or before ________ ___, 1999, this Amendment shall be null and
void and of no force or effect whatsoever.
4. MISCELLANEOUS. Except as expressly amended and modified hereby, and
except as otherwise agreed in writing, the Non-Competition Agreement remains in
full force and effect in accordance with its terms. The headings contained in
this Amendment are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Amendment. The recitals to this Amendment
are, and shall be construed to be, an integral part of this Amendment. This
Amendment may be executed in several counterparts, each of which shall
constitute one and the same instrument. This Amendment shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of New York without giving effect to the conflict of laws rules thereof.
IN WITNESS WHEREOF, the parties, on behalf of themselves and their
respective Affiliates, have caused this Amendment to be duly executed by their
respective duly authorized representatives as of the date first above written.
PELIKAN HOLDING AG PELIKAN PRODUKTIONS AG
By: By:
-------------------------- --------------------------
Its: Its:
-------------------------- --------------------------
GREIF-WERKE GmbH
By: By:
-------------------------- --------------------------
Its: Its:
-------------------------- --------------------------
NU-KOTE HOLDING, INC. PELIKAN SCOTLAND LTD.
By: By:
-------------------------- --------------------------
Its: Its:
-------------------------- --------------------------
2
<PAGE> 1
EXHIBIT 10.20
----------------------------------------------
----------------------------------------------
CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
NORWEST BUSINESS CREDIT, INC.
AND
NU-KOTE HOLDING, INC., NU-KOTE IMPERIAL, LTD.,
NU-KOTE INTERNATIONAL, INC., INTERNATIONAL
COMMUNICATION MATERIALS, INC., NU-KOTE IMAGING
INTERNATIONAL, INC., FUTURE GRAPHICS, INC. AND NU-KOTE
LATIN AMERICA, INC.
Dated as of: December, 14 2000
[NORWEST LOGO]
----------------------------------------------
----------------------------------------------
<PAGE> 2
Table of Contents
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS............................................................................................1
Section 1.1 Definitions.......................................................................................1
Section 1.2 Cross References.................................................................................11
ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY..............................................................11
Section 2.1 Revolving Advances...............................................................................11
Section 2.2 Interest; Minimum Interest Charge; Default Interest; Participations; Usury.......................11
Section 2.3 Fees.............................................................................................13
Section 2.4 Computation of Interest and Fees; When Interest Due and Payable..................................13
Section 2.5 Capital Adequacy.................................................................................13
Section 2.6 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by the
Borrowers....................................................................................................14
Section 2.7 Termination, Line Reduction and Prepayment Fees; Waiver of Termination, Prepayment and Line
Reduction Fees...............................................................................................14
Section 2.8 Mandatory Prepayment.............................................................................15
Section 2.9 Payment..........................................................................................15
Section 2.10 Payment on Non-Banking Days.....................................................................15
Section 2.11 Use of Proceeds.................................................................................15
Section 2.12 Liability Records...............................................................................15
ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF................................................................15
Section 3.1 Grant of Security Interest.......................................................................15
Section 3.2 Notification of Account Debtors and Other Obligors...............................................16
Section 3.3 Assignment of Insurance..........................................................................16
Section 3.4 Occupancy........................................................................................16
Section 3.5 License..........................................................................................17
Section 3.6 Financing Statement..............................................................................17
Section 3.7 Setoff...........................................................................................18
ARTICLE IV CONDITIONS OF LENDING................................................................................19
Section 4.1 Conditions Precedent to the Initial Revolving Advance............................................19
Section 4.2 Conditions Precedent to All Advances.............................................................20
ARTICLE V REPRESENTATIONS AND WARRANTIES........................................................................21
Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations;
Tax Identification Number....................................................................................21
Section 5.2 Capitalization...................................................................................22
Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements..................................22
Section 5.4 Legal Agreements.................................................................................22
Section 5.5 Subsidiaries.....................................................................................22
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Section 5.6 Financial Condition; No Adverse Change...........................................................22
Section 5.7 Litigation.......................................................................................23
Section 5.8 Regulation U.....................................................................................23
Section 5.9 Taxes............................................................................................23
Section 5.10 Titles and Liens; Priority......................................................................23
Section 5.11 Intellectual Property Rights....................................................................23
Section 5.12 Plans...........................................................................................24
Section 5.13 Default.........................................................................................24
Section 5.14 Environmental Matters...........................................................................24
Section 5.15 Submissions to Lender...........................................................................26
Section 5.16 Financing Statements............................................................................26
Section 5.17 Rights to Payment...............................................................................26
Section 5.18 Direct and Substantial Economic Interest........................................................26
Section 5.19 Joint and Several Liability.....................................................................26
Section 5.20 Dormancy of Viro-kote, Inc......................................................................26
ARTICLE VI BORROWERS' AFFIRMATIVE COVENANTS.....................................................................27
Section 6.1 Reporting Requirements...........................................................................27
Section 6.2 Books and Records; Inspection and Examination....................................................29
Section 6.3 Account Verification.............................................................................30
Section 6.4 Compliance with Laws.............................................................................30
Section 6.5 Payment of Taxes and Other Claims................................................................30
Section 6.6 Maintenance of Properties........................................................................30
Section 6.7 Insurance........................................................................................31
Section 6.8 Preservation of Existence........................................................................31
Section 6.9 Delivery of Instruments, etc.....................................................................31
Section 6.10 Collateral Account..............................................................................31
Section 6.11 Maintenance of Debtor-in-Possession Accounts....................................................32
Section 6.12 Performance by the Lender.......................................................................32
Section 6.13 Year 2000 Compliance............................................................................33
Section 6.14 Borrowers' Financial Projections................................................................33
Section 6.15 Maximum Days in Inventory Covenant..............................................................33
Section 6.16 Minimum EBITDAR.................................................................................34
Section 6.17 Minimum Net Income..............................................................................35
Section 6.18 Subrogation.....................................................................................36
ARTICLE VII NEGATIVE COVENANTS..................................................................................36
Section 7.1 Liens............................................................................................36
Section 7.2 Indebtedness.....................................................................................37
Section 7.3 Guaranties.......................................................................................37
Section 7.4 Investments and Subsidiaries.....................................................................37
Section 7.5 Dividends........................................................................................38
Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations....................................38
Section 7.7 Intellectual Property............................................................................38
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
Section 7.8 Financing Orders.................................................................................38
Section 7.9 Chapter 11 Claims................................................................................38
Section 7.10 Consolidation and Merger; Asset Acquisitions....................................................39
Section 7.11 Sale and Leaseback..............................................................................39
Section 7.12 Restrictions on Nature of Business..............................................................39
Section 7.13 Capital Expenditures............................................................................39
Section 7.14 Accounting......................................................................................39
Section 7.15 Discounts, etc..................................................................................39
Section 7.16 Defined Benefit Pension Plans...................................................................39
Section 7.17 Other Defaults..................................................................................39
Section 7.18 Place of Business; Name.........................................................................40
Section 7.19 Organizational Documents........................................................................40
Section 7.20 Salaries........................................................................................40
Section 7.21 Change in Ownership.............................................................................40
ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES.............................................................40
Section 8.1 Events of Default................................................................................40
Section 8.2 Rights and Remedies..............................................................................42
Section 8.3 Certain Notices..................................................................................43
ARTICLE IX MISCELLANEOUS........................................................................................44
Section 9.1 No Discharge of Claims; No Waiver by Lender......................................................44
Section 9.2 No Waiver; Cumulative Remedies...................................................................44
Section 9.3 Amendments, Etc..................................................................................44
Section 9.4 Addresses for Notices, Etc.......................................................................44
Section 9.5 Further Documents................................................................................45
Section 9.6 Collateral.......................................................................................45
Section 9.7 Costs and Expenses...............................................................................45
Section 9.8 Indemnity........................................................................................46
Section 9.9 Participants.....................................................................................47
Section 9.10 Execution in Counterparts.......................................................................47
Section 9.11 Binding Effect; Assignment; Complete Agreement; Exchanging Information..........................47
Section 9.12 Severability of Provisions......................................................................47
Section 9.13 Headings........................................................................................47
Section 9.14 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial........................................47
</TABLE>
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<PAGE> 5
CREDIT AND SECURITY AGREEMENT
Dated as of December 14, 2000
NU-KOTE HOLDING, INC., a Delaware corporation, NU-KOTE
IMPERIAL, LTD., a Delaware corporation, NU-KOTE INTERNATIONAL, INC., a Delaware
corporation, INTERNATIONAL COMMUNICATION MATERIALS, INC., a Pennsylvania
corporation, NU-KOTE IMAGING INTERNATIONAL, INC., a Delaware corporation, FUTURE
GRAPHICS, INC., a California corporation, and NU-KOTE LATIN AMERICA, INC., a
Delaware corporation (each a "Borrower" and together, the "Borrowers"), and
Norwest Business Credit, Inc., a Minnesota corporation (the "Lender"), hereby
agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. For all purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accounts" means all of the Borrowers' accounts, as such term
is defined in the UCC, including without limitation the aggregate
unpaid obligations of customers and other account debtors to the
Borrowers arising out of the sale or lease of goods or rendition of
services by the Borrowers on an open account or deferred payment basis.
"Advance" means a Revolving Advance.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrowers, including
(without limitation) any Subsidiary of any of the Borrowers. For
purposes of this definition, "control," when used with respect to any
specified Person, means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement, as
amended, supplemented or restated from time to time.
"Availability" means the difference of (i) the Borrowing Base
and (ii) the outstanding principal balance of the Revolving Note.
<PAGE> 6
"Bank Cartridge Liability" means the amount of the Borrowers'
liability to their customers, on a consolidated basis, for recyclable
cartridges returned to any of the Borrowers for credit.
"Banking Day" means a day other than a Saturday, Sunday or
other day on which banks are generally not open for business in
Minneapolis, Minnesota.
"Bankruptcy Code" means 11 U.S.C. ss. 101 et seq.
"Bankruptcy Court" means the United States Bankruptcy Court
for the Middle District of Tennessee, including any judge presiding
over the Cases.
"Base Rate" means the rate of interest publicly announced from
time to time by Norwest Bank Minnesota, National Association as its
"base rate" or, if such bank ceases to announce a rate so designated,
any similar successor rate designated by the Lender.
"Borrowing Base" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change from time to time in the Lender's sole
discretion, the sum of:
(i) 75% of Eligible Accounts, plus
(ii) 40% of Eligible Inventory.
"Capital Expenditures" for a period means any expenditure of
money for the lease, purchase or other acquisition of any capital
asset.
"Cases" means the Chapter 11 bankruptcy cases of the Borrowers
pending before the Bankruptcy Court entitled In re Nu-kote Holding,
Inc., case number 398-10600, In re Nu-kote Imperial, Ltd., case number
398-10601, In re Nu-kote International, Inc., case number 398-10602, In
re Nu-kote Imaging International, Inc., case number 398-10603, In re
International Communication Materials, Inc., case number 398-10604, In
re Future Graphics, Inc., case number 398-10605, and In re Nu-kote
Latin America, Inc., case number 398-10606, including any adversary
proceedings, jointly administered cases or other ancillary proceedings.
"Collateral" means all of the Borrowers' Equipment, General
Intangibles (including any rights to avoidance of transfers or
recoveries of property or money under the Bankruptcy Code), Inventory,
Real Estate Collateral, Receivables, Investment Property, all sums on
deposit in any Collateral Account, and any items in any Lockbox;
together with (i) all substitutions and replacements for and products
of any of the foregoing; (ii) proceeds of any and all of the foregoing;
(iii) in the case of all tangible goods, all accessions; (iv) all
accessories, attachments, parts, equipment
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<PAGE> 7
and repairs now or hereafter attached or affixed to or used in
connection with any tangible goods; and (v) all warehouse receipts,
bills of lading and other documents of title now or hereafter covering
such goods.
"Collateral Account" has the meaning given in the Collateral
Account Agreement.
"Collateral Account Agreement" means the Collateral Account
Agreement of even date herewith by and among the Borrowers, Norwest
Bank Minnesota, National Association and the Lender.
"Commitment" means the Lender's commitment to make Advances to
or for the Borrowers' account pursuant to Article II.
"Credit Facility" means the credit facility being made
available to the Borrowers by the Lender pursuant to Article II.
"Debt" of any Person means all items of indebtedness or
liability which in accordance with GAAP would be included in
determining total liabilities as shown on the liabilities side of a
balance sheet of that Person as of the date as of which Debt is to be
determined. For purposes of determining a Person's aggregate Debt at
any time, "Debt" shall also include the aggregate payments required to
be made by such Person at any time under any lease that is considered a
capitalized lease under GAAP.
"Default" means an event that, with giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the
first day of any month during which a Default or Event of Default has
occurred and ending on the date the Lender notifies the Borrowers in
writing that such Default or Event of Default has been cured or waived,
such notification not to be unreasonably withheld.
"Default Rate" means an annual rate equal to two percent (2%)
over the Floating Rate, which rate shall change when and as the
Floating Rate changes.
"EBITDAR" for a period means, the sum of (i) pretax earnings
from continuing operations, (ii) Interest Expense, and (iii)
depreciation, depletion, and amortization of tangible and intangible
assets, before (a) special extraordinary gains, (b) restructuring
charges, and (c) miscellaneous gains and losses, in each case for such
period, computed and calculated in accordance with GAAP.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Eligible Accounts" means all unpaid Accounts, net of any
credits, except the following shall not in any event be deemed Eligible
Accounts:
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<PAGE> 8
(i) That portion of Accounts unpaid 60 days or more
after the invoice date;
(ii) That portion of Accounts with terms in excess
of 60 days;
(iii) That portion of Accounts that is disputed or
subject to a claim of offset or a contra account;
(iv) That portion of Accounts not yet earned by the
final delivery of goods or rendition of services, as
applicable, by the Borrowers to the customer;
(v) Accounts owed by any unit of government, whether
foreign or domestic (provided, however, that there shall be
included in Eligible Accounts that portion of Accounts owed by
such units of government for which the Borrowers have provided
evidence satisfactory to the Lender that (A) the Lender has a
first priority perfected security interest and (B) such
Accounts may be enforced by the Lender directly against such
unit of government under all applicable laws);
(vi) Accounts owed by an account debtor located
outside the United States or Canada which are not (A) backed
by a bank letter of credit naming the Lender as beneficiary or
assigned to the Lender, in the Lender's possession and
acceptable to the Lender in all respects, in its sole
discretion, (B) covered by a foreign receivables insurance
policy acceptable to the Lender in its sole discretion;
(vii) Accounts owed by an account debtor that is
insolvent, the subject of bankruptcy proceedings or has gone
out of business;
(viii) Suspense Accounts;
(ix) Accounts owed by a shareholder, Subsidiary,
Affiliate, officer or employee of any of the Borrowers;
(x) Accounts not subject to a duly perfected security
interest in the Lender's favor or which are subject to any
lien, security interest or claim in favor of any Person other
than the Lender including without limitation any payment or
performance bond;
(xi) That portion of Accounts that has been
restructured, extended, amended or modified;
(xii) That portion of Accounts that constitutes
advertising, freight, finance charges, service charges or
sales or excise taxes;
(xiii) Accounts owed by an account debtor, regardless
of whether otherwise eligible, if 10% or more of the total
amount due under Accounts from such debtor is ineligible under
clauses (i), (iii) or (xi) above;
-4-
<PAGE> 9
(xiv) That portion of Accounts, otherwise deemed
eligible, in an amount equal to the Retention Bonus Liability,
the Bank Cartridge Liability and the Sales Allowance Accrual;
and
(xv) Accounts, or portions thereof, otherwise deemed
ineligible by the Lender in its sole discretion, including,
but not limited to, Receivables from Office Max, Inc.
"Eligible Inventory" means all Inventory of the Borrowers, at
the lower of cost or market value as determined in accordance with
GAAP; provided, however, that the following shall not in any event be
deemed Eligible Inventory:
(i) Inventory that is: in-transit; located at any
warehouse, job site or other premises not approved by the
Lender in writing; located outside of the states, or
localities, as applicable, in which the Lender has filed
financing statements to perfect a first priority security
interest in such Inventory; covered by any negotiable or
non-negotiable warehouse receipt, bill of lading or other
document of title; on consignment from or to any Person or
subject to any bailment;
(ii) Supplies, packaging, parts or sample Inventory;
(iii) Work-in-process Inventory;
(iv) Prepaid Inventory;
(v) Inventory that is damaged, obsolete, slow moving
or not currently saleable in the normal course of the
Borrowers' operations, including Non-net-able Inventory;
(vi) Inventory that the Borrowers have returned, have
attempted to return, are in the process of returning or intend
to return to the vendor thereof;
(vii) Inventory that is perishable or live;
(viii) Inventory manufactured by the Borrowers
pursuant to a license unless the applicable licensor has
agreed in writing to permit the Lender to exercise its rights
and remedies against such Inventory;
(ix) Inventory that is subject to a security interest
in favor of any Person other than the Lender not subordinated
to the Lender pursuant to Bankruptcy Court order or documents
acceptable to the Lender; and
(x) Inventory otherwise deemed ineligible by the
Lender in its sole discretion.
"Environmental Laws" has the meaning specified in Section
5.14.
"Equipment" means all of the Borrowers' equipment, as such
term is defined in the UCC, whether now owned or hereafter acquired,
including but not limited to all present and future machinery,
vehicles, furniture, fixtures, manufacturing equipment,
-5-
<PAGE> 10
shop equipment, office and recordkeeping equipment, parts, tools,
supplies, and including specifically (without limitation) the goods
described in any equipment schedule or list herewith or hereafter
furnished to the Lender by the Borrowers.
"Event of Default" has the meaning specified in Section 8.1.
"Excess Availability" means the Borrowing Base less (i) all
closing costs; and (ii) all claims and expenses which would be required
to be paid by the Borrowers if a chapter 11 plan were to be confirmed
on the Funding Date.
"Existing Banks" means Barclays Bank PLC, NationsBank of
Texas, NA, Commerzbank Aktiengesellschaft, Deutsche Bank A.G., New York
Branch or Caymen Islands Branch, First National Bank of Chicago,
Societe Generale, First American National Bank, ABN AMRO Bank, N.V. and
Credit Lyonnais.
"Existing Credit Facility" means that credit facility provided
to the Borrowers by the Existing Banks pursuant to a certain Second
Amended and Restated Credit Agreement dated as of July 31, 1997, as
amended.
"Expense Deposit" has the meaning specified in Section 9.7.
"Final Order" means the final order, in form and substance
satisfactory to Lender, entered by the Bankruptcy Court after adequate
notice to all parties entitled to be served, which, among other things,
approves the Loan Documents, authorizes the Borrowers to enter into the
Loan Documents and grants the Lender a senior lien in the Collateral
and a Superpriority Claim.
"Floating Rate" means an annual rate equal to the sum of the
Base Rate plus two percent (2%), which annual rate shall change when
and as the Base Rate changes.
"Funding Date" has the meaning given in Section 2.1.
"GAAP" means generally accepted accounting principles, applied
on a basis consistent with the accounting practices applied in the
financial statements described in Section 5.6.
"General Intangibles" means all of the Borrowers' general
intangibles, as such term is defined in the UCC, whether now owned or
hereafter acquired, including (without limitation) all rights to
payment arising from any lawsuits now existing or hereafter arising
brought by the Borrowers against any Person, including the lawsuit
against Hewlett-Packard Company, all present and future patents, patent
applications, copyrights, trademarks, trade names, trade secrets,
customer or supplier lists and contracts, manuals, operating
instructions, permits, franchises, the right to use each of the
Borrowers' names, other than Future Graphics, Inc., and the goodwill of
the Borrowers' business as well as any rights to avoidance of transfers
or recoveries of property or money under the Bankruptcy Code.
-6-
<PAGE> 11
"Hazardous Substance" has the meaning given in Section 5.14.
"Interest Expense" means, for a fiscal year-to-date period,
the Borrowers' total gross interest expense during such period
(excluding interest income), and shall in any event include, without
limitation, (i) interest expensed (whether or not paid) on all Debt,
(ii) the amortization of debt discounts, (iii) the amortization of all
fees payable in connection with the incurrence of Debt to the extent
included in interest expense, and (iv) the portion of any capitalized
lease obligation allocable to interest expense.
"Inventory" means all of the Borrowers' inventory, as such
term is defined in the UCC, whether now owned or hereafter acquired,
whether consisting of whole goods, spare parts or components, supplies
or materials, whether acquired, held or furnished for sale, for lease
or under service contracts or for manufacture or processing, and
wherever located.
"Investment Property" means all of the Borrowers' investment
property, as such term is defined in the UCC, whether now owned or
hereafter acquired, including but not limited to all securities,
security entitlements, securities accounts, commodity contracts,
commodity accounts, stocks, bonds, mutual fund shares, money market
shares and U.S. Government securities.
"Lienholder" means each Person, other than the Lender, holding
a lien in any of the Borrowers' assets constituting the Collateral of
any of the Borrowers, including but not limited to those financial
institutions at which the Borrowers maintain accounts (general or
special, time or demand, provisional or final).
"Lienholder Notice" means: (i) timely notice of the final
hearing scheduled for approval of this Agreement, accompanied by (ii) a
copy of Borrowers' Motion filed with the Bankruptcy Court for authority
to enter into this Agreement, and (iii) a copy of the proposed Final
Order to be entered by the Bankruptcy Court.
"Loan Documents" means this Agreement, the Note and the
Security Documents.
"Lockbox" has the meaning given in the Lockbox Agreement.
"Lockbox Agreements" means the Lockbox Agreements by and among
the Borrowers, the Borrowers' existing lockbox banks and the Lender, of
even date herewith.
"Maturity Date" means the earlier of December 14, 2000 or the
confirmation of a plan of reorganization.
"Maximum Line" means $7,500,000, unless said amount is reduced
pursuant to Section 2.6, in which event it means the amount to which
said amount is reduced.
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"Minimum Interest Charge" has the meaning given in
Section 2.2(b).
"Net Income" means fiscal year-to-date after-tax net income
from continuing operations as determined in accordance with GAAP.
"Non-net-able Inventory" means Inventory returned by customers
and held by any of the Borrowers that has not been inspected.
"Note" means the Revolving Note.
"OEM Litigation" means those pending infringement claims
brought by original equipment manufacturers against the Borrowers.
"Obligations" means the Note and each and every other debt,
liability and obligation of every type and description which the
Borrowers may now or at any time hereafter owe to the Lender, whether
such debt, liability or obligation now exists or is hereafter created
or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of the Borrowers,
and whether it is direct or indirect, due or to become due, absolute or
contingent, primary or secondary, liquidated or unliquidated, or sole,
joint, several or joint and several, and including specifically, but
not limited to, all indebtedness of the Borrowers arising under this
Agreement, the Note or any other loan or credit agreement or guaranty
between the Borrowers and the Lender, whether now in effect or
hereafter entered into.
"Patent and Trademark Security Agreement" means the Patent and
Trademark Security Agreement of even date herewith by and between the
Borrowers and the Lender, as the same may be amended, supplemented or
restated from time to time.
"Pelikan License" means that certain Trademark License
Agreement among Pelikan Holding AG, Pelikan International
Handelsgesellschaft mbH & Co. KG, Pelikan GmbH (Hannover) and Nu-kote
Holding, Inc. dated as of ____________ respecting the non-exclusive use
of the Pelikan trademark.
"Permitted Lien" has the meaning given in Section 7.1.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained
for the Borrowers' employees and covered by Title IV of ERISA.
"Premises" means all premises where the Borrowers conduct
their business and have any rights of possession, including (without
limitation) the premises legally described in Exhibit C attached
hereto.
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"Real Estate Collateral" means each of the Premises, together
with all of each Borrowers' right, title and interest in (i) all of the
buildings, structures and other improvements now standing or at any
time hereafter constructed or placed upon any of the Premises; (ii) all
lighting, heating, ventilating, air-conditioning, sprinkling and
plumbing fixtures, water and power systems, engines and machinery,
boilers, furnaces, oil burners, elevators and motors, communication
systems, dynamos, transformers, electrical equipment and all other
fixtures of every description located in or on, or used, or intended to
be used in connection with any of the Premises or any building now or
hereafter located thereon; (iii) all hereditaments, easements,
appurtenances, riparian rights, rents, issues, profits, condemnation
awards, mineral rights and water rights now or hereafter belonging or
in any way pertaining to the Premises or to any building now or
hereafter located thereon and all the estates, rights and interests of
any of the Borrowers in the Premises; (iv) all building materials,
furniture, furnishings, maintenance equipment and all other personal
property now or hereafter located in, or on, or used, or intended to be
used in connection with any of the Premises or any building now or
hereafter located thereon and all replacements and additions thereto;
(v) all additions, accessions, increases, parts, fittings, accessories,
replacements, substitutions, betterments, repairs and proceeds to, of
or for any and all of the foregoing; and (vi) any and all
after-acquired interest of any of the Borrowers in any of the
foregoing, including the Premises.
"Receivables" means each and every right of the Borrowers to
the payment of money, whether such right to payment now exists or
hereafter arises, whether such right to payment arises out of a sale,
lease or other disposition of goods or other property, out of a
rendering of services, out of a loan, out of the overpayment of taxes
or other liabilities, or otherwise arises under any contract or
agreement, whether such right to payment is created, generated or
earned by the Borrowers or by some other person who subsequently
transfers such person's interest to the Borrowers, whether such right
to payment is or is not already earned by performance, and howsoever
such right to payment may be evidenced, together with all other rights
and interests (including all liens and security interests) which the
Borrowers may at any time have by law or agreement against any account
debtor or other obligor obligated to make any such payment or against
any property of such account debtor or other obligor; all including but
not limited to all present and future accounts, contract rights, loans
and obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.
"Reportable Event" shall have the meaning assigned to that
term in Title IV of ERISA.
"Retention Bonus Liability" means the amount of the Borrowers'
liability, on a consolidated basis, for earned credit given by any of
the Borrowers to any of their customers.
"Revolving Advance" has the meaning given in Section 2.1.
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"Revolving Note" means the Borrowers' revolving promissory
note, payable to the order of the Lender in substantially the form of
Exhibit A hereto and any note or notes issued in substitution therefor,
as the same may hereafter be amended, supplemented or restated from
time to time.
"Sales Allowance Accrual" means an amount equal to the
Borrowers' estimated outstanding rebates and allowances.
"Security Documents" means this Agreement, the Patent and
Trademark Security Agreement, the Collateral Account Agreement, the
Lockbox Agreement, and any other document delivered to the Lender from
time to time to secure the Obligations, as the same may hereafter be
amended, supplemented or restated from time to time.
"Security Interest" has the meaning given in Section 3.1.
"Senior Management" means Patrick E. Howard, C. Ronald
Baiocchi and Phillip L. Theodore.
"Subsidiary" means any corporation of which more than 50% of
the outstanding shares of capital stock having general voting power
under ordinary circumstances to elect a majority of the board of
directors of such corporation, irrespective of whether or not at the
time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency, is at the
time directly or indirectly owned by the Borrowers, by the Borrowers
and one or more other Subsidiaries, or by one or more other
Subsidiaries.
"Superpriority Claim" means a claim against each of the
Borrowers in the Cases which is an administrative expense claim having
priority over any and all administrative expenses of the kind specified
in sections 503(b) and 507(b) of the Bankruptcy Code.
"Suspense Accounts" means those Accounts deemed questionable
as to collectability by any of the Borrowers.
"Termination Date" means the earliest of (i) the Maturity
Date, (ii) the date the Borrowers terminate the Credit Facility, or
(iii) the date the Lender demands payment of the Obligations after an
Event of Default pursuant to Section 8.2.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the state designated in Section 9.14 as the state whose laws
shall govern this Agreement, or in any other state whose laws are held
to govern this Agreement or any portion hereof.
"Xaar License" means that certain license agreement between
Xaar Limited and Nu-kote International, Inc. respecting the use of the
Xaar trademark.
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Section 1.2 Cross References. All references in this Agreement
to Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.
ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
Section 2.1 Revolving Advances. The Lender agrees, on the
terms and subject to the conditions herein set forth, to make advances to the
Borrowers from time to time from the date all of the conditions set forth in
Section 4.1 are satisfied (the "Funding Date") to the Termination Date (the
"Revolving Advances"). The Lender shall have no obligation to make a Revolving
Advance if, after giving effect to such requested Revolving Advance, the sum of
the outstanding and unpaid Revolving Advances would exceed the Borrowing Base.
The Borrowers' obligation to pay the Revolving Advances shall be evidenced by
the Revolving Note and shall be secured by the Collateral as provided in Article
III. Within the limits set forth in this Section 2.1, the Borrowers may borrow,
prepay pursuant to Section 2.6 and reborrow. The Borrowers agree to comply with
the following procedures in requesting Revolving Advances under this Section
2.1:
(a) The Borrowers shall make each request for a Revolving
Advance to the Lender before 11:00 a.m. (Minneapolis, Minnesota time)
of the day of the requested Revolving Advance. Requests may be made in
writing or by telephone, specifying the date of the requested Revolving
Advance and the amount thereof. Each request shall be by (i) an officer
of the Borrowers; or (ii) any person designated as the Borrowers' agent
by any officer of the Borrowers in a writing delivered to the Lender;
or (iii) any person whom the Lender reasonably believes to be an
officer of the Borrowers or such a designated agent.
(b) Upon fulfillment of the applicable conditions set forth in
Article IV, the Lender shall disburse the proceeds of the requested
Revolving Advance by crediting the same to the Borrowers' demand
deposit account maintained with Nations Bank of Texas, N.A. unless the
Lender and the Borrowers shall agree in writing to another manner of
disbursement. Upon the Lender's request, the Borrowers shall promptly
confirm each telephonic request for an Advance by executing and
delivering an appropriate confirmation certificate to the Lender. The
Borrowers shall repay all Advances even if the Lender does not receive
such confirmation and even if the person requesting an Advance was not
in fact authorized to do so. Any request for an Advance, whether
written or telephonic, shall be deemed to be a representation by the
Borrowers that the conditions set forth in Section 4.2 have been
satisfied as of the time of the request.
Section 2.2 Interest; Minimum Interest Charge; Default
Interest; Participations; Usury. Interest accruing on the Note shall be due and
payable in arrears on the first day of each month.
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(a) REVOLVING NOTE. Except as set forth in Sections 2.2(c),
2.2(d) and 2.2(e), the outstanding principal balance of the Revolving
Note shall bear interest at the Floating Rate.
(b) MINIMUM INTEREST CHARGE. Notwithstanding the interest
payable pursuant to Section 2.2(a), the Borrowers shall pay to the
Lender interest of not less than $50,000 per calendar quarter (the
"Minimum Interest Charge") during the term of this Agreement, and the
Borrowers shall pay any deficiency between the Minimum Interest Charge
and the amount of interest otherwise calculated under Sections 2.2(a)
and 2.2(d) on the first day of January, April, July and October.
(c) DEFAULT INTEREST RATE. The principal of the Advances
outstanding from time to time shall bear interest at the Default Rate
during any Default Period, regardless of any interim statement for
interest presented to the Borrowers or other action of the Lender. The
difference between interest at the Default Rate and interest at the
rate otherwise in effect shall be due and payable on demand.
(d) PARTICIPATIONS. If any Person shall acquire a
participation in the Advances, the Borrowers shall be obligated to the
Lender to pay the full amount of all interest calculated under this
Section 2.2, along with all other fees, charges and other amounts due
under this Agreement, regardless if such Person elects to accept
interest with respect to its participation at a lower rate than the
Floating Rate, or otherwise elects to accept less than its prorata
share of such fees, charges and other amounts due under this Agreement.
(e) USURY. In any event no rate change shall be put into
effect which would result in a rate greater than the highest rate
permitted by law. Notwithstanding anything to the contrary contained in
any Loan Document, all agreements which either now are or which shall
become agreements between the Borrowers and the Lender are hereby
limited so that in no contingency or event whatsoever shall the total
liability for payments in the nature of interest, additional interest
and other charges exceed the applicable limits imposed by the usury
laws of the State of Minnesota. If any payments in the nature of
interest, additional interest and other charges made under any Loan
Document are held to be in excess of the applicable limits imposed by
the usury laws of the State of Minnesota, it is agreed that any such
amount held to be in excess shall be considered payment of principal
hereunder, and the indebtedness evidenced hereby shall be reduced by
such amount so that the total liability for payments in the nature of
interest, additional interest and other charges shall not exceed the
applicable limits imposed by the usury laws of the State of Minnesota,
in compliance with the desires of the Borrowers and the Lender. This
provision shall never be superseded or waived and shall control every
other provision of the Loan Documents and all agreements between the
Borrowers and the Lender, or their successors and assigns.
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Section 2.3 Fees. The Borrowers acknowledge that the Lender
has incurred, and will incur, substantial costs and loss of economic opportunity
in connection with the negotiation, execution and performance of this Agreement,
and that the Lender has provided, or will provide, reasonably equivalent value
for the following fees:
(a) COMMITMENT FEE. The Lender acknowledges receipt of a
fully-earned and nonrefundable commitment fee in the amount of
$150,000.
(b) AUDIT FEES. The Borrowers hereby agree to pay the Lender,
on demand, audit fees in connection with any audits or inspections
conducted by the Lender of any Collateral or the Borrowers' operations
or business at the rates established from time to time by the Lender as
its audit fees (which fees are currently $62.50 per hour per auditor),
together with all actual out-of-pocket costs and expenses incurred in
conducting any such audit or inspection.
Section 2.4 Computation of Interest and Fees; When Interest
Due and Payable. Fees hereunder and interest accruing on the outstanding
principal balance of the Advances outstanding from time to time shall be
computed on the basis of actual number of days elapsed in a year of 360 days.
Interest shall be payable in arrears on the first day of each month and on the
Termination Date.
Section 2.5 Capital Adequacy.
(a) CAPITAL ADEQUACY. If any Related Lender determines at any
time that its Return has been reduced as a result of any Rule Change,
such Related Lender may require the Borrowers to pay it the amount
necessary to restore its Return to what it would have been had there
been no Rule Change. For purposes of this Section 2.5(a):
(i) "Capital Adequacy Rule" means any law, rule,
regulation, guideline, directive, requirement or request
regarding capital adequacy, or the interpretation or
administration thereof by any governmental or regulatory
authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender.
Such rules include rules requiring financial institutions to
maintain total capital in amounts based upon percentages of
outstanding loans, binding loan commitments and letters of
credit.
(ii) "Related Lender" includes (but is not limited to)
the Lender, any parent corporation of the Lender and any
assignee of any interest of the Lender hereunder and any
participant in the loans made hereunder.
(iii) "Return", for any period, means the return as
determined by a Related Lender on the Advances based upon its
total capital requirements and a reasonable attribution
formula that takes account of the Capital Adequacy Rules then
in effect and amounts received or receivable under this
Agreement or the Notes with respect to any Advance. Return may
be calculated for each
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calendar quarter and for the shorter period between the end
of a calendar quarter and the date of termination in whole of
this Agreement.
(iv) "Rule Change" means any change in any Capital
Adequacy Rule occurring after the date of this Agreement, but
the term does not include any changes in applicable
requirements that at the Closing Date are scheduled to take
place under the existing Capital Adequacy Rules or any
increases in the capital that any Related Lender is required
to maintain to the extent that the increases are required due
to a regulatory authority's assessment of the financial
condition of such Related Lender.
The Lender will promptly notify the Borrowers of any event of which it
has knowledge, occurring after the date hereof, which will entitle the
Lender to compensation pursuant to this Section 2.5. Certificates of
any Related Lender sent to the Borrowers from time to time claiming
compensation under this Section 2.5, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional
amount or amounts to be paid to the Related Lender hereunder to restore
its Return shall be conclusive absent manifest error. In determining
such amounts, the Related Lender may use any reasonable averaging and
attribution methods.
Section 2.6 Voluntary Prepayment; Reduction of the Maximum
Line; Termination of the Credit Facility by the Borrowers. Except as otherwise
provided herein, the Borrowers may prepay the Revolving Advances in whole at any
time or from time to time in part. The Borrowers may terminate the Credit
Facility or reduce the Maximum Line at any time if they (i) give the Lender at
least 30 days' prior written notice and (ii) pay the Lender the prepayment,
termination or line reduction fees in accordance with Section 2.7. Any reduction
in the Maximum Line must be in an amount not less than $1,000,000 or an integral
multiple thereof. If the Borrowers reduce the Maximum Line to zero, all
Obligations shall be immediately due and payable. Upon termination of the Credit
Facility and payment and performance of all Obligations, the Lender shall
release or terminate the Security Interest and the Security Documents to which
the Borrowers are entitled by law.
Section 2.7 Termination, Line Reduction and Prepayment Fees;
Waiver of Termination, Prepayment and Line Reduction Fees.
(a) TERMINATION AND LINE REDUCTION FEES. If the Lender or the
Borrowers terminate the Credit Facility for any reason as of a date
other than December 14, 2000, if the Credit Facility matures due to the
confirmation of a Chapter 11 plan, or if the Borrowers reduce the
Maximum Line, the Borrowers shall pay the Lender a fee in an amount
equal to a percentage of the Maximum Line (or the reduction, as the
case may be) as follows: (i) two percent (2%) if the termination or
reduction occurs on or before October 31, 1999; and (ii) one percent
(1%) if the termination or reduction occurs thereafter.
(b) WAIVER OF TERMINATION AND LINE REDUCTION FEES. The
Borrowers will not be required to pay the termination or line reduction
fees otherwise due under this
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Section 2.7 if such termination or line reduction is made because of
refinancing by an affiliate of the Lender.
Section 2.8 Mandatory Prepayment. Without notice or demand, if
the outstanding principal balance of the Revolving Advances shall at any time
exceed the Borrowing Base, the Borrowers shall immediately prepay the Revolving
Advances to the extent necessary to eliminate such excess. Any payment received
by the Lender under this Section 2.8 or under Section 2.6 may be applied to the
Obligations, in such order and in such amounts as the Lender, in its discretion,
may from time to time determine.
Section 2.9 Payment. All payments to the Lender shall be made
in immediately available funds and shall be applied to the Obligations one (1)
Banking Day after receipt by the Lender. The Lender may hold all payments not
constituting immediately available funds for three (3) additional days before
applying them to the Obligations. Notwithstanding anything in Section 2.1, the
Borrowers hereby authorize the Lender, in its discretion at any time or from
time to time without the Borrowers' request and even if the conditions set forth
in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount
equal to the portion of the Obligations from time to time due and payable.
Section 2.10 Payment on Non-Banking Days. Whenever any payment
to be made hereunder shall be stated to be due on a day which is not a Banking
Day, such payment may be made on the next succeeding Banking Day, and such
extension of time shall in such case be included in the computation of interest
on the Advances or the fees hereunder, as the case may be.
Section 2.11 Use of Proceeds. The Borrowers shall use the
proceeds of Advances to provide for ongoing working capital needs during the
Cases in accordance with Schedule 2.11.
Section 2.12 Liability Records. The Lender may maintain from
time to time, at its discretion, liability records as to the Obligations. All
entries made on any such record shall be presumed correct until the Borrowers
establish the contrary. Upon the Lender's demand, the Borrowers will admit and
certify in writing the exact principal balance of the Obligations that the
Borrowers then assert to be outstanding. Any billing statement or accounting
rendered by the Lender shall be conclusive and fully binding on the Borrowers
unless the Borrowers give the Lender specific written notice of exception within
30 days after receipt.
ARTICLE III
SECURITY INTEREST; OCCUPANCY; SETOFF
Section 3.1 Grant of Security Interest. Each of the Borrowers
hereby pledge, assign and grant to the Lender a security interest (collectively
referred to as the "Security Interest") and lien in the Collateral, as security
for the payment and performance of the Obligations.
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Section 3.2 Notification of Account Debtors and Other
Obligors. The Lender may at any time (whether or not a Default Period then
exists) notify any account debtor or other person obligated to pay the amount
due and instruct such account debtor or other person to pay any such amounts to
the Lockbox Account or the Collateral Account. During a Default Period, the
Lender may notify any account debtor or other person obligated to pay the amount
due that such right to payment has been assigned or transferred to the Lender
for security and shall be paid directly to the Lender. The Borrowers will join
in giving such notice if the Lender so requests. At any time after the Borrowers
or the Lender give such notice to an account debtor or other obligor, the Lender
may, but need not, in the Lender's name or in any of the Borrowers' names,
provided a Default Period then exists, (a) demand, sue for, collect or receive
any money or property at any time payable or receivable on account of, or
securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as the Borrowers' agent and attorney-in-fact,
notify the United States Postal Service to change the address for delivery of
the Borrowers' mail to any address designated by the Lender, otherwise intercept
the Borrowers' mail, and receive, open and dispose of the Borrowers' mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrowers' account or forwarding such mail to the Borrowers' last
known address.
Section 3.3 Assignment of Insurance. As additional security
for the payment and performance of the Obligations, the Borrowers hereby assign
to the Lender any and all monies (including, without limitation, proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of the Borrowers with respect to, any and all policies of insurance
now or at any time hereafter covering the Collateral or any evidence thereof or
any business records or valuable papers pertaining thereto, and the Borrowers
hereby direct the issuer of any such policy to pay all such monies directly to
the Lender. At any time, whether or not a Default Period then exists, the Lender
may (but need not), in the Lender's name or in any of the Borrowers' names,
execute and deliver proof of claim, receive all such monies, endorse checks and
other instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
Section 3.4 Occupancy.
(a) The Borrowers hereby irrevocably grant to the Lender the
right to take exclusive possession of the Premises at any time during a
Default Period. The Borrowers will not take any action to reject under
section 365 of the Bankruptcy Code, any unexpired lease or executory
contract relating to use or occupancy of the Premises without prior
written consent of the Lender.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are
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Collateral and for other purposes that the Lender may in good faith
deem to be related or incidental purposes.
(c) The Lender's right to hold the Premises shall cease and
terminate upon the earlier of (i) payment in full and discharge of all
Obligations and termination of the Commitment, and (ii) final sale or
disposition of all goods constituting Collateral and delivery of all
such goods to purchasers.
(d) The Lender shall not be obligated to pay or account for
any rent or other compensation for the possession, occupancy or use of
any of the Premises; provided, however, that if the Lender does pay or
account for any rent or other compensation for the possession,
occupancy or use of any of the Premises, the Borrowers shall reimburse
the Lender promptly for the full amount thereof. In addition, the
Borrowers will pay, or reimburse the Lender for, all taxes, fees,
duties, imposts, charges and expenses at any time incurred by or
imposed upon the Lender by reason of the execution, delivery,
existence, recordation, performance or enforcement of this Agreement or
the provisions of this Section 3.4.
Section 3.5 License. Each of the Borrowers hereby grant to the
Lender a non-exclusive, worldwide and royalty-free license to use or otherwise
exploit all trademarks, franchises, trade names, copyrights and patents of the
Borrowers for the purpose of selling, leasing or otherwise disposing of any or
all Collateral during any Default Period. Notwithstanding the foregoing, the
Borrowers' grant to the Lender of such non-exclusive, worldwide and royalty-free
licenses shall not extend to the Xaar License or to the Pelikan License for use
outside of the Borrowers' United States operations.
Section 3.6 Financing Statement. A carbon, photographic or
other reproduction of this Agreement or of any financing statements signed by
any of the Borrowers is sufficient as a financing statement and may be filed as
a financing statement in any state to perfect the security interests granted
hereby. For this purpose, the following information is set forth:
Names and addresses of Borrowers:
Nu-kote Holding, Inc.
200 Beasley Drive
Franklin, TN 37064
Federal Tax Identification No. 16-1296153
Nu-kote Imperial, Ltd.
200 Beasley Drive
Franklin, TN 37064
Federal Tax Identification No. 75-2581494
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Nu-kote International, Inc.
200 Beasley Drive
Franklin, TN 37064
Federal Tax Identification No. 16-1289013
International Communication Materials, Inc.
200 Beasley Drive
Franklin, TN 37064
Federal Tax Identification No. 25-1346516
Nu-kote Imaging International, Inc.
200 Beasley Drive
Franklin, TN 37064
Federal Tax Identification No. 75-2578014
Future Graphics, Inc.
200 Beasley Drive
Franklin, TN 37064
Federal Tax Identification No. 95-4192851
Nu-kote Latin America, Inc.
200 Beasley Drive
Franklin, TN 37064
Federal Tax Identification No. 58-1735923
Name and address of Secured Party:
Norwest Business Credit, Inc.
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0103
Federal Tax Identification No. 41-1237652
Section 3.7 Setoff. The Borrowers agree that the Lender may at
any time or from time to time, at its sole discretion and without demand and
without notice to anyone, setoff any liability owed to the Borrowers by the
Lender, whether or not due, against any Obligation, whether or not due. In
addition, each other Person holding a participating interest in any Obligations
shall have the right to appropriate or setoff any deposit or other liability
then owed by such Person to the Borrowers, whether or not due, and apply the
same to the payment of said participating interest, as fully as if such Person
had lent directly to the Borrowers the amount of such participating interest.
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ARTICLE IV
CONDITIONS OF LENDING
Section 4.1 Conditions Precedent to the Initial Revolving
Advance. The Lender's obligation to make the initial Revolving Advance hereunder
shall be subject to the condition precedent that the Lender shall have received
all of the following, each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed by each of the
Borrowers.
(b) The Note, properly executed by each of the Borrowers.
(c) A true and correct copy of any and all mortgages pursuant
to which the Borrowers have mortgaged the Premises.
(d) True and correct copies of all license agreements pursuant
to which any of the Borrowers have licensed intellectual property.
(e) The Collateral Account Agreement, properly executed by the
Borrowers and Norwest Bank Minnesota, National Association.
(f) The Lockbox Agreements, properly executed by each of the
Borrowers and each of the Borrowers' existing lockbox banks.
(g) A landlords disclaimer and consent with respect to each
lease to which any of the Borrowers are leasing the Premises.
(h) The Patent and Trademark Security Agreement, properly
executed by each of the Borrowers.
(i) An acknowledgment and waiver of liens from each warehouse
or other location in which any of the Borrowers are storing Inventory.
(j) Current searches of appropriate filing offices showing
that (i) no state or federal tax liens have been filed and remain in
effect against any of the Borrowers, (ii) no financing statements have
been filed and remain in effect against any of the Borrowers except
those financing statements relating to Permitted Liens, and (iii) the
Lender has duly filed all financing statements necessary to perfect the
Security Interest, to the extent the Security Interest is capable of
being perfected by filing.
(k) A separate Certificate of each of the Borrowers'
secretaries or assistant secretaries certifying as to (i) the
resolutions of such Borrowers' directors and if required, shareholders,
authorizing the execution, delivery and performance of the Loan
Documents, (ii) such Borrowers' articles of incorporation and bylaws,
and (iii) the signatures of such Borrowers' officers or agents
authorized to execute and
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deliver the Loan Documents and other instruments, agreements and
certificates, including Advance requests, on the Borrowers' behalf.
(l) Current certificates issued by the Secretaries of State
where each Borrower are organized, certifying that each Borrower is in
compliance with all applicable organizational requirements of that
State.
(m) Evidence that each of the Borrowers are duly licensed or
qualified to transact business in all jurisdictions where the character
of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary.
(n) A certificate of one of the Borrowers' officers
confirming, in his personal capacity, the representations and
warranties set forth in Article V.
(o) Support agreements in favor of the Lender, properly
executed by Patrick E. Howard, C. Ronald Baiocchi, and Phillip L.
Theodore in their personal capacity.
(p) Evidence satisfactory to the Lender of the legal
separation of the Borrowers' North American operations from its
European operations and that any insolvency or receivership proceedings
involving the Borrowers' European operations will be separate and
distinct from the Borrowers' Cases.
(q) An opinion of counsel to the Borrowers, addressed to the
Lender.
(r) Certificates of the insurance required hereunder, with all
hazard insurance containing a lender's loss payable endorsement in the
Lender's favor and with all liability insurance naming the Lender as an
additional insured.
(s) A copy of the Lienholder Notice sent to each Lienholder.
(t) The Lender's obligation to make Revolving Advances
subsequent to the final hearing held to approve the Credit Facility
shall be subject to the Lender's receipt of the Final Order.
(u) Payment of the fees and commissions due through the date
of the initial Advance under Section 2.3 and expenses incurred by the
Lender through such date and required to be paid by the Borrowers under
Section 9.7, including all legal expenses incurred through the date of
this Agreement.
Section 4.2 Conditions Precedent to All Advances. The Lender's
obligation to make each Advance (including the initial Advance) shall be subject
to the further conditions precedent that on such date:
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(a) the representations and warranties contained in Article V
are correct on and as of the date of such Advance as though made on and
as of such date, except to the extent that such representations and
warranties relate solely to an earlier date;
(b) no event has occurred and is continuing, or would result
from such Advance which constitutes a Default or an Event of Default;
and
(c) no Bankruptcy Court order is entered (i) authorizing the
Borrowers to obtain financing or credit pursuant to section 364 of the
Bankruptcy Code from any Person other than the Lender secured by a
security interest or a Superpriority Claim unless such security
interest and administrative claim are junior to the Security Interest
and the Lender's Superpriority Claim, as the case may be or will be
paid off from the Initial Advance; or (ii) providing adequate
protection to any Person under sections 361 through 364 of the
Bankruptcy Code by granting a security interest in any of the
Collateral unless such security interest is junior to the Security
Interest save and except for the claims against Hewlett-Packard
Company.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrowers represent and warrant to the Lender as follows:
Section 5.1 Corporate Existence and Power; Name; Chief
Executive Office; Inventory and Equipment Locations; Tax Identification Number.
Nu-kote Holding, Inc., Nu-kote Imperial, Ltd., and Nu-kote Latin America, Inc.
are each corporations, duly organized, validly existing and in good standing
under the laws of the State of Delaware. International Communication Materials,
Inc. is a corporation duly organized, validly existing and in good standing
under the laws of the State of Pennsylvania. Future Graphics, Inc. is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California. Each of the Borrowers is duly licensed or qualified
to transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary. No dissolution or termination of any of
the Borrowers has occurred, and no notice of dissolution or articles of
termination have been filed with respect to the Borrowers. Each of the Borrowers
has all requisite power and authority, corporate or otherwise, to conduct its
business, to own its properties and to execute and deliver, and to perform all
of its obligations under, the Loan Documents. During its existence, each of the
Borrowers has done business solely under the names set forth in Schedule 5.1
hereto. Each Borrower's chief executive office and principal place of business
is located at the address set forth in Schedule 5.1 hereto, and each Borrower's
records relating to its business or the Collateral are kept at that location.
All Inventory and Equipment is located at that location or at one of the other
locations set forth in Schedule 5.1 hereto. The Borrowers' tax identification
numbers are correctly set forth in Section 3.6 hereto. As of the date hereof,
each Borrower is current on all postpetition lease payments which are due and
owing for such locations. No Inventory, except Inventory in
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transit in the ordinary course of business, is located any place other than as
identified on Schedule 5.1.
Section 5.2 Capitalization. Schedule 5.2 constitutes a correct
and complete list of all shareholders holding a five percent (5%) or greater
interest in any the Borrowers and rights to acquire a five percent (5%) or
greater interest in any of the Borrowers, including the amount and record holder
thereof.
Section 5.3 Authorization of Borrowing; No Conflict as to Law
or Agreements. The execution, delivery and performance by the Borrowers of the
Loan Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of any of the Borrowers' shareholders; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization required by the Bankruptcy Court and except such authorization,
consent, approval, registration, declaration, filing or notice as has been
obtained, accomplished or given prior to the date hereof; (iii) violate any
provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
any of the Borrowers or of any of the Borrowers' articles of incorporation and
bylaws; (iv) result in a breach of or constitute a default under any indenture
or loan or credit agreement or any other material agreement, lease or instrument
to which any of the Borrowers are a party or by which it or its properties may
be bound or affected (except breaches or defaults under the Existing Credit
Facility); or (v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interest) upon or with
respect to any of the properties now owned or hereafter acquired by any of the
Borrowers.
Section 5.4 Legal Agreements. This Agreement constitutes and,
upon due execution by each of the Borrowers, the other Loan Documents will
constitute the legal, valid and binding obligations of the Borrowers,
enforceable against the Borrowers in accordance with their respective terms.
Section 5.5 Subsidiaries. Except as set forth in Schedule 5.5
hereto, the Borrowers have no Subsidiaries.
Section 5.6 Financial Condition; No Adverse Change. The
Borrowers have heretofore furnished to the Lender audited financial statements
dated as of March 31, 1998, and unaudited interim financial statements dated as
of August 21, 1998 and those statements fairly present each of the Borrowers'
financial condition on the dates thereof and the results of its operations and
cash flows for the periods then ended and were prepared in accordance with
generally accepted accounting principles. Since the date of the most recent
financial
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statements, there has been no material adverse change in the Borrowers'
businesses, properties or condition (financial or otherwise) other than the
Cases.
Section 5.7 Litigation. Except as set forth in Schedule 5.7
hereto, there are no actions, suits or proceedings pending or, to any of the
Borrowers' knowledge, threatened against or affecting any of the Borrowers or
any of their Affiliates or the properties of any of the Borrowers or any of
their Affiliates before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which, if determined
adversely to the Borrowers or any of their Affiliates, would have a material
adverse effect on the financial condition, properties or operations of the
Borrowers or any of its Affiliates.
Section 5.8 Regulation U. The Borrowers are not engaged in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of any Advance will be used
to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.
Section 5.9 Taxes. The Borrowers and their Affiliates have
paid or caused to be paid to the proper authorities when due all federal, state
and local taxes required to be withheld by each of them. The Borrowers and their
Affiliates have filed all federal, state and local tax returns which to the
knowledge of the officers of the Borrowers or any of their Affiliates, as the
case may be, are required to be filed, and the Borrowers and their Affiliates
have paid or caused to be paid to the respective taxing authorities all taxes as
shown on said returns or on any assessment received by any of them to the extent
such taxes have become due and are permitted to be paid under the Bankruptcy
Code.
Section 5.10 Titles and Liens; Priority. The Borrowers have
good and absolute title to all Collateral described in the collateral reports
provided to the Lender and all other Collateral, properties and assets reflected
in the latest financial statements referred to in Section 5.6 and all proceeds
thereof, free and clear of all mortgages, security interests, liens, adverse
claims and encumbrances, except for Permitted Liens. Without limiting the
generality of the foregoing, the Collateral is not subject to any claim or lien
pursuant to section 506(c) of the Bankruptcy Code. No financing statement naming
any of the Borrowers as debtor is on file in any office except to perfect only
Permitted Liens. Pursuant to the Final Order, the Security Interest shall have
priority over all other security interests in the Collateral. Upon entry of the
Final Order, pursuant to section 364(c)(1) of the Bankruptcy Code, the
Obligations shall at all times constitute allowed priority claims in the Cases
having priority over all administrative expenses of the kind specified in
sections 503(b) and 507(b) of the Bankruptcy Code.
Section 5.11 Intellectual Property Rights. The Borrowers (a)
own or have the exclusive right to use, free and clear of all material liens,
claims and restrictions, all patents, trademarks, service marks, trade names,
copyrights, licenses and rights with respect to the foregoing, used in the
conduct of its business as now conducted, provided, however, such
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right is non-exclusive as to the Pelikan License; (b) are not obligated or under
any liability whatsoever to make any payments of a material nature by way of
royalties, fees or otherwise to any owner of, licensor of, or other claimant to,
any patent, trademark, trade name, copyright or other intangible asset, with
respect to the use thereof or in connection with the conduct of its business or
otherwise, other than royalty payments due under the Xaar License; (c) own or
have the unrestricted right to use all trade secrets, including know-how,
inventions, designs, processes, computer programs and technical data necessary
to the development, operation and sale of all products and services sold or
proposed to be sold by it, free and clear of any rights, liens or claims of
others, except as such rights are limited by the OEM Litigation; and (d) are not
using any confidential information or trade secrets of others. The Borrowers are
not, nor have they received notice with respect to, infringing upon or otherwise
acting adversely to any known right or claimed right of any person under or with
respect to any patents, trademarks, service marks, trade names, copyrights,
licenses or rights with respect to the foregoing, other than the OEM Litigation.
Section 5.12 Plans. Except for the Borrowers' disclosure to
the Lender that the Borrowers' Plan may be underfunded in the approximate amount
of $300,000, none of the Borrowers nor any of their Affiliates have received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. None of the Borrowers nor any of their
Affiliates have:
(a) Any accumulated funding deficiency within the meaning of
ERISA; or
(b) Any liability or knows of any fact or circumstances which
could result in any liability to the Pension Benefit Guaranty
Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than accrued
benefits which or which may become payable to participants or
beneficiaries of any such Plan).
Section 5.13 Default. Each of the Borrowers is in compliance
with all provisions of all agreements, instruments, decrees and orders to which
it is a party or by which it or its property is bound or affected, a breach or
default of which could have an effect on any of the Borrowers' financial
condition, properties or operations on a consolidated basis in an aggregate
amount greater than $100,000.
Section 5.14 Environmental Matters.
(a) Definitions. As used in this Agreement, the following
terms shall have the following meanings:
(i) "Environmental Law" means any federal, state, local or
other governmental statute, regulation, law or ordinance
dealing with the protection of human health and the
environment.
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(ii) "Hazardous Substances" means pollutants,
contaminants, hazardous substances, hazardous wastes,
petroleum and fractions thereof, and all other chemicals,
wastes, substances and materials listed in, regulated by or
identified in any Environmental Law.
(b) To the Borrowers' best knowledge, other than as identified
on Schedule 5.14, there are not present in, on or under the Premises
any Hazardous Substances in such form or quantity as to create any
liability or obligation for any of the Borrowers or the Lender under
common law of any jurisdiction or under any Environmental Law, and no
Hazardous Substances have ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under the Premises in such a
way as to create any such liability.
(c) To the Borrowers' best knowledge, other than as identified
on Schedule 5.14, the Borrowers have not disposed of Hazardous
Substances in such a manner as to create any liability under any
Environmental Law.
(d) Other than as identified on Schedule 5.14, there are not
and there never have been any requests, claims, notices,
investigations, demands, administrative proceedings, hearings or
litigation, relating in any way to the Premises or any of the
Borrowers, alleging liability under, violation of, or noncompliance
with any Environmental Law or any license, permit or other
authorization issued pursuant thereto. To the Borrowers' best
knowledge, no such matter is threatened or impending other than as
identified on Schedule 5.14.
(e) To the Borrowers' best knowledge, other than as identified
on Schedule 5.14, the Borrowers' businesses are and have in the past
always been conducted in accordance with all Environmental Laws and all
licenses, permits and other authorizations required pursuant to any
Environmental Law and necessary for the lawful and efficient operation
of such businesses are in the Borrowers' possession and are in full
force and effect. No permit required under any Environmental Law is
scheduled to expire within 12 months and there is no threat that any
such permit will be withdrawn, terminated, limited or materially
changed, other than as identified on Schedule 5.14.
(f) To the Borrowers' best knowledge, other than as identified
on Schedule 5.14, the Premises are not and never have been listed on
the National Priorities List, the Comprehensive Environmental Response,
Compensation and Liability Information System or any similar federal,
state or local list, schedule, log, inventory or database.
(g) The Borrowers have delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or Borrowers'
businesses.
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Section 5.15 Submissions to Lender. All financial and other
information provided to the Lender by or on behalf of the Borrowers in
connection with the Borrowers' request for the credit facilities contemplated
hereby is true and correct in all material respects and, as to projections,
valuations or proforma financial statements, present a good faith opinion as to
such projections, valuations and proforma condition and results.
Section 5.16 Financing Statements. The Borrowers have provided
to the Lender signed financing statements sufficient when filed to perfect the
Security Interest and the other security interests created by the Security
Documents. The Final Order when entered, shall grant the Lender a perfected
prior Security Interest as described therein without the need for filing further
documents such as financing statements. In addition, however, if such financing
statements are filed in the offices noted therein, the Lender will also have a
valid and perfected security interest in all Collateral and all other collateral
described in the Security Documents which is capable of being perfected by
filing financing statements.
Section 5.17 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrowers' records pertaining thereto as being
obligated to pay such obligation.
Section 5.18 Direct and Substantial Economic Interest. Each
Borrower has a direct and substantial economic interest in each other Borrower
and as such, each Borrower expects to derive substantial benefits from any and
all Advances made to each Borrower and other transactions and events resulting
in the creation of any and all obligations.
Section 5.19 Joint and Several Liability. The Obligations
created by this Agreement are the joint and several obligation of the Borrowers.
The Lender shall not be required to first seek payment of the Obligations from
any one of the Borrowers, but rather may seek payment from any or all of the
Borrower as it sees fit, in its sole discretion.
Section 5.20 Dormancy of Viro-kote, Inc. Viro-kote, Inc. is a
dormant corporation and holds no assets except for that certain trademark with a
registration number of 74/663,763 (the "Viro-kote Trademark"). The Viro-kote
Trademark is no longer being used by Viro-kote, Inc. or any of the Borrowers.
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ARTICLE VI
BORROWERS' AFFIRMATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrowers will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
Section 6.1 Reporting Requirements. The Borrowers will
deliver, or cause to be delivered, to the Lender each of the following, which
shall be in form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 120 days
after the end of each fiscal year of the Borrowers, each of the
Borrowers' audited financial statements with the opinion of independent
certified public accountants selected by the Borrowers and acceptable
to the Lender, which annual financial statements shall include each of
the Borrowers' balance sheets as at the end of such fiscal year and the
related statements of each of the Borrowers' income, retained earnings
and cash flows for the fiscal year then ended, prepared, if the Lender
so requests, on a consolidating and consolidated basis to include any
Affiliates, all in reasonable detail and prepared in accordance with
GAAP, together with (i) copies of all management letters prepared by
such accountants; (ii) a report signed by such accountants stating that
in making the investigations necessary for said opinion they obtained
no knowledge, except as specifically stated, of any Default or Event of
Default hereunder and all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrowers are
in compliance with the requirements set forth in Sections 6.15, 6.16,
6.17, and 7.13; and (iii) a certificate of the Borrowers' chief
financial officers stating that such financial statements have been
prepared in accordance with GAAP, fairly represent the Borrowers'
financial position and the results of its operations, and whether or
not such officer has knowledge of the occurrence of any Default or
Event of Default hereunder and, if so, stating in reasonable detail the
facts with respect thereto;
(b) as soon as available and in any event within 20 days after
the end of each month, an unaudited/internal balance sheet and
statements of income and retained earnings of each of the Borrowers as
at the end of and for such month and for the year to date period then
ended, prepared, if the Lender so requests, on a consolidating and
consolidated basis to include any Affiliates, in reasonable detail and
stating in comparative form the figures for the corresponding date and
periods in the previous year, all prepared in accordance with GAAP,
subject to year-end audit adjustments; and accompanied by a certificate
of the Borrowers' chief financial officers, substantially in the form
of Exhibit B hereto stating (i) that such financial statements have
been prepared in accordance with GAAP, subject to year-end audit
adjustments, and fairly represent the Borrowers' financial position and
the results of their operations, (ii) whether or not such officer has
knowledge of the occurrence of
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any Default or Event of Default hereunder not theretofore reported and
remedied and, if so, stating in reasonable detail the facts with
respect thereto, and (iii) all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrowers are
in compliance with the requirements set forth in Sections 6.15, 6.16,
6.17, and 7.13;
(c) within 15 days after the end of each month or more
frequently if the Lender so requires, agings of each Borrower's
accounts receivable and its accounts payable, an inventory
certification report, and a calculation of the Borrowers' Accounts,
Eligible Accounts, Inventory and Eligible Inventory as at the end of
such month or shorter time period;
(d) at least 30 days before the beginning of each fiscal year
of the Borrowers, the projected balance sheets and income statements
for each month of such year, each in reasonable detail, representing
each Borrower's good faith projections and certified by such Borrower's
chief financial officer as being the most accurate projections
available and identical to the projections used by such Borrower for
internal planning purposes, together with such supporting schedules and
information as the Lender may in its discretion require;
(e) immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any
governmental or regulatory agency affecting any of the Borrowers of the
type described in Section 5.14 or which seek a monetary recovery
against any of the Borrowers in excess of $100,000;
(f) as promptly as practicable (but in any event not later
than five business days) after any Senior Management obtains knowledge
of the occurrence of any breach, default or event of default under any
Security Document or any event which constitutes a Default or Event of
Default hereunder, notice of such occurrence, together with a detailed
statement by a responsible officer of such Borrower of the steps being
taken by the Borrowers to cure the effect of such breach, default or
event;
(g) as soon as possible and in any event within 30 days after
any Senior Management knows or has reason to know that any Reportable
Event with respect to any Plan has occurred, the statement of the
Borrowers' chief financial officers setting forth details as to such
Reportable Event and the action which the Borrowers propose to take
with respect thereto, together with a copy of the notice of such
Reportable Event to the Pension Benefit Guaranty Corporation;
(h) as soon as possible, and in any event within 10 days after
any of the Borrowers fail to make any quarterly contribution required
with respect to any Plan under Section 412(m) of the Internal Revenue
Code of 1986, as amended, the statement of such Borrower's chief
financial officer setting forth details as to such failure and the
action which the Borrowers propose to take with respect thereto,
together with a copy of any notice of such failure required to be
provided to the Pension Benefit Guaranty Corporation;
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(i) promptly upon any Senior Management's knowledge thereof,
notice of (i) any disputes or claims by any of the Borrowers' customers
exceeding $25,000 individually or $50,000 in the aggregate during any
fiscal year; (ii) any goods returned to or recovered by any of the
Borrowers; and (iii) any change in the persons constituting the
Borrowers' officers and directors;
(j) promptly upon any Senior Management's knowledge thereof,
notice of any loss of or material damage to any Collateral or other
collateral covered by the Security Documents or of any substantial
adverse change in any Collateral or such other collateral or the
prospect of payment thereof;
(k) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which any of the Borrowers
shall have sent to its stockholders;
(l) promptly after the sending or filing thereof, copies of
all regular and periodic reports which any of the Borrowers shall file
with the Securities and Exchange Commission or any national securities
exchange;
(m) promptly upon receipt, or if filed by any or all of the
Borrowers, promptly upon filing, all motions, notices, reports,
applications, objections, responses or other papers filed or served in
any of the Cases;
(n) within two days of filing, copies of monthly reports filed
with the U.S. Trustee's office;
(o) promptly upon any Senior Management's knowledge thereof,
notice of any of the Borrowers' violations of any law, rule or
regulation, the non-compliance with which could materially and
adversely affect the Borrowers' business or its financial condition;
(p) on a daily basis, sales and collections reports and credit
memos; and
(q) from time to time, with reasonable promptness, any and all
receivables schedules, deposit records, equipment schedules, copies of
invoices to account debtors, shipment documents and delivery receipts
for goods sold, and such other material, reports, records or
information as the Lender may reasonably request.
Section 6.2 Books and Records; Inspection and Examination. The
Borrowers will keep accurate books of record and account pertaining to the
Collateral and pertaining to the Borrowers' businesses and their financial
condition and such other matters as the Lender may from time to time request in
which true and complete entries will be made in accordance with GAAP and, upon
the Lender's request, will permit any officer, employee, attorney or accountant
for the Lender to audit, review, make extracts from or copy any and all
corporate and financial books and records of the Borrowers at all times during
ordinary business hours, to send and discuss with account debtors and other
obligors requests for verification of
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amounts owed to the Borrowers, and to discuss the Borrowers' affairs with any of
its directors, officers, employees or agents. The Borrowers will permit the
Lender, or its employees, accountants, attorneys or agents, to examine and
inspect any Collateral, other collateral covered by the Security Documents or
any other property of the Borrowers at any time during ordinary business hours.
Section 6.3 Account Verification. The Lender may at any time
and from time to time send or require the Borrowers to send requests for
verification of accounts or notices of assignment to account debtors and other
obligors. The Lender may also at any time and from time to time telephone
account debtors and other obligors to verify accounts.
Section 6.4 Compliance with Laws.
(a) The Borrowers will (i) comply with the requirements of
applicable laws and regulations, the non-compliance with which would
materially and adversely affect its business or its financial condition
and (ii) use and keep the Collateral, and require that others use and
keep the Collateral, only for lawful purposes, without violation of any
federal, state or local law, statute or ordinance.
(b) Without limiting the foregoing undertakings, the Borrowers
specifically agree that they will comply with all applicable
Environmental Laws and obtain and comply with all permits, licenses and
similar approvals required by any Environmental Laws, and will not
generate, use, transport, treat, store or dispose of any Hazardous
Substances in such a manner as to create any liability or obligation
under the common law of any jurisdiction or any Environmental Law.
Section 6.5 Payment of Taxes and Other Claims. The Borrowers
will pay or discharge, when due, (a) all taxes, assessments and governmental
charges levied or imposed upon it or upon its income or profits, upon any
properties belonging to them (including, without limitation, the Collateral) or
upon or against the creation, perfection or continuance of the Security
Interest, prior to the date on which penalties attach thereto, (b) all federal,
state and local taxes required to be withheld by it, and (c) all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
or charge upon any properties of the Borrowers; provided, that the Borrowers
shall not be required to pay any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings and for which proper reserves have been made.
Section 6.6 Maintenance of Properties.
(a) The Borrowers will keep and maintain the Collateral, the
other collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from
time to time replace or repair any worn, defective or broken parts;
provided, however, that nothing in this Section 6.6 shall prevent the
Borrowers from discontinuing the operation and maintenance of any of
their
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properties if such discontinuance is, in the Lender's judgment,
desirable in the conduct of the Borrowers' business and not
disadvantageous in any material respect to the Lender.
(b) The Borrowers will defend the Collateral against all
claims or demands of all persons (other than the Lender) claiming the
Collateral or any interest therein.
(c) The Borrowers will keep all Collateral and other
collateral covered by the Security Documents free and clear of all
security interests, liens and encumbrances except Permitted Liens.
Section 6.7 Insurance. The Borrowers will obtain and at all
times maintain insurance with insurers believed by the Borrowers to be
responsible and reputable, in such amounts and against such risks as may from
time to time be required by the Lender, but in all events in such amounts and
against such risks as is usually carried by companies engaged in similar
business and owning similar properties in the same general areas in which the
Borrowers operate. Without limiting the generality of the foregoing, the
Borrowers will at all times maintain business interruption insurance including
coverage for force majeure and keep all tangible Collateral insured against
risks of fire (including so-called extended coverage), theft, collision (for
Collateral consisting of motor vehicles) and such other risks and in such
amounts as the Lender may reasonably request, with any loss payable to the
Lender to the extent of its interest, and all policies of such insurance shall
contain a lender's loss payable endorsement for the Lender's benefit acceptable
to the Lender. All policies of liability insurance required hereunder shall name
the Lender as an additional insured.
Section 6.8 Preservation of Existence. The Borrowers will
preserve and maintain their existence and all of their rights, privileges and
franchises necessary or desirable in the normal conduct of their business and
shall conduct their business in an orderly, efficient and regular manner.
Section 6.9 Delivery of Instruments, etc. Upon request by the
Lender, the Borrowers will promptly deliver to the Lender in pledge all
instruments, documents and chattel paper constituting Collateral, duly endorsed
or assigned by the appropriate Borrower.
Section 6.10 Collateral Account.
(a) If, notwithstanding the instructions to debtors to make
payments to the Lockbox, any of the Borrowers receives any payments on
Receivables, that Borrower shall deposit such payments into the
Collateral Account. Until so deposited, the Borrowers shall hold all
such payments in trust for and as the property of the Lender and shall
not commingle such payments with any of its other funds or property.
(b) Amounts deposited in the Collateral Account shall not bear
interest and shall not be subject to withdrawal by any of the
Borrowers, except after full payment and discharge of all Obligations.
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(c) All deposits in the Collateral Account shall constitute
proceeds of Collateral and shall not constitute payment of the
Obligations. The Lender from time to time at its discretion may, after
allowing (2) Banking Days, apply deposited funds in the Collateral
Account to the payment of the Obligations, in any order or manner of
application satisfactory to the Lender, by transferring such funds to
the Lender's general account.
(d) All items deposited in the Collateral Account shall be
subject to final payment. If any such item is returned uncollected, the
Borrowers will immediately pay the Lender, or, for items deposited in
the Collateral Account, the bank maintaining such account, the amount
of that item, or such bank at its discretion may charge any uncollected
item to the Borrowers' commercial account or other account. The
Borrowers shall be liable as an endorser on all items deposited in the
Collateral Account, whether or not in fact endorsed by the Borrowers.
Section 6.11 Maintenance of Debtor-in-Possession Accounts. The
Borrowers shall maintain all bank accounts with the Lender or institutions
acceptable to the Lender. A list identifying all of its accounts not maintained
with the Lender and the financial institutions at which such accounts are
maintained is set forth in Schedule 6.11. The Borrowers shall notify the Lender
in writing of any changes in and additions to such list as soon as any change or
addition occurs. If the Lender is required to pledge any collateral or in
another manner secure any deposit account pursuant to the provisions of section
345 of the Bankruptcy Code, the Lender shall be entitled to charge a reasonable
fee for such account which fee shall be paid by the Borrowers on demand and
which fee shall be similar to fees charged to like borrowers.
Section 6.12 Performance by the Lender. If the Borrowers at
any time fail to perform or observe any of the foregoing covenants contained in
this Article VI or elsewhere herein, and if such failure shall continue for a
period of ten calendar days (or in the case of the agreements contained in
Sections 6.5, 6.7 and 6.10, immediately upon the occurrence of such failure,
without lapse of time), the Lender may, but need not, perform or observe such
covenant on behalf and in the name, place and stead of the Borrowers (or, at the
Lender's option, in the Lender's name) and may, but need not, take any and all
other actions which the Lender may reasonably deem necessary to cure or correct
such failure (including, without limitation, the payment of taxes, the
satisfaction of security interests, liens or encumbrances, the performance of
obligations owed to account debtors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments); and the Borrowers
shall thereupon pay to the Lender on demand the amount of all monies expended
and all costs and expenses (including reasonable attorneys' fees and legal
expenses) incurred by the Lender in connection with or as a result of the
performance or observance of such agreements or the taking of such action by the
Lender, together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the Lender's performance or observance of such
covenants of the Borrowers, the Borrowers hereby irrevocably appoint the Lender,
or the Lender's delegate, acting alone, as the Borrowers' attorney in fact
(which appointment is
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coupled with an interest) with the right (but not the duty) from time to time to
create, prepare, complete, execute, deliver, endorse or file in the name and on
behalf of the Borrowers any and all instruments, documents, assignments,
security agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by the Borrowers under this Section 6.12.
Section 6.13 Year 2000 Compliance. The Borrowers agree to (1)
conduct a detailed inventory and assessment of all of their computer hardware
and software systems and imbedded chip technology ("Information Systems") and of
their business and operations that could be adversely affected by their failure
to be Year 2000 Compliant on a timely basis; (2) develop, fund, and implement a
project plan to make their Information Systems Year 2000 Compliant, and complete
implementation of the plan and the remediation and testing of its Information
Systems no later July 31, 1999; and (3) initiate a process to determine whether
their material suppliers, vendors, and customers have taken meaningful steps to
become Year 2000 Compliant on a timely basis, and develop and implement a
feasible contingency plan to ensure the uninterrupted and unimpaired operation
of its business in the event of the failure of the systems of such third parties
or of their own Information Systems no later than July 31, 1999. For purposes of
this covenant, "Year 2000 Compliant" means that the Borrowers' Information
Systems that are material to their operations and financial condition will be
able to properly process date sensitive functions before, on, and after December
31, 1999. The Borrowers will also provide to the Lender promptly upon receipt,
copies of any reports or management letters relating to their Year 2000
compliance project and contingency plans, either internally prepared or prepared
by outside consultants or their accountants, and will provide such other
information relating to their Year 2000 compliance efforts, and deliver such
certifications by their officers relating thereto as the Lender in its
discretion may deem appropriate.
Section 6.14 Borrowers' Financial Projections. The financial
projections used by the Borrowers in the Bankruptcy Court to seek approval of
the credit facility provided for herein and to use cash collateral shall be the
same financial projections delivered to the Lender on November 4, 1998.
Section 6.15 Maximum Days in Inventory Covenant. The
Borrowers, on a consolidated basis, will not exceed Maximum Days in Inventory of
155 during each Fiscal Month. Maximum Days in Inventory shall be determined by
the following formula:
Maximum Days in Inventory = 360 / R
The following definitions apply to the above formula:
R=[(COGS / Applicable Fiscal Periods) x 12] / Inventory at Cost
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"COGS" equal cost of goods sold incurred from the beginning of
then applicable Fiscal Year through the last day of the measuring Fiscal Month.
"Applicable Fiscal Periods" means the number of fiscal periods
that have occurred from the beginning of the applicable fiscal year through the
last day of the measuring fiscal month.
Section 6.16 Minimum EBITDAR. The Borrowers will maintain, on
a consolidated basis, during each period described below, EBITDAR of not less
than the amount set forth opposite such period:
Period Minimum EBITDAR
------ ---------------
April 1, 1998 through $1,560,000
November 30, 1998
April 1, 1998 through $1,365,000
December 31, 1998
April 1, 1998 through $1,393,000
January 31, 1999
April 1, 1998 through $1,332,000
February 28, 1999
Fiscal Year ending $1,280,000
March 31, 1999
April 1, 1999 through $77,000
April 30, 1999
April 1, 1999 through $151,000
May 31, 1999
April 1, 1999 through $219,000
June 30, 1999
April 1, 1999 through $265,000
July 31, 1999
April 1, 1999 through $336,000
August 31, 1999
April 1, 1999 through $574,000
September 30, 1999
April 1, 1999 through $657,000
October 31, 1999
April 1, 1999 through $824,000
November 30, 1999
April 1, 1999 through $1,061,000
December 31, 1999
April 1, 1999 through $1,314,000
January 31, 2000
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Period Minimum EBITDAR
------ ---------------
April 1, 1999 through $1,664,000
February 29, 2000
Fiscal Year ending $2,062,000
March 31, 2000
Each Fiscal Month thereafter $150,000
Section 6.17 Minimum Net Income. The Borrowers will maintain,
on a consolidated basis, during each period described below, Net Income, of not
less than the amount set forth opposite such period:
Period Minimum Net Income
------ ------------------
April 1, 1998 through $(2,833,000)
November 30, 1998
April 1, 1998 through $(4,570,000)
December 31, 1998
April 1, 1998 through $(5,737,000)
January 31, 1999
April 1, 1998 through $(6,997,000)
February 28, 1999
Fiscal Year ending $(8,362,000)
March 31, 1999
April 1, 1999 through $(873,000)
April 30, 1999
April 1, 1999 through $(1,741,000)
May 31, 1999
April 1, 1999 through $(2,729,000)
June 30, 1999
April 1, 1999 through $(3,539,000)
July 31, 1999
April 1, 1999 through $(4,332,000)
August 31, 1999
April 1, 1999 through $(5,170,000)
September 30, 1999
April 1, 1999 through $(5,953,000)
October 31, 1999
April 1, 1999 through $(6,645,000)
November 30, 1999
April 1, 1999 through $(7,471,000)
December 31, 1999
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Period Minimum Net Income
------ ------------------
April 1, 1999 through $(7,971,000)
January 31, 2000
April 1, 1999 through $(8,367,000)
February 29, 2000
Fiscal Year ending $(8,970,000)
March 31, 2000
Each Fiscal Month thereafter $1
Section 6.18 Subrogation. No Borrower will exercise or enforce
any right of contribution, reimbursement, recourse or subrogation available to
such Borrower as against any other Borrower unless and until all of the
Obligations have been fully paid and discharged.
ARTICLE VII
NEGATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrowers agree that, without the
Lender's prior written consent:
Section 7.1 Liens. The Borrowers will not create, incur or
suffer to exist any mortgage, deed of trust, pledge, lien, security interest,
adverse claim, assignment or transfer upon or of any of its assets, now owned or
hereafter acquired, to secure any indebtedness; excluding, however, from the
operation of the foregoing, the following (collectively, "Permitted Liens"):
(a) in the case of any of the Borrowers' property which is not
Collateral or other collateral described in the Security Documents,
covenants, restrictions, rights, easements and minor irregularities in
title which do not materially interfere with the Borrowers' business or
operations as presently conducted;
(b) mortgages, deeds of trust, pledges, liens, security
interests and assignments in existence on the date hereof and listed in
Schedule 7.1 hereto or otherwise subject and junior to the Lender's
Security Interest securing indebtedness for borrowed money permitted
under Section 7.2;
(c) the Security Interest and liens and security interests
created by the Security Documents;
(d) purchase money security interests relating to the
acquisition of machinery and equipment of the Borrowers not exceeding
the lesser of cost or fair market value thereof, not exceeding $250,000
for any one purchase or $1,200,000 in
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the aggregate during any fiscal year and so long as no Default Period
is then in existence and none would exist immediately after such
acquisition; and
(e) a first priority lien in lawsuits filed by the Borrowers
in favor of Employers Insurance of Wausau and Coudert Brothers to the
extent of fees and expenses incurred in connection with pursuing such
causes of actions and a second priority lien in lawsuits filed by the
Borrowers in favor of the Existing Banks to the extent of the
diminution in value of their collateral resulting from entry of the
Final Order.
Section 7.2 Indebtedness. The Borrowers will not incur,
create, assume or permit to exist any indebtedness or liability on account of
deposits or advances or any indebtedness for borrowed money or letters of credit
issued on the Borrowers' behalf, or any other indebtedness or liability
evidenced by notes, bonds, debentures or similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrowers in existence on the date
hereof and listed in Schedule 7.2 hereto or any other indebtedness
subject and junior to the Lender's Superpriority Claim; and
(c) indebtedness relating to liens permitted in accordance
with Section 7.1.
Section 7.3 Guaranties. The Borrowers will not assume,
guarantee, endorse or otherwise become directly or contingently liable in
connection with any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrowers
for deposit or collection or similar transactions in the ordinary
course of business;
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 7.2 hereto;
(c) guaranties relating to liens permitted in accordance with
Section 7.1.
Section 7.4 Investments and Subsidiaries.
(a) The Borrowers will not purchase or hold beneficially any
stock or other securities or evidences of indebtedness of, make or
permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including
specifically but without limitation any partnership or joint venture,
except:
(i) any of the Borrowers' ownership of existing
Subsidiaries;
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(ii) investments in direct obligations of the United
States of America or any agency or instrumentality thereof
whose obligations constitute full faith and credit
obligations of the United States of America having a
maturity of one year or less, commercial paper issued by
U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service
or certificates of deposit or bankers' acceptances having a
maturity of one year or less issued by members of the
Federal Reserve System having deposits in excess of
$100,000,000 (which certificates of deposit or bankers'
acceptances are fully insured by the Federal Deposit
Insurance Corporation);
(iii) travel advances or loans to the Borrowers'
officers and employees not exceeding at any one time an
aggregate of $20,000; and
(iv) advances in the form of progress payments, prepaid
rent not exceeding one (1) month or security deposits.
(b) The Borrowers will not create or permit to exist any
Subsidiary, other than the Subsidiaries in existence on the date hereof
and listed in Schedule 5.5.
Section 7.5 Dividends. The Borrowers will not declare or pay
any dividends (other than dividends payable solely in stock of the Borrowers) on
any class of its stock or make any payment on account of the purchase,
redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly.
Section 7.6 Sale or Transfer of Assets; Suspension of
Business Operations. The Borrowers will not sell, lease, assign, transfer or
otherwise dispose of (i) the stock of any Subsidiary (except in connection with
the sale of the Borrowers' European operations), (ii) all or a substantial part
of its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrowers will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
Section 7.7 Intellectual Property. The Borrowers will not
sell, assign or grant licenses to use, any of its applications for patents,
patents, copyrights, trademarks, trade secrets, trade names or other
intellectual property to any other Person. Provided, however, the Borrowers may
sell, assign or grant licenses in connection with a sale of the Borrowers'
European operations, subject to the Lender's approval of any documentation in
connection therewith and provided further that the Borrowers shall in all events
maintain the right to use any such intellectual property necessary to conduct
its United States operations.
Section 7.8 Financing Orders. The Borrowers shall not violate
or seek to modify, appeal, or otherwise affect, the terms of the Final Order.
Section 7.9 Chapter 11 Claims. The Borrowers shall not incur,
create, assume, suffer to exist, or permit any claim in any of the Cases
(including, without limitation, any
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claim under section 506(c) of the Bankruptcy Code and any deficiency claim
remaining after the satisfaction of a lien that secures a claim) to be on a
parity with or senior to the claims of the Lender against the Borrowers
hereunder, or apply to the Bankruptcy Court for authority to do so.
Section 7.10 Consolidation and Merger; Asset Acquisitions. The
Borrowers will not consolidate with or merge into any Person, or permit any
other Person to merge into it, or acquire (in a transaction analogous in purpose
or effect to a consolidation or merger) all or substantially all the assets of
any other Person.
Section 7.11 Sale and Leaseback. The Borrowers will not enter
into any arrangement, directly or indirectly, with any other Person whereby the
Borrowers shall sell or transfer any real or personal property, whether now
owned or hereafter acquired, and then or thereafter rent or lease as lessee such
property or any part thereof or any other property which the Borrowers intend to
use for substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.12 Restrictions on Nature of Business. The Borrowers
will not engage in any line of business materially different from that presently
engaged in by the Borrowers and will not purchase, lease or otherwise acquire
assets not related to its business.
Section 7.13 Capital Expenditures. The Borrowers will not
incur or contract to incur Capital Expenditures of more than $400,000 in the
aggregate for the period November 1, 1998 through March 31, 1999 and of no more
than $300,000 during each fiscal quarter thereafter.
Section 7.14 Accounting. The Borrowers will not adopt any
material change in accounting principles other than as required by GAAP. Each
Borrower will not adopt, permit or consent to any change in its fiscal year.
Section 7.15 Discounts, etc. The Borrowers will not, after
notice from the Lender, grant any discount, credit or allowance to any customer
of the Borrowers or accept any return of goods sold, or at any time (whether
before or after notice from the Lender) modify, amend, subordinate, cancel or
terminate the obligation of any account debtor or other obligor of the
Borrowers.
Section 7.16 Defined Benefit Pension Plans. The Borrowers will
not adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.12.
Section 7.17 Other Defaults. The Borrowers will not permit any
breach, default or event of default to occur under any note, loan agreement,
indenture, lease, mortgage, contract for deed, security agreement or other
contractual obligation binding upon the Borrowers, except for existing breaches,
defaults or events of default under the Existing Credit Facility and any other
defaults that occurred prior to bankruptcy.
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Section 7.18 Place of Business; Name. The Borrowers will not
transfer their chief executive offices or principal place of business, or move,
relocate, close or sell any business location. The Borrowers will not permit any
tangible Collateral or any records pertaining to the Collateral to be located in
any state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrowers will not change
their names. Notwithstanding the foregoing, the Borrowers may change the name of
Future Graphics, Inc. upon prior written notice to the Lender and upon execution
and delivery of any and all instruments, financing statements and other
agreements and writings that the Lender requires in order to secure, protect,
perfect or enforce the Security Interest or the Lender's rights under the Loan
Documents.
Section 7.19 Organizational Documents. The Borrowers will not
amend their articles of incorporation and bylaws. The Borrowers will not become
an S Corporation within the meaning of the Internal Revenue Code of 1986, as
amended.
Section 7.20 Salaries. The Borrowers will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any directors, shareholders or consultant, or any member
of their families.
Section 7.21 Change in Ownership. The Borrowers will not issue
or sell any stock of the Borrowers so as to change the percentage of voting and
non-voting stock owned by each of the Borrowers' shareholders, and the
Borrowers, excluding Nu-kote Holding, Inc., will not permit or suffer to occur
the sale, transfer, assignment, pledge or other disposition of any or all of the
issued and outstanding shares of stock of the Borrowers.
ARTICLE VIII
Events of Default, Rights and Remedies
Section 8.1 Events of Default. "Event of Default", wherever
used herein, means any one of the following events:
(a) Default in the payment of the Obligations when they become
due and payable;
(b) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrowers under this Agreement;
(c) Default in the performance, or breach, of any covenant or
agreement of the Borrowers contained in this Agreement;
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(d) Entry of an order of the Bankruptcy Court modifying,
amending, reversing, vacating, or staying the Final Order, or the
Borrowers shall violate the terms of the Final Order;
(e) In connection with any of the Cases: (i) the Bankruptcy
Court shall enter an order dismissing any of the Cases; (ii) any of the
Cases shall be converted to a case under chapter 7 of the Bankruptcy
Code; (iii) a motion shall be filed for, or there shall arise, any
claim (other than those of the Lender hereunder) in any of the Cases
having a priority under section 364(c)(1) of the Bankruptcy Code unless
such motion provides for the payment in full in cash of the Obligations
upon the closing of such financing, except a motion in connection with
Employers Insurance of Wausau and Coudert Brothers; (iv) a motion shall
be filed for, or there shall arise, a claim (other than those of the
Lender hereunder) in any of the Cases secured by a lien having a
priority under section 364(d) of the Bankruptcy Code unless such motion
provides for payment in full in cash of the Obligations upon the
closing of such financing except a motion in connection with Employers
Insurance of Wausau and Coudert Brothers; (v) there shall arise any
lien (other than a Permitted Lien) in the Collateral or any part
thereof save and except for a lien in favor of Employers Insurance of
Wausau and Coudert Brothers; (vi) the Bankruptcy Court shall enter an
order granting relief from the automatic stay applicable under section
362 of the Bankruptcy Code to the holder of any security interest other
than the Lender; or (vii) the Bankruptcy Court shall enter an order
approving a disclosure statement in connection with a plan of
reorganization proposed by any of the Borrowers or any other Person
which plan of reorganization is inconsistent with the Borrowers'
agreements and obligations hereunder, e.g., a plan which does not
provide for payment in full in cash of the Obligations as required by
section 1129(a)(9) of the Bankruptcy Code;
(f) Any representation or warranty made by the Borrowers in
this Agreement, or by the Borrowers (or by any of their officers) in
any agreement, certificate, instrument or financial statement or other
statement contemplated by or made or delivered pursuant to or in
connection with this Agreement shall prove to have been incorrect in
any material respect when deemed to be effective;
(g) The rendering against any of the Borrowers of a final
judgment, decree or order for the payment of money in excess of
$100,000 and the continuance of such judgment, decree or order
unsatisfied and in effect for any period of 30 consecutive days without
a stay of execution;
(h) A default, other than any existing default under the
Existing Credit Facility, under any bond, debenture, note or other
evidence of indebtedness of any of the Borrowers owed to any Person
other than the Lender, or under any indenture or other instrument under
which any such evidence of indebtedness has been issued or by which it
is governed, or under any lease of any of the Premises, and the
expiration
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of the applicable period of grace, if any, specified in such evidence
of indebtedness, indenture, other instrument or lease;
(i) Any Reportable Event, which the Lender determines in good
faith might constitute grounds for the termination of any Plan or for
the appointment by the appropriate United States District Court of a
trustee to administer any Plan, shall have occurred and be continuing
30 days after written notice to such effect shall have been given to
any of the Borrowers by the Lender; or a trustee shall have been
appointed by an appropriate United States District Court to administer
any Plan; or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan; or any of the Borrowers shall have filed for a
distress termination of any Plan under Title IV of ERISA; or any of the
Borrowers shall have failed to make any quarterly contribution required
with respect to any Plan under Section 412(m) of the Internal Revenue
Code of 1986, as amended, which the Lender determines in good faith may
by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition
of a lien on the Borrowers' assets in favor of the Plan provided
however that Borrowers may seek a voluntary termination of any Plan in
the Cases;
(j) An event of default shall occur under any Security
Document or under any other security agreement, mortgage, deed of
trust, assignment or other instrument or agreement securing any
obligations of the Borrowers hereunder or under any note, except for an
existing event of default under the Existing Credit Facility;
(k) Any of the Borrowers shall liquidate, dissolve, terminate
or suspend its business operations or otherwise fail to operate its
business in the ordinary course, or sell all or substantially all of
its assets, without the Lender's prior written consent;
(l) Any of the Borrowers shall fail to pay, withhold, collect
or remit any tax or tax deficiency when assessed or due (other than any
tax deficiency which is being contested in good faith and by proper
proceedings and for which it shall have set aside on its books adequate
reserves therefor) or notice of any state or federal tax liens shall be
filed or issued;
(m) Any event or circumstance with respect to any of the
Borrowers shall occur such that the Lender shall believe in good faith
that the prospect of payment of all or any part of the Obligations or
the performance by the Borrowers under the Loan Documents is impaired
or any material adverse change in the business or financial condition
of the Borrowers shall occur; or
(n) Any breach, default or event of default by or attributable
to any Affiliate under any agreement between such Affiliate and the
Lender.
Section 8.2 Rights and Remedies. During any Default Period,
the Lender may without further order of, or application to the Bankruptcy Court
for an order granting relief
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from the automatic stay of Section 362 of the Bankruptcy Code, exercise any or
all of the following rights and remedies:
(a) the Lender may, by notice to the Borrowers, declare the
Commitment to be terminated, whereupon the same shall forthwith
terminate;
(b) the Lender may, by notice to the Borrowers, declare the
Obligations to be forthwith due and payable, whereupon all Obligations
shall become and be forthwith due and payable, without presentment,
notice of dishonor, protest or further notice of any kind, all of which
the Borrowers hereby expressly waive;
(c) the Lender may, without notice to the Borrowers and
without further action, apply any and all money owing by the Lender to
the Borrowers to the payment of the Obligations;
(d) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of
Collateral, or any evidence thereof, proceeding without judicial
process or by judicial process (without a prior hearing or notice
thereof, which the Borrowers hereby expressly waive) and the right to
sell, lease or otherwise dispose of any or all of the Collateral, and,
in connection therewith, the Borrowers will on demand assemble the
Collateral and make it available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both
parties;
(e) the Lender may exercise and enforce its rights and
remedies under the Loan Documents; and
(f) the Lender may exercise any other rights and remedies
available to it by law or agreement.
The Borrowers agree and admit that the occurrence of any Event of Default is
sufficient cause for relief from the automatic stay under Section 362(d)(1) of
the Bankruptcy Code. If an Event of Default occurs, the Borrowers consent to
entry of an Order terminating the automatic stay 3 business days after the
filing of an affidavit with the Bankruptcy Court by the Lender, or one of its
attorneys, with service upon counsel for the Borrowers, setting forth the nature
of the Default; provided, however, that if a Default under Section 8.1(e)(ii)
occurs, the Lender must give notice of the Default to the trustee or examiner
and request a hearing for relief from the stay based on the Default. The
Borrowers shall have no defense, other than showing the alleged Default has not
occurred.
Section 8.3 Certain Notices. If notice to the Borrowers of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 9.4) at least ten
calendar days before the date of intended disposition or other action.
-43-
<PAGE> 48
ARTICLE IX
Miscellaneous
Section 9.1 No Discharge of Claims; No Waiver by Lender. The
Obligations and the Security Interest shall not be discharged by the entry of an
order confirming a plan of reorganization in any of the Cases, and by execution
hereof the Borrowers waive, pursuant to section 1141(d) of the Bankruptcy Code,
any such discharge. The Superpriority Claim granted to Lender by the Final Order
and the Security Interest granted to Lender hereunder and by the Final Order
shall not be affected in any manner by entry of an order confirming a plan of
reorganization in any of the Cases, or the entry of an order dismissing or
converting any of the Cases. The Lender does not waive, and nothing contained in
the Loan Documents shall be construed to be a waiver by the Lender, of the
Lender's rights under section 1129(a)(9)(A) of the Bankruptcy Code.
Section 9.2 No Waiver; Cumulative Remedies. No failure or
delay by the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law.
Section 9.3 Amendments, Etc. No amendment, modification,
termination or waiver of any provision of any Loan Document or consent to any
departure by the Borrowers therefrom or any release of a Security Interest shall
be effective unless the same shall be in writing and signed by the Lender, and
then such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given. No notice to or demand on the
Borrowers in any case shall entitle the Borrowers to any other or further notice
or demand in similar or other circumstances.
Section 9.4 Addresses for Notices, Etc. Except as otherwise
expressly provided herein, all notices, requests, demands and other
communications provided for under the Loan Documents shall be in writing and
shall be (a) personally delivered, (b) sent by first class United States mail,
(c) sent by overnight courier of national reputation, or (d) transmitted by
telecopy, in each case addressed or telecopied to the party to whom notice is
being given at its address or telecopier number as set forth below:
If to the Borrowers:
Nu-kote Holding, Inc.
200 Beasley Drive
Franklin, TN 37064
Telecopier: 615/791-6100
Attention: Phillip L. Theodore
-44-
<PAGE> 49
If to the Lender:
Norwest Business Credit, Inc.
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0103
Telecopier: (612) 341-2472
Attention: Brian J. Waldinger
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.
Section 9.5 Further Documents. The Borrowers will from time to
time execute and deliver or endorse any and all instruments, documents,
conveyances, assignments, security agreements, financing statements and other
agreements and writings that the Lender may reasonably request in order to
secure, protect, perfect or enforce the Security Interest or the Lender's rights
under the Loan Documents (but any failure to request or assure that the
Borrowers execute, deliver or endorse any such item shall not affect or impair
the validity, sufficiency or enforceability of the Loan Documents and the
Security Interest, regardless of whether any such item was or was not executed,
delivered or endorsed in a similar context or on a prior occasion).
Section 9.6 Collateral. This Agreement does not contemplate a
sale of accounts, contract rights or chattel paper, and, as provided by law, the
Borrowers are entitled to any surplus and shall remain liable for any
deficiency. The Lender's duty of care with respect to Collateral in its
possession (as imposed by law) shall be deemed fulfilled if it exercises
reasonable care in physically keeping such Collateral, or in the case of
Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and the Lender need not otherwise preserve, protect, insure or care for any
Collateral. The Lender shall not be obligated to preserve any rights the
Borrowers may have against prior parties, to realize on the Collateral at all or
in any particular manner or order or to apply any cash proceeds of the
Collateral in any particular order of application.
Section 9.7 Costs and Expenses. The Borrowers shall reimburse
the Lender for all reasonable out-of-pocket expenses incurred by the Lender in
connection with seeking to obtain the Bankruptcy Court's approval of the Credit
Facility, in seeking to close and maintain the Credit Facility, and any other
out-of-pocket expenses otherwise incurred in connection with the Obligations,
this Agreement, the Loan Documents, and any other document or agreement related
hereto or thereto, and the transactions contemplated hereby,
-45-
<PAGE> 50
including without limitation, reasonable attorneys' fees and expenses, closing
costs, appraisal fees, UCC search and recording fees, individual and corporate
credit reports, inventory appraisal fees and collateral auditing costs, whether
incurred prepetition or postpetition and regardless of whether the Credit
Facility is approved by the Bankruptcy Court or funded. The Lender acknowledges
receipt of a $50,000 due diligence deposit and a $50,000 expense deposit
(collectively, the "Expense Deposit") to cover the Lender's expenses associated
with obtaining court approval of this Agreement and all documentation related
thereto. Upon the approval or rejection of the Credit Facility herein, the
Deposit shall be returned to the Borrowers after deducting all out-of-pocket
expenses incurred by the Lender. The Borrowers' obligation to reimburse the
Lender for all costs and expenses shall be effective regardless of whether the
Credit Facility is approved by the Bankruptcy Court or whether the Credit
Facility is funded.
Section 9.8 Indemnity. In addition to the payment of expenses
pursuant to Section 9.7, the Borrowers agree to indemnify, defend and hold
harmless the Lender, and any of its participants, parent corporations,
subsidiary corporations, affiliated corporations, successor corporations, and
all present and future officers, directors, employees, attorneys and agents of
the foregoing (the "Indemnitees") from and against any of the following
(collectively, "Indemnified Liabilities"):
(i) any and all transfer taxes, documentary taxes,
assessments or charges made by any governmental authority by
reason of the execution and delivery of the Loan Documents or
the making of the Advances;
(ii) any claims, loss or damage to which any
Indemnitee may be subjected if any representation or warranty
contained in Section 5.14 proves to be incorrect in any
respect or as a result of any violation of the covenant
contained in Section 6.4(b); and
(iii) any and all other liabilities, losses, damages,
penalties, judgments, suits, claims, costs and expenses of any
kind or nature whatsoever (including, without limitation, the
reasonable fees and disbursements of counsel) in connection
with the foregoing and any other investigative, administrative
or judicial proceedings, whether or not such Indemnitee shall
be designated a party thereto, which may be imposed on,
incurred by or asserted against any such Indemnitee, in any
manner related to or arising out of or in connection with the
making of the Advances and the Loan Documents or the use or
intended use of the proceeds of the Advances.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrowers, or counsel designated by the Borrowers and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrowers' sole cost and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrowers shall nevertheless make the
maximum contribution to the
-46-
<PAGE> 51
payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. The Borrowers' obligation under this Section
9.8 shall survive the termination of this Agreement and the discharge of the
Borrowers' other obligations hereunder.
Section 9.9 Participants. The Lender and its participants, if
any, are not partners or joint venturers, and the Lender shall not have any
liability or responsibility for any obligation, act or omission of any of its
participants. All rights and powers specifically conferred upon the Lender may
be transferred or delegated to any of the Lender's participants, successors or
assigns, without further order of the Bankruptcy Court.
Section 9.10 Execution in Counterparts. This Agreement and
other Loan Documents may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument.
Section 9.11 Binding Effect; Assignment; Complete Agreement;
Exchanging Information. The Loan Documents shall be binding upon and inure to
the benefit of the Borrowers and the Lender and their respective successors and
assigns, except that the Borrowers shall not have the right to assign their
rights thereunder or any interest therein without the Lender's prior written
consent. This Agreement, together with the Loan Documents, comprises the
complete and integrated agreement of the parties on the subject matter hereof
and supersedes all prior agreements, written or oral, on the subject matter
hereof. Without limiting the Lender's right to share information regarding the
Borrowers and any of their Affiliates with the Lender's participants,
accountants, lawyers and other advisors, the Lender, Wells Fargo & Company,
formerly known as Norwest Corporation, and all direct and indirect subsidiaries
of Wells Fargo & Company, may exchange any and all information they may have in
their possession regarding the Borrowers and any of their Affiliates, and the
Borrowers waive any right of confidentiality they may have with respect to such
exchange of such information.
Section 9.12 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.13 Headings. Article and Section headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 9.14 Governing Law; Jurisdiction, Venue; Waiver of
Jury Trial. The Loan Documents shall be governed by and construed in accordance
with the substantive laws (other than conflict laws) of the State of Minnesota.
The parties hereto hereby (i) consent to the personal jurisdiction of the state
and federal courts located in the State of Minnesota in connection with any
controversy related to this Agreement; (ii) waive any argument that venue in any
such forum is not convenient, (iii) agree that any litigation initiated by the
Lender or the Borrowers in connection with this Agreement or the other Loan
Documents
-47-
<PAGE> 52
shall be venued in either the District Court of Hennepin County, Minnesota or
the United States District Court, District of Minnesota; and (iv) agree that a
final judgment in any such suit, action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first above written.
[Signature Page to Follow]
-48-
<PAGE> 53
NORWEST BUSINESS CREDIT, INC. NU-KOTE HOLDING, INC.
By _______________________________
Its ________________
By _______________________________
Its Vice President
NU-KOTE INTERNATIONAL, INC. NU-KOTE IMPERIAL, LTD.
By _______________________________ By _______________________________
Its ________________ Its ________________
INTERNATIONAL COMMUNICATION
MATERIALS, INC. FUTURE GRAPHICS, INC.
By _______________________________ By _______________________________
Its ________________ Its ________________
NU-KOTE LATIN AMERICA, INC. NU-KOTE IMAGING INTERNATIONAL,
INC.
By _______________________________ By _______________________________
Its ________________ Its ________________
-49-
<PAGE> 54
Table of Exhibits and Schedules
Exhibit A Form of Revolving Note
Exhibit B Form of Compliance Certificate
Exhibit C Premises
-------------------
Schedule 2.11 Sources and Uses of Funds
Schedule 5.1 Trade Names, Chief Executive Office, Principal
Place of Business, and Locations of Collateral
Schedule 5.2 Capital Stock
Schedule 5.5 Subsidiaries
Schedule 5.7 Litigation
Schedule 5.14 Environmental Matters
Schedule 6.11 Debtor-in-Possession Accounts
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
<PAGE> 55
Exhibit A to Credit and Security
Agreement
REVOLVING NOTE
$7,500,000 Minneapolis, Minnesota
________________, 2000
For value received, the undersigned, NU-KOTE HOLDING, INC., a
Delaware corporation, NU-KOTE IMPERIAL, LTD., a Delaware corporation, NU-KOTE
INTERNATIONAL, INC., a Delaware corporation, INTERNATIONAL COMMUNICATION
MATERIALS, INC., a Pennsylvania corporation, NU-KOTE IMAGING INTERNATIONAL,
INC., a Delaware corporation, FUTURE GRAPHICS, INC., a California corporation,
and NU-KOTE LATIN AMERICA, INC., a Delaware corporation (collectively, the
"Borrowers"), hereby promise to pay, jointly and severally, on the Termination
Date under the Credit Agreement (defined below), to the order of Norwest
Business Credit, Inc., a Minnesota corporation (the "Lender"), at its main
office in Minneapolis, Minnesota, or at any other place designated at any time
by the holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Seven Million Five Hundred
Thousand Dollars and No Cents ($7,500,000) or, if less, the aggregate unpaid
principal amount of all Revolving Advances made by the Lender to the Borrowers
under the Credit Agreement (defined below) together with interest on the
principal amount hereunder remaining unpaid from time to time, computed on the
basis of the actual number of days elapsed and a 360-day year, from the date
hereof until this Note is fully paid at the rate from time to time in effect
under the Credit and Security Agreement of even date herewith (as the same may
hereafter be amended, supplemented or restated from time to time, the "Credit
Agreement") by and between the Lender and the Borrowers. The principal hereof
and interest accruing thereon shall be due and payable as provided in the Credit
Agreement. This Note may be prepaid only in accordance with the Credit
Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Revolving Note referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents as therein defined, and may now or hereafter be secured by one or more
other security agreements, mortgages, deeds of trust, assignments or other
instruments or agreements.
The Borrowers hereby agree to pay all costs of collection,
including attorneys' fees and legal expenses in the event this Note is not paid
when due, whether or not legal proceedings are commenced.
<PAGE> 56
Presentment or other demand for payment, notice of dishonor
and protest are expressly waived.
NU-KOTE HOLDING, INC.
By _______________________________
Its ________________
NU-KOTE INTERNATIONAL, INC
By _______________________________
Its ________________
NU-KOTE IMPERIAL, LTD.
By _______________________________
Its ________________
INTERNATIONAL COMMUNICATION MATERIALS, INC.
By _______________________________
Its ________________
FUTURE GRAPHICS, INC.
By _______________________________
Its ________________
NU-KOTE IMAGING INTERNATIONAL, INC.
By _______________________________
Its _________________
NU-KOTE LATIN AMERICA, INC.
By _______________________________
Its ________________
-2-
<PAGE> 57
Exhibit B to Credit and Security
Agreement
COMPLIANCE CERTIFICATE
To: ____________________
Norwest Business Credit, Inc.
Date: __________________, 199___
Subject: Nu-kote Holding, Inc., Nu-kote Imperial, Ltd., Nu-kote International,
Inc., International Communication Materials, Inc., Nu-kote Imaging
International, Inc., Future Graphics, Inc. and Nu-kote Latin America,
Inc.
Financial Statements
In accordance with our Credit and Security Agreement dated as
of ______________, 2000 (the "Credit Agreement"), attached are the financial
statements of Nu-kote Holding, Inc., Nu-kote Imperial, Ltd., Nu-kote
International, Inc., International Communication Materials, Inc., Nu-kote
Imaging International, Inc., Future Graphics, Inc. and Nu-kote Latin America,
Inc. (the "Borrowers") as of and for ________________, 19___ (the "Reporting
Date") and the year-to-date period then ended (the "Current Financials"). All
terms used in this certificate have the meanings given in the Credit Agreement.
I certify that the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and fairly present
the Borrowers' financial condition and the results of its operations as of the
date thereof.
Events of Default. (Check one):
[ ] The undersigned does not have knowledge of the
occurrence of a Default or Event of Default under the Credit
Agreement.
[ ] The undersigned has knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement and
attached hereto is a statement of the facts with respect to
thereto.
I hereby certify to the Lender as follows:
[ ] The Reporting Date does not mark the end of one of the
Borrowers' fiscal months, hence I am completing only paragraph
__ below.
[ ] The Reporting Date marks the end of one of the
Borrowers' fiscal months, hence I am completing all paragraphs
below except paragraph __.
<PAGE> 58
[ ] The Reporting Date marks the end of the Borrowers'
fiscal year, hence I am completing all paragraphs below.
Financial Covenants. I further hereby certify as follows:
1. Minimum EBITDAR. Pursuant to Section 6.16 of the Credit
Agreement, the Borrowers' EBITDAR for the ________ period ending on the
Reporting Date, was $____________, which [ ] satisfies [ ] does not
satisfy the requirement that such amount be not less than
$_____________ during such period as set forth in table below:
Period Minimum EBITDAR
------ ---------------
April 1, 1998 through $1,560,000
November 30, 1998
April 1, 1998 through $1,365,000
December 31, 1998
April 1, 1998 through $1,393,000
January 31, 1999
April 1, 1998 through $1,332,000
February 28, 1999
Fiscal Year ending $1,280,000
March 31, 1999
April 1, 1999 through $77,000
April 30, 1999
April 1, 1999 through $151,000
May 31, 1999
April 1, 1999 through $219,000
June 30, 1999
April 1, 1999 through $265,000
July 31, 1999
April 1, 1999 through $336,000
August 31, 1999
April 1, 1999 through $574,000
September 30, 1999
April 1, 1999 through $657,000
October 31, 1999
April 1, 1999 through $824,000
November 30, 1999
April 1, 1999 through $1,061,000
December 31, 1999
<PAGE> 59
Period Minimum EBITDAR
------ ---------------
April 1, 1999 through $1,314,000
January 31, 2000
April 1, 1999 through $1,664,000
February 29, 2000
Fiscal Year ending $2,062,000
March 31, 2000
Each Fiscal Month $150,000
thereafter
2. Minimum Net Income. Pursuant to Section 6.17 of the Credit
Agreement, the Borrowers' Net Income for the ________ period ending
on the Reporting Date, was $____________, which [ ] satisfies [ ]
does not satisfy the requirement that such amount be not less than
$_____________ during such period as set forth in table below:
Period Minimum Net Income
------ ------------------
April 1, 1998 through $(2,833,000)
November 30, 1998
April 1, 1998 through $(4,570,000)
December 31, 1998
April 1, 1998 through $(5,737,000)
January 31, 1999
April 1, 1998 through $(6,997,000)
February 28, 1999
Fiscal Year ending $(8,362,000)
March 31, 1999
April 1, 1999 through $(873,000)
April 30, 1999
April 1, 1999 through $(1,741,000)
May 31, 1999
April 1, 1999 through $(2,729,000)
June 30, 1999
April 1, 1999 through $(3,539,000)
July 31, 1999
April 1, 1999 through $(4,332,000)
August 31, 1999
April 1, 1999 through $(5,170,000)
September 30, 1999
April 1, 1999 through $(5,953,000)
October 31, 1999
<PAGE> 60
Period Minimum Net Income
------ ------------------
April 1, 1999 through $(6,645,000)
November 30, 1999
April 1, 1999 through $(7,471,000)
December 31, 1999
April 1, 1999 through $(7,971,000)
January 31, 2000
April 1, 1999 through $(8,367,000)
February 29, 2000
Fiscal Year ending $(8,970,000)
March 31, 2000
Each Fiscal Month thereafter $1
3. Maximum Days in Inventory. Pursuant to Section 6.15 of the
Credit Agreement, for the year-to-date period ending on the Reporting
Date, the Borrowers have maintained ___ days in inventory which [ ]
satisfies [ ] does not satisfy the requirement that the Borrowers will
not exceed 155 days in inventory.
4. Capital Expenditures. Pursuant to Section 7.13 of the
Credit Agreement, for the year-to-date period ending on the Reporting
Date, the Borrowers have expended or contracted to expend during the
_____________ year ended ______________, 199___, for Capital
Expenditures, $__________________ in the aggregate and at most
$______________ in any one transaction, which [ ] satisfies [ ]
does not satisfy the requirement that such expenditures not exceed
$__________ in the aggregate and $___________ for any one transaction
during such year.
5. Salaries. As of the Reporting Date, the Borrower [ ] is
[ ] is not in compliance with Section 7.20 of the Credit Agreement
concerning salaries.
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
NU-KOTE HOLDING, INC.
By ____________________________
Its Chief Financial Officer
<PAGE> 61
NU-KOTE IMPERIAL, LTD.
By ____________________________
Its Chief Financial Officer
NU-KOTE INTERNATIONAL, INC.
By ____________________________
Its Chief Financial Officer
INTERNATIONAL COMMUNICATION
MATERIALS, INC.
By ____________________________
Its Chief Financial Officer
NU-KOTE IMAGING INTERNATIONAL, INC.
By ____________________________
Its Chief Financial Officer
FUTURE GRAPHICS, INC.
By ____________________________
Its Chief Financial Officer
NU-KOTE LATIN AMERICA, INC.
By ____________________________
Its Chief Financial Officer
<PAGE> 62
Exhibit C to Credit and Security
Agreement
PREMISES
The Premises referred to in the Credit and Security Agreement
are legally described as follows:
[To be completed by Borrowers]
<PAGE> 63
Schedule 2.11 to Credit and Security
Agreement
Sources and Uses of Funds
[to be completed by Borrowers]
<PAGE> 64
Schedule 5.1 to Credit and Security
Agreement
Trade Names, Chief Executive Office, Principal Place of Business,
and Locations of Collateral
TRADE NAMES
CHIEF EXECUTIVE OFFICE PRINCIPAL PLACE OF BUSINESS
---------------------- ---------------------------
Nu-kote Holding, Inc. Same
200 Beasley Drive
Franklin, TN 37064
Nu-kote Imperial, Ltd. Same
200 Beasley Drive
Franklin, TN 37064
Nu-kote International, Inc. Same
200 Beasley Drive
Franklin, TN 37064
International Communication Connellsville, PA
Materials, Inc.
200 Beasley Drive
Franklin, TN 37064
Nu-kote Imaging International, Inc. Same
200 Beasley Drive
Franklin, TN 37064
Future Graphics, Inc. Chatsworth, CA
200 Beasley Drive
Franklin, TN 37064
Nu-kote Latin America, Inc. Same
200 Beasley Drive
Franklin, TN 37064
<PAGE> 65
OTHER INVENTORY AND EQUIPMENT LOCATIONS
<TABLE>
<CAPTION>
Average Average
Cost of Inventory
Equipment Balances
On Hand On Hand
------- -------
<S> <C> <C> <C>
Nu-kote De Mexico. Nogales, Mexico $1,200,000 $2,300,000
Nu-kote International, Inc. Nogales, Arizona $ -0- $ 200,000
Outsource Warehouse Mississauga, Canada $ -0- $ 500,000
Outsource Manufacturer Portland, TN $ 500,000 $ 750,000
</TABLE>
<PAGE> 66
Schedule 5.2 to Credit and Security
Agreement
CAPITAL STOCK OF SHAREHOLDERS WITH A 5% OR GREATER INTEREST
IN THE BORROWERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE OF CLASS
OWNED (1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Ligapart AG 4,600,000 21.1%
- --------------------------------------------------------------------------------------------------
Richmont Capital Partners I, L.P. 2,559,360 11.8%
- --------------------------------------------------------------------------------------------------
Heartland Advisors, Inc. 1,100,000 5.1%
- --------------------------------------------------------------------------------------------------
Oppenheimer Group, Inc. 2,062,600 (2) 9.5%
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Unless otherwise indicated, such shares of the Common Stock are owned with
sole voting and investment powers.
(2) Represents the aggregate shares held by the Oppenheimer Group, Inc. and its
subsidiaries and affiliates, including Oppenheimer Financial Corp., Oppenheimer
Equities Inc., Oppenheimer Holding, Inc., Oppenheimer & Co., Inc. and
Oppenheimer Capital, L.P. Oppenheimer Group, Inc. is a parent holding company
and disclaims beneficial ownership and voting and dispositive power over the
shares held by its subsidiaries and their clients.
Describe any outstanding subscriptions, options, warrants, calls, contracts,
demands, commitments, or convertible securities
See Attached.
<PAGE> 67
Schedule 5.5 to Credit and Security
Agreement
SUBSIDIARIES
[ORGANIZATIONAL CHART]
<PAGE> 68
Schedule 5.7 to Credit and Security
Agreement
LITIGATION
See Attached.
<PAGE> 69
Schedule 5.14 to Credit and Security
Agreement
ENVIRONMENTAL MATTERS
See Attached.
<PAGE> 70
Schedule 6.11 to Credit and Security
Agreement
DEBTOR-IN-POSSESSION ACCOUNTS
See Attached.
<PAGE> 71
Schedule 7.1 to Credit and Security
Agreement
PERMITTED LIENS (each of which is subject and junior to the
Lender's Superpriority Claim)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NAME JURISDICTION SECURED PARTY FILING NO. FILING DATE COLLATERAL OR
LIEN AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nu-kote California Secretary Nationsbank of Texas 9629561315 10/16/96 Blanket
International, Inc. of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
New York Secretary Nationsbank of Texas 41900 3/1/95 Blanket
of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Phillips-Joanna, a 200021 9/18/98 Consignment
division of Industrial interest in all
Coatings Group Inc. high density film
- ----------------------------------------------------------------------------------------------------------------------
Pennsylvania Dollar Bank Leasing 25461692 5/17/96 Canon Color
Secretary of State Corp Printing System
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 26400744 2/25/97 Blanket
NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Pitney Bowes Credit 28761723 4/6/98 All equipment
Corporation sold by secured
party; subject
to lease dated
11/3/97
- ---------------------------------------------------------------------------------------------------------------------
Colonial Pacific 29370361 9/10/98 Marklift Scissor
Leasing Lift
- ---------------------------------------------------------------------------------------------------------------------
Fayette County, PA Nationsbank of Texas 2391 (real 2/21/97 Blanket
NA as collateral agent estate records)
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 136-97-ST 2/21/97 Blanket
NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Colonial Pacific 742-98-ST 9/14/98 Specific
Leasing Equipment
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 72
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Tennessee Secretary Hyster Credit Co 950453714 7/21/95 Specific
of State Equipment
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 950493011 11/20/95 Blanket
NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
CIT Group 972084363 10/23/97 Specific
Equipment
- ---------------------------------------------------------------------------------------------------------------------
Tennant Financial 982029881 3/31/98 Specific
Services Equipment
- ---------------------------------------------------------------------------------------------------------------------
Phillips-Joanna, a 982081059 9/22/98 Consignment
division of Industrial interest in all
Coatings Group Inc. high density film
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Nu-kote Holdings, California Secretary Nationsbank of Texas 9705160154 2/18/97 Blanket
Inc. of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
New York Secretary Nationsbank of Texas 205124 10/16/96 Blanket
of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Pennsylvania AT&T Credit Corporation 23580198 10/3/94 AT&T Merlin
Secretary of State Legend equipment
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 26421338 3/4/97 Exhibit A not
NA as collateral agent attached
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
International California Secretary Nationsbank of Texas 9705061082 2/18/97 Blanket
Communication of State NA as collateral agent
Materials, Inc.
- ---------------------------------------------------------------------------------------------------------------------
New York Secretary Nationsbank of Texas 35098 2/19/97 Blanket
of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Pennsylvania CIT Group/Equipment 20511737 2/11/92 Specific
Secretary of State Financing Inc. Equipment and
related parts
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 73
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 24070625 3/10/95 All trademarks
NA as collateral agent and general
intangibles
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 24070632 3/10/95 Blanket
NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 24070638 3/10/95 All patents and
NA as collateral agent general
intangibles
- ---------------------------------------------------------------------------------------------------------------------
Xerox Corp 24971629 12/13/95 Xerox copier
- ---------------------------------------------------------------------------------------------------------------------
Fayette County, PA CIT Group/Equipment 3026 (real 3/13/92 Specific
Financing Inc. estate records) Equipment and
related parts
- ---------------------------------------------------------------------------------------------------------------------
CIT Group/Equipment 128-92-ST 3/13/92 Specific
Financing Inc. Equipment and
related parts
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 133-95-ST 3/1/95 Blanket
NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 134-95-ST 3/1/95 All trademarks
NA as collateral agent and general
intangibles
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 135-95-ST 3/1/95 All patents and
NA as collateral agent general
intangibles
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 142-95-ST 3/2/95 Blanket
NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Xerox Corp 1022-95-ST 12/15/95 Xerox copier
- ---------------------------------------------------------------------------------------------------------------------
PA Dept of Revenue 271-96 4/18/96 $64.48
- ---------------------------------------------------------------------------------------------------------------------
RSL Industrial 18926 8/31/98 $37,022.59
Contracting, Inc.
(mechanic's lien)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Future Graphics, California Secretary Nationsbank of Texas 9506660396 3/1/95 Blanket
Inc. of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 74
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 9506660432 3/1/95 All patents and
NA as collateral agent general
intangibles
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 9525760234 9/8/95 All trademarks
NA as collateral agent and general
intangibles
- ---------------------------------------------------------------------------------------------------------------------
Technologies 9805060160 2/11/98 Blanket
Investments, Inc.
- ---------------------------------------------------------------------------------------------------------------------
New York Secretary Nationsbank of Texas 35136 2/19/97 Blanket
of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
IRS - Federal Tax Lien 212339 10/25/96 $21,741.22
- ---------------------------------------------------------------------------------------------------------------------
Pennsylvania American Business 25070088 1/16/96 Specific
Secretary of State Leasing Inc. Equipment
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 26401437 2/26/97 Blanket
NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Pelikan Tennessee Secretary Yale Financial 920112678 8/12/92 All leased
of State Services Inc. equipment,
including New
Yale Forklift
- ---------------------------------------------------------------------------------------------------------------------
First United Leasing 930244505 10/18/93 Specific
Equipment
- ---------------------------------------------------------------------------------------------------------------------
Hyster Credit Company 940289068 3/14/94 Specific
Equipment
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Nu-kote Imaging New York Secretary Nationsbank of Texas 205128 10/16/96 Blanket
International, Inc. of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Pennsylvania Nationsbank of Texas 24070643 3/10/95 Blanket
Secretary of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 75
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Fayette County, PA Nationsbank of Texas 4368 (real 3/31/97 Blanket
NA as collateral agent estate records)
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 232-97-ST 3/31/97 Blanket
NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Tennessee Secretary Nationsbank of Texas 9504493009 11/20/95 All trademarks
of State NA as collateral agent and general
intangibles
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 9504493010 11/20/95 Blanket
NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Nationsbank of Texas 9504493012 11/20/95 All patents and
NA as collateral agent general
intangibles
- ---------------------------------------------------------------------------------------------------------------------
ABCC 961016445 6/12/96 Lease filing -
specific
equipment
- ---------------------------------------------------------------------------------------------------------------------
California Secretary Nationsbank of Texas 9629561306 10/16/96 Blanket
of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Nu-kote Imperial, New York Secretary Nationsbank of Texas 35143 2/19/97 Blanket
Ltd. of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
Pennsylvania Nationsbank of Texas 26410289 2/27/97 Blanket
Secretary of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
California Secretary Nationsbank of Texas 9705061122 2/18/97 Blanket
of State NA as collateral agent
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 76
Schedule 7.2 to Credit and Security
Agreement
PERMITTED INDEBTEDNESS AND GUARANTIES
Indebtedness
<TABLE>
<CAPTION>
Principal Maturity Monthly
Creditor Amount Date Payment Collateral
-------- ------ ---- ------- ----------
<S> <C> <C> <C> <C>
Robert W. Blair $532,000 N/A N/A Escrowed Funds
John Ridenour $228,000 N/A N/A Escrowed Funds
</TABLE>
*Above does not include Trade Vendors or other account creditors listed on
bankruptcy schedules.
Guaranties
None other than those listed as Permitted Liens.
<PAGE> 1
EXHIBIT 10.21
FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This First Amendment, dated as of _______________, 1999, is made by and
among NU-KOTE HOLDING, INC., a Delaware corporation, NU-KOTE IMPERIAL, LTD., a
Delaware corporation, NU-KOTE INTERNATIONAL, INC., a Delaware corporation,
INTERNATIONAL COMMUNICATION MATERIALS, INC., a Pennsylvania corporation, NU-KOTE
IMAGING INTERNATIONAL, INC., a Delaware corporation, FUTURE GRAPHICS, INC., a
California corporation, and NU-KOTE LATIN AMERICA, INC., a Delaware corporation
(each a "Borrower" and together the "Borrowers"), and WELLS FARGO BUSINESS
CREDIT, INC., a Minnesota corporation, formerly known as Norwest Business
Credit, Inc. (the "Lender").
Recitals
The Borrowers and the Lender have entered into a Credit and Security
Agreement dated as of December 14, 1998 (the "Credit Agreement"). All
capitalized terms used in these recitals shall have the meanings given to them
in the Credit Agreement.
The Borrowers have requested (i) that the Lender, in its sole
discretion, cause letters of credit to be issued for the Borrowers' account from
time to time in an amount not to exceed $1,500,000 at any one time outstanding,
(ii) that the Lender release its security interest in the Xaar License, (iii)
that the Capital Expenditures limitation be increased and (iv) that certain
financial covenant violations be waived. The Lender is willing to grant the
Borrowers' request subject to the terms of this First Amendment.
Accordingly, the Borrowers and the Lender hereby agree as follows:
1. Defined Terms. Capitalized terms used in this First Amendment which
are defined in the Credit Agreement shall have the same meanings as defined
therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit
Agreement is amended as follows:
(a) Section 1.1 of the Credit Agreement is amended to add or substitute
the following definitions:
"'Collateral' means the Borrowers' Special Account, all of the
Borrowers' Equipment, General Intangibles (including any rights to
avoidance of transfers or recoveries of property or money under the
Bankruptcy Code), Inventory, Real Estate Collateral, Receivables,
Investment Property, all sums on deposit in any Collateral Account, and
any items in any Lockbox; together with (i) all substitutions and
replacements for and products of any of the foregoing; (ii) proceeds of
any and all of the foregoing; (iii) in the case of all tangible goods, all
accessions; (iv) all accessories, attachments, parts, equipment and
repairs now or hereafter attached or affixed to or
<PAGE> 2
used in connection with any tangible goods; and (v) all warehouse
receipts, bills of lading and other documents of title now or hereafter
covering such goods."
"'First Amendment' means this First Amendment to the Credit and
Security Agreement."
"'Issuer' means the issuer of any Letter of Credit."
"'L/C Amount' means the sum of (i) the aggregate face amount of any
issued and outstanding Letters of Credit and (ii) the unpaid amount of the
Obligation of Reimbursement."
"'L/C Application' means an application and agreement for Letters of
Credit in a form acceptable to the Issuer and the Lender."
"'Letter of Credit' has the meaning given in Section 2.13."
"'Obligation of Reimbursement' has the meaning given in Section
2.14(a)."
"'Obligations' means each and every debt, liability and obligation
of every type and description which the Borrowers may now or at any time
hereafter owe to the Lender, whether such debt, liability or obligation
now exists or is hereafter created or incurred, whether it arises in a
transaction involving the Lender alone or in a transaction involving other
creditors of the Borrowers, and whether it is direct or indirect, due or
to become due, absolute or contingent, primary or secondary, liquidated or
unliquidated, or sole, joint, several or joint and several, and including
specifically, but not limited to, all indebtedness of the Borrowers
arising under this Agreement or any L/C Application completed by the
Borrowers (including but not limited to the Note and the Obligation of
Reimbursement), or any other loan or credit agreement or guaranty between
the Borrowers and the Lender, whether now in effect or hereafter entered
into."
"'Prime Rate' means the rate publicly announced from time to time by
Wells Fargo Bank, National Association as its "prime rate" or, if such
bank ceases to announce a rate so designated, any similar successor rate
designated by the Lender."
"'Special Account' means a specified cash collateral account
maintained by a financial institution acceptable to the Lender in
connection with Letters of Credit, as contemplated by Sections 2.14."
(b) The definition of "Base Rate" is deleted from Section 1.1 of the
Credit Agreement. All references to the Base Rate shall be deemed
references to the Prime Rate.
- 2 -
<PAGE> 3
2. Advances. The first paragraph of Section 2.1 of the Credit
Agreement is amended to read as follows:
"Section 2.1 Revolving Advances. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances to the
Borrowers from time to time from the date all of the conditions set forth
in Section 4.1 are satisfied (the "Funding Date") to the Termination Date
(the "Revolving Advances"). The Lender shall have no obligation to make a
Revolving Advance if, after giving effect to such requested Revolving
Advance, the sum of the outstanding and unpaid Revolving Advances would
exceed the Borrowing Base less the L/C Amount. The Borrowers' obligation
to pay the Revolving Advances shall be evidenced by the Revolving Note and
shall be secured by the Collateral as provided in Article III. Within the
limits set forth in this Section 2.1, the Borrowers may borrow, prepay
pursuant to Section 2.6 and reborrow. The Borrowers agree to comply with
the following procedures in requesting Revolving Advances under this
Section 2.1."
3. Fees. The following new Sections 2.3(c) and 2.3(d) are added to
the Credit Agreement immediately after Section 2.3(b):
"(c) LETTER OF CREDIT FEES. The Borrowers agree to pay the Lender a
fee with respect to each Letter of Credit, if any, accruing on a daily
basis and computed at the annual rate of two percent (2%) of the aggregate
amount that may then be drawn on all issued and outstanding Letters of
Credit, assuming compliance with all conditions for drawing thereunder
(the "Aggregate Face Amount"), from and including the date of issuance of
such Letter of Credit until such date as such Letter of Credit shall
terminate by its terms or be returned to the Lender, due and payable
monthly in arrears on the first day of each month and on the Termination
Date; provided, however that during Default Periods, in the Lender's sole
discretion and without waiving any of its other rights and remedies, such
fee shall increase to four percent (4%) of the Aggregate Face Amount. The
foregoing fee shall be in addition to any and all fees, commissions and
charges of any Issuer of a Letter of Credit with respect to or in
connection with such Letter of Credit."
"(d) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrowers agree to
pay the Lender, on demand, the administrative fees charged by the Issuer
in connection with the honoring of drafts under any Letter of Credit,
amendments thereto, transfers thereof and all other activity with respect
to the Letters of Credit at the then-current rates published by the Issuer
for such services rendered on behalf of customers of the Issuer
generally."
4. Mandatory Prepayment. Section 2.8 of the Credit Agreement is
amended to read as follows:
- 3 -
<PAGE> 4
"Section 2.8 Mandatory Prepayment. Without notice or demand, if the
outstanding principal balance of the Revolving Advances plus the L/C
Amount shall at any time exceed the Borrowing Base, the Borrowers shall
(i) immediately prepay the Revolving Advances to the extent necessary to
eliminate such excess; and (ii) if prepayment in full of the Revolving
Advances is insufficient to eliminate such excess, pay to the Lender in
immediately available funds for deposit in the Special Account an amount
equal to the remaining excess. Any payment received by the Lender under
this Section 2.8 or under Section 2.6 may be applied to the Obligations,
in such order and in such amounts as the Lender, in its discretion, may
from time to time determine."
5. Letter of Credit Provisions. The following new Sections are added
to the Credit Agreement at the end of Article II:
"Section 2.13 Issuance of Letters of Credit.
(a) The Lender may, in its sole discretion, cause to be issued
by an Issuer one or more letters of credit for the account of the
Borrowers (each a "Letter of Credit") from time to time during the
period from the date of the First Amendment until the earlier of the
date the Lender demands payment of the Revolving Advances or the
Termination Date, in an aggregate amount at any time outstanding not
to exceed the lesser of:
(i) $1,500,000 less the L/C Amount, or
(ii) the Borrowing Base less the sum of (A) all
outstanding and unpaid Advances hereunder and (B) the L/C
Amount.
Each Letter of Credit, if any, shall be issued pursuant to a
separate L/C Application entered into by the Borrowers and the
Lender as co-applicants for the benefit of the Issuer, completed in
a manner satisfactory to the Lender and the Issuer. The terms and
conditions set forth in each such L/C Application shall supplement
the terms and conditions hereof, but in the event of inconsistency
between the terms of any such L/C Application and the terms hereof,
the terms hereof shall control.
(b) No Letter of Credit shall be issued with an expiry date
later than December 14, 2000.
(c) Any request for the issuance of a Letter of Credit under
this Section 2.13 shall be deemed to be a representation by each
Borrower that the statements set forth in Section 4.2 hereof are
correct as of the time of the request.
- 4 -
<PAGE> 5
"Section 2.14 Payment of Amounts Drawn Under Letters of Credit;
Obligation of Reimbursement. The Borrowers acknowledge that the Lender, as
co-applicant, will be liable to the Issuer of any Letter of Credit for
reimbursement of any and all draws thereunder and all other amounts
required to be paid under the applicable L/C Application. Accordingly, the
Borrowers agree to pay to the Lender any and all amounts required to be
paid under the applicable L/C Application, when and as required to be paid
thereby, and the amounts designated below, when and as designated:
(a) The Borrowers hereby agree to pay the Lender on the day a
draft is honored under any Letter of Credit a sum equal to all
amounts drawn under such Letter of Credit plus any and all
reasonable charges and expenses that the Issuer or the Lender may
pay or incur relative to such draw, plus interest on all such
amounts, charges and expenses as set forth below (all such amounts
are hereinafter referred to, collectively, as the "Obligation of
Reimbursement").
(b) The Borrowers hereby agree to pay the Lender on demand
interest on all amounts, charges and expenses payable by the
Borrowers to the Lender under this Section 2.14, accrued from the
date any such draft, charge or expense is paid by the Issuer until
payment in full by the Borrowers at the Revolving Floating Rate.
If the Borrowers fail to pay to the Lender promptly the amount of
their Obligation of Reimbursement in accordance with the terms
hereof and the L/C Application pursuant to which such Letter of
Credit was issued, the Lender is hereby irrevocably authorized and
directed, in its sole discretion, to make a Revolving Advance in an
amount sufficient to discharge the Obligation of Reimbursement,
including all interest accrued thereon but unpaid at the time of
such Revolving Advance, and such Revolving Advance shall be
evidenced by the Revolving Note and shall bear interest as provided
in Section 2.4 hereof."
"Section 2.15 Special Account. If a plan of reorganization is
confirmed, if the Lender terminates this Credit Facility pursuant to
Section 2.7 or this Credit Facility is otherwise terminated for any reason
whatsoever, while any Letter of Credit is outstanding, the Borrowers shall
thereupon pay the Lender in immediately available funds for deposit in the
Special Account an amount equal to the maximum aggregate amount available
to be drawn under all Letters of Credit then outstanding, assuming
compliance with all conditions for drawing thereunder. The Special Account
shall be maintained for the Lender by any financial institution acceptable
to the Lender. Any interest earned on amounts deposited in the Special
Account shall be credited to the Special Account. Amounts on deposit in
the Special Account may be applied by the Lender at any time or from time
to time to the Borrowers' Obligation of Reimbursement or any other
Obligations, in the Lender's sole discretion, and shall not be subject to
withdrawal by the Borrowers so long as the Lender maintains a security
- 5 -
<PAGE> 6
interest therein. The Lender agrees to transfer any balance in the Special
Account to the Borrowers at such time as the Lender is required to release
its security interest in the Special Account under applicable law."
"Section 2.16 Obligations Absolute. The obligations of the Borrowers
arising under Section 2.14 shall be absolute, unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of
this Agreement, under all circumstances whatsoever, including (without
limitation) the following circumstances:
(a) any lack of validity or enforceability of any Letter of
Credit or any other agreement or instrument relating to any Letter
of Credit (collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure
from all or any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right
which the Borrowers may have at any time, against any beneficiary or
any transferee of any Letter of Credit (or any persons or entities
for whom any such beneficiary or any such transferee may be acting),
or other person or entity, whether in connection with this
Agreement, the transactions contemplated herein or in the Related
Documents or any unrelated transactions;
(d) any statement or any other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect whatsoever;
(e) payment by or on behalf of the Issuer or the Lender under
any Letter of Credit against presentation of a draft or certificate
which does not strictly comply with the terms of such Letter of
Credit; or
(f) any other circumstance or happening whatsoever, whether or
not similar to any of the foregoing."
6. Pledge of Special Account and Collateral Account. The following
new Section 3.8 is added at the end of Article III:
"Section 3.8 Security Interest in Special Account. Each Borrower
hereby pledges, and grants to the Lender a security interest in, all funds
held in the Special Account from time to time and all proceeds thereof, as
security for the payment of all Obligations."
7. Conditions Precedent to Each Advance and Each Letter of Credit.
Section 4.2 of the Credit Agreement is amended to read as follows:
- 6 -
<PAGE> 7
"Section 4.2 Conditions Precedent to the Lender's Willingness to
Consider Making All Advances and Causing All Letters of Credit to be
Issued. The Lenders obligation to make each Advance or issue any Letter of
Credit shall be subject to the further conditions that on such date:
(a) the representations and warranties contained in Article V
hereof are correct on and as of such date as though made on and as
of such date, except to the extent that such representations and
warranties relate solely to an earlier date;
(b) no event has occurred and is continuing, or would result
from such Advance or the issuance of such Letter of Credit, as the
case may be, which constitutes a Default or an Event of Default; and
(a) no Bankruptcy Court order is entered (i) authorizing the
Borrowers to obtain financing or credit pursuant to section 364 of
the Bankruptcy Code from any Person other than the Lender secured by
a security interest or a Superpriority Claim unless such security
interest and administrative claim are junior to the Security
Interest and the Lender's Superpriority Claim, as the case may be or
will be paid off from the Initial Advance; or (ii) providing
adequate protection to any Person under sections 361 through 364 of
the Bankruptcy Code by granting a security interest in any of the
Collateral unless such security interest is junior to the Security
Interest save and except for the claims against Hewlett-Packard
Company."
8. Capital Expenditures. Section 7.13 of the Credit Agreement is
amended to read as follows:
"Section 7.13 Capital Expenditures. The Borrowers will not incur or
contract to incur, as of each fiscal year-to-date period described below,
Capital Expenditures of more than the aggregate amount set forth opposite
such period:
<TABLE>
<CAPTION>
---------------------------------------------------
Fiscal Year-to-Date Maximum
------------------- -------
Period Ending Capital Expenditures
------------- --------------------
---------------------------------------------------
<S> <C>
June 30, 1999 $ 512,500
---------------------------------------------------
September 30, 1999 $1,025,000
---------------------------------------------------
December 31, 1999 $1,537,500
---------------------------------------------------
March 31, 2000 $2,050,000
---------------------------------------------------
</TABLE>
- 7 -
<PAGE> 8
9. Events of Default. Section 8.1 of the Credit Agreement is amended
to add the following new subsection 8.1(o) immediately thereafter:
"(o) Failure to pay when due any amount specified in Section 2.14
hereof relating to the Borrowers' Obligation of Reimbursement, or failure
to pay immediately when due or upon termination of the Credit Facility any
amounts required to be paid for deposit in the Special Account under
Section 2.9 or 2.15 hereof."
10. Rights and Remedies. Section 8.2 of the Credit Agreement is
amended to read as follows:
"During any Default Period, the Lender may without further order of,
or application to the Bankruptcy Court for an order granting relief from
the automatic stay of Section 362 of the Bankruptcy Code, exercise any or
all of the following rights and remedies:
(a) the Lender may, by notice to the Borrowers, declare the
Commitment to be terminated, whereupon the same shall forthwith
terminate;
(b) the Lender may, by notice to the Borrowers, declare the
Obligations to be forthwith due and payable, whereupon all
Obligations shall become and be forthwith due and payable, without
presentment, notice of dishonor, protest or further notice of any
kind, all of which the Borrowers hereby expressly waive;
(c) the Lender may, without notice to the Borrowers and
without further action, apply any and all money owing by the Lender
to the Borrowers to the payment of the Obligations;
(d) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of
Collateral, or any evidence thereof, proceeding without judicial
process or by judicial process (without a prior hearing or notice
thereof, which the Borrowers hereby expressly waive) and the right
to sell, lease or otherwise dispose of any or all of the Collateral,
and, in connection therewith, the Borrowers will on demand assemble
the Collateral and make it available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both
parties;
(e) the Lender may make demand upon the Borrowers and,
forthwith upon such demand, the Borrowers will pay to the Lender in
immediately available funds for deposit in the Special Account
pursuant to Sections 2.9 and 2.15 an amount equal to the maximum
aggregate amount
- 8 -
<PAGE> 9
available to be drawn under all Letters of Credit then outstanding,
assuming compliance with all conditions for drawing thereunder;
(f) the Lender may exercise and enforce its rights and
remedies under the Loan Documents; and
(g) the Lender may exercise any other rights and remedies
available to it by law or agreement.
The Borrowers agree and admit that the occurrence of any Event of Default
is sufficient cause for relief from the automatic stay under Section
362(d)(1) of the Bankruptcy Code. If an Event of Default occurs, the
Borrowers consent to entry of an Order terminating the automatic stay 3
business days after the filing of an affidavit with the Bankruptcy Court
by the Lender, or one of its attorneys, with service upon counsel for the
Borrowers, setting forth the nature of the Default; provided, however,
that if a Default under Section 8.1(e)(ii) occurs, the Lender must give
notice of the Default to the trustee or examiner and request a hearing for
relief from the stay based on the Default. The Borrowers shall have no
defense, other than showing the alleged Default has not occurred."
11. Waiver of Defaults. The Borrowers are in default of the
following provisions of the Credit Agreement (collectively, the "Defaults"):
(a) Section 6.16 regarding the Borrowers' Minimum EBITDAR for the
fiscal year ending March 31, 1999; and
(b) Section 6.17 regarding the Borrowers' Minimum Net Income for the
fiscal year ending March 31, 1999.
The Lender hereby waives the Defaults specified in this Paragraph
11, but only with respect to the periods therein specified. This waiver shall be
effective only in the specific instance and for the specific purpose for which
it is given, and this waiver shall not entitle the Borrowers to any other or
further waiver in any similar or other circumstances.
12. Amendment and Waiver Fee. Concurrent with the execution of this
Amendment by the Borrowers, the Borrowers shall pay the Lender an amendment and
waiver fee in the amount of $10,000. Such fee shall be deemed fully earned by
the execution of this Amendment by the Lender.
13. Release of Lien on Xaar License. The Lender shall release its
security interest in the Xaar License by executing a partial release statement
in substantially the form of Exhibit A attached hereto.
- 9 -
<PAGE> 10
14. No Other Changes. Except as explicitly amended by this First
Amendment, all of the terms and conditions of the Credit Agreement shall remain
in full force and effect and shall apply to any Advance or Letter of Credit
thereunder.
15. Conditions Precedent. This First Amendment shall be effective
upon receipt by the Lender of an executed original hereof, together with each of
the following, each in substance and form acceptable to the Lender in its sole
discretion:
(a) A separate Certificate of each Borrowers' secretaries or
assistant secretaries certifying as to (i) the resolutions of such
Borrowers' board of directors and if required, shareholders, authorizing
the execution and delivery of this First Amendment, (ii) the fact that the
Articles of Incorporation and Bylaws of such Borrowers, which were
certified and delivered to the Lender pursuant to the Certificate of such
Borrowers' secretaries or assistant secretaries dated as of December 14,
1998, continue in full force and effect and have not been amended or
otherwise modified except as set forth in the Certificate to be delivered,
and (iii) certifying that the officers and agents of such Borrowers' who
have been certified to the Lender, pursuant to the Certificate of
Authority of such Borrowers' secretaries or assistant secretaries dated as
of December 14, 1998, as being authorized to sign and to act on behalf of
such Borrowers continue to be so authorized or setting forth the sample
signatures of such Borrowers' officers and agents authorized to execute
and deliver this First Amendment and all other documents, agreements and
certificates on behalf of the Borrowers.
(b) A final order in form and substance satisfactory to the Lender,
entered by the Bankruptcy Court after adequate notice of all parties
entitled to be served, which, among other things, approves this First
Amendment, authorizes the Borrowers to enter into this First Amendment and
affirms that the senior lien in the Collateral and Superpriority Claim
provided in the Credit Agreement applies to the Credit Agreement as
amended hereby.
(c) Such other matters as the Lender may require.
16. Representations and Warranties. The Borrowers hereby represent
and warrant to the Lender as follows:
(a) Each of the Borrowers has all requisite power and authority to
execute this First Amendment and to perform all of its obligations
hereunder, and this First Amendment has been duly executed and delivered
by the Borrowers and constitutes the legal, valid and binding obligation
of the Borrowers, enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrowers of this
First Amendment have been duly authorized by all necessary corporate
action and do not
- 10 -
<PAGE> 11
(i) require any authorization, consent or approval by any governmental
department, commission, board, bureau, agency or instrumentality, domestic
or foreign or any third party, except such authorization required by the
Bankruptcy Court, (ii) violate any provision of any law, rule or
regulation or of any order, writ, injunction or decree presently in
effect, having applicability to any of the Borrowers, or the articles of
incorporation or by-laws of the Borrowers, or (iii) result in a breach of
or constitute a default under any indenture or loan or credit agreement or
any other agreement, lease or instrument to which the Borrowers are a
party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
17. References. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Loan Documents to the Credit Agreement shall
be deemed to refer to the Credit Agreement as amended hereby.
18. No Waiver. The execution of this First Amendment and acceptance
of any documents related hereto shall not be deemed to be a waiver of any
Default or Event of Default under the Credit Agreement or breach, default or
event of default under any Security Document or other document held by the
Lender, whether or not known to the Lender and whether or not existing on the
date of this First Amendment.
19. Costs and Expenses. The Borrowers hereby reaffirm their
agreement under the Credit Agreement to pay or reimburse the Lender on demand
for all costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrowers
specifically agree to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation of
this First Amendment and the documents and instruments incidental hereto. The
Borrowers hereby agree that the Lender may, at any time or from time to time in
its sole discretion and without further authorization by the Borrowers, make a
loan to the Borrowers under the Credit Agreement, or apply the proceeds of any
loan, for the purpose of paying any such fees, disbursements, costs and
expenses.
- 11 -
<PAGE> 12
20. Miscellaneous. This First Amendment may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original and all of which counterparts, taken together, shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed as of the day and year first above written.
WELLS FARGO BUSINESS CREDIT, INC. NU-KOTE HOLDING, INC.
By
---------------------------------
Its
-----------------
By
----------------------------------
Its Vice President
NU-KOTE INTERNATIONAL, INC. NU-KOTE IMPERIAL, LTD.
By By
---------------------------------- ---------------------------------
Its Its
--------------- -----------------
INTERNATIONAL COMMUNICATION FUTURE GRAPHICS, INC.
MATERIALS, INC.
By By
---------------------------------- ---------------------------------
Its Its
--------------- -----------------
NU-KOTE LATIN AMERICA, INC. NU-KOTE IMAGING INTERNATIONAL, INC.
By By
--------------------------------- ---------------------------------
Its Its
-------------- -----------------
- 12 -
<PAGE> 1
EXHIBIT 10.22
RETENTION AGREEMENT
THIS RETENTION AGREEMENT is made and entered into as of June 10, 1999,
by and between NU-KOTE HOLDING, INC., a Delaware corporation (hereinafter, the
"Company"), and C. Ronald Baiocchi (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into a certain retention
agreement on or around May 1, 1998 (the "Old Agreement"); and
WHEREAS, the Company is presently in the process of reorganizing (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code (the
"Code"); and
WHEREAS, pursuant to the provisions set forth in the Code, the Company
has the right to reject the Old Agreement, and notwithstanding such right of
rejection, the Company is willing to retain Employee as an employee until such
time as the Company determines the services of Employee are no longer required
and Employee desires to remain employed by the Company during such time and the
Employee has provided valuable services to the Company in connection with the
Chapter 11 filing;
NOW, THEREFORE, for the reasons set forth, in consideration of the
mutual promises, covenants and agreements made herein, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
1. Retention. The Company hereby retains Employee in the position of
Vice President/General Manager North American Operations and Employee hereby
accepts said retention by the Company on the terms and conditions specified
herein and subject specifically to approval by the Bankruptcy Court.
2. Term. The term of this Agreement shall commence on the date hereof
and, unless earlier terminated in accordance with the provisions set forth
herein below, shall expire on the earlier of (i) the date on which a Chapter 11
Plan for the Company is confirmed by the U.S. Bankruptcy Court for the Middle
District of Tennessee; or (ii) the sale of all or a substantial portion of the
Company's assets under ss. 363 of the Bankruptcy Code ("Period of Employment").
Notwithstanding anything to the contrary in this Section 2, the provisions of
Section 7 will survive the expiration or earlier termination of this Agreement.
In the event Employee and the Company desire to maintain an employment
relationship following the expiration of the Period of Employment, such
employment relationship shall be "at will" unless further agreements are made in
writing between the Employee and the Company.
3. Duties of Employee. Employee shall perform those duties which are
assigned to him/her by the chief executive officer of the Company and which are
commensurate with the Employee's position. Employee hereby represents that
his/her employment hereunder and
RETENTION AGREEMENT - PAGE 1
<PAGE> 2
compliance by him/her with the terms and conditions of this Agreement will not
conflict with or result in the breach of any agreement to which he/she is a
party or by which he/she may be bound. Employee agrees to devote his/her full
time, attention and skill to his/her duties hereunder.
4. Compensation.
(a) As compensation for the duties and services performed by
Employee, the Company will pay Employee a monthly base salary at the rate
in effect on the date of this Agreement, subject to federal and state
withholding allowances and in accordance with the Company's standard
payroll practices.
(b) In addition, the Company acknowledges that Employee is
performing his/her job at a time when the Company's financial situation is
precarious and that Employee has other employment opportunities which
he/she has been asked to forego. Thus, the Company agrees that, in
addition to, and without limitation of, any other compensation
contemplated hereby, Employee shall receive upon the expiration of the
Period of Employment a cash bonus in the lump sum amount of Two Hundred
Twenty-Five Thousand Dollars and No/100ths ($225,000.00), subject to
applicable state and federal withholding allowances (the "Retention
Payment"). This Retention Payment shall be earned and payable, as a
post-petition administrative expense, in the next regular payroll cycle of
the Company following expiration of the Period of Employment, such
expiration being defined in Section 2.
(c) Employee shall be entitled to receive this Retention Payment so
long as the Employee is employed by the Company at the time the Period of
Employment expires as defined in Section 2 herein. Notwithstanding the
preceding provisions of this Section 4 should the Company terminate this
Agreement without cause, then the Retention Payment shall be payable
immediately as a post-petition administrative expense. However, if this
Agreement is terminated prior to the expiration of the Period of
Employment for cause by the Company or without cause by the Employee no
Retention Payment shall be payable.
5. Benefits. Employee shall also be entitled to participate in all benefit
plans and programs that are available to the Employee as of the date of this
Agreement. Additionally, the Employee shall be entitled to receive all benefits
which accrue through the date of termination of the Employee's employment with
the Company.
6. Termination.
(a) By the Company. The Company shall have the right at any time, by
written notice to the Employee to terminate this Agreement, if one of the
following events occurs:
(i) Employee's conviction in a court of law of any crime or
offense involving misuse or misappropriation of money or
other property of the Company; or
RETENTION AGREEMENT - PAGE 2
<PAGE> 3
(ii) Employee's willful failure or refusal to perform
specific directives of the chief executive officer of
the Company, which directives are consistent with the
scope and nature of Employee's duties and responsibilities
as described in this Agreement and which are not remedied
by the Employee within thirty (30) days after notice to
the Employee, or the commission of any intentional tort
by the Employee against the Company, or any breach by
Employee of the covenants set forth in Section 7 of this
Agreement; or
(iii) any action of dishonesty or disloyalty by Employee or
any act involving moral turpitude of the Employee which
materially adversely affect the business of the Company;
or
(iv) the inability of Employee to perform his/her duties
hereunder for a period of thirty (30) consecutive days
(or sixty (60) total days in any ninety (90) day period)
by reason of illness or mental or physical disability;
or
(v) any statements, observations, or opinions or communication
of information (whether oral or written) made by or
caused to be made by the Employee that disparages or is
likely in any way to harm the reputation of the Company;
or
(vi) Employee's death.
For purposes of this Section, it is understood and agreed that good faith errors
in judgment made by the Employee shall not constitute grounds for termination
for cause hereunder. Notwithstanding the above, it is the intent of the Company
at all times to comply with the Americans With Disabilities Act, the Family and
Medical Leave Act and any other applicable federal and state employment laws. In
the case of termination under this Section 6(a), all obligations of the parties
under this Agreement shall cease, except for the Company's obligations under
Sections 4(a) and 5 herein through the date of the Employee's separation and
Employee's obligations under Section 7 hereof.
(b) By Employee. This Agreement shall be terminable without cause by
Employee upon two (2) weeks written notice to the Company. This Agreement
shall be terminable by Employee for cause upon thirty (30) days written
notice to the Company, if the Company willfully breaches any material
terms of this Agreement and provided such breach has not been cured by the
Company within such thirty (30) day period. In the case of termination
under this Section 6(b), all obligations of the parties in this Agreement
shall cease, except for Employee's obligations under Section 7 and, unless
the termination by the Employee is without cause, Employer's obligation to
pay the Retention Payment.
7. Confidential Information. In consideration of the covenants of the
Company contained herein, Employee agrees as follows:
RETENTION AGREEMENT - PAGE 3
<PAGE> 4
(a) Employee hereby agrees and acknowledges that he/she has had
access to or is aware of certain confidential, restricted and/or
proprietary information concerning operation by the Company's business
(the "Business"). Employee hereby undertakes and agrees that he/she shall
have a duty to the Company to protect such information from use or
disclosure.
(b) For the purposes of this Section 7, the following definitions
shall apply:
(i) "Trade Secret" as related to the Business, shall mean
any specialized technical information or data relating
to (A) the manufacture and distribution 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 toner for laser printers, facsimile
machines and copiers, cartridges and ink for ink jet
printers, specialty papers, calculator ink rolls, and
carbon paper; (B) marketing strategy or plans of the
Company; (C) proprietary computer software; and (D)
terms of contracts with suppliers, employees and
principal customers of the Company which are not generally
known to the competitors of the Company.
(ii) "Confidential Information," as related to the Business,
shall mean any data or information, other than Trade
Secrets, which is material to the Company or its
affiliates and not generally known by the public.
Confidential Information shall include, without
limitation, any information pertaining to the business
opportunities of the Company, the details of this
Agreement, and the business plans, financial statements
and projections of the Company.
(c) Employee shall not, without the prior written consent of the
Company, use or disclose, or negligently permit any unauthorized person
who is not an employee of the Company to use, disclose, or gain access to,
any Trade Secrets or Confidential Information; provided, however, Employee
shall be permitted, and this Agreement shall constitute written consent of
the Company, to use Confidential Information, and to disclose such
Confidential Information to his/her advisors (including specifically,
without limitation, attorneys, accountants, bankers, and others) for the
purposes of assessing the viability of and preparing a plan to acquire a
portion of the assets of the Company.
(d) Employee hereby agrees to deliver to, or maintain on behalf of,
the Company and its affiliates all memoranda, notes, records, drawings,
manuals or other documents, including all copies of such materials,
containing Trade Secrets or Confidential Information, whether made or
compiled by Employee or furnished to him/her from any source by virtue
RETENTION AGREEMENT - PAGE 4
<PAGE> 5
of his/her relationship with the Company or its affiliates. All such
memoranda, notes, records, drawings, manuals, other documents and
other materials shall be delivered to the Company by the Employee
upon termination of the Employee's employment with the Company.
8. Assignments; Successors and Assigns. The rights and obligations of
Employee hereunder are not assignable or delegable and any prohibited assignment
or delegation will be null and void. The Company may assign and delegate this
Agreement to a successor in interest to the Company's business. Any such
assignment shall expressly include the obligations herein and shall not relieve
the Company of same. The provisions hereof shall inure to the benefit of and be
binding upon the permitted successors and assigns of the parties hereto.
9. Governing Law. This Agreement shall be interpreted under, subject to
and governed by the substantive laws of the State of Tennessee, without giving
effect to provisions thereof regarding conflict of laws, and all questions
concerning its validity, construction, and administration shall be determined in
accordance thereby.
10. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original but all of
which will together constitute one and same instrument.
11. Invalidity. The invalidity or unenforceability of any provision of
this Agreement shall not affect any other provision hereof, and this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.
12. Exclusiveness. This Agreement constitutes the entire understanding
and agreement between the parties with respect to the retention by the Company
of Employee and supersedes any and all other agreements, oral or written,
between the parties, including but not limited to the Old Agreement. To the
extent the Employee has a claim arising out of the Company's rejection of the
Old Agreement, such claim is waived.
13. Modification. This Agreement may not be modified or amended except
in writing signed by the parties. No term or condition of this Agreement will be
deemed to have been waived except in writing by the party charged with waiver. A
waiver shall operate only as to the specific term or condition waived and will
not constitute a waiver for the future or act on anything other than that which
is specifically waived.
14. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
RETENTION AGREEMENT - PAGE 5
<PAGE> 6
(a) If to the Company, at 200 Beasley Drive, P.O. Box 3000,
Franklin, Tennessee, 37068, Attention: President and Chief Executive
Officer, or at such other address as may have been furnished to the
Employee by the Company in writing; or
(b) If to the Employee, at the address stated below, or such other
address as may have been furnished to the Company by Employee in writing.
15. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging in to or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertaking of the Company
hereunder. No such consolidation, merger or transfer shall affect the rights of
the Employee or the obligations of the Company hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"COMPANY"
NU-KOTE HOLDING, INC.
By:
-----------------------------------
Patrick E. Howard, President
"EMPLOYEE"
--------------------------------------
C. Ronald Baiocchi
Employee's Principal Address:
--------------------------------------
--------------------------------------
--------------------------------------
RETENTION AGREEMENT - PAGE 6
<PAGE> 7
RETENTION AGREEMENT
THIS RETENTION AGREEMENT is made and entered into as of June 10, 1999,
by and between NU-KOTE HOLDING, INC., a Delaware corporation (hereinafter, the
"Company"), and Phillip L. Theodore (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into a certain retention
agreement on or around May 1, 1998 (the "Old Agreement"); and
WHEREAS, the Company is presently in the process of reorganizing (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code (the
"Code"); and
WHEREAS, pursuant to the provisions set forth in the Code, the Company
has the right to reject the Old Agreement, and notwithstanding such right of
rejection, the Company is willing to retain Employee as an employee until such
time as the Company determines the services of Employee are no longer required
and Employee desires to remain employed by the Company during such time and the
Employee has provided valuable services to the Company in connection with the
Chapter 11 filing;
NOW, THEREFORE, for the reasons set forth, in consideration of the
mutual promises, covenants and agreements made herein, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
16. Retention. The Company hereby retains Employee in the position of
Senior Vice President/Chief Financial Officer and Employee hereby accepts said
retention by the Company on the terms and conditions specified herein and
subject specifically to approval by the Bankruptcy Court.
17. Term. The term of this Agreement shall commence on the date hereof
and, unless earlier terminated in accordance with the provisions set forth
herein below, shall expire on the earlier of (i) the date on which a Chapter 11
Plan for the Company is confirmed by the U.S. Bankruptcy Court for the Middle
District of Tennessee; or (ii) the sale of all or a substantial portion of the
Company's assets under ss. 363 of the Bankruptcy Code ("Period of Employment").
Notwithstanding anything to the contrary in this Section 2, the provisions of
Section 7 will survive the expiration or earlier termination of this Agreement.
In the event Employee and the Company desire to maintain an employment
relationship following the expiration of the Period of Employment, such
employment relationship shall be "at will" unless further agreements are made in
writing between the Employee and the Company.
18. Duties of Employee. Employee shall perform those duties which are
assigned to him/her by the chief executive officer of the Company and which are
commensurate with the Employee's position. Employee hereby represents that
his/her employment hereunder and
RETENTION AGREEMENT - PAGE 1
<PAGE> 8
compliance by him/her with the terms and conditions of this Agreement will not
conflict with or result in the breach of any agreement to which he/she is a
party or by which he/she may be bound. Employee agrees to devote his/her full
time, attention and skill to his/her duties hereunder.
19. Compensation.
(a) As compensation for the duties and services performed by
Employee, the Company will pay Employee a monthly base salary at the rate
in effect on the date of this Agreement, subject to federal and state
withholding allowances and in accordance with the Company's standard
payroll practices.
(b) In addition, the Company acknowledges that Employee is
performing his/her job at a time when the Company's financial situation is
precarious and that Employee has other employment opportunities which
he/she has been asked to forego. Thus, the Company agrees that, in
addition to, and without limitation of, any other compensation
contemplated hereby, Employee shall receive upon the expiration of the
Period of Employment a cash bonus in the lump sum amount of One Hundred
Sixty Thousand Dollars and No/100ths ($160,000.00), subject to applicable
state and federal withholding allowances (the "Retention Payment"). This
Retention Payment shall be earned and payable, as a post-petition
administrative expense, in the next regular payroll cycle of the Company
following expiration of the Period of Employment, such expiration being
defined in Section 2.
(c) Employee shall be entitled to receive this Retention Payment so
long as the Employee is employed by the Company at the time the Period of
Employment expires as defined in Section 2 herein. Notwithstanding the
preceding provisions of this Section 4 should the Company terminate this
Agreement without cause, then the Retention Payment shall be payable
immediately as a post-petition administrative expense. However, if this
Agreement is terminated prior to the expiration of the Period of
Employment for cause by the Company or without cause by the Employee no
Retention Payment shall be payable.
20. Benefits. Employee shall also be entitled to participate in all
benefit plans and programs that are available to the Employee as of the date of
this Agreement. Additionally, the Employee shall be entitled to receive all
benefits which accrue through the date of termination of the Employee's
employment with the Company.
21. Termination.
(a) By the Company. The Company shall have the right at any time, by
written notice to the Employee to terminate this Agreement, if one of the
following events occurs:
(i) Employee's conviction in a court of law of any crime or
offense involving misuse or misappropriation of money or
other property of the Company; or
RETENTION AGREEMENT - PAGE 2
<PAGE> 9
(ii) Employee's willful failure or refusal to perform specific
directives of the chief executive officer of the Company,
which directives are consistent with the scope and nature
of Employee's duties and responsibilities as described
in this Agreement and which are not remedied by the
Employee within thirty (30) days after notice to the
Employee, or the commission of any intentional tort by the
Employee against the Company, or any breach by Employee
of the covenants set forth in Section 7 of this Agreement;
or
(iii) any action of dishonesty or disloyalty by Employee or any
act involving moral turpitude of the Employee which
materially adversely affect the business of the Company;
or
(iv) the inability of Employee to perform his/her duties
hereunder for a period of thirty (30) consecutive days
(or sixty (60) total days in any ninety (90) day period)
by reason of illness or mental or physical disability; or
(v) any statements, observations, or opinions or communication
of information (whether oral or written) made by or caused
to be made by the Employee that disparages or is likely
in any way to harm the reputation of the Company; or
(vi) Employee's death.
For purposes of this Section, it is understood and agreed that good faith errors
in judgment made by the Employee shall not constitute grounds for termination
for cause hereunder. Notwithstanding the above, it is the intent of the Company
at all times to comply with the Americans With Disabilities Act, the Family and
Medical Leave Act and any other applicable federal and state employment laws. In
the case of termination under this Section 6(a), all obligations of the parties
under this Agreement shall cease, except for the Company's obligations under
Sections 4(a) and 5 herein through the date of the Employee's separation and
Employee's obligations under Section 7 hereof.
(b) By Employee. This Agreement shall be terminable without cause by
Employee upon two (2) weeks written notice to the Company. This Agreement
shall be terminable by Employee for cause upon thirty (30) days written
notice to the Company, if the Company willfully breaches any material
terms of this Agreement and provided such breach has not been cured by the
Company within such thirty (30) day period. In the case of termination
under this Section 6(b), all obligations of the parties in this Agreement
shall cease, except for Employee's obligations under Section 7 and, unless
the termination by the Employee is without cause, Employer's obligation to
pay the Retention Payment.
22. Confidential Information. In consideration of the covenants of the
Company contained herein, Employee agrees as follows:
RETENTION AGREEMENT - PAGE 3
<PAGE> 10
(a) Employee hereby agrees and acknowledges that he/she has had
access to or is aware of certain confidential, restricted and/or
proprietary information concerning operation by the Company's business
(the "Business"). Employee hereby undertakes and agrees that he/she shall
have a duty to the Company to protect such information from use or
disclosure.
(b) For the purposes of this Section 7, the following definitions
shall apply:
(i) "Trade Secret" as related to the Business, shall mean
any specialized technical information or data relating
to (A) the manufacture and distribution 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 toner for laser printers, facsimile
machines and copiers, cartridges and ink for ink jet
printers, specialty papers, calculator ink rolls, and
carbon paper; (B) marketing strategy or plans of the
Company; (C) proprietary computer software; and (D) terms
of contracts with suppliers, employees and principal
customers of the Company which are not generally known to
the competitors of the Company.
(ii) "Confidential Information," as related to the Business,
shall mean any data or information, other than Trade
Secrets, which is material to the Company or its
affiliates and not generally known by the public.
Confidential Information shall include, without
limitation, any information pertaining to the business
opportunities of the Company, the details of this
Agreement, and the business plans, financial statements
and projections of the Company.
(c) Employee shall not, without the prior written consent of the
Company, use or disclose, or negligently permit any unauthorized person
who is not an employee of the Company to use, disclose, or gain access to,
any Trade Secrets or Confidential Information; provided, however, Employee
shall be permitted, and this Agreement shall constitute written consent of
the Company, to use Confidential Information, and to disclose such
Confidential Information to his/her advisors (including specifically,
without limitation, attorneys, accountants, bankers, and others) for the
purposes of assessing the viability of and preparing a plan to acquire a
portion of the assets of the Company.
(d) Employee hereby agrees to deliver to, or maintain on behalf of,
the Company and its affiliates all memoranda, notes, records, drawings,
manuals or other documents, including all copies of such materials,
containing Trade Secrets or Confidential Information, whether made or
compiled by Employee or furnished to him/her from any source by virtue
RETENTION AGREEMENT - PAGE 4
<PAGE> 11
of his/her relationship with the Company or its affiliates. All such
memoranda, notes, records, drawings, manuals, other documents and other
materials shall be delivered to the Company by the Employee upon
termination of the Employee's employment with the Company.
23. Assignments; Successors and Assigns. The rights and obligations of
Employee hereunder are not assignable or delegable and any prohibited assignment
or delegation will be null and void. The Company may assign and delegate this
Agreement to a successor in interest to the Company's business. Any such
assignment shall expressly include the obligations herein and shall not relieve
the Company of same. The provisions hereof shall inure to the benefit of and be
binding upon the permitted successors and assigns of the parties hereto.
24. Governing Law. This Agreement shall be interpreted under, subject
to and governed by the substantive laws of the State of Tennessee, without
giving effect to provisions thereof regarding conflict of laws, and all
questions concerning its validity, construction, and administration shall be
determined in accordance thereby.
25. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original but all of
which will together constitute one and same instrument.
26. Invalidity. The invalidity or unenforceability of any provision of
this Agreement shall not affect any other provision hereof, and this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.
27. Exclusiveness. This Agreement constitutes the entire understanding
and agreement between the parties with respect to the retention by the Company
of Employee and supersedes any and all other agreements, oral or written,
between the parties, including but not limited to the Old Agreement. To the
extent the Employee has a claim arising out of the Company's rejection of the
Old Agreement, such claim is waived.
28. Modification. This Agreement may not be modified or amended except
in writing signed by the parties. No term or condition of this Agreement will be
deemed to have been waived except in writing by the party charged with waiver. A
waiver shall operate only as to the specific term or condition waived and will
not constitute a waiver for the future or act on anything other than that which
is specifically waived.
29. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
RETENTION AGREEMENT - PAGE 5
<PAGE> 12
(a) If to the Company, at 200 Beasley Drive, P.O. Box 3000,
Franklin, Tennessee, 37068, Attention: President and Chief Executive
Officer, or at such other address as may have been furnished to the
Employee by the Company in writing; or
(b) If to the Employee, at the address stated below, or such other
address as may have been furnished to the Company by Employee in writing.
30. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging in to or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertaking of the Company
hereunder. No such consolidation, merger or transfer shall affect the rights of
the Employee or the obligations of the Company hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"COMPANY"
NU-KOTE HOLDING, INC.
By:
-----------------------------------
Patrick E. Howard, President
"EMPLOYEE"
Phillip L. Theodore
Employee's Principal Address:
--------------------------------------
--------------------------------------
--------------------------------------
RETENTION AGREEMENT - PAGE 6
<PAGE> 13
RETENTION AGREEMENT
THIS RETENTION AGREEMENT is made and entered into as of June 10, 1999,
by and between NU-KOTE HOLDING, INC., a Delaware corporation (hereinafter, the
"Company"), and Ian Elliott (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into a certain retention
agreement on or around May 1, 1998 (the "Old Agreement"); and
WHEREAS, the Company is presently in the process of reorganizing (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code (the
"Code"); and
WHEREAS, pursuant to the provisions set forth in the Code, the Company
has the right to reject the Old Agreement, and notwithstanding such right of
rejection, the Company is willing to retain Employee as an employee until such
time as the Company determines the services of Employee are no longer required
and Employee desires to remain employed by the Company during such time and the
Employee has provided valuable services to the Company in connection with the
Chapter 11 filing;
NOW, THEREFORE, for the reasons set forth, in consideration of the
mutual promises, covenants and agreements made herein, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
31. Retention. The Company hereby retains Employee in the position of
Vice President - Product Development and Employee hereby accepts said retention
by the Company on the terms and conditions specified herein and subject
specifically to approval by the Bankruptcy Court.
32. Term. The term of this Agreement shall commence on the date hereof
and, unless earlier terminated in accordance with the provisions set forth
herein below, shall expire on the earlier of (i) the date on which a Chapter 11
Plan for the Company is confirmed by the U.S. Bankruptcy Court for the Middle
District of Tennessee; or (ii) the sale of all or a substantial portion of the
Company's assets under ss. 363 of the Bankruptcy Code ("Period of Employment").
Notwithstanding anything to the contrary in this Section 2, the provisions of
Section 7 will survive the expiration or earlier termination of this Agreement.
In the event Employee and the Company desire to maintain an employment
relationship following the expiration of the Period of Employment, such
employment relationship shall be "at will" unless further agreements are made in
writing between the Employee and the Company.
33. Duties of Employee. Employee shall perform those duties which are
assigned to him/her by the chief executive officer of the Company and which are
commensurate with the Employee's position. Employee hereby represents that
his/her employment hereunder and compliance by him/her with the terms and
conditions of this Agreement will not conflict with or
RETENTION AGREEMENT - PAGE 1
<PAGE> 14
result in the breach of any agreement to which he/she is a party or by which
he/she may be bound. Employee agrees to devote his/her full time, attention and
skill to his/her duties hereunder.
34. Compensation.
(a) As compensation for the duties and services performed by
Employee, the Company will pay Employee a monthly base salary at the rate
in effect on the date of this Agreement, subject to federal and state
withholding allowances and in accordance with the Company's standard
payroll practices.
(b) In addition, the Company acknowledges that Employee is
performing his/her job at a time when the Company's financial situation is
precarious and that Employee has other employment opportunities which
he/she has been asked to forego. Thus, the Company agrees that, in
addition to, and without limitation of, any other compensation
contemplated hereby, Employee shall receive upon the expiration of the
Period of Employment a cash bonus in the lump sum amount of One Hundred
Five Thousand Dollars and No/100ths ($105,000.00), subject to applicable
state and federal withholding allowances (the "Retention Payment"). This
Retention Payment shall be earned and payable, as a post-petition
administrative expense, in the next regular payroll cycle of the Company
following expiration of the Period of Employment, such expiration being
defined in Section 2.
(c) Employee shall be entitled to receive this Retention Payment so
long as the Employee is employed by the Company at the time the Period of
Employment expires as defined in Section 2 herein. Notwithstanding the
preceding provisions of this Section 4 should the Company terminate this
Agreement without cause, then the Retention Payment shall be payable
immediately as a post-petition administrative expense. However, if this
Agreement is terminated prior to the expiration of the Period of
Employment for cause by the Company or without cause by the Employee no
Retention Payment shall be payable.
35. Benefits. Employee shall also be entitled to participate in all
benefit plans and programs that are available to the Employee as of the date of
this Agreement. Additionally, the Employee shall be entitled to receive all
benefits which accrue through the date of termination of the Employee's
employment with the Company.
36. Termination.
(a) By the Company. The Company shall have the right at any time, by
written notice to the Employee to terminate this Agreement, if one of the
following events occurs:
(i) Employee's conviction in a court of law of any crime or
offense involving misuse or misappropriation of money or
other property of the Company; or
(ii) Employee's willful failure or refusal to perform specific
directives of the chief executive officer of the Company,
RETENTION AGREEMENT - PAGE 2
<PAGE> 15
which directives are consistent with the scope and nature
of Employee's duties and responsibilities as described
in this Agreement and which are not remedied by the
Employee within thirty (30) days after notice to the
Employee, or the commission of any intentional tort by the
Employee against the Company, or any breach by Employee
of the covenants set forth in Section 7 of this Agreement;
or
(iii) any action of dishonesty or disloyalty by Employee or
any act involving moral turpitude of the Employee which
materially adversely affect the business of the Company;
or
(iv) the inability of Employee to perform his/her duties
hereunder for a period of thirty (30) consecutive days
(or sixty (60) total days in any ninety (90) day period)
by reason of illness or mental or physical disability; or
(v) any statements, observations, or opinions or communication
of information (whether oral or written) made by or caused
to be made by the Employee that disparages or is likely
in any way to harm the reputation of the Company; or
(vi) Employee's death.
For purposes of this Section, it is understood and agreed that good faith errors
in judgment made by the Employee shall not constitute grounds for termination
for cause hereunder. Notwithstanding the above, it is the intent of the Company
at all times to comply with the Americans With Disabilities Act, the Family and
Medical Leave Act and any other applicable federal and state employment laws. In
the case of termination under this Section 6(a), all obligations of the parties
under this Agreement shall cease, except for the Company's obligations under
Sections 4(a) and 5 herein through the date of the Employee's separation and
Employee's obligations under Section 7 hereof.
(b) By Employee. This Agreement shall be terminable without cause by
Employee upon two (2) weeks written notice to the Company. This Agreement
shall be terminable by Employee for cause upon thirty (30) days written
notice to the Company, if the Company willfully breaches any material
terms of this Agreement and provided such breach has not been cured by the
Company within such thirty (30) day period. In the case of termination
under this Section 6(b), all obligations of the parties in this Agreement
shall cease, except for Employee's obligations under Section 7 and, unless
the termination by the Employee is without cause, Employer's obligation to
pay the Retention Payment.
37. Confidential Information. In consideration of the covenants of the
Company contained herein, Employee agrees as follows:
RETENTION AGREEMENT - PAGE 3
<PAGE> 16
(a) Employee hereby agrees and acknowledges that he/she has had
access to or is aware of certain confidential, restricted and/or
proprietary information concerning operation by the Company's business
(the "Business"). Employee hereby undertakes and agrees that he/she shall
have a duty to the Company to protect such information from use or
disclosure.
(b) For the purposes of this Section 7, the following definitions
shall apply:
(i) "Trade Secret" as related to the Business, shall mean
any specialized technical information or data relating to
(A) the manufacture and distribution 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 toner for laser printers, facsimile
machines and copiers, cartridges and ink for ink jet
printers, specialty papers, calculator ink rolls, and
carbon paper; (B) marketing strategy or plans of the
Company; (C) proprietary computer software; and (D) terms
of contracts with suppliers, employees and principal
customers of the Company which are not generally known
to the competitors of the Company.
(ii) "Confidential Information," as related to the Business,
shall mean any data or information, other than Trade
Secrets, which is material to the Company or its
affiliates and not generally known by the public.
Confidential Information shall include, without
limitation, any information pertaining to the business
opportunities of the Company, the details of this
Agreement, and the business plans, financial statements
and projections of the Company.
(c) Employee shall not, without the prior written consent of the
Company, use or disclose, or negligently permit any unauthorized person
who is not an employee of the Company to use, disclose, or gain access to,
any Trade Secrets or Confidential Information; provided, however, Employee
shall be permitted, and this Agreement shall constitute written consent of
the Company, to use Confidential Information, and to disclose such
Confidential Information to his/her advisors (including specifically,
without limitation, attorneys, accountants, bankers, and others) for the
purposes of assessing the viability of and preparing a plan to acquire a
portion of the assets of the Company.
(d) Employee hereby agrees to deliver to, or maintain on behalf of,
the Company and its affiliates all memoranda, notes, records, drawings,
manuals or other documents, including all copies of such materials,
containing Trade Secrets or Confidential Information, whether made or
compiled by Employee or furnished to him/her from any source by virtue of
his/her relationship with the Company or its affiliates. All such
memoranda, notes,
RETENTION AGREEMENT - PAGE 4
<PAGE> 17
records, drawings, manuals, other documents and other materials shall
be delivered to the Company by the Employee upon termination of the
Employee's employment with the Company.
38. Assignments; Successors and Assigns. The rights and obligations of
Employee hereunder are not assignable or delegable and any prohibited assignment
or delegation will be null and void. The Company may assign and delegate this
Agreement to a successor in interest to the Company's business. Any such
assignment shall expressly include the obligations herein and shall not relieve
the Company of same. The provisions hereof shall inure to the benefit of and be
binding upon the permitted successors and assigns of the parties hereto.
39. Governing Law. This Agreement shall be interpreted under, subject
to and governed by the substantive laws of the State of Tennessee, without
giving effect to provisions thereof regarding conflict of laws, and all
questions concerning its validity, construction, and administration shall be
determined in accordance thereby.
40. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original but all of
which will together constitute one and same instrument.
41. Invalidity. The invalidity or unenforceability of any provision of
this Agreement shall not affect any other provision hereof, and this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.
42. Exclusiveness. This Agreement constitutes the entire understanding
and agreement between the parties with respect to the retention by the Company
of Employee and supersedes any and all other agreements, oral or written,
between the parties, including but not limited to the Old Agreement. To the
extent the Employee has a claim arising out of the Company's rejection of the
Old Agreement, such claim is waived.
43. Modification. This Agreement may not be modified or amended except
in writing signed by the parties. No term or condition of this Agreement will be
deemed to have been waived except in writing by the party charged with waiver. A
waiver shall operate only as to the specific term or condition waived and will
not constitute a waiver for the future or act on anything other than that which
is specifically waived.
44. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
RETENTION AGREEMENT - PAGE 5
<PAGE> 18
(a) If to the Company, at 200 Beasley Drive, P.O. Box 3000,
Franklin, Tennessee, 37068, Attention: President and Chief Executive
Officer, or at such other address as may have been furnished to the
Employee by the Company in writing; or
(b) If to the Employee, at the address stated below, or such other
address as may have been furnished to the Company by Employee in writing.
45. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging in to or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertaking of the Company
hereunder. No such consolidation, merger or transfer shall affect the rights of
the Employee or the obligations of the Company hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"COMPANY"
NU-KOTE HOLDING, INC.
By:
---------------------------------------
Patrick E. Howard, President
"EMPLOYEE"
------------------------------------------
Ian Elliott
Employee's Principal Address:
------------------------------------------
------------------------------------------
------------------------------------------
RETENTION AGREEMENT - PAGE 6
<PAGE> 19
RETENTION AGREEMENT
THIS RETENTION AGREEMENT is made and entered into as of June 10, 1999,
by and between NU-KOTE HOLDING, INC., a Delaware corporation (hereinafter, the
"Company"), and Faxon Learner (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into a certain retention
agreement on or around May 1, 1998 (the "Old Agreement"); and
WHEREAS, the Company is presently in the process of reorganizing (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code (the
"Code"); and
WHEREAS, pursuant to the provisions set forth in the Code, the Company
has the right to reject the Old Agreement, and notwithstanding such right of
rejection, the Company is willing to retain Employee as an employee until such
time as the Company determines the services of Employee are no longer required
and Employee desires to remain employed by the Company during such time and the
Employee has provided valuable services to the Company in connection with the
Chapter 11 filing;
NOW, THEREFORE, for the reasons set forth, in consideration of the
mutual promises, covenants and agreements made herein, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
46. Retention. The Company hereby retains Employee in the position of
Vice President - Logistics and Employee hereby accepts said retention by the
Company on the terms and conditions specified herein and subject specifically to
approval by the Bankruptcy Court.
47. Term. The term of this Agreement shall commence on the date hereof
and, unless earlier terminated in accordance with the provisions set forth
herein below, shall expire on the earlier of (i) the date on which a Chapter 11
Plan for the Company is confirmed by the U.S. Bankruptcy Court for the Middle
District of Tennessee; or (ii) the sale of all or a substantial portion of the
Company's assets under ss. 363 of the Bankruptcy Code ("Period of Employment").
Notwithstanding anything to the contrary in this Section 2, the provisions of
Section 7 will survive the expiration or earlier termination of this Agreement.
In the event Employee and the Company desire to maintain an employment
relationship following the expiration of the Period of Employment, such
employment relationship shall be "at will" unless further agreements are made in
writing between the Employee and the Company.
48. Duties of Employee. Employee shall perform those duties which are
assigned to him/her by the chief executive officer of the Company and which are
commensurate with the Employee's position. Employee hereby represents that
his/her employment hereunder and compliance by him/her with the terms and
conditions of this Agreement will not conflict with or
RETENTION AGREEMENT - PAGE 1
<PAGE> 20
result in the breach of any agreement to which he/she is a party or by which
he/she may be bound. Employee agrees to devote his/her full time, attention and
skill to his/her duties hereunder.
49. Compensation.
(a) As compensation for the duties and services performed by
Employee, the Company will pay Employee a monthly base salary at the rate
in effect on the date of this Agreement, subject to federal and state
withholding allowances and in accordance with the Company's standard
payroll practices.
(b) In addition, the Company acknowledges that Employee is
performing his/her job at a time when the Company's financial situation is
precarious and that Employee has other employment opportunities which
he/she has been asked to forego. Thus, the Company agrees that, in
addition to, and without limitation of, any other compensation
contemplated hereby, Employee shall receive upon the expiration of the
Period of Employment a cash bonus in the lump sum amount of Seventy-Five
Thousand Dollars and No/100ths ($75,000.00), subject to applicable state
and federal withholding allowances (the "Retention Payment"). This
Retention Payment shall be earned and payable, as a post-petition
administrative expense, in the next regular payroll cycle of the Company
following expiration of the Period of Employment, such expiration being
defined in Section 2.
(c) Employee shall be entitled to receive this Retention Payment so
long as the Employee is employed by the Company at the time the Period of
Employment expires as defined in Section 2 herein. Notwithstanding the
preceding provisions of this Section 4 should the Company terminate this
Agreement without cause, then the Retention Payment shall be payable
immediately as a post-petition administrative expense. However, if this
Agreement is terminated prior to the expiration of the Period of
Employment for cause by the Company or without cause by the Employee no
Retention Payment shall be payable.
50. Benefits. Employee shall also be entitled to participate in all
benefit plans and programs that are available to the Employee as of the date of
this Agreement. Additionally, the Employee shall be entitled to receive all
benefits which accrue through the date of termination of the Employee's
employment with the Company.
51. Termination.
(a) By the Company. The Company shall have the right at any time, by
written notice to the Employee to terminate this Agreement, if one of the
following events occurs:
(i) Employee's conviction in a court of law of any crime or
offense involving misuse or misappropriation of money or
other property of the Company; or
(ii) Employee's willful failure or refusal to perform specific
directives of the chief executive officer of the Company,
RETENTION AGREEMENT - PAGE 2
<PAGE> 21
which directives are consistent with the scope and nature
of Employee's duties and responsibilities as described
in this Agreement and which are not remedied by the
Employee within thirty (30) days after notice to the
Employee, or the commission of any intentional tort by the
Employee against the Company, or any breach by Employee
of the covenants set forth in Section 7 of this Agreement;
or
(iii) any action of dishonesty or disloyalty by Employee or any
act involving moral turpitude of the Employee which
materially adversely affect the business of the Company;
or
(iv) the inability of Employee to perform his/her duties
hereunder for a period of thirty (30) consecutive days
(or sixty (60) total days in any ninety (90) day period)
by reason of illness or mental or physical disability; or
(v) any statements, observations, or opinions or communication
of information (whether oral or written) made by or caused
to be made by the Employee that disparages or is likely
in any way to harm the reputation of the Company; or
(vi) Employee's death.
For purposes of this Section, it is understood and agreed that good faith errors
in judgment made by the Employee shall not constitute grounds for termination
for cause hereunder. Notwithstanding the above, it is the intent of the Company
at all times to comply with the Americans With Disabilities Act, the Family and
Medical Leave Act and any other applicable federal and state employment laws. In
the case of termination under this Section 6(a), all obligations of the parties
under this Agreement shall cease, except for the Company's obligations under
Sections 4(a) and 5 herein through the date of the Employee's separation and
Employee's obligations under Section 7 hereof.
(b) By Employee. This Agreement shall be terminable without cause by
Employee upon two (2) weeks written notice to the Company. This Agreement
shall be terminable by Employee for cause upon thirty (30) days written
notice to the Company, if the Company willfully breaches any material
terms of this Agreement and provided such breach has not been cured by the
Company within such thirty (30) day period. In the case of termination
under this Section 6(b), all obligations of the parties in this Agreement
shall cease, except for Employee's obligations under Section 7 and, unless
the termination by the Employee is without cause, Employer's obligation to
pay the Retention Payment.
52. Confidential Information. In consideration of the covenants of the
Company contained herein, Employee agrees as follows:
RETENTION AGREEMENT - PAGE 3
<PAGE> 22
(a) Employee hereby agrees and acknowledges that he/she has had
access to or is aware of certain confidential, restricted and/or
proprietary information concerning operation by the Company's business
(the "Business"). Employee hereby undertakes and agrees that he/she shall
have a duty to the Company to protect such information from use or
disclosure.
(b) For the purposes of this Section 7, the following definitions
shall apply:
(i) "Trade Secret" as related to the Business, shall mean
any specialized technical information or data relating
to (A) the manufacture and distribution 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 toner for laser printers, facsimile
machines and copiers, cartridges and ink for ink jet
printers, specialty papers, calculator ink rolls, and
carbon paper; (B) marketing strategy or plans of the
Company; (C) proprietary computer software; and (D) terms
of contracts with suppliers, employees and principal
customers of the Company which are not generally known to
the competitors of the Company.
(ii) "Confidential Information," as related to the Business,
shall mean any data or information, other than Trade
Secrets, which is material to the Company or its
affiliates and not generally known by the public.
Confidential Information shall include, without
limitation, any information pertaining to the business
opportunities of the Company, the details of this
Agreement, and the business plans, financial statements
and projections of the Company.
(c) Employee shall not, without the prior written consent of the
Company, use or disclose, or negligently permit any unauthorized person
who is not an employee of the Company to use, disclose, or gain access to,
any Trade Secrets or Confidential Information; provided, however, Employee
shall be permitted, and this Agreement shall constitute written consent of
the Company, to use Confidential Information, and to disclose such
Confidential Information to his/her advisors (including specifically,
without limitation, attorneys, accountants, bankers, and others) for the
purposes of assessing the viability of and preparing a plan to acquire a
portion of the assets of the Company.
(d) Employee hereby agrees to deliver to, or maintain on behalf of,
the Company and its affiliates all memoranda, notes, records, drawings,
manuals or other documents, including all copies of such materials,
containing Trade Secrets or Confidential Information, whether made or
compiled by Employee or furnished to him/her from any source by virtue of
his/her relationship with the Company or its affiliates. All such
memoranda, notes,
RETENTION AGREEMENT - PAGE 4
<PAGE> 23
records, drawings, manuals, other documents and other materials shall
be delivered to the Company by the Employee upon termination of the
Employee's employment with the Company.
53. Assignments; Successors and Assigns. The rights and obligations of
Employee hereunder are not assignable or delegable and any prohibited assignment
or delegation will be null and void. The Company may assign and delegate this
Agreement to a successor in interest to the Company's business. Any such
assignment shall expressly include the obligations herein and shall not relieve
the Company of same. The provisions hereof shall inure to the benefit of and be
binding upon the permitted successors and assigns of the parties hereto.
54. Governing Law. This Agreement shall be interpreted under, subject
to and governed by the substantive laws of the State of Tennessee, without
giving effect to provisions thereof regarding conflict of laws, and all
questions concerning its validity, construction, and administration shall be
determined in accordance thereby.
55. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original but all of
which will together constitute one and same instrument.
56. Invalidity. The invalidity or unenforceability of any provision of
this Agreement shall not affect any other provision hereof, and this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.
57. Exclusiveness. This Agreement constitutes the entire understanding
and agreement between the parties with respect to the retention by the Company
of Employee and supersedes any and all other agreements, oral or written,
between the parties, including but not limited to the Old Agreement. To the
extent the Employee has a claim arising out of the Company's rejection of the
Old Agreement, such claim is waived.
58. Modification. This Agreement may not be modified or amended except
in writing signed by the parties. No term or condition of this Agreement will be
deemed to have been waived except in writing by the party charged with waiver. A
waiver shall operate only as to the specific term or condition waived and will
not constitute a waiver for the future or act on anything other than that which
is specifically waived.
59. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
RETENTION AGREEMENT - PAGE 5
<PAGE> 24
(a) If to the Company, at 200 Beasley Drive, P.O. Box 3000,
Franklin, Tennessee, 37068, Attention: President and Chief Executive
Officer, or at such other address as may have been furnished to the
Employee by the Company in writing; or
(b) If to the Employee, at the address stated below, or such other
address as may have been furnished to the Company by Employee in writing.
60. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging in to or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertaking of the Company
hereunder. No such consolidation, merger or transfer shall affect the rights of
the Employee or the obligations of the Company hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"COMPANY"
NU-KOTE HOLDING, INC.
By:
--------------------------------------
Patrick E. Howard, President
"EMPLOYEE"
------------------------------------------
Faxon Learner
Employee's Principal Address:
------------------------------------------
------------------------------------------
------------------------------------------
RETENTION AGREEMENT - PAGE 6
<PAGE> 25
RETENTION AGREEMENT
THIS RETENTION AGREEMENT is made and entered into as of June 10, 1999,
by and between NU-KOTE HOLDING, INC., a Delaware corporation (hereinafter, the
"Company"), and Jerry Gigliotti (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into a certain retention
agreement on or around May 1, 1998 (the "Old Agreement"); and
WHEREAS, the Company is presently in the process of reorganizing (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code (the
"Code"); and
WHEREAS, pursuant to the provisions set forth in the Code, the Company
has the right to reject the Old Agreement, and notwithstanding such right of
rejection, the Company is willing to retain Employee as an employee until such
time as the Company determines the services of Employee are no longer required
and Employee desires to remain employed by the Company during such time and the
Employee has provided valuable services to the Company in connection with the
Chapter 11 filing;
NOW, THEREFORE, for the reasons set forth, in consideration of the
mutual promises, covenants and agreements made herein, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
61. Retention. The Company hereby retains Employee in the position of
Senior Vice President - Office Products and Employee hereby accepts said
retention by the Company on the terms and conditions specified herein and
subject specifically to approval by the Bankruptcy Court.
62. Term. The term of this Agreement shall commence on the date hereof
and, unless earlier terminated in accordance with the provisions set forth
herein below, shall expire on the earlier of (i) the date on which a Chapter 11
Plan for the Company is confirmed by the U.S. Bankruptcy Court for the Middle
District of Tennessee; or (ii) the sale of all or a substantial portion of the
Company's assets under ss. 363 of the Bankruptcy Code ("Period of Employment").
Notwithstanding anything to the contrary in this Section 2, the provisions of
Section 7 will survive the expiration or earlier termination of this Agreement.
In the event Employee and the Company desire to maintain an employment
relationship following the expiration of the Period of Employment, such
employment relationship shall be "at will" unless further agreements are made in
writing between the Employee and the Company.
63. Duties of Employee. Employee shall perform those duties which are
assigned to him/her by the chief executive officer of the Company and which are
commensurate with the Employee's position. Employee hereby represents that
his/her employment hereunder and compliance by him/her with the terms and
conditions of this Agreement will not conflict with or
RETENTION AGREEMENT - PAGE 1
<PAGE> 26
result in the breach of any agreement to which he/she is a party or by which
he/she may be bound. Employee agrees to devote his/her full time, attention and
skill to his/her duties hereunder.
64. Compensation.
(a) As compensation for the duties and services performed by
Employee, the Company will pay Employee a monthly base salary at the rate
in effect on the date of this Agreement, subject to federal and state
withholding allowances and in accordance with the Company's standard
payroll practices.
(b) In addition, the Company acknowledges that Employee is
performing his/her job at a time when the Company's financial situation is
precarious and that Employee has other employment opportunities which
he/she has been asked to forego. Thus, the Company agrees that, in
addition to, and without limitation of, any other compensation
contemplated hereby, Employee shall receive upon the expiration of the
Period of Employment a cash bonus in the lump sum amount of Seventy
Thousand Dollars and No/100ths ($70,000.00), subject to applicable state
and federal withholding allowances (the "Retention Payment"). This
Retention Payment shall be earned and payable, as a post-petition
administrative expense, in the next regular payroll cycle of the Company
following expiration of the Period of Employment, such expiration being
defined in Section 2.
(c) Employee shall be entitled to receive this Retention Payment so
long as the Employee is employed by the Company at the time the Period of
Employment expires as defined in Section 2 herein. Notwithstanding the
preceding provisions of this Section 4 should the Company terminate this
Agreement without cause, then the Retention Payment shall be payable
immediately as a post-petition administrative expense. However, if this
Agreement is terminated prior to the expiration of the Period of
Employment for cause by the Company or without cause by the Employee no
Retention Payment shall be payable.
65. Benefits. Employee shall also be entitled to participate in all
benefit plans and programs that are available to the Employee as of the date of
this Agreement. Additionally, the Employee shall be entitled to receive all
benefits which accrue through the date of termination of the Employee's
employment with the Company.
66. Termination.
(a) By the Company. The Company shall have the right at any time, by
written notice to the Employee to terminate this Agreement, if one of the
following events occurs:
(i) Employee's conviction in a court of law of any crime or
offense involving misuse or misappropriation of money or
other property of the Company; or
(ii) Employee's willful failure or refusal to perform specific
directives of the chief executive officer of the Company,
RETENTION AGREEMENT - PAGE 2
<PAGE> 27
which directives are consistent with the scope and nature
of Employee's duties and responsibilities as described
in this Agreement and which are not remedied by the
Employee within thirty (30) days after notice to the
Employee, or the commission of any intentional tort by
the Employee against the Company, or any breach by
Employee of the covenants set forth in Section 7 of this
Agreement; or
(iii) any action of dishonesty or disloyalty by Employee or any
act involving moral turpitude of the Employee which
materially adversely affect the business of the Company;
or
(iv) the inability of Employee to perform his/her duties
hereunder for a period of thirty (30) consecutive days
(or sixty (60) total days in any ninety (90) day period)
by reason of illness or mental or physical disability; or
(v) any statements, observations, or opinions or communication
of information (whether oral or written) made by or caused
to be made by the Employee that disparages or is likely in
any way to harm the reputation of the Company; or
(vi) Employee's death.
For purposes of this Section, it is understood and agreed that good faith errors
in judgment made by the Employee shall not constitute grounds for termination
for cause hereunder. Notwithstanding the above, it is the intent of the Company
at all times to comply with the Americans With Disabilities Act, the Family and
Medical Leave Act and any other applicable federal and state employment laws. In
the case of termination under this Section 6(a), all obligations of the parties
under this Agreement shall cease, except for the Company's obligations under
Sections 4(a) and 5 herein through the date of the Employee's separation and
Employee's obligations under Section 7 hereof.
(b) By Employee. This Agreement shall be terminable without cause by
Employee upon two (2) weeks written notice to the Company. This Agreement
shall be terminable by Employee for cause upon thirty (30) days written
notice to the Company, if the Company willfully breaches any material
terms of this Agreement and provided such breach has not been cured by the
Company within such thirty (30) day period. In the case of termination
under this Section 6(b), all obligations of the parties in this Agreement
shall cease, except for Employee's obligations under Section 7 and, unless
the termination by the Employee is without cause, Employer's obligation to
pay the Retention Payment.
67. Confidential Information. In consideration of the covenants of the
Company contained herein, Employee agrees as follows:
RETENTION AGREEMENT - PAGE 3
<PAGE> 28
(a) Employee hereby agrees and acknowledges that he/she has had
access to or is aware of certain confidential, restricted and/or
proprietary information concerning operation by the Company's business
(the "Business"). Employee hereby undertakes and agrees that he/she shall
have a duty to the Company to protect such information from use or
disclosure.
(b) For the purposes of this Section 7, the following definitions
shall apply:
(i) "Trade Secret" as related to the Business, shall mean any
specialized technical information or data relating to
(A) the manufacture and distribution 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 toner for laser printers, facsimile
machines and copiers, cartridges and ink for ink jet
printers, specialty papers, calculator ink rolls, and
carbon paper; (B) marketing strategy or plans of the
Company; (C) proprietary computer software; and (D) terms
of contracts with suppliers, employees and principal
customers of the Company which are not generally known
to the competitors of the Company.
(ii) "Confidential Information," as related to the Business,
shall mean any data or information, other than Trade
Secrets, which is material to the Company or its
affiliates and not generally known by the public.
Confidential Information shall include, without
limitation, any information pertaining to the business
opportunities of the Company, the details of this
Agreement, and the business plans, financial statements
and projections of the Company.
(c) Employee shall not, without the prior written consent of the
Company, use or disclose, or negligently permit any unauthorized person
who is not an employee of the Company to use, disclose, or gain access to,
any Trade Secrets or Confidential Information; provided, however, Employee
shall be permitted, and this Agreement shall constitute written consent of
the Company, to use Confidential Information, and to disclose such
Confidential Information to his/her advisors (including specifically,
without limitation, attorneys, accountants, bankers, and others) for the
purposes of assessing the viability of and preparing a plan to acquire a
portion of the assets of the Company.
(d) Employee hereby agrees to deliver to, or maintain on behalf of,
the Company and its affiliates all memoranda, notes, records, drawings,
manuals or other documents, including all copies of such materials,
containing Trade Secrets or Confidential Information, whether made or
compiled by Employee or furnished to him/her from any source by virtue of
his/her relationship with the Company or its affiliates. All such
memoranda, notes,
RETENTION AGREEMENT - PAGE 4
<PAGE> 29
records, drawings, manuals, other documents and other materials shall
be delivered to the Company by the Employee upon termination of the
Employee's employment with the Company.
68. Assignments; Successors and Assigns. The rights and obligations of
Employee hereunder are not assignable or delegable and any prohibited assignment
or delegation will be null and void. The Company may assign and delegate this
Agreement to a successor in interest to the Company's business. Any such
assignment shall expressly include the obligations herein and shall not relieve
the Company of same. The provisions hereof shall inure to the benefit of and be
binding upon the permitted successors and assigns of the parties hereto.
69. Governing Law. This Agreement shall be interpreted under, subject
to and governed by the substantive laws of the State of Tennessee, without
giving effect to provisions thereof regarding conflict of laws, and all
questions concerning its validity, construction, and administration shall be
determined in accordance thereby.
70. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original but all of
which will together constitute one and same instrument.
71. Invalidity. The invalidity or unenforceability of any provision of
this Agreement shall not affect any other provision hereof, and this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.
72. Exclusiveness. This Agreement constitutes the entire understanding
and agreement between the parties with respect to the retention by the Company
of Employee and supersedes any and all other agreements, oral or written,
between the parties, including but not limited to the Old Agreement. To the
extent the Employee has a claim arising out of the Company's rejection of the
Old Agreement, such claim is waived.
73. Modification. This Agreement may not be modified or amended except
in writing signed by the parties. No term or condition of this Agreement will be
deemed to have been waived except in writing by the party charged with waiver. A
waiver shall operate only as to the specific term or condition waived and will
not constitute a waiver for the future or act on anything other than that which
is specifically waived.
74. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
RETENTION AGREEMENT - PAGE 5
<PAGE> 30
(a) If to the Company, at 200 Beasley Drive, P.O. Box 3000,
Franklin, Tennessee, 37068, Attention: President and Chief Executive
Officer, or at such other address as may have been furnished to the
Employee by the Company in writing; or
(b) If to the Employee, at the address stated below, or such other
address as may have been furnished to the Company by Employee in writing.
75. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging in to or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertaking of the Company
hereunder. No such consolidation, merger or transfer shall affect the rights of
the Employee or the obligations of the Company hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"COMPANY"
NU-KOTE HOLDING, INC.
By:
-------------------------------------
Patrick E. Howard, President
"EMPLOYEE"
----------------------------------------
Jerry Gigliotti
Employee's Principal Address:
----------------------------------------
----------------------------------------
----------------------------------------
RETENTION AGREEMENT - PAGE 6
<PAGE> 31
RETENTION AGREEMENT
THIS RETENTION AGREEMENT is made and entered into as of June 10, 1999,
by and between NU-KOTE HOLDING, INC., a Delaware corporation (hereinafter, the
"Company"), and Cindy Hutchins (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into a certain retention
agreement on or around May 1, 1998 (the "Old Agreement"); and
WHEREAS, the Company is presently in the process of reorganizing (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code (the
"Code"); and
WHEREAS, pursuant to the provisions set forth in the Code, the Company
has the right to reject the Old Agreement, and notwithstanding such right of
rejection, the Company is willing to retain Employee as an employee until such
time as the Company determines the services of Employee are no longer required
and Employee desires to remain employed by the Company during such time and the
Employee has provided valuable services to the Company in connection with the
Chapter 11 filing;
NOW, THEREFORE, for the reasons set forth, in consideration of the
mutual promises, covenants and agreements made herein, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
76. Retention. The Company hereby retains Employee in the position of
Vice President - Customer Service and Employee hereby accepts said retention by
the Company on the terms and conditions specified herein and subject
specifically to approval by the Bankruptcy Court.
77. Term. The term of this Agreement shall commence on the date hereof
and, unless earlier terminated in accordance with the provisions set forth
herein below, shall expire on the earlier of (i) the date on which a Chapter 11
Plan for the Company is confirmed by the U.S. Bankruptcy Court for the Middle
District of Tennessee; or (ii) the sale of all or a substantial portion of the
Company's assets under ss. 363 of the Bankruptcy Code ("Period of Employment").
Notwithstanding anything to the contrary in this Section 2, the provisions of
Section 7 will survive the expiration or earlier termination of this Agreement.
In the event Employee and the Company desire to maintain an employment
relationship following the expiration of the Period of Employment, such
employment relationship shall be "at will" unless further agreements are made in
writing between the Employee and the Company.
78. Duties of Employee. Employee shall perform those duties which are
assigned to him/her by the chief executive officer of the Company and which are
commensurate with the Employee's position. Employee hereby represents that
his/her employment hereunder and compliance by him/her with the terms and
conditions of this Agreement will not conflict with or
RETENTION AGREEMENT - PAGE 1
<PAGE> 32
result in the breach of any agreement to which he/she is a party or by which
he/she may be bound. Employee agrees to devote his/her full time, attention and
skill to his/her duties hereunder.
79. Compensation.
(a) As compensation for the duties and services performed by
Employee, the Company will pay Employee a monthly base salary at the rate
in effect on the date of this Agreement, subject to federal and state
withholding allowances and in accordance with the Company's standard
payroll practices.
(b) In addition, the Company acknowledges that Employee is
performing his/her job at a time when the Company's financial situation is
precarious and that Employee has other employment opportunities which
he/she has been asked to forego. Thus, the Company agrees that, in
addition to, and without limitation of, any other compensation
contemplated hereby, Employee shall receive upon the expiration of the
Period of Employment a cash bonus in the lump sum amount of Forty-Five
Thousand Dollars and No/100ths ($45,000.00), subject to applicable state
and federal withholding allowances (the "Retention Payment"). This
Retention Payment shall be earned and payable, as a post-petition
administrative expense, in the next regular payroll cycle of the Company
following expiration of the Period of Employment, such expiration being
defined in Section 2.
(c) Employee shall be entitled to receive this Retention Payment so
long as the Employee is employed by the Company at the time the Period of
Employment expires as defined in Section 2 herein. Notwithstanding the
preceding provisions of this Section 4 should the Company terminate this
Agreement without cause, then the Retention Payment shall be payable
immediately as a post-petition administrative expense. However, if this
Agreement is terminated prior to the expiration of the Period of
Employment for cause by the Company or without cause by the Employee no
Retention Payment shall be payable.
80. Benefits. Employee shall also be entitled to participate in all
benefit plans and programs that are available to the Employee as of the date of
this Agreement. Additionally, the Employee shall be entitled to receive all
benefits which accrue through the date of termination of the Employee's
employment with the Company.
81. Termination.
(a) By the Company. The Company shall have the right at any time, by
written notice to the Employee to terminate this Agreement, if one of the
following events occurs:
(i) Employee's conviction in a court of law of any crime or
offense involving misuse or misappropriation of money or
other property of the Company; or
(ii) Employee's willful failure or refusal to perform specific
directives of the chief executive officer of the Company,
RETENTION AGREEMENT - PAGE 2
<PAGE> 33
which directives are consistent with the scope and nature
of Employee's duties and responsibilities as described
in this Agreement and which are not remedied by the
Employee within thirty (30) days after notice to the
Employee, or the commission of any intentional tort by the
Employee against the Company, or any breach by Employee
of the covenants set forth in Section 7 of this
Agreement; or
(iii) any action of dishonesty or disloyalty by Employee or any
act involving moral turpitude of the Employee which
materially adversely affect the business of the Company;
or
(iv) the inability of Employee to perform his/her duties
hereunder for a period of thirty (30) consecutive days
(or sixty (60) total days in any ninety (90) day period)
by reason of illness or mental or physical disability; or
(v) any statements, observations, or opinions or communication
of information (whether oral or written) made by or caused
to be made by the Employee that disparages or is likely
in any way to harm the reputation of the Company; or
(vi) Employee's death.
For purposes of this Section, it is understood and agreed that good faith errors
in judgment made by the Employee shall not constitute grounds for termination
for cause hereunder. Notwithstanding the above, it is the intent of the Company
at all times to comply with the Americans With Disabilities Act, the Family and
Medical Leave Act and any other applicable federal and state employment laws. In
the case of termination under this Section 6(a), all obligations of the parties
under this Agreement shall cease, except for the Company's obligations under
Sections 4(a) and 5 herein through the date of the Employee's separation and
Employee's obligations under Section 7 hereof.
(b) By Employee. This Agreement shall be terminable without cause by
Employee upon two (2) weeks written notice to the Company. This Agreement
shall be terminable by Employee for cause upon thirty (30) days written
notice to the Company, if the Company willfully breaches any material
terms of this Agreement and provided such breach has not been cured by the
Company within such thirty (30) day period. In the case of termination
under this Section 6(b), all obligations of the parties in this Agreement
shall cease, except for Employee's obligations under Section 7 and, unless
the termination by the Employee is without cause, Employer's obligation to
pay the Retention Payment.
82. Confidential Information. In consideration of the covenants of the
Company contained herein, Employee agrees as follows:
RETENTION AGREEMENT - PAGE 3
<PAGE> 34
(a) Employee hereby agrees and acknowledges that he/she has had
access to or is aware of certain confidential, restricted and/or
proprietary information concerning operation by the Company's business
(the "Business"). Employee hereby undertakes and agrees that he/she shall
have a duty to the Company to protect such information from use or
disclosure.
(b) For the purposes of this Section 7, the following definitions
shall apply:
(i) "Trade Secret" as related to the Business, shall mean
any specialized technical information or data relating
to (A) the manufacture and distribution 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 toner for laser printers, facsimile
machines and copiers, cartridges and ink for ink jet
printers, specialty papers, calculator ink rolls, and
carbon paper; (B) marketing strategy or plans of the
Company; (C) proprietary computer software; and (D) terms
of contracts with suppliers, employees and principal
customers of the Company which are not generally known to
the competitors of the Company.
(ii) "Confidential Information," as related to the Business,
shall mean any data or information, other than Trade
Secrets, which is material to the Company or its
affiliates and not generally known by the public.
Confidential Information shall include, without
limitation, any information pertaining to the business
opportunities of the Company, the details of this
Agreement, and the business plans, financial statements
and projections of the Company.
(c) Employee shall not, without the prior written consent of the
Company, use or disclose, or negligently permit any unauthorized person
who is not an employee of the Company to use, disclose, or gain access to,
any Trade Secrets or Confidential Information; provided, however, Employee
shall be permitted, and this Agreement shall constitute written consent of
the Company, to use Confidential Information, and to disclose such
Confidential Information to his/her advisors (including specifically,
without limitation, attorneys, accountants, bankers, and others) for the
purposes of assessing the viability of and preparing a plan to acquire a
portion of the assets of the Company.
(d) Employee hereby agrees to deliver to, or maintain on behalf of,
the Company and its affiliates all memoranda, notes, records, drawings,
manuals or other documents, including all copies of such materials,
containing Trade Secrets or Confidential Information, whether made or
compiled by Employee or furnished to him/her from any source by virtue of
his/her relationship with the Company or its affiliates. All such
memoranda, notes,
RETENTION AGREEMENT - PAGE 4
<PAGE> 35
records, drawings, manuals, other documents and other materials shall
be delivered to the Company by the Employee upon termination of the
Employee's employment with the Company.
83. Assignments; Successors and Assigns. The rights and obligations of
Employee hereunder are not assignable or delegable and any prohibited assignment
or delegation will be null and void. The Company may assign and delegate this
Agreement to a successor in interest to the Company's business. Any such
assignment shall expressly include the obligations herein and shall not relieve
the Company of same. The provisions hereof shall inure to the benefit of and be
binding upon the permitted successors and assigns of the parties hereto.
84. Governing Law. This Agreement shall be interpreted under, subject
to and governed by the substantive laws of the State of Tennessee, without
giving effect to provisions thereof regarding conflict of laws, and all
questions concerning its validity, construction, and administration shall be
determined in accordance thereby.
85. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original but all of
which will together constitute one and same instrument.
86. Invalidity. The invalidity or unenforceability of any provision of
this Agreement shall not affect any other provision hereof, and this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.
87. Exclusiveness. This Agreement constitutes the entire understanding
and agreement between the parties with respect to the retention by the Company
of Employee and supersedes any and all other agreements, oral or written,
between the parties, including but not limited to the Old Agreement. To the
extent the Employee has a claim arising out of the Company's rejection of the
Old Agreement, such claim is waived.
88. Modification. This Agreement may not be modified or amended except
in writing signed by the parties. No term or condition of this Agreement will be
deemed to have been waived except in writing by the party charged with waiver. A
waiver shall operate only as to the specific term or condition waived and will
not constitute a waiver for the future or act on anything other than that which
is specifically waived.
89. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
RETENTION AGREEMENT - PAGE 5
<PAGE> 36
(a) If to the Company, at 200 Beasley Drive, P.O. Box 3000,
Franklin, Tennessee, 37068, Attention: President and Chief Executive
Officer, or at such other address as may have been furnished to the
Employee by the Company in writing; or
(b) If to the Employee, at the address stated below, or such other
address as may have been furnished to the Company by Employee in writing.
90. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging in to or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertaking of the Company
hereunder. No such consolidation, merger or transfer shall affect the rights of
the Employee or the obligations of the Company hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"COMPANY"
NU-KOTE HOLDING, INC.
By:
-----------------------------------------
Patrick E. Howard, President
"EMPLOYEE"
--------------------------------------------
Cindy Hutchins
Employee's Principal Address:
--------------------------------------------
--------------------------------------------
--------------------------------------------
RETENTION AGREEMENT - PAGE 6
<PAGE> 37
RETENTION AGREEMENT
THIS RETENTION AGREEMENT is made and entered into as of June 10, 1999,
by and between NU-KOTE HOLDING, INC., a Delaware corporation (hereinafter, the
"Company"), and Mike Ducey (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into a certain retention
agreement on or around May 1, 1998 (the "Old Agreement"); and
WHEREAS, the Company is presently in the process of reorganizing (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code (the
"Code"); and
WHEREAS, pursuant to the provisions set forth in the Code, the Company
has the right to reject the Old Agreement, and notwithstanding such right of
rejection, the Company is willing to retain Employee as an employee until such
time as the Company determines the services of Employee are no longer required
and Employee desires to remain employed by the Company during such time and the
Employee has provided valuable services to the Company in connection with the
Chapter 11 filing;
NOW, THEREFORE, for the reasons set forth, in consideration of the
mutual promises, covenants and agreements made herein, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
91. Retention. The Company hereby retains Employee in the position of
Vice President - OEM and Employee hereby accepts said retention by the Company
on the terms and conditions specified herein and subject specifically to
approval by the Bankruptcy Court.
92. Term. The term of this Agreement shall commence on the date hereof
and, unless earlier terminated in accordance with the provisions set forth
herein below, shall expire on the earlier of (i) the date on which a Chapter 11
Plan for the Company is confirmed by the U.S. Bankruptcy Court for the Middle
District of Tennessee; or (ii) the sale of all or a substantial portion of the
Company's assets under ss. 363 of the Bankruptcy Code ("Period of Employment").
Notwithstanding anything to the contrary in this Section 2, the provisions of
Section 7 will survive the expiration or earlier termination of this Agreement.
In the event Employee and the Company desire to maintain an employment
relationship following the expiration of the Period of Employment, such
employment relationship shall be "at will" unless further agreements are made in
writing between the Employee and the Company.
93. Duties of Employee. Employee shall perform those duties which are
assigned to him/her by the chief executive officer of the Company and which are
commensurate with the Employee's position. Employee hereby represents that
his/her employment hereunder and compliance by him/her with the terms and
conditions of this Agreement will not conflict with or
RETENTION AGREEMENT - PAGE 1
<PAGE> 38
result in the breach of any agreement to which he/she is a party or by which
he/she may be bound. Employee agrees to devote his/her full time, attention and
skill to his/her duties hereunder.
94. Compensation.
(a) As compensation for the duties and services performed by
Employee, the Company will pay Employee a monthly base salary at the rate
in effect on the date of this Agreement, subject to federal and state
withholding allowances and in accordance with the Company's standard
payroll practices.
(b) In addition, the Company acknowledges that Employee is
performing his/her job at a time when the Company's financial situation is
precarious and that Employee has other employment opportunities which
he/she has been asked to forego. Thus, the Company agrees that, in
addition to, and without limitation of, any other compensation
contemplated hereby, Employee shall receive upon the expiration of the
Period of Employment a cash bonus in the lump sum amount of Fifty-Seven
Thousand Five Hundred Dollars and No/100ths ($57,500.00), subject to
applicable state and federal withholding allowances (the "Retention
Payment"). This Retention Payment shall be earned and payable, as a
post-petition administrative expense, in the next regular payroll cycle of
the Company following expiration of the Period of Employment, such
expiration being defined in Section 2.
(c) Employee shall be entitled to receive this Retention Payment so
long as the Employee is employed by the Company at the time the Period of
Employment expires as defined in Section 2 herein. Notwithstanding the
preceding provisions of this Section 4 should the Company terminate this
Agreement without cause, then the Retention Payment shall be payable
immediately as a post-petition administrative expense. However, if this
Agreement is terminated prior to the expiration of the Period of
Employment for cause by the Company or without cause by the Employee no
Retention Payment shall be payable.
95. Benefits. Employee shall also be entitled to participate in all
benefit plans and programs that are available to the Employee as of the date of
this Agreement. Additionally, the Employee shall be entitled to receive all
benefits which accrue through the date of termination of the Employee's
employment with the Company.
96. Termination.
(a) By the Company. The Company shall have the right at any time, by
written notice to the Employee to terminate this Agreement, if one of the
following events occurs:
(i) Employee's conviction in a court of law of any crime or
offense involving misuse or misappropriation of money or
other property of the Company; or
(ii) Employee's willful failure or refusal to perform specific
directives of the chief executive officer of the Company,
RETENTION AGREEMENT - PAGE 2
<PAGE> 39
which directives are consistent with the scope and nature
of Employee's duties and responsibilities as described in
this Agreement and which are not remedied by the Employee
within thirty (30) days after notice to the Employee, or
the commission of any intentional tort by the Employee
against the Company, or any breach by Employee of the
covenants set forth in Section 7 of this Agreement; or
(iii) any action of dishonesty or disloyalty by Employee or any
act involving moral turpitude of the Employee which
materially adversely affect the business of the Company; or
(iv) the inability of Employee to perform his/her duties
hereunder for a period of thirty (30) consecutive days (or
sixty (60) total days in any ninety (90) day period) by
reason of illness or mental or physical disability; or
(v) any statements, observations, or opinions or communication
of information (whether oral or written) made by or caused
to be made by the Employee that disparages or is likely
in any way to harm the reputation of the Company; or
(vi) Employee's death.
For purposes of this Section, it is understood and agreed that good faith errors
in judgment made by the Employee shall not constitute grounds for termination
for cause hereunder. Notwithstanding the above, it is the intent of the Company
at all times to comply with the Americans With Disabilities Act, the Family and
Medical Leave Act and any other applicable federal and state employment laws. In
the case of termination under this Section 6(a), all obligations of the parties
under this Agreement shall cease, except for the Company's obligations under
Sections 4(a) and 5 herein through the date of the Employee's separation and
Employee's obligations under Section 7 hereof.
(b) By Employee. This Agreement shall be terminable without cause by
Employee upon two (2) weeks written notice to the Company. This Agreement
shall be terminable by Employee for cause upon thirty (30) days written
notice to the Company, if the Company willfully breaches any material
terms of this Agreement and provided such breach has not been cured by the
Company within such thirty (30) day period. In the case of termination
under this Section 6(b), all obligations of the parties in this Agreement
shall cease, except for Employee's obligations under Section 7 and, unless
the termination by the Employee is without cause, Employer's obligation to
pay the Retention Payment.
97. Confidential Information. In consideration of the covenants of the
Company contained herein, Employee agrees as follows:
RETENTION AGREEMENT - PAGE 3
<PAGE> 40
(a) Employee hereby agrees and acknowledges that he/she has had
access to or is aware of certain confidential, restricted and/or
proprietary information concerning operation by the Company's business
(the "Business"). Employee hereby undertakes and agrees that he/she shall
have a duty to the Company to protect such information from use or
disclosure.
(b) For the purposes of this Section 7, the following definitions
shall apply:
(i) "Trade Secret" as related to the Business, shall mean
any specialized technical information or data relating
to (A) the manufacture and distribution 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 toner for laser printers, facsimile
machines and copiers, cartridges and ink for ink jet
printers, specialty papers, calculator ink rolls, and
carbon paper; (B) marketing strategy or plans of the
Company; (C) proprietary computer software; and (D) terms
of contracts with suppliers, employees and principal
customers of the Company which are not generally known to
the competitors of the Company.
(ii) "Confidential Information," as related to the Business,
shall mean any data or information, other than Trade
Secrets, which is material to the Company or its
affiliates and not generally known by the public.
Confidential Information shall include, without
limitation, any information pertaining to the business
opportunities of the Company, the details of this
Agreement, and the business plans, financial statements
and projections of the Company.
(c) Employee shall not, without the prior written consent of the
Company, use or disclose, or negligently permit any unauthorized person
who is not an employee of the Company to use, disclose, or gain access to,
any Trade Secrets or Confidential Information; provided, however, Employee
shall be permitted, and this Agreement shall constitute written consent of
the Company, to use Confidential Information, and to disclose such
Confidential Information to his/her advisors (including specifically,
without limitation, attorneys, accountants, bankers, and others) for the
purposes of assessing the viability of and preparing a plan to acquire a
portion of the assets of the Company.
(d) Employee hereby agrees to deliver to, or maintain on behalf of,
the Company and its affiliates all memoranda, notes, records, drawings,
manuals or other documents, including all copies of such materials,
containing Trade Secrets or Confidential Information, whether made or
compiled by Employee or furnished to him/her from any source by virtue of
his/her relationship with the Company or its affiliates. All such
memoranda, notes,
RETENTION AGREEMENT - PAGE 4
<PAGE> 41
records, drawings, manuals, other documents and other materials shall
be delivered to the Company by the Employee upon termination of the
Employee's employment with the Company.
98. Assignments; Successors and Assigns. The rights and obligations of
Employee hereunder are not assignable or delegable and any prohibited assignment
or delegation will be null and void. The Company may assign and delegate this
Agreement to a successor in interest to the Company's business. Any such
assignment shall expressly include the obligations herein and shall not relieve
the Company of same. The provisions hereof shall inure to the benefit of and be
binding upon the permitted successors and assigns of the parties hereto.
99. Governing Law. This Agreement shall be interpreted under, subject
to and governed by the substantive laws of the State of Tennessee, without
giving effect to provisions thereof regarding conflict of laws, and all
questions concerning its validity, construction, and administration shall be
determined in accordance thereby.
100. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original but all of
which will together constitute one and same instrument.
101. Invalidity. The invalidity or unenforceability of any provision of
this Agreement shall not affect any other provision hereof, and this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.
102. Exclusiveness. This Agreement constitutes the entire understanding
and agreement between the parties with respect to the retention by the Company
of Employee and supersedes any and all other agreements, oral or written,
between the parties, including but not limited to the Old Agreement. To the
extent the Employee has a claim arising out of the Company's rejection of the
Old Agreement, such claim is waived.
103. Modification. This Agreement may not be modified or amended except
in writing signed by the parties. No term or condition of this Agreement will be
deemed to have been waived except in writing by the party charged with waiver. A
waiver shall operate only as to the specific term or condition waived and will
not constitute a waiver for the future or act on anything other than that which
is specifically waived.
104. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
RETENTION AGREEMENT - PAGE 5
<PAGE> 42
(a) If to the Company, at 200 Beasley Drive, P.O. Box 3000,
Franklin, Tennessee, 37068, Attention: President and Chief Executive
Officer, or at such other address as may have been furnished to the
Employee by the Company in writing; or
(b) If to the Employee, at the address stated below, or such other
address as may have been furnished to the Company by Employee in writing.
105. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging in to or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertaking of the Company
hereunder. No such consolidation, merger or transfer shall affect the rights of
the Employee or the obligations of the Company hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"COMPANY"
NU-KOTE HOLDING, INC.
By:
--------------------------------
Patrick E. Howard, President
"EMPLOYEE"
----------------------------------
Mike Ducey
Employee's Principal Address:
----------------------------------
----------------------------------
----------------------------------
RETENTION AGREEMENT - PAGE 6
<PAGE> 1
EXHIBIT 10.23
GLASS & ASSOCIATES, INC.
AGREEMENT ENGAGING THE SERVICES OF
GLASS & ASSOCIATES, INC. AS INTERIM MANAGER
Nu-kote Holding, Inc. of 17950 Preston Road, Suite 690, Dallas, Texas
75252 (the "Company") wishes to engage professional management assistance to
provide general management of the Company's operating and business affairs, and
to assist the Company to the extent possible in seeking and finding solutions to
certain problems within the sphere of management direction and planning.
The Company hereby agrees to engage Glass & Associates, Inc. ("Glass"), a
Delaware corporation with its principal office located at 4571 Stephen Circle
N.W., Suite 130, Canton, Ohio 44718, for the purpose of managing the Company
during the critical period ahead. Glass will provide Shaun K. Donnellan to serve
as Interim Chief Executive Officer of the Company, subject to the following
terms and conditions. Glass may provide others from time to time as required
during the course of the assignment.
1. Glass shall have full access to all personnel and a relationship
with the entire internal organization, much like that of the Chief
Executive Officer, although the relationship of Glass to the Company
shall at all times be that of an independent contractor. Glass may,
in the performance of its duties, negotiate on behalf of Company
with various parties including but not limited to creditors,
stockholders and employees of Company, and governmental entities.
2. Glass shall review and approve all financial and operating policies,
plans and programs and shall participate in any major decision which
might have a significant impact on such policies.
3. Glass shall be subject solely to the control of the Board of
Directors of the Company. Except for such control, Glass shall not
be subject to the control of any other person or persons.
4. Glass shall be compensated for its services under this Agreement at
its regular published rates, per the attached schedule, plus
expenses. There shall be an initial payment of $200,000.00 as a
client deposit which unused portion will be refunded at the end of
the assignment. Fees and expenses shall be billed weekly, and all
invoices are due and payable upon receipt.
5. Upon completion of its engagement, the Board will consider a
performance bonus for Glass, consistent with that which a resident
top executive might receive for a job well done. During the course
of the assignment, Glass may propose a basis upon which such bonus
could be paid.
1
<PAGE> 2
6. In consideration for the Glass understanding to discharge the
responsibilities as set forth above:
a) The Company shall and does hereby forever release,
remise and discharge, agree to indemnify, pay on demand
and hold harmless Glass, its agents, attorneys,
employees, and representatives, (the "Releases"), from
any and all claims, costs, demands, actions,
liabilities, judgments, or attorneys' fees which may
result from any act or failure to act in what Releasees
in good faith believe to be the best interests of the
Company arising out of Releasees' performance or
non-performance under this Agreement, or Releasees'
present or future association with the affairs of the
Company, its creditors, stockholders, employees, agents,
attorneys or representatives. This release,
indemnification and agreement to hold harmless extends
to all claims of every nature and kind whatsoever, past,
present or future, known or unknown, and suspected or
unsuspected.
b) Company further expressly agrees that it will execute
and enter into, sign, seal and deliver any and all
additional documents, papers, releases, indemnity
agreements, and will do and perform any and all things
which Glass may deem desirable to protect it or its
agents, attorneys, employees, representatives, and each
of them, from any aforesaid claims, costs, demands,
actions, liabilities, judgments or attorneys' fees,
whatsoever, and to do any and all other things necessary
or desirable in the opinion of Glass to effectuate the
purposes of this release, indemnification and agreement
to hold harmless.
c) In the event of a breach of this Agreement by the
Company, the Company agrees to pay all costs, including
reasonable attorneys' fees incurred by Glass in its
efforts to enforce its rights under this Agreement.
7. This engagement of Glass shall continue at the pleasure of the Board
of Directors, and may be terminated at any time by resolution of the
Board of Directors, a certified copy of which shall be delivered to
Glass. Glass shall have the option to terminate its employment at
any time upon notification to the Board of Directors of its desire
to terminate. The provisions of Paragraph 6 (indemnification) shall
survive the termination of this Agreement for any reason.
8. In the event that the Glass representative is offered and accepts a
permanent assigned position with the Company, Glass will receive
from Company payment equal to 30% of his first year's total
compensation, an amount not unlike that received by an executive
recruiter.
2
<PAGE> 3
9. The parties hereto agree that the interpretation and enforceability
of this Agreement shall be determined in accordance with the
substantive laws of the State of Ohio, exclusive of choice of law
provisions. In case any one of more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and
this Agreement shall be construed as if such invalid, illegal, or
unenforceable provision had never been contained herein.
Dated: 12/10/97 GLASS & ASSOCIATES, INC.
By: /s/
--------------------------------
President (office)
-----------------------------------
COMPANY
By: /s/
--------------------------------
Its: Chairman
-------------------------------
3
<PAGE> 4
RATE SCHEDULE
Effective January 1, 1996
Principal ............ $250.00 - $300.00 per hour
Case Director ............ $200.00 - $250.00 per hour
Senior Consultant ........... $175.00 - $225.00 per hour
Consultant .............. $125.00 - $175.00 per hour
Clerical/Administrative ............ $45.00 - $60.00 per hour
Out-of-Pocket Expenses ............ At Cost
<PAGE> 1
EXHIBIT 18
Nu-kote Holdings, Inc.
Nashville, Tennessee
January 7, 2000
Gentlemen:
We have audited the consolidated balance sheet of Nu-kote Holdings, Inc. and
subsidiaries as of March 31, 1999 and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and comprehensive loss and
cash flows for the year ended March 31, 1999, and have reported thereon under
date of January 7, 2000. The aforementioned financial statements and our audit
report thereon are included in the Company's 1999 Annual Report on Form 10-K. As
disclosed in Note 3 to those financial statements, the Company changed its
method of accounting for the costs of its inventories from the last-in first-out
(LIFO) method to the first-in first-out (FIFO) method and indicated that the
newly adopted accounting principle is preferable in the circumstances because it
better measures the current value of such inventories, avoids distortion of
profits resulting from decrements and deflation, and provides a more appropriate
matching of revenue and expenses for the current and future periods.
Additionally, the change will enhance the comparability of the Company's
financial statements by changing to the predominant method utilized in its
industry.
In accordance with your request, we have reviewed and discussed with Company
officials the circumstances and business judgment and planning upon which the
decision to make this change in the method of accounting was based.
With regard to the aforementioned accounting change, authoritative criteria
have not been established for evaluating the preferability of one acceptable
method of accounting over another acceptable method. However, for purposes of
Nu-kote Holdings, Inc.'s compliance with the requirements of the Securities and
Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the Company's circumstances.
Very truly yours,
KPMG LLP
<PAGE> 1
EXHIBIT 21.1
NU-KOTE HOLDING, INC.
AND ITS SUBSIDIARIES
--------------------
Nu-kote Holding, Inc. Delaware
Nu-kote Imperial, Inc. (1) Delaware
Nu-kote International, Inc. (1) Delaware
Nu-kote Imaging International, Inc. (2) Delaware
Nu-kote Latin America, Inc. (2) Delaware
International Communication Materials, Inc. (2) Pennsylvania
Future Graphics, Inc. (2) California
Nu-kote de Mexico, S.A. de CV (5) Mexico
Interfas SA (3) France
Interfas Holding, SA (2) France
Nu-kote International Holding, Limited (2)(6) England
Nu-kote International Limited (4)(6) England
Nu-kote Wyncliffe, Limited (4)(6) England
Virokote, Inc. (2) Delaware
Nu-kote Quality Imaging GmbH (2)(6) Germany
Greif-Werke GmbH (2)(6) Germany
Pelikan Scotland Ltd (2)(6) England
Pelikan Productions AG (2)(6) Switzerland
- -----------------------------
(1) 100% owned by Nu-kote Holding, Inc.
(2) 100% owned by Nu-kote International, Inc.
(3) 100% owned by Interfas Holding S.A.
(4) 100% owned by Nu-kote International Holding Limited
(5) 65% owned by Nu-kote International, Inc. and 35% owned by Nu-kote Latin
America, Inc.
(6) Entities were sold on September 30, 1999.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration
statement on Form S-8 (File No. 333-13093, File No. 33-60326, File No. 33-69708
and File No. 33-97376) of Nu-kote Holdings, Inc. of our report dated January 7,
2000, related to the consolidated balance sheet of Nu-kote Holdings, Inc. and
subsidiaries as of March 31, 1999 and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and comprehensive income
(loss) and cash flows for the year then ended and our report on the related
financial statement schedule, which reports appear in the March 31, 1999, annual
report on Form 10-K of Nu-kote Holdings, Inc.
The audit report on the consolidated financial statements of Nu-kote
Holdings, Inc. and subsidiaries referred to above contains an explanatory
paragraph that states the consolidated financial statements do not purport to
reflect or provide for the consequences of the Company's filing for
reorganization under Chapter 11 of the U.S. Bankruptcy Code and the bankruptcy
proceedings. The above referenced audit report on the consolidated financial
statements of the Company also contains an explanatory paragraph that states
that the Company's recurring losses from operations, material uncertainties
related to pending litigation and other claims and shareholders' deficit raise
substantial doubt about the entity's ability to continue as a going concern.
The financial statement schedule referred to above does not include any
adjustments that might result from the outcome of the bankruptcy proceedings
and the uncertainty relating to the Company's ability to continue as a going
concern.
Our report to the consolidated financial statements of the Company
refers to a change to the first-in, first-out method of valuing inventory.
KPMG LLP
Nashville, Tennessee
April 19, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File No. 333-13093, File No. 33-60326, File No.
33-69708, and File No. 33-97376) of Nu-Kote Holding, Inc. of our reports dated
June 26, 1998 relating to the financial statements and financial statement
schedule, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
April 19, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NU-KOTE HOLDINGS, INC. FOR THE YEAR ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 7,272
<SECURITIES> 0
<RECEIVABLES> 42,669
<ALLOWANCES> 5,542
<INVENTORY> 47,310
<CURRENT-ASSETS> 99,525
<PP&E> 81,031
<DEPRECIATION> 34,999
<TOTAL-ASSETS> 152,449
<CURRENT-LIABILITIES> 74,397
<BONDS> 0
0
0
<COMMON> 223
<OTHER-SE> (65,837)
<TOTAL-LIABILITY-AND-EQUITY> 152,449
<SALES> 240,529
<TOTAL-REVENUES> 240,529
<CGS> 204,991
<TOTAL-COSTS> 59,537
<OTHER-EXPENSES> 17,663
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,158
<INCOME-PRETAX> (54,089)
<INCOME-TAX> (515)
<INCOME-CONTINUING> (54,972)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (54,972)
<EPS-BASIC> (2.52)
<EPS-DILUTED> (2.52)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
IN RE: SS.
SS.
SS.
NU-KOTE HOLDING, INC. SS.
SS.
NU-KOTE IMPERIAL, LTD. SS.
SS.
NU-KOTE INTERNATIONAL, INC. SS.
SS.
NU-KOTE IMAGING INTERNATIONAL, SS.
INC. SS. JOINTLY ADMINISTERED AND
SS. SUBSTANTIVELY CONSOLIDATED
SS. UNDER CASE NO. 398-10600
INTERNATIONAL COMMUNICATION SS.
MATERIALS, INC. SS. CHAPTER 11
SS.
FUTURE GRAPHICS, INC. SS. JUDGE KEITH M. LUNDIN
SS.
NU-KOTE LATIN AMERICA, INC. SS.
SS.
DEBTORS SS.
SS.
DISCLOSURE STATEMENT FOR JOINT PLAN OF
REORGANIZATION FOR NU-KOTE
(DATED: NOVEMBER 30, 1999)
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
TABLE OF CONTENTS................................................................................................ii
INTRODUCTION......................................................................................................1
ARTICLE I. FACTORS PRECIPITATING CHAPTER 11 CASE...............................................................4
ARTICLE II. PURPOSE OF CHAPTER 11...............................................................................7
ARTICLE III. CERTAIN RISK FACTORS................................................................................7
A. Factors Relating to Chapter 11 and the Joint Plan...............................................7
1. Insufficient Acceptances...............................................................8
2. Confirmation Risks.....................................................................8
3. Business Risks.........................................................................8
4. Litigation Risks.......................................................................8
ARTICLE IV. DESCRIPTION OF DEBTORS'BUSINESS.....................................................................9
A. Summary.........................................................................................9
B. Background and Structure of the Company.........................................................9
1. Nu-kote Holding, Inc..................................................................10
2. Nu-kote Imperial, Ltd.................................................................11
3. Nu-kote International, Inc............................................................12
4. Nu-kote Imaging International, Inc....................................................12
5. International Communication Materials, Inc............................................12
6. Future Graphics, Inc..................................................................12
7. Nu-kote Latin America, Inc............................................................12
C. Current Officers and Directors of Nu-kote......................................................12
D. Historical And Renewed Retention Agreements with
Key Nu-kote Employees..........................................................................14
1. Historical Retention Agreements.......................................................14
2. New and Renewed Retention Agreements..................................................14
E. Prepetition Information: Historical Perspective on the Industry...............................14
F. Nu-kote's Place in the Office Products Market..................................................16
G. Nu-kote's Market Segmentation..................................................................16
ARTICLE V. ASSETS OF NU-KOTE..................................................................................18
A. Cash...........................................................................................18
B. Inventory......................................................................................18
C. Trademarks.....................................................................................18
D. Patents........................................................................................18
E. Receivables....................................................................................19
F. Real Property..................................................................................19
G. Machinery, Fixtures and Equipment..............................................................19
</TABLE>
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE ii
<PAGE> 3
<TABLE>
<S> <C>
H. Stock..........................................................................................20
I. The OEM Litigation.............................................................................20
1. Hewlett-Packard Company...............................................................20
2. Seiko Epson Corp......................................................................23
3. Canon USA, Inc........................................................................25
J. Other Claims and Causes of Action..............................................................26
1. Preferential Transfers/Fraudulent Transfers...........................................26
2. Potential Claims Against Glass & Associates...........................................27
3. Claims Against Pelikan Holding........................................................27
4. Settlement of the Declaratory Judgment Action Against
the Lenders Asserted by the Debtors...................................................29
5. Settlement of Potential Subordination of the Lenders'
Unsecured Claims Asserted by the Debtors..............................................29
6. Potential Cause of Action Against the Officers and
Directors of Nu-kote..................................................................30
K. Intercompany Payables and Receivables..........................................................31
ARTICLE VI. LIABILITIES OF THE DEBTORS..........................................................................32
A. Administrative Expenses .......................................................................32
1. Professionals.........................................................................32
2. Payment of Professionals Employed Pursuant to ss.330
of the Bankruptcy Code................................................................34
3. Norwest Business Credit, Inc..........................................................34
4. Retention Agreements with Key Employees...............................................35
5. Administrative Claims Asserted by the Litigating OEMs.................................35
6. Administrative Claim Asserted by the PBGC.............................................35
7. Administrative Claim Asserted by Wausau...............................................36
B. Secured Claims.................................................................................36
1. Secured Claim of the Lenders..........................................................36
(a) The US Facility..............................................................37
(b) The UK and Swiss Facilities..................................................37
2. Other Asserted Secured Claims.........................................................37
C. Priority Claims................................................................................38
1. Priority Wage Claims..................................................................38
2. Priority Tax Claims...................................................................39
3. Other Asserted Priority Claims........................................................39
D. Unsecured Claims...............................................................................39
1. Scheduled Unsecured Claims: Inclusive of
Intercompany Payables.................................................................39
2. Scheduled Unsecured Claims: Exclusive of
Intercompany Payables.................................................................39
3. Unsecured Claims Asserted Against the Debtors.........................................40
4. Particular Asserted Claims in Excess of $500,000......................................40
(a) Abdiraham Aden...............................................................40
(b) Fay, Sharpe, Beall, Fagan, Minnich & McKee, LLP..............................40
(c) Keller Crescent Company, Inc.................................................41
</TABLE>
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE iii
<PAGE> 4
<TABLE>
<S> <C>
(d) Coudert Brothers.............................................................41
(e) Employers Insurance of Wausau................................................41
(f) Pelikan Holding, AG..........................................................41
(g) Williams Die & Mold, Inc.....................................................41
E. Pending Litigation Against the Debtors.........................................................41
1. Lori Lemmer, et al. v. Nu-kote Holding, Inc,
Case No. 3:98-CV-0161-T...............................................................41
2. Spectra, Inc. v. Nu-kote International, Inc. & Modular Ink I
Stockholm, AB, Case No. 98-CV-130-JD..................................................42
3. Rock-Tenn Co. v. Nu-kote International, Inc.,
Case No. 125633.......................................................................42
4. Abdiraham A. Aden v. Nu-kote International, Inc.,
Case No. 398- 0365....................................................................42
F. Environmental and Regulatory Matters...........................................................43
ARTICLE VII. CHAPTER 11 CASES...................................................................................45
A. Filing of Petition.............................................................................45
B. First Day Administration.......................................................................45
C. Adversary Proceeding...........................................................................45
D. Cash Collateral................................................................................46
E. DIP Financing..................................................................................47
F. Substantive Consolidation......................................................................48
G. Epson's Unsuccessful Attempt to Lift the Automatic Stay........................................48
H. Epson's Violation of the First to File Rule....................................................49
I. Financing the OEM Lawsuits.....................................................................51
J. Exclusivity....................................................................................51
K. Claims Bar Date................................................................................52
L. The Committees.................................................................................52
M. Ratification of European Agreements............................................................52
N. Sale of Certain European Subsidiaries..........................................................53
1. Sale of MIT...........................................................................53
2. The Sale of European Entities.........................................................54
O. Settlement with Blair and Ridenour.............................................................55
P. Proposed Settlement with Hewlett-Packard Company...............................................56
Q. Appointment of Examiner........................................................................57
R. Administrative Claims Bar Date.................................................................57
ARTICLE VIII. FINANCIAL INFORMATION AND FUTURE OPERATIONS.......................................................57
A. Historical and Postpetition Financial Information:
Nu-kote's Results of Operations................................................................58
B. Future Operations of the Reorganized Debtors...................................................59
1. The Future of the Market..............................................................59
2. Strategic Goals & Objectives..........................................................60
3. Sales & Marketing.....................................................................60
4. Accounts & Sku's......................................................................61
5. Logistics & Manufacturing.............................................................61
</TABLE>
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE iv
<PAGE> 5
<TABLE>
<S> <C>
6. Outsourcing...........................................................................61
7. Trade Credit..........................................................................61
8. Information Systems...................................................................61
9. Future Financial Performance..........................................................62
ARTICLE IX. DISCUSSION OF THE JOINT PLAN........................................................................62
A. Summary of the Joint Plan......................................................................62
B. Classification and Treatment of Claims.........................................................63
1. Treatment of Unclassified Claims......................................................63
(a) Deadline for Filing Administrative Claims....................................63
(b) Payment of Allowed Administrative Claims.....................................63
(c) Fee Claims of Professionals Other than Committees'Professionals..............63
(d) Fee Claims of the Committees' Professionals..................................64
(e) Payment of Administrative Tax Claims.........................................64
(f) Payment of Priority Tax Claims...............................................64
(g) Payment of Norwest Claim.....................................................64
(h) Payment of Fees to U.S. Trustee..............................................65
2. Treatment of Classified Claims........................................................65
(a) Class 1- Secured Claims of the Lenders.......................................65
(b) Class 2 - Other Secured Claims...............................................66
(c) Class 3 - Unsecured Claims...................................................68
(d) Class 4 - Common Stock.......................................................69
C. Implementation of the Joint Plan: A Successful Bidder.........................................69
1. The Proposed Purchaser: Richmont......................................................70
2. Richmont's Obligation to Close........................................................70
3. The Letter of Credit..................................................................70
4. The Bidding Procedure.................................................................71
(a) Solicitation.................................................................71
(b) Information to Third Parties.................................................71
(c) Overbids.....................................................................71
(i) Overbid Deadline.....................................................71
(ii) Overbid Requirements.................................................72
(iii) Richmont Deposit Requirement.........................................73
(iv) Overbid Process......................................................73
(d) Right to Reject Bids.........................................................74
(e) Bidding Procedure Disputes...................................................74
5. Failure of the Successful Bidder to Close.............................................74
6 Encumbrances..........................................................................74
7. Satisfaction of Encumbrances..........................................................75
8. Distribution of Assets................................................................75
9. The Reorganized Debtors...............................................................75
10. Officers and Directors................................................................76
11. Baiocchi Retention....................................................................76
12. Funding of the Causes of Action .....................................................76
13. Authority for Settlement of Causes of Action and Releases.............................76
</TABLE>
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D. Implementation of the Joint Plan: The Trust Triggering Event...................................77
1. Effective Date Entities...............................................................77
2. Transfer of the Litigation by the Debtors to the Litigation Trust.....................77
(a) Purposes for the Litigation Trust............................................77
(b) Prosecution of the Litigation Trust..........................................77
(c) Management of the Litigation Trust and Litigation Advisory Board.............78
(d) Beneficiaries of the Litigation Trust........................................78
3. Transfer of Trust Shares to the Trust.................................................78
(a) Purposes for the Trust.......................................................78
(b) Management of the Trust and Trust Advisory Board.............................78
(c) Incorporation of Ink Jet Subsidiary and Transfer of Assets...................78
(d) Sale of the Trust Shares and the Retained Assets.............................78
(e) Beneficiaries of the Trust...................................................79
4. Effective Date Financing..............................................................79
5. Board of Directors and Officers.......................................................79
E. Releases.......................................................................................79
F. Acceptance and Confirmation of the Joint Plan..................................................80
1. Requirements for Confirmation.........................................................80
G. The Joint Plan Meets All of the Requirements for Confirmation..................................82
ARTICLE X. ALTERNATIVES TO THE JOINT PLAN......................................................................82
A. Analysis of Liquidation under Chapter 7........................................................83
B. Alternatives under Chapter 11..................................................................84
ARTICLE XI. VOTING PROCEDURES...................................................................................85
A. Classes Entitled to Vote on the Joint Plan.....................................................85
B. Persons Entitled to Vote on the Joint Plan.....................................................85
C. Vote Required for Class Acceptance.............................................................86
D. Voting Instructions............................................................................86
1. Ballots and Voting....................................................................86
2. Returning Ballots and Voting Deadline.................................................87
3. Incomplete or Irregular Ballots.......................................................87
4. Changing Votes........................................................................87
E. Contested and Unliquidated Claims..............................................................87
F. Possible Reclassification of Creditors and Interest Holders....................................88
ARTICLE XII. MISCELLANEOUS PROVISIONS...........................................................................88
A. Request for Relief under Section 1129(b).......................................................88
B. The Joint Plan is Confirmable Under ss.1129(b) of the Bankruptcy Code..........................89
1. The Joint Plan Meets the "Best Interest of Creditors"Test.............................89
2. The Joint Plan is Feasible............................................................89
3. The Joint Plan Meets the Cramdown Standard With Respect to Any
Impaired Class of Claims Rejecting the Joint Plan....................................90
C. Modification...................................................................................90
</TABLE>
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D. Further Assurances and Authorizations..........................................................90
E. Agreements between the Plan Proponents.........................................................90
ARTICLE XIII. SECURITIES LAW CONSIDERATIONS.....................................................................90
A. Registration of Plan Securities/Reporting Requirements.........................................91
ARTICLE XIV. CERTAIN FEDERAL INCOME TAXCONSEQUENCES OF THE JOINT PLAN...........................................91
A. Federal Income Tax Consequences if There is a Successful Bidder................................92
1. Tax Consequences to the Debtors.......................................................92
(a) Gain or Loss on Non-cash Payments............................................93
(b) Discharge of Indebtedness....................................................93
(c) Limitations on Net Operating Losses..........................................94
2. Tax Consequences to Creditors.........................................................94
(a) Overview.....................................................................94
(b) Realization and Recognition of Gain or
Loss in General..............................................................95
3. Tax Consequences to Holders of Interests..............................................95
B. Federal Income Tax Considerations if There is a
Trust Triggering Event.........................................................................96
1. Federal Income Tax Consequences to the Debtors........................................96
(a) Gain or Loss on Non-cash Payments............................................96
(b) Discharge of Indebtedness....................................................96
(c) Limitations on Net Operating Losses..........................................97
2. Tax Consequences to Creditors.........................................................99
(a) Overview.....................................................................99
(b) Realization and Recognition of Gain or
Loss in General..............................................................99
(c) Certain Tax Consequences of the Joint Plan to Creditors......................99
C. Certain Tax Consequences of the Joint Plan to Holders of Interests............................100
ARTICLE XV. EFFECTIVE DATE TRANSACTIONS........................................................................101
ARTICLE XVI. RESPONSES TO OBJECTIONS TOPRIOR DISCLOSURE STATEMENTS.............................................101
A. Response to Objections by Canon...............................................................101
1. Creditors'Response...................................................................101
2. Debtors'Response.....................................................................102
B. Response to Objections by Epson...............................................................103
1. Creditors'Response...................................................................103
2. Debtors'Response.....................................................................105
C. Debtors'Response to Objections by Hewlett-Packard.............................................107
1. Creditors'Response...................................................................107
2. Debtors'Response.....................................................................107
D. Response to Objections by Wausau..............................................................107
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DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE vii
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1. Creditors'Response...................................................................107
2. Debtors'Response.....................................................................109
E. Response to the Objection and Comments by the SEC.............................................111
1. Creditors'Response...................................................................111
2. Debtors'Response.....................................................................112
F. Response to Comments by PBGC..................................................................112
1. Creditors'Response...................................................................112
2. Debtors'Response.....................................................................113
G. Responses to Objections by Lemmer.............................................................113
1. Creditors'Response...................................................................113
2. Debtors'Response.....................................................................114
H. Creditors'Response to Objections of Wells Fargo Business
Credit, Inc., Formerly Norwest Business Credit, Inc...........................................114
I. Creditors'Response to Objections of Spectra, Inc..............................................115
J. Responses to Pelikan Holding A.G.'s Objections................................................115
1. Creditors'Response...................................................................115
2. Debtors'Response.....................................................................117
K. Creditors'Response to Objections of Patrick E. Howard
and John P. Rochon............................................................................118
L. Debtors'Response to Objections by Pagliara....................................................119
M. Debtors'Response to Objections by State of Tennessee..........................................120
ARTICLE XVII. RECOMMENDATION OF PLAN PROPONENTS................................................................120
</TABLE>
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE viii
<PAGE> 9
INTRODUCTION
This Disclosure Statement ("DISCLOSURE STATEMENT") and the accompanying
Ballots are being furnished by the Debtors, the Lenders and the Committees
(collectively referred to as the "PLAN PROPONENTS") to the holders of Claims
against and Interests in the Debtors pursuant to Section 1125 of the United
States Bankruptcy Code in connection with the solicitation of ballots for the
acceptance of the Joint Plan of Reorganization for Nu-kote (the "JOINT PLAN")
under Chapter 11 ("CHAPTER 11") of Title 11 of the United States Code (the
"BANKRUPTCY CODE") filed by the Plan Proponents. Capitalized terms used in this
Disclosure Statement and not defined herein shall have their respective meanings
set forth in the Joint Plan or, if not defined in the Joint Plan, as defined in
the Bankruptcy Code.
On November 6, 1998, the Debtors filed their Voluntary Petitions for
Relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court,
Middle District of Tennessee, Nashville Division (the "BANKRUPTCY COURT"). On
November 24, 1999, the Plan Proponents filed the Joint Plan. On _______________,
1999, after notice and hearing, the Bankruptcy Court approved this Disclosure
Statement and authorized the Plan Proponents to solicit votes with respect to
the Joint Plan.
The purpose of this Disclosure Statement is to enable those persons
whose Claims against and Interests in the Debtors are Impaired and entitled to
vote under the Joint Plan to make an informed decision with respect to the Joint
Plan before exercising their rights to vote to accept or reject the Joint Plan.
On ______________, 1999, after notice and a hearing, this Disclosure Statement
was approved by the Bankruptcy Court as containing information, of a kind and in
sufficient detail, to enable persons whose votes are being solicited to make an
informed judgment with respect to acceptance or rejection of the Joint Plan. A
copy of the Bankruptcy Court's order approving this Disclosure Statement and
establishing procedures for voting on the Joint Plan (the "APPROVAL ORDER") is
attached as Exhibit "A" to this Disclosure Statement. The Bankruptcy Court's
approval of this Disclosure Statement does not constitute either a guarantee of
the accuracy or completeness of the information contained herein or an
endorsement of any of the information contained in this Disclosure Statement or
the Joint Plan.
Holders of Claims should read this Disclosure Statement and the Joint
Plan in their entirety before voting on the Joint Plan. No solicitation of votes
with respect to the Joint Plan may be made except pursuant to this Disclosure
Statement. No statement or information concerning the Debtors (particularly as
to results of operations or financial condition, or with respect to
distributions to be made under the Joint Plan) or any of the respective assets,
properties or businesses of the Debtors that is given for the purpose of
soliciting acceptances or rejections of the Joint Plan is authorized, other than
as set forth in this Disclosure Statement. In the event of any inconsistencies
between the provisions of the Joint Plan and this Disclosure Statement, the
provisions of the Joint Plan shall control. A copy of the Joint Plan is attached
hereto as Exhibit "G" to this Disclosure Statement.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 1
<PAGE> 10
After carefully reviewing this Disclosure Statement and all exhibits
and schedules attached hereto, please indicate your acceptance or rejection of
the Joint Plan by voting in favor of or against the Joint Plan on the enclosed
Ballot. Then, except as provided below, RETURN THE BALLOT TO LAIN FAULKNER &
CO., P.C. (THE "TABULATION AGENT") IN THE ENCLOSED, POSTAGE-PAID, RETURN
ENVELOPE IN SUFFICIENT TIME TO BE RECEIVED NO LATER THAN 4:00 P.M., CENTRAL
STANDARD TIME, ON _______________, 1999 (THE "VOTING DEADLINE").
THE PLAN PROPONENTS BELIEVE THAT ACCEPTANCE OF THE JOINT PLAN IS IN THE
BEST INTERESTS OF ALL CLAIMANTS OF THE DEBTORS AND, CONSEQUENTLY, THE PLAN
PROPONENTS URGE ALL CLAIMANTS TO VOTE TO ACCEPT THE JOINT PLAN.
Any Ballots received after the Voting Deadline will not be counted
(unless otherwise ordered by the Bankruptcy Court). Ballots that are received
after the Voting Deadline may not be used in connection with the Plan
Proponents' request for confirmation of the Joint Plan or any modification
thereof, except to the extent allowed by the Bankruptcy Court. See "Voting
Procedures--Voting Instructions--Returning Ballots and Voting Deadline."
This Disclosure Statement has been compiled by the Plan Proponents to
accompany the Joint Plan based upon information provided by the Debtors. The
factual statements, projections, financial information, and other information
contained in this Disclosure Statement have been taken from documents prepared
by the Debtors, including the Debtors' March 31, 1998 and March 31, 1997 Form
10K's publicly filed with the Securities & Exchange Commission, the Debtors'
unaudited Amended Schedules and Statement of Financial Affairs, the Debtors'
Monthly Operating Reports, pleadings filed in the Bankruptcy Cases, and
information obtained in the Chapter 11 Case. The Lenders and Committees have
relied upon the Debtors and their professionals regarding the inclusion of
certain information in this Disclosure Statement, and therefore make no
representations or warranties to the correctness or accuracy thereof. Any
information provided in the Disclosure Statement should not be relied upon
unless such information has been independently verified. Nothing contained in
this Disclosure Statement shall have any preclusive effect against the Plan
Proponents (whether by waiver, admission, estoppel or otherwise) in any cause or
proceeding which may exist or occur in the future. This Disclosure Statement
shall not be construed or deemed to constitute an acceptance of fact or an
admission by the Plan Proponents as regards any of the statements made herein,
and all rights and remedies of the Plan Proponents are expressly reserved in
this regard. This Disclosure Statement contains statements which constitute the
Debtors', Lenders, Committees or other third parties view of certain facts. All
such disclosures should be read as assertions of such parties. To the extent any
paragraph does not contain an express reference that it constitutes an assertion
of a particular party, it should be read as an assertion of the party indicated
by the context and meaning of such paragraph.
The statements contained in this Disclosure Statement are made as of
the Petition Date hereof unless another time is specified herein, and neither
delivery of this Disclosure Statement nor any exercise of rights granted in
connection with the Joint Plan shall, under
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 2
<PAGE> 11
any circumstances, create an implication that there has been no change in the
information set forth herein since the date of this Disclosure Statement.
Certain of the information contained in this Disclosure Statement, by
its nature, is forward looking, contains estimates and assumptions which may
prove to be inaccurate, and contains projections which may prove to be wrong, or
which may be materially different from actual future results.
Each Claimant should independently verify and consult its individual
attorney and accountant as to the effect of the Joint Plan on such individual
Claimant or Interest holder.
For convenience of all parties, material terms of the Joint Plan are
summarized in this Disclosure Statement. Although the Plan Proponents believe
that this Disclosure Statement accurately describes the material provisions of
the Joint Plan, all summaries of the Joint Plan contained in this Disclosure
Statement are qualified by the Joint Plan itself, the exhibits thereto, and the
documents described therein, which control in the event of any inconsistency or
incompleteness. Accordingly, the Plan Proponents strongly urge each recipient
entitled to vote on the Joint Plan to review carefully the contents of this
Disclosure Statement, the Plan, and the other documents that accompany or are
referenced in this Disclosure Statement in their entirety before making a
decision to accept or reject the Joint Plan.
IT IS OF THE UTMOST IMPORTANCE TO THE PLAN PROPONENTS THAT YOU VOTE
PROMPTLY TO ACCEPT THE JOINT PLAN BY COMPLETING AND SIGNING THE BALLOT ENCLOSED
HEREWITH AND RETURNING IT TO THE TABULATION AGENT, LAIN FAULKNER & CO., P.C. AT
THE ADDRESS SET FORTH IN THE BALLOT INSTRUCTIONS THAT ACCOMPANY SUCH BALLOT.
SHOULD YOU HAVE ANY QUESTIONS REGARDING THE VOTING PROCEDURES, YOUR BALLOT, OR
THE BALLOT INSTRUCTIONS, OR IF YOUR BALLOT IS DAMAGED OR LOST, CONTACT COUNSEL
FOR THE DEBTORS AT THE FOLLOWING ADDRESS:
FRANK J. WRIGHT
C. ASHLEY ELLIS
HANCE | SCARBOROUGH | WRIGHT
2900 RENAISSANCE TOWER
1201 ELM STREET
DALLAS, TEXAS 75270
The Approval Order fixes _________________, 1999, at _______ Central
Standard Time, in the Courtroom of the Honorable Keith M. Lundin, United States
Bankruptcy Judge, United States Bankruptcy Court for the Middle District of
Tennessee, Nashville Division, 207 Customs House, 701 Broadway, Nashville,
Tennessee 37203, as the date, time, and place for the hearing on Confirmation of
the Joint Plan, and fixes ________________, 1999, as the date by which all
objections to Confirmation of the Joint Plan must be filed with the Bankruptcy
Court and received by the respective counsel for each of the Plan Proponents and
certain other persons identified in the Approval Order. See Exhibit "A" to
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 3
<PAGE> 12
this Disclosure Statement. The Plan Proponents will request Confirmation of the
Joint Plan at the Confirmation Hearing.
As used herein, the terms "Nu-kote", the "Company" and the "Debtors"
are used interchangeably to mean one or more of the Debtors and their
affiliates.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED
HEREIN.
ARTICLE I. FACTORS PRECIPITATING CHAPTER 11 CASE
Nu-kote sought bankruptcy protection in part due to an historical
proliferation of customer accounts, products, and packaging alternatives which,
in retrospect generated relatively little unit volume, proved to be of marginal
profitability, and incurred unwarranted infrastructure cost, and a series of
strategically sound, conceptually correct, but disappointing acquisitions.
Primary among the reasons precipitating the filing of the Bankruptcy
Case was Nu-kote's worsening financial situation in large part due to the
continued litigation between Nu-kote International, Inc. ("INTERNATIONAL"), the
Hewlett-Packard Company ("HP"), Seiko Epson Corporation and Epson America, Inc.
(collectively, "EPSON"), Canon Computer Systems, Inc., Canon USA, Inc. and
Canon, Inc. (collectively "CANON"). As discussed in detail below, the finished
products of the Company are sold at both the retail level to consumers under the
"Nu-kote" and "Pelikan" brand names and directly to original equipment
manufacturers of printing equipment. When referring to the industry generally,
the complete term "original equipment manufacturers" will be used. When
referring to HP, Epson and Canon specifically, the definition "OEM" will be
used.
The products manufactured for the original equipment manufacturers are
manufactured to their specifications and sold both with the original hardware
and in the aftermarket. Nu-kote manufactures and distributes a variety of
compatible ink jet cartridges for use in the HP, Epson and Canon ink jet
printers, as well as a line of HP compatible cartridge refill kits designed for
the home or small business user, and provides a cartridge remanufacturing
service similar to the one employed for remanufactured laser toner cartridges.
The nature of the products manufactured and distributed by Nu-kote has
resulted in a variety of litigation with the OEMs. The litigation with HP, Canon
and Epson is referred to herein collectively as the "OEM LITIGATION" or
individually as the "HP LITIGATION," the "EPSON LITIGATION," or the "CANON
LITIGATION." Pre-petition, HP, Epson and Canon all filed lawsuits against
International and certain subsidiaries alleging numerous claims of patent
infringement, trademark infringement, false advertising and unfair competition.
This litigation forced the Company to incur substantial legal expenses in its
defense, and diverted senior and middle management attention from the day-to-day
needs of the
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 4
<PAGE> 13
business to defense of these lawsuits. Nu-kote has filed answers asserting
numerous affirmative defenses to the claims asserted by the OEMs in each of
these respective lawsuits including that several of the subject patents are
invalid, unenforceable and/or not infringed. Additionally, International has
asserted counterclaims including monopolization and attempted monopolization of
the aftermarket for replacement cartridges for the printers manufactured by the
OEMs. Although the trial stage of the HP Litigation has concluded and a
settlement has been presented for approval by the Bankruptcy Court as discussed
herein, the Canon and Epson Litigations remain pending.
Nu-kote and management have been compelled to expend much time and
effort in vigorous defense of the allegations in the OEM Litigation. The HP
Litigation has to date commanded the most time and attention of management.
Nu-kote employed the law firm of Coudert Brothers as trial counsel in its
defense of the claims brought by the OEMs and in prosecution of the
counterclaims against them. Nu-kote continues to defend the patent infringement
allegations in the Epson Litigation and the Canon Litigation, and to pursue its
antitrust actions against these OEMs. Discussions with Epson and Canon are
ongoing, and a settlement, subject to Court approval, has now been reached with
HP. The on-going litigation and the corresponding disruption of operations,
however, will continue to impact the Company negatively until such time as
settlement or court resolution is reached in all of the OEM Litigation. The
impact of the OEM Litigation, was a major precipitating factor in the
commencement of the Bankruptcy Case.
Another triggering factor in the filing of Nu-kote's Chapter 11
petitions was the need for the Company to obtain additional financing and to
recapitalize. Nu-kote International, Inc., as Borrower, and Nu-kote Holding,
Inc., as Guarantor, are parties to a certain Second Amended and Restated Credit
Agreement dated as of July 31, 1997 (the "US FACILITY"). The nine lenders on the
US Facility are Barclays Bank PLC as Lender and Documentation Agent; Bank of
America, National Association, as successor in interest to NationsBank of Texas,
NA as Collateral Agent, Lender and Administrative Agent; Commerzbank
Aktiengesellschaft; Deutsche Bank A.G., New York Branch or Cayman Islands
Branch; First National Bank of Chicago; Societe Generale; First American
National Bank; ABN AMRO Bank, N.V.; and Credit Lyonnais (collectively, the
"LENDERS"). The current amount outstanding on the US Facility is approximately
$95 million.
Additionally, certain of the non-debtor affiliates were, on the
Petition Date, parties to two other credit agreements, a Third Amended and
Restated Revolving Credit Facility Agreement dated July 31, 1997 by Pelikan
Scotland Limited as borrower ("the UK FACILITY"), and a Third Amended and
Restated Revolving Credit Facility Agreement dated July 31, 1997 by Pelikan
Produktions AG and Pelikan Hardcopy International AG as borrowers (the "SWISS
FACILITY"). The eight lenders on the UK Facility and the Swiss Facility are
Barclays Bank PLC; Bank of America, National Association, as successor in
interest to NationsBank of Texas NA; Commerzbank Aktiengesellschaft; Deutsche
Bank A.G.; First National Bank of Chicago; Societe Generale; ABN AMRO Bank,
N.V.; and Credit Lyonnais, the same above-referenced Lenders with the exception
of First American National Bank. On the Petition Date, the amount outstanding on
the UK Facility was approximately $10.3 million, and the amount outstanding on
the Swiss Facility was
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 5
<PAGE> 14
approximately $33.6 million. The post-petition sale of the Pelikan Hardcopy
Subsidiaries, however, has reduced the amounts outstanding.
Incident to the US Facility, UK Facility and Swiss Facility
(collectively, the "CREDIT FACILITIES"), certain of the Debtors and their
affiliates executed various guaranties, security agreements, and stock pledge
agreements pursuant to which they have pledged to the Lenders substantially all
of the assets of the Debtors and their affiliates. In particular, the Debtors
have pledged all of their accounts, chattel paper, inventory, equipment,
instruments, general intangibles, fixtures and capital stock, and any and all
products and proceeds thereof, as well as all real property and improvements and
any and all products and proceeds thereof. Interest payments alone on the Credit
Facilities exceeded $11.4 million from August 1, 1997 through the Petition Date.
In December of 1997, to comply with the amended terms of the US
Facility, Nu-kote employed the turn around company Glass & Associates, Inc.
("GLASS & ASSOCIATES") to provide interim management services. Shaun K.
Donnellan became President, Chief Executive Officer and Chief Operating Officer
of the Company in December, 1997, and William R. Ligon General Manager, North
American operations in January, 1998. Mr. Donnellan is the President and Mr.
Ligon an associate of Glass & Associates. The services of Messrs. Shaun K.
Donnellan and William R. Ligon were made available to the Company pursuant to a
consulting agreement between Glass & Associates and the Company. While the
Company did not compensate Messrs. Donnellan and Ligon directly for their
services, the Company paid Glass & Associates $1,766,315 during the one year
immediately preceding the commencement of this case. These services represented
operational, sales, financial, marketing and management consulting services
provided by Messrs. Donnellan and Ligon and other associates of Glass &
Associates. Additionally, the above amount includes the reimbursement of
expenses incurred by Glass & Associates in performing services for the Company.
Even with the employment of a workout firm, Nu-kote's financial
condition did not materially improve. The credit agreement evidencing the US
Facility was amended six times in 1997 and 1998, requiring payment by Nu-kote of
the fees and expenses of the Lenders' professionals averaging in excess of
approximately $364,000 per amendment. These attempts to restructure and
refinance the Credit Facilities in the year preceding bankruptcy placed a
further burden on the Company's already strained cash position created by the
Company's obligation to service its required interest payments and fees and
expenses associated with the debt owed to the Lenders. In total, from August 1,
1997 through the Petition Date, Nu-kote paid in excess of $2.7 million in
restructuring fees and expenses, $2.8 million in principal payments and $11.4
million in interest. An interest payment in excess of $1 million was to come due
on November 9, 1998.
Finally, Nu-kote's need for additional financing and to recapitalize
was made critical by the cumulative effect on the Company's cash position of
customers taking rebates in the fall of 1998. Historically in the Company's
business, certain customers were entitled to rebates based on their purchases
throughout the calendar year which traditionally accumulated during the calendar
year and were utilized by customers in the fall in the form
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 6
<PAGE> 15
of offsets on receivables. Immediately prior to the Petition Date, Nu-kote's
cash situation became critical due to an increase in CODs, cash requirements
incident to servicing continuing sales, and certain customers setting off their
rebates against receivables owed to the Company that came due in November and
early December. Nu-kote was further concerned that if a default under the Credit
Facilities occurred, the Lenders would attempt to foreclose on the stock of
Nu-kote's subsidiaries.
Faced with the litigation with the OEMs, the mounting prospective costs
of a debt workout and restructuring, and the threat of foreclosure by the
Lenders, all compounded by the rebate issue and the impending interest payment
to the Lenders, Nu-kote asserts it had no alternative but to file for protection
under Chapter 11 of the Bankruptcy Code.
ARTICLE II. PURPOSE OF CHAPTER 11
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. The commencement of a Chapter 11 case creates an "estate"
comprised of all the legal and equitable interests of the debtor. Sections 1101,
1107, and 1108 of the Bankruptcy Code provide that a debtor may remain in
possession of its property and continue to operate its business as a "debtor in
possession" ("DIP"). These Chapter 11 Cases were commenced with the filing of
voluntary petitions under Chapter 11 by the Debtors on November 6, 1998. Since
the filing of the Chapter 11 Case, the Debtors have been authorized to operate
and manage their business as debtors in possession.
Formulation of a plan of reorganization is the principal purpose of a
Chapter 11 case. The plan is the vehicle for satisfying the holders of claims
against and equity interests in a debtor. The Joint Plan was developed by the
Plan Proponents as an alternative to the pursuit of competing plans. See
"Discussion of the Joint Plan."
Under the Bankruptcy Code, when soliciting acceptance or rejection of a
plan of reorganization, a debtor must transmit to the holders of claims or
interests a disclosure statement approved by the court as containing "adequate
information." On ___________, 1999, the Bankruptcy Court found that this
Disclosure Statement contained information that is in compliance with the
adequate information requirement of the Bankruptcy Code. The Disclosure
Statement describes various transactions contemplated under the Joint Plan and
is supplied to you for purposes of assisting in your evaluation of, and your
decision of how to vote on, the Joint Plan.
ARTICLE III. CERTAIN RISK FACTORS
A. FACTORS RELATING TO CHAPTER 11 AND THE JOINT PLAN
The following is intended as a summary of certain risks associated with
the Joint Plan, but is not exhaustive and must be supplemented by the analysis
and evaluation of the Joint Plan and this Disclosure Statement made by each
Claimant as a whole in consultation with such Claimant's own advisors.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 7
<PAGE> 16
1. INSUFFICIENT ACCEPTANCES
The Joint Plan may not be confirmed without sufficient accepting votes.
Each impaired Class of Claims and Interests receiving a distribution under the
Joint Plan is given the opportunity to vote to accept or reject the Joint Plan.
The Joint Plan will be accepted by a Class of impaired Claims if the Joint Plan
is accepted by Claimants in such Class actually voting on the Joint Plan who
hold at least two-thirds (2/3) in amount and more than one-half (1/2) in number
of the total Allowed Claims of that Class which actually vote. The Joint Plan
will be accepted by a Class of impaired Interests if it is accepted by holders
of Interests in such Class actually voting on the Joint Plan who hold at least
two-thirds (2/3) in amount of the total Allowed Interests of the Class which
actually vote. However, an Interest Holder in Class 5 of the Joint Plan is
deemed to have rejected the Joint Plan and is therefore not entitled to vote on
the Joint Plan. Only those members of a Class who vote to accept or reject the
Joint Plan will be counted for voting purposes.
If any impaired Class of Claims under the Joint Plan fails to provide
acceptance levels sufficient to meet the minimum Class vote requirements but at
least one impaired Class of Claims accepts the Joint Plan, then, subject to the
provisions of the Joint Plan, the Plan Proponents intend to request confirmation
of the Joint Plan under Section 1129(b) of the Bankruptcy Code.
2. CONFIRMATION RISKS
Any objection to the Joint Plan filed in the Chapter 11 Case by a
Claimant or Interest Holder could either prevent Confirmation of the Joint Plan
or delay such Confirmation for a significant period of time.
3. BUSINESS RISKS
As with any business venture, risks are an inherent part of the process
and success can not be guaranteed. The Joint Plan contains projections that are
naturally estimations of future revenues and expenses which may not be realized.
It should be noted that all risk factors cannot be anticipated, that some events
develop in ways that were not foreseen and that many or all of the assumptions
which have been used in connection with this Disclosure Statement and the Joint
Plan will not transpire exactly as assumed. Some or all of such variations may
be material. While significant efforts have been made to be reasonable in this
regard, there can be no assurance that subsequent events will bear out the
analyses set forth herein. This Disclosure Statement contains a detailed
analysis of the market in which Nu-kote's business operates and a discussion of
recent changes therein. While Nu-kote believes it has taken all prudent measures
to address the future needs of this changing market, no assurance of future
success can be made.
4. LITIGATION RISKS
Finally, litigation is speculative and unpredictable. While Nu-kote
asserts that it is confident in the merits of the Canon and Epson Litigation,
the HP Litigation did not result
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 8
<PAGE> 17
in a monetary recovery as Nu-kote had hoped, and Nu-kote can not guarantee a
successful recovery on the anti-trust claims asserted against Canon and Epson.
ARTICLE IV. DESCRIPTION OF DEBTORS' BUSINESS
A. SUMMARY
Nu-kote 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, Canada and
Mexico 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.
B. BACKGROUND AND STRUCTURE OF THE COMPANY
Holding was formed as a Delaware corporation in 1986 by Clayton,
Dubilier & Rice, Inc. to acquire substantially all the assets and certain
liabilities of Worldwide Office Supplies Division and International Business
Forms Division of Unisys Corporation ("UNISYS"). Holding has two wholly owned
subsidiaries, International and Imperial.
The Company acquired ICMI in February 1992, Future Graphics in February
1993, and the worldwide hardcopy supplies business (the "PELIKAN HARDCOPY
DIVISION") of Pelikan Holding AG of Zug, Switzerland ("PELIKAN HOLDING") in
February 1995 (the "PELIKAN ACQUISITION"). ICMI is an independent manufacturer
of toner for non-impact printers and copiers and Future Graphics is a
remanufacturer of laser printer cartridges. Both are located in the United
States. In December 1997, the Company disposed of the Future Graphics cartridge
components division. The Company's Pelikan Hardcopy Division is a European
manufacturer of supplies for impact and non-impact printers. As detailed in
Article VII.N.2., the sale of the Pelikan Hardcopy Subsidiaries was closed
effective as of September 30, 1999.
The Debtors, their relationships to each other and their subsidiaries
are as follows, with the seven Debtor entities appearing in bold type:
- NU-KOTE HOLDING, INC., and its subsidiaries,
(i) NU-KOTE IMPERIAL, LTD.
(ii) NU-KOTE INTERNATIONAL, INC.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 9
<PAGE> 18
- NU-KOTE INTERNATIONAL, INC., and its U.S. subsidiaries,
(i) NU-KOTE IMAGING, INC.
(ii) INTERNATIONAL COMMUNICATION MATERIALS, INC.
(iii) VIRO-KOTE, INC.
(iv) FUTURE GRAPHICS, INC.
and its international subsidiaries,
<TABLE>
<CAPTION>
ENTITY JURISDICTION
------ ------------
<S> <C> <C>
(a) Interfas Holding, S.A. France
(b) NU-KOTE LATIN AMERICA, INC., and its subsidiary, Mexico
Nu-kote Internacional de Mexico,
S.A. de C.V. (35% stock ownership)
(c) Nu-kote Internacional de Mexico, SA (65% stock ownership) Mexico
</TABLE>
As detailed below, Holding is a publicly traded company with over 3,000
shareholders. Holding owns the stock of International and Imperial.
International, ICMI and Future Graphics are the operating entities for the U.S.
operations of the Company. Imperial holds the trademarks. ICMI was acquired in
1992. ICMI manufactures toner for non-impact printers and copiers. Future
Graphics manufactures laser printer cartridges.
The Company manufactures and/or distributes over 1,500 products in more
than 3,000 different packaging configurations for use in over 30,000 different
models of impact and non-impact printing mechanisms. The products can be broken
down into five main categories: laser cartridges, impact ribbons, toner, ink jet
cartridges and non-impact ribbons. The products are used in over 30,000
different models of impact and non-impact printing mechanisms, and the laser
products are compatible with over 90% of the low to mid-range laser printers now
on the market. The Company sells its products primarily throughout the United
States, Canada, and Mexico. The Company employs approximately 800 persons
worldwide.
The Debtors and the non-debtor affiliates in the U.S. operate as a
single economic and business unit. The Debtors operate under a centralized
accounting system, with all books and records kept, all collections made and all
payments generated from one central location in Franklin, Tennessee. The
Debtors' financial reporting is done on a consolidated basis, and the Debtors
file their federal tax returns on a consolidated basis. The business address for
each of the Debtors is 200 Beasley Drive, Franklin, TN 37064. A brief
individualized description of each Debtor and its function within the Company is
as follows:
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 10
<PAGE> 19
1. NU-KOTE HOLDING, INC.
Nu-kote Holding, Inc. ("HOLDING") is a public company with over 3,000
shareholders. Holding holds 100% of the stock of Nu-kote International, Inc. and
Nu-kote Imperial, Ltd. As of February 5, 1999, Holding had 21,775,302 shares of
Class A common stock, $.01 par value, outstanding. The following table reflects
certain of the stock ownership of Holding as of March 31, 1998:
<TABLE>
<CAPTION>
NATURE AND PERCENTAGE OF STOCK
NAME AND ADDRESS TITLE OWNERSHIP (A)(B)
---------------- ----- ------------------------------
<S> <C> <C>
Richard A. Larsen Sr. VP, General Counsel & *
200 Beasley Dr. Secretary (f)
Franklin, TN 37064
Phillip L. Theodore Sr. VP, CFO, Treasurer & Asst. *
200 Beasley Dr. Secretary
Franklin, TN 37064
John P. Rochon (d) (e) Director 11.5%
Richmont Capital Partners I LP
4300 Westgrove Dr.
Addison, TX 75001
Patrick E. Howard CEO, President and Director *
4300 Westgrove Dr.
Addison, TX 75001
Ligapart AG Stockholder 21.1%
Neuhofstrasse 4
6340 Bear, Switzerland
Oppenheimer Group (c) Stockholder 9.5%
Oppenheimer Tower
World Financial Center
New York, NY 10281
</TABLE>
* Less than 1% of Class
(a) Data as of November 6, 1998
(b) Unless otherwise indicated, such shares of common stock are owned with
sole voting and investment powers.
(c) Represents the aggregate shares held by the Oppenheimer Group, Inc. and
its subsidiaries and affiliates, including Oppenheimer Financial Corp.,
Oppenheimer Equities, Inc., Oppenheimer Holding, Inc., Oppenheimer &
Co., Inc. And Oppenheimer Capital, L.P., Oppenheimer Group, Inc. Is a
parent holding company and disclaims beneficial ownership and
dispositive power over the shares held by its subsidiaries and their
clients.
(d) Includes 2,559,360 shares owned by Richmont Capital Partners, L.P. as
to which shares Mr. Rochon has shared voting and investment power.
(e) Includes 18,000 shares that may be acquired through exercise of stock
options.
(f) Richard A. Larsen resigned from the Company effective October 31, 1999.
2. NU-KOTE IMPERIAL, LTD.
Nu-kote Imperial, Ltd. ("IMPERIAL") holds various of the trademarks of
the Company, including the Pelikan trademark and trade name which the Company
has the right to use pursuant to terms of a trademark license agreement entered
into in 1995 in connection with the purchase of the hardcopy supplies business
of Pelikan Holding A.G., an unrelated Swiss company. As of the Petition Date,
the Pelikan trademark and the associated covenant-not-to-compete were valued
(book value) at $6,876,000 and $4,558,000, respectively. Imperial receives
royalty income, approximately $885,413 for fiscal year 1999 through the Petition
Date, on the Pelikan trademark. As a result of the sale of the Pelikan
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 11
<PAGE> 20
Hardcopy Subsidiaries, the license on the Pelikan trademark has been limited to
North America and there are no provisions for ongoing royalty income. The stock
of Imperial is owned 100% by Holding.
3. NU-KOTE INTERNATIONAL, INC.
Nu-kote International, Inc. ("INTERNATIONAL") along with ICMI and
Future Graphics, is the operating entity for all of the US operations.
International manufactures and distributes ribbons, inkjet cartridges, ink rolls
and toner. International owns 100% of the stock of Imaging, ICMI, Viro-kote,
Inc., Future Graphics, Latin America, Interfas Holding S.A. International owns
65% of the stock of Nu-kote Internacional de Mexico, S.A. International is the
named defendant in each of the OEM lawsuits.
4. NU-KOTE IMAGING INTERNATIONAL, INC.
Nu-kote Imaging International, Inc. ("IMAGING") was formed to acquire
certain US hardcopy assets of Pelikan Holding A.G., an unrelated entity in 1995.
The stock of Imaging is owned 100% by International.
5. INTERNATIONAL COMMUNICATION MATERIALS, INC.
International Communication Materials, Inc. ("ICMI") manufactures toner
for non-impact printers and copiers. The stock of ICMI is owned 100% by
International. International purchased the stock of ICMI on or about February
24, 1992. ICMI and private label branded laser and copier toners are marketed to
distributors serving the laser cartridge remanufacturing market and to large
original equipment manufacturers.
6. FUTURE GRAPHICS, INC.
Future Graphics, Inc. ("FUTURE GRAPHICS") manufactures laser printer
cartridges. On December 31, 1997, Future Graphics transferred all of the assets
of its components division to Future Graphics, L.L.C. (an unrelated transferee)
for approximately $3,700,000 in a combination of cash and assumed liabilities.
The stock of Future Graphics is owned 100% by International.
7. NU-KOTE LATIN AMERICA, INC.
Nu-kote Latin America, Inc. ("LATIN AMERICA") has no independent
operations and holds no assets, except that Latin America owns 35% of the stock
of Nu-kote Internacional de Mexico, S.A., valued at $1.00. The stock of Latin
America is owned 100% by International.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 12
<PAGE> 21
C. CURRENT OFFICERS AND DIRECTORS OF NU-KOTE
There are currently only two directors of Nu-kote. While there may
exist certain other officers of the Company, the officers with primary
operational and decisional responsibilities for the business operations of the
Company are listed below:
PATRICK E. HOWARD, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr.
Howard, age 52, has been the Chief Executive Officer of the Company since
October, 1998. Previously, Mr. Howard served as Chief Operating Officer and
Chief Executive Officer of the Company from February, 1997 and August, 1997,
respectively, until December, 1997. Mr. Howard has been a director of the
Company continuously since August, 1997. Mr. Howard has been the Chief Executive
Officer of the Richmont Group since January, 1996. Prior to joining the Company,
Mr. Howard served as Executive Vice President of Mary Kay, Inc. from December,
1985 until January, 1996.
JOHN P. ROCHON, DIRECTOR. Mr. Rochon, age 48, has been a director of
the Company since 1994. Mr. Rochon has been Chairman of the Richmont Corporation
since 1990 and Chief Executive Officer of Mary Kay Holding Corporation since
1991. Previously, Mr. Rochon served in positions of increasing responsibility
with Mary Kay Holding Corporation, including Vice Chairman from 1987 to 1991.
Through Richmont Corporation and its predecessor and affiliated companies, Mr.
Rochon has built a large, diversified portfolio of companies and investments
strongly focused on consumer goods and services. Mr. Rochon also serves as a
director of Royal Appliance Manufacturing Company.
C. RONALD BAIOCCHI, SENIOR VICE-PRESIDENT, GENERAL MANAGER, NU-KOTE
INTERNATIONAL, INC. Mr. Baiocchi, age 56, has been Vice President, Nu-kote
International, Inc. since January 1987. Prior to joining the Company, Mr.
Baiocchi worked at Burroughs Corporation (now Unisys) since October 1978 and has
held a number of executive positions in manufacturing, product management, sales
and marketing and business planning.
PHILLIP L. THEODORE, SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
TREASURER, ASST. SECRETARY AND DIRECTOR. Mr. Theodore, age 32, has been Senior
Vice President, Chief Financial Officer, Treasurer and Assistant Secretary since
March 1998. He joined the Company in June 1994 to serve as controller of the
North American Operations. Prior to joining the Company, Mr. Theodore was a
manager at Coopers & Lybrand L.L.P. and worked in the business assurance group
where he specialized in mergers and acquisitions. Mr. Theodore is a Certified
Public Accountant.
IAN ELLIOTT, VICE PRESIDENT, PRODUCT DEVELOPMENT, NU-KOTE
INTERNATIONAL, INC. Mr. Elliott, age 42, has been Vice President, Product
Development, Nu-kote International, Inc. since September 1996. He joined
Burroughs Corporation (now Unisys) in the United Kingdom in 1978 and has served
in positions of increasing responsibility primarily in sales and product
management functions, within Europe and the U.S. From April 1994 to September
1996 he served as Vice President, Business Development and Director, Product
Management - North American Supplies Group.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 13
<PAGE> 22
RICHARD A. LARSEN, SENIOR VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY. Mr. Larsen, age 50, has been Senior Vice President and General
Counsel of the Company since June 1995 and has also been Secretary of the
Company since March 1998. Prior to joining Nu-kote, Mr. Larsen was Vice
President, General Counsel and Secretary of Harris Adacom Corporation for five
years. As stated above, Mr. Larsen has resigned from the Company effective
October 31, 1999.
D. HISTORICAL AND RENEWED RETENTION AGREEMENTS WITH KEY NU-KOTE EMPLOYEES
1. HISTORICAL RETENTION AGREEMENTS
None of the Company's executive officers have written employment
agreements. In May 1998, however, Messrs. Baiocchi, Larsen, Theodore and Elliott
entered into retention agreements with Nu-kote which are triggered upon a change
in control or a restructuring of the Nu-kote's long-term financing agreement
with its lenders.
2. NEW AND RENEWED RETENTION AGREEMENTS
Additionally, on April 21, 1999, Nu-kote filed a Motion to Approve Key
Employee Retention Agreements (the "EMPLOYEE RETENTION MOTION"). Nu-kote filed
the Employee Retention Motion in recognition of what Nu-kote believes to be the
efforts of certain Key Employees who have been instrumental to Nu-kote's
reorganization efforts. Under the terms of the retention agreements, a retention
payment to the individuals designated in the Employee Retention Motion will be
payable only upon confirmation of a plan for the Debtors, a sale of
substantially all of the assets of the Debtors or a termination of a key
employee without cause. On June 10, 1999, the Bankruptcy Court entered its order
approving the Employee Retention Motion.
E. PREPETITION INFORMATION: HISTORICAL PERSPECTIVE ON THE INDUSTRY
The market for supplies for typewriters and other impact printers has
been declining in recent years and is expected to continue to decline as
non-impact printing devices become more popular and replace many of the impact
printers now in service. During fiscal 1998, the Debtors experienced a decline
of approximately 9.8% in their sales from impact products. While the Debtors
expect the market for supplies for typewriters and other impact printers to
continue to decline as a whole, the Debtors believe there will continue to be an
important market for its ribbon products for the foreseeable future. The selling
prices for the Debtors' impact products have come under pressure as competitors
have reduced prices in an attempt to preserve their portion of a declining
market.
The printing supplies market is extremely competitive. In both the
impact and non-impact markets, the Debtors' biggest competitors are the original
equipment manufacturers, most of which are substantially larger and have greater
financial resources than the Debtors. In the impact supplies business, some
original equipment manufacturers manufacture their own ribbon products. Other
original equipment manufacturers buy ribbons from outside suppliers. In
addition, there are currently over 100 independent
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 14
<PAGE> 23
ribbon manufacturers in the United States and over 200 worldwide, ranging from
small local producers to national and international companies.
Original equipment manufacturers currently dominate the market for the
majority of toner products and ink jet supplies. However, the market for
compatible toner supplies is still developing, and there are currently several
independent competitors in this market. The willingness of the original
equipment manufacturers to offer ink jet products at very low prices, and the
possibility of substantial price reductions by one or more original equipment
manufacturers, could have a material adverse effect on the portion of the
Debtors' business affected thereby. The remanufactured laser printer cartridge
market and the cartridge remanufacturing and refilling market have historically
consisted of numerous small independent producers. Recently, however, various
original equipment manufacturers have entered these markets resulting in a
significant increase in competition.
During the past five years, the U.S. office products industry has
undergone a series of significant changes. Although the original equipment
manufacturer channel of distribution, which includes such well known brand name
manufacturers as Xerox, Brother, Canon, HP, Pitney Bowes, Ricoh, Unisys and
Epson, has remained relatively constant, consolidation in the aftermarket has
led to the emergence of a limited number of large, well capitalized wholesalers,
dealers, and mass merchandisers. Today, in fact, the wholesale channel of
distribution is dominated by two national resellers, S. P. Richards and United
Stationers. Similarly, the dealer channel of distribution is dominated by Boise
Cascade, BT Office Products, Corporate Express, Office Depot Business Services
Division, Staples Business Advantage, and U. S. Office Products, all of which
have sales offices and distribution centers on a nationwide basis. In addition,
a secondary segment of the dealer channel of distribution is dominated by five
large buying groups which, in turn, represent approximately 4,000 smaller dealer
participants. Similarly, the mass merchandise, or retail channel of
distribution, is dominated by Kmart, Office Depot, Office Max, Sams Club,
Staples, and Walmart, all of which have outlets throughout the United States.
As these aftermarket leaders focused on improving market share,
end-user product prices declined, reseller margins narrowed, and third party
suppliers, like Nu-kote, were squeezed. As the market stabilized, however, these
large, well capitalized companies began to focus on supply chain management and
more effective end-user merchandising in an effort to improve what had become
thinner margins. These companies recognized that the original equipment
manufacturers' brand name products were drivers of consumer traffic and
generators of sales volume. At the same time, however, they recognized that the
original equipment manufacturers' brand name products provided very little in
the way of gross profits. As a result, these market leaders became more enamored
with private label products of comparable quality, selling at significantly
lower price points and generating significantly higher profit margins, as
important alternatives to original equipment manufacturers' brand name products.
As a result, aftermarket suppliers, such as Nu-kote, began to see, albeit only
recently, an easing of the intense third party supplier price pressures of the
past.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 15
<PAGE> 24
During the past five years, too, the U.S. office products industry has
seen a declining level of demand for impact products in favor of non-impact
products or, alternatively, has seen a migration from the old technology to the
new technology where the products are protected by more complex patents and
demand a more sophisticated level of knowledge vis-a-vis the end-user purchasing
decision.
<TABLE>
<CAPTION>
NEW TECHNOLOGY:
OLD TECHNOLOGY: NON-IMPACT PRODUCTS
IMPACT PRODUCTS (Thermal, Inkjet,
(Ribbons) Toner & Laser Cartridges)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
- - Declining Markets - Growing Markets
- - Low Barriers to Entry - High Barriers to Entry
- - Excess Manufacturing Capacity - Insufficient Manufacturing Capacity
- - Shrinking Profit Margins - Expanding Profit Margins
- - Unsophisticated Purchasing Decision - Sophisticated Purchasing Decision
- --------------------------------------------------------------------------------------------------------
</TABLE>
F. NU-KOTE'S PLACE IN THE OFFICE PRODUCTS MARKET
Nu-kote operates in an approximately $20 billion office products market
which includes impact ribbons, thermal products, ink jet accessories, monochrome
and color toners, and recycled laser cartridges. While impact ribbon sales have
been declining at 16%-18% per year, thermal ribbons, ink jet accessories,
toners, and laser cartridges have been growing at 8%-20% per year depending on
the particular product. Nu-kote intends to offset the continued decline of
impact ribbon sales with faster growing non-impact thermal, ink jet, toner, and
laser cartridge sales, the latter of which demand a more sophisticated level of
end-user knowledge vis-a-vis the end-user purchasing decision. Impact ribbon
sales, however, should fall at a rate somewhat less than that of the overall
market due, primarily, to market share gains.
G. NU-KOTE'S MARKET SEGMENTATION
Nu-kote has historically served and intends to continue to serve both
the original equipment manufacturers and the aftermarket distributors, namely
the wholesalers, dealers, and retailers. Both have similar product offerings.
Each, however, is driven by distinctly different operating characteristics and,
as a result, provides suppliers with significantly different profit margins.
<TABLE>
<CAPTION>
ORIGINAL EQUIPMENT MANUFACTURERS AFTERMARKET DISTRIBUTORS
(Wholesalers, Dealers, Retailers)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- - Technology & Engineering Driven - End User & Distribution Driven
- - Long Lead Times - Short Lead Times
</TABLE>
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 16
<PAGE> 25
<TABLE>
<S> <C> <C>
- - No Product Returns - Significant Product Returns
- - On Time Collection of A/R - Extended Collection of A/R
- - No Rebates - Rebates
- - No Advertising Expense - Advertising Expense
- - Modest Supporting Infrastructure - Significant Supporting Infrastructure
- - No Hidden Costs - Hidden Costs
- - Longer Term Stable Contracts - Less Certain Annual Bid Process
</TABLE>
In serving the original equipment manufacturers, Nu-kote must be
sensitive to the technological and engineering content of the original equipment
manufacturers' products and become, therefore, integrally involved with the
original equipment manufacturers' new printer development programs from a
research and development point of view. In addition, Nu-kote must deliver
innovative packaging and create end-user merchandising programs if the company
is to become a preferred supplier.
In addressing the aftermarket, however, namely the wholesalers,
dealers, and retailers, Nu-kote must be sensitive to supply chain and end user
considerations. In all three of these channels of distribution, the company must
provide quality products, aggressive prices and superior line fill rates. In the
wholesaler and dealer channels of distribution, however, Nu-kote must offer
marketing incentive programs to ensure that the Nu-kote label is promoted at the
expense of the original equipment manufacturer label and, in the retail channel
of distribution, Nu-kote must offer point-of-sale merchandising programs to
ensure that the end-user is fully conversant with the advantages of a Nu-kote
product versus an original equipment manufacturer product.
Similarly, the original equipment manufacturers are distinctly
different from the aftermarket distributors in terms of lead times, pricing,
infrastructure support, and credit terms. The original equipment manufacturers,
for example, offer long lead times, which reduces the need for on-hand
inventory; purchase printer supplies at prices which are not impacted by
rebates, advertising allowances and/or product returns; demand less in support
of their products; and remit trade payables on a timely basis. The aftermarket
distributors, however, are at the opposite end of the spectrum. They demand
three-to-five day delivery, prices which include rebates and advertising
allowances, and the right to return product as an inventory management tool. In
addition, they require extensive support in terms of supplier personnel and
infrastructure and tend to stretch trade payables well beyond due dates.
Accordingly, original equipment manufacturers provide better profit margins and
lower break-even levels in terms of sales volume.
Nu-kote has historically functioned well in both the original equipment
manufacturer and the aftermarket distributors markets. Among Nu-kote's core
competencies which have contributed to its historical success are:
1. Strong engineering and technical skills, which are critical to
success in the original equipment manufacturer market;
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 17
<PAGE> 26
2. Quality products and good line fill rates, which are critical
to success in the wholesale, dealer, and retail markets;
3. Excellent manufacturing facilities which, domestically, have
been consolidated and reorganized by product line;
4. A streamlined transportation program, which has reduced the
number of common carriers from over one hundred to under ten; and
5. Broad channels of distribution, excellent customer service,
and a loyal customer base.
ARTICLE V. ASSETS OF NU-KOTE
The following is a summary description of Nu-kote's principal assets.
The information has been compiled from Nu-kote's audited and unaudited records,
Schedules and Statements of Financial Affairs, and Monthly Operating Reports
filed by Nu-kote. The Debtors have historically operated as one company, filed
their federal tax returns and done all financial reporting on a consolidated
basis, and the Bankruptcy Court previously ordered that the assets of the
Debtors shall be treated as a single consolidated estate save and except that
any recoveries on the OEM Litigation shall be distributed as if such estates had
not been consolidated. Pursuant to the terms of the Joint Plan, a claim against
any one of the Debtors shall be treated as a claim against the consolidated
estate, including any recoveries on the OEM Litigation, and the assets of the
Debtors are therefore discussed on a consolidated basis.
A. CASH
As of October 22, 1999, the books and records of Nu-kote reflect on a
consolidated basis cash and cash equivalents totaling $3,675,000.
B. INVENTORY
As of October 22, 1999, the Debtors have inventory at lower of cost or
market of $29,432,000.
C. TRADEMARKS
Nu-kote (Imperial) owns the rights to the Pelikan trademark and the
associated covenant-not-to-compete which are valued (book value) at $6,876,000
and $4,558,000, respectively, less accumulated amortization of $4,698,943, for a
total book value of $6,735,057 as of February 19, 1999. In connection with the
sale of the Pelikan Hardcopy Subsidiaries, the Pelikan trademark license was
restricted to North America.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 18
<PAGE> 27
D. PATENTS
Subject to certain changes incident to the sale of the Pelikan Hardcopy
Subsidiaries, Nu-kote holds numerous patents, certain of which are subject to
the security interests of the Lenders. International, Imaging and ICMI are the
owners of record of numerous patents of the Company, as listed in the charts
attached hereto as Exhibit "B".
E. RECEIVABLES
Nu-kote has trade receivables in the amount of $18,737,000 as of
October 22, 1999.
The Intercompany receivables, including receivables owed by the related
nondebtor entities, were $271,717,000 as of October 22, 1999.
F. REAL PROPERTY
As of the Petition Date, the real property of the Debtors was as follows:
1. Connellsville, Pennsylvania facility: a manufacturing,
research and development and distribution facility used in connection with the
manufacture of toner and located at Rt. 119 South, Connellsville, PA 15425
valued at $740,613 on the Debtors' books (ICMI);
2. Derry, Pennsylvania facility: a 108,000 square foot industrial
manufacturing, research and development facility at One Imaging Lane in Derry,
Pennsylvania which has a fair market value of approximately $500,000 (Imaging);
and
3. Franklin, Tennessee facility: a 144,154 square foot metal
manufacturing warehouse located in Franklin, TN valued at $3,827,896
(accumulated depreciation of $611,895) (International).
G. MACHINERY, FIXTURES AND EQUIPMENT
As of the Petition Date, the machinery, fixtures and equipment of the
Debtors was as follows:
1. machinery, fixtures equipment and supplies in Franklin, TN,
Rochester, NY and Nogales, Mexico(1) valued at $18,164,748 (International);
2. machinery, fixtures and equipment located at the
Connellsville, PA distribution facility valued at $6,473,901 (ICMI);
3. $746,825 in equipment in Chatsworth, California (Future
Graphics);
- -------------------
(1) As part of the Company's ongoing effort to cut costs and
streamline operations, the Nogales, Mexico facility was closed in July, 1999.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 19
<PAGE> 28
4. leasehold improvements in Franklin, TN valued at $2,492,370
(accumulated depreciation of $391,254) (International); and
5. leasehold improvements in Rochester, NY valued at $105,351
(accumulated depreciation of $84,836) (International).
H. STOCK
Holding holds 100% of the stock of International and Imperial.
International owns 100% of the stock of Future Graphics, ICMI, Imaging, Latin
America, Viro-kote, Inc., Interfas Holding, S.A., and 65% of the stock of
Nu-kote Internacional de Mexico, S.A. All of these stock interests of
International are pledged as collateral to secure the claims of the Lenders and
are of no value in excess of the liens of the Lenders. Latin America owns 35% of
the stock of Nu-kote Internacional de Mexico, S.A., valued at $1.00.
I. THE OEM LITIGATION
The finished products of Nu-kote are sold at both the retail level to
consumers under the Nu-kote and Pelikan brand names and directly to the original
equipment manufacturers of printing equipment. Products are manufactured to the
original equipment manufacturers' specifications and sold both with the original
hardware and in the aftermarket. Nu-kote also manufactures and distributes a
variety of compatible ink jet cartridges for use in the HP, Epson and Canon ink
jet printers, as well as a line of HP compatible cartridge refill kits designed
for the home or small business user, and provides a cartridge remanufacturing
service similar to the one employed for remanufactured laser toner cartridges.
The nature of the products manufactured and distributed by Nu-kote and the OEMs
has resulted in a variety of litigation. International is the named defendant in
each of the OEM Litigation cases.
1. HEWLETT-PACKARD COMPANY. HEWLETT-PACKARD CO. V. NU-KOTE
INTERNATIONAL, INC., Case No. C94-20647 JW (EIA):
HISTORY OF THE HP LITIGATION: On September 19, 1994, HP filed a lawsuit
against Nu-kote in the United States District Court for the Northern District of
California (the "CALIFORNIA DISTRICT COURT"), San Jose Division, Case No.
C94-20647 JW (EIA), (the "HP LITIGATION") alleging patent and trademark
infringement, unfair competition and false advertising. Nu-kote asserted
affirmative defenses to claims brought by HP, and asserted seven counterclaims
against HP, including inter alia: violations of the Lanham Act, Sherman and
Clayton Antitrust Acts. Nu-kote sought compensatory, punitive and treble
damages, court costs and attorneys' fees, as well as injunctive relief.
On November 13, 1998, Nu-kote filed a motion for relief from stay to
allow the HP Litigation to continue despite the pendency of these bankruptcy
cases. Nu-kote felt that continuation of the HP Litigation was appropriate as
the litigation was large and complex, had been the subject of years of extensive
preparation, and was then on the eve of trial.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 20
<PAGE> 29
The Bankruptcy Court found that "cause" under ss. 362 of the Bankruptcy Code
existed to lift the automatic stay to allow the HP Litigation to proceed to
trial.
Prior to trial the California District Court dismissed certain of HP's
patent claims and certain of Nu-kote's antitrust and other claims. The remaining
claims in the HP Litigation went to trial on May 17, 1999. On July 22, 1999, the
jury rendered its verdict. The jury found that Nu-kote infringed three HP
patents and certain of HP's trademarks, and engaged in false advertising. The
jury found that Nu-kote's conduct was willful. The jury awarded HP damages in
the amounts of $456,937.80, $434,120.00 and $1,138,394.00 for damages suffered
by HP for patent infringement claims, trademark/unfair competition claims and
false advertising claims. The jury found in Nu-kote's favor on one of HP's
patent claims and certain of HP's trademark claims. The jury also found that
Nu-kote's use of its current green and white packaging does not violate HP's
trademarks. The jury rejected all of Nu-kote's remaining antitrust claims and
awarded Nu-kote no damages. There remain before the California District Court
issues not addressed by the jury including those concerning HP's claims for
attorneys' fees, enhanced damages, costs and injunctive relief, and Nu-kote's
equitable defenses, claims for attorneys' fees and other relief. The California
District Court must resolve certain issues before entering judgment on the jury
verdict.
PROPOSED SETTLEMENT OF THE HP LITIGATION: Subsequent to the rendition
of the jury verdict in the HP Litigation, Debtors' management and general
bankruptcy counsel have entered into extensive good faith arms length
negotiations seeking settlement and resolution of the litigation between the
parties. As a result of these negotiations, an agreement (the "SETTLEMENT
AGREEMENT") has been reached, subject to approval of the Court. Due to the
confidential and proprietary nature of certain portions of the Settlement
Agreement, a redacted version of same, is attached to the Motion to Approve
Compromise and Settlement Agreement as proposed by and between Nu-kote and
Hewlett-Packard Company, filed of record with the Bankruptcy Court.
The principal material terms of the proposed Settlement Agreement which
have not been redacted due to concerns of confidentiality include:
(A) JUDGMENTS: HP shall be granted judgments and claims in its
favor dismissing Nu-kote's antitrust claims and awarding
damages on HP's claims on trademark infringement, unfair
competition, false advertising, attorneys' fees and costs in
the following amounts: $1,500,000.00 for awardable costs
incurred by HP in the HP Litigation, plus $456,937.80 for
damages suffered by HP on HP's patent infringement claims,
plus $434,120.00 and $1,138,394.00 for damages suffered by HP
on HP's trademark/unfair competition claims and false
advertising claims, plus $2,000,000.00 for HP's awardable
attorney's fees in the HP Litigation, for a sum total of
$5,529,451.80. The judgments and claims shall be treated as
allowed liquidated, undisputed, non-contingent, unsecured
pre-petition claims in the Bankruptcy Case. The judgments will
not be entered until the Patent Covenants become effective.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 21
<PAGE> 30
(B) INJUNCTIONS: Subject to the Patent Covenants granted by HP,
Nu-kote agrees to the entry of certain injunctions against
further patent infringement, trademark infringement, and false
advertising. The injunctions will not be entered until after
the Patent Covenants become effective.
(C) VACATUR OF PATENT RULINGS AND FINDINGS: The parties agree to
the vacatur of certain of the District Court's orders and
certain of the jury's findings regarding the validity,
invalidity or infringement of certain of HP's patents. In
addition, Nu-kote acknowledges the validity, enforceability
and infringement of certain HP patents.
(D) PATENT COVENANTS: HP grants to Nu-kote Patent Covenants, which
are covenants not to sue Nu-kote for infringement of certain
patents as set forth in the confidential portions of the
Settlement Agreement, which shall become effective upon
receipt by HP of the duly executed Certificates of Compliance
relating to the Document Escrow contemplated by the Settlement
Agreement. The Patent Covenants will allow Nu-kote to continue
to market its full line of HP compatible inkjet products.
(E) DOCUMENT ESCROW: Placement in escrow under seal with the
United States Trustee by Nu-kote and the persons and entities
defined as Nu-kote Persons under the Settlement Agreement of
all Discovery Materials, including but not limited to HP
Discovery Materials and Nu-kote Discovery Materials,
Deposition Materials, and Privileged Materials (Nu-kote alone
shall not be required to search for or turn over Privileged
Materials) that are in the possession, custody or control of
Nu-kote or any Nu-kote Persons or that Nu-kote or any Nu-kote
Persons know to be in the possession, custody or control of
any Litigation Vendors. Nu-kote Persons will be enjoined to
turn over all Discovery Materials that are currently in their
possession or that come into their possession in the future.
These Discovery Materials shall be placed in a storage
facility mutually acceptable to the parties and the United
States Trustee to be held under seal by the United States
Trustee for the Retention Period as defined in the Settlement
Agreement, and verification of the placement of such Discovery
Materials by Nu-kote by execution of Certificates of
Compliance as contemplated in the Settlement Agreement.
Interested parties will have access to the Discovery Materials
only pursuant to Bankruptcy Court Order after notice and a
hearing, and only under the conditions set forth in the
Settlement Agreement as specified by the applicable Bankruptcy
Court Order. All Discovery Materials must be returned to the
escrow within the Retention Period, and at the end of the
Retention Period the Discovery Materials will be destroyed.
(F) MUTUAL RELEASES: Mutual releases executed by and between
Nu-kote for itself and for any and all Subsidiaries,
predecessors, successors, assigns, and, to the extent
permitted by law, for its related companies, officers,
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 22
<PAGE> 31
directors, employees, agents, shareholders, customers,
attorneys and consultants and HP for itself and for any and
all Subsidiaries, predecessors, successors, assigns, and, to
the extent permitted by law, for its related companies,
officers, directors, employees, agents, shareholders,
customers, attorneys and consultants.
(G) FUTURE DISPUTES: An agreement between HP and Nu-kote that each
will give the other written notice of and endeavor to resolve
any potential future disputes between themselves prior to
resorting to litigation, unless such issues or questions have
immediate adverse legal implications relative to the trademark
or trade dress rights of the offended party. The Bankruptcy
Court will retain exclusive jurisdiction to enforce the
Settlement Agreement and to resolve any disputes that might
arise under the Settlement Agreement .
(H) RESTRICTIONS ON TRANSFER: The agreement restricts who can
benefit from the Patent Covenants and requires HP's consent if
more than 20% of the stock or assets of Nu-kote are to be sold
to a third party.
This summary is not intended to supersede or replace any of the terms
of the Settlement Agreement and shall not be used to interpret the Settlement
Agreement. If there is any inconsistency between this summary and the terms of
the Settlement Agreement, the terms of the Settlement Agreement shall control.
Nu-kote firmly believes that the Settlement Agreement negotiated
between Nu-kote and HP is in the best interests of the estate. The HP Litigation
has consumed the time and resources of the Company for in excess of four years.
Unless the HP Litigation is compromised and settled, the parties anticipate that
the judgment to be entered by the California District Court will likely be
appealed, and final resolution of the HP Litigation will be protracted. This
Settlement Agreement, negotiated with the interests' of the Debtors and the
creditors of this estate as a paramount concern, brings closure to this chapter
of Nu-kote's history and brings the Debtors one step closer to reorganization.
Finally, the benefits to Nu-kote stemming from the Settlement Agreement
are substantial. Although confidentiality concerns prevent a detailed recitation
of the effect of the Settlement Agreement on the business operations of Nu-kote,
Nu-kote represents that the Patent Covenants granted under the Settlement
Agreement are crucial to the continued business success of Nu-kote and will
allow Nu-kote to continue its full line of HP compatible products. The prompt
and efficient resolution of the claims asserted by HP in this case as
pre-petition unsecured claims instead of administrative claims is also of
significant value, and the intangible benefit of the Debtors, their management
and counsel directing their attention to other essential matters should not be
undervalued. The hearing on the Motion to Approve the Settlement Agreement will
be held before the Bankruptcy Court on December 2, 1999.
2. SEIKO EPSON CORP. SEIKO EPSON CORP. AND EPSON AMERICA, INC.,
PLAINTIFFS AND COUNTER-DEFENDANTS VS. NU-KOTE INTERNATIONAL, INC. AND PELIKAN
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 23
<PAGE> 32
PRODUKTIONS, A.G., DEFENDANTS AND COUNTER-CLAIMANTS, Case No. CV95-2734RTJH
("EPSON I") and SEIKO-EPSON CORP. AND EPSON AMERICA, INC., PLAINTIFFS AND
COUNTER-DEFENDANTS VS. NU-KOTE INTERNATIONAL INC., AND PELIKAN PRODUKTIONS,
A.G., DEFENDANTS AND COUNTER-CLAIMANTS, pending in the U.S. District for Central
District of California under Case No. CV97-9587TJH ("EPSON II") (consolidated);
SEIKO EPSON CORP. AND EPSON AMERICA, INC., PLAINTIFFS/APPELLANTS VS. NU-KOTE
INTERNATIONAL, INC. AND PELIKAN PRODUKTIONS, A.G., DEFENDANTS/APPELLEES, Appeal
from Orders of U.S. District Court for Central District of California to the
U.S. Court of Appeals for the Federal Circuit under Docket Nos.
97-1313-1548-1566-1588 and 98-1015 ("APPEAL"):
On April 25, 1995, Epson commenced Epson I (which involves actions
which were included in the Appeal) alleging patent infringement, trademark
infringement, false advertising and unfair competition. International and PPAG
have filed answers that assert nine affirmative defenses to the claims alleged
in Epson's complaint. Both International and PPAG have asserted counterclaims
involving invalidity, unenforceability and non-infringement of patent rights,
together with violations of the Sherman and Lanham Acts. International seeks
damages and an injunction for false advertising, trade libel, disparagement of
goods, defamation, and unfair competition. Epson II was filed on October 15,
1997 involving a second action for patent infringement and has now been
consolidated with Epson I by stipulation. Little or no action has taken place
regarding the pertinent matters involved in Epson II.
International and PPAG were initially successful in disposing of six
out of seven patents alleged to be infringed through summary judgment action. In
a series of rulings in 1997, the District Court held six (6) out of seven (7) of
Epson's patents-in-suit in Epson I to be either invalid or unenforceable. The
District Court also held Nu-kote and PPAG in contempt for violating the PI. The
District Court's contempt ruling is memorialized in two written orders. The
first order directs Nu-kote and PPAG to pay Epson's lost profits of $1,050,849
and attorneys' fees of $31,413. The second order does not quantify a monetary
award. The District Court also issued an amended preliminary injunction (the
"API"), which enjoins Nu-kote and PPAG from, among other things, infringing
certain patents that were not part of the PI. On or about September 28, 1998,
Epson filed a motion to hold Nu-kote and PPAG in contempt for violation of the
API. Pre-petition, the motion had not been decided by the District Court.
Epson appealed the District Court's invalidity and unenforceability
rulings. Nu-kote and PPAG appealed the District Court's contempt rulings. The
Appeal was fully briefed and oral argument was conducted before the Federal
Circuit on November 2, 1998, prior to the Petition Date.
The litigation with Epson has been the subject of many days of hearings
in the Bankruptcy Court. Initially, on December 1, 1998, Epson filed an
Emergency Motion for relief from the automatic stay claiming it was suffering
immediate and irreparable harm because the stay had interrupted the pending
patent litigation against International. Disposition of this Emergency Motion is
discussed in detail in this Disclosure Statement. In summary, the final hearing
on Epson's Emergency Motion commenced, after much
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 24
<PAGE> 33
rescheduling, on February 4 and 5, 1999. This hearing was not completed, and on
February 10, 1999, the Bankruptcy Court entered an Order scheduling the
conclusion of the final hearing for twenty days after the completion of the
presentation of evidence in the HP trial. The Bankruptcy Court specifically
found that Epson's "claims of an `emergency' need for relief from the stay are
not consistent with its behavior," and that "the `emergencies' Seiko-Epson
alleged in December to demand a final hearing on less than three days' notice
have evaporated or have not motivated Seiko-Epson to expeditiously prosecute its
`Emergency' Motion." In light of the non-exigent circumstances, and in order to
avoid interference with the HP trial, the Bankruptcy Court then continued the
final hearing until twenty days after the completion of the presentation of
evidence in the HP trial. The Bankruptcy Court ruled that "the stay is continued
in effect pending completion of this final hearing." As set forth below, upon
rendition of the verdict in the HP Litigation, in order to avoid another
prolonged hearing, the Debtors and Epson agreed to limited relief from the
automatic stay only to the extent necessary to allow the Appeal to continue as
and to the extent determined appropriate by the United States Court of Appeals
for the Federal Circuit, and the Federal Circuit has now issued its opinion.
The California District Court has stayed all further proceedings in the
Epson Litigation. On April 1, 1999, the California District Court entered an
Order Deferring Decision on Application of Bankruptcy Stay to the United States
Bankruptcy Court for the Middle District of Tennessee, and Deferring Any Further
Proceedings in this Matter Pending Decision on that Issue. The California
District Court held "that there shall be no further proceedings in this action
until a decision on whether the bankruptcy stay applies to Pelikan Produktions,
A.G. issues from the United States Bankruptcy Court for the Middle District of
Tennessee."
The Debtors and Epson reached an agreement to certain limited relief
regarding the Appeal as sought in the Motion for Relief from Stay filed by
Epson. The Debtors and Epson agreed to relief from the automatic stay only to
the extent necessary to allow the Appeal to continue as and to the extent
determined appropriate by the United States Court of Appeals for the Federal
Circuit. On September 8, 1999, the Federal Circuit Court issued its opinion
remanding the issues concerning the contempt orders to the California District
Court for further consideration, reversing the invalidity and unenforceablity
summary judgment rulings on certain Epson patents placing those patents back
into the Epson Litigation, and stating that Court's opinion that the automatic
stay did not apply to PPAG. On October 29, 1999, the Federal Circuit issued an
additional decision stating that Court's opinion that its prior decision as to
all issues, including vacatur and remand of the assessment of sanctions, is
fully applicable to Nu-kote as to Pelikan. No trial date for the Epson
litigation has been set by the California District Court.
3. CANON USA, INC. CANON USA, INC. V. NU-KOTE INTERNATIONAL,
INC., Case No. SA CV-95-288 (the "CANON LITIGATION"):
On April 3, 1995, Canon, Inc., a Japan corporation, and its U.S.
affiliates, Canon Computer Systems, Inc. and Canon USA, Inc. (collectively,
"CANON") filed a lawsuit in the United States District Court for the Central
District of California styled Canon Computer
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 25
<PAGE> 34
Systems, Inc. v. Nu-kote International, Inc. seeking, among other things, to
have the Court enjoin International and its affiliates from infringing its
patents and from making false designations of origin or false descriptions
regarding International's cartridges and kits, and, seeking compensatory,
punitive and treble damages, court costs and attorney's fees. In July 1996 Canon
filed a second and related lawsuit, alleging infringement of an additional
patent, bringing the total number of patents at issue in the Canon case to six.
International filed an answer asserting twelve affirmative defenses to
the claims alleged in Canon's complaint. These include, among others, defenses
that Canon's patents are invalid, unenforceable and/or not infringed by
International, that Canon has defrauded the U.S. Patent and Trademark Office and
trademark misuse. Additionally, International has alleged counterclaims which
include claims of monopolization and attempted monopolization of the aftermarket
for replacement cartridges for Canon printers. International is also seeking
declaratory relief asking the Court to find that it has not infringed any valid
claim of Canon's right in the six patents in the suits, cancellation of Canon's
patents because of fraud on the U.S. Patent and Trademark Office, damages and an
injunction for intentional interference with business relations, trade liable,
disparagement of goods, defamation and unfair competition.
By Order dated April 18, 1997, the Court construed the claims of the
`994 patent as requested by Nu-kote, not as requested by Canon. Nu-kote filed a
Motion for Summary Judgment on the basis that the `994 Patent is anticipated by
prior art. Canon also filed a Motion for Summary Judgment on the `994 Patent. On
May 26, 1998, the Court held the claims of the `994 Patent invalid because they
are anticipated by the prior art. This was a significant victory for Nu-kote,
and Canon has appealed this ruling, Appeal Nos. 98-1445 - 1453, is also pending
in the United States District Court of Appeals for the Federal Circuit
On June 16, 1997, the Court granted Canon's Motion for Summary Judgment
on the issues of inventorship, obviousness and enforceability of the `928
patent, but denied Canon's MSJ with respect to the key issue of whether patented
features of that same patent are primarily ornamental or functional. A design
patent is invalid if the patented features are primarily functional rather than
primarily ornamental. Because it denied Canon's Motion as to that issue, the
Court ruled that it was premature to rule on whether this particular patent has
been infringed. The Court granted Canon's Motion for Summary Judgment on the
`140 patent, but only as to two discontinued versions of Nu-kote's products. The
Court confirmed that the current version of the Nu-kote cartridge, which is a
design around introduced by Nu-kote on receiving notice of this subject patent,
does not infringe the patent.
J. OTHER CLAIMS AND CAUSES OF ACTION
In addition to the counter-claims asserted in the OEM Litigation,
Nu-kote owns the following claims and causes of action:
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 26
<PAGE> 35
1. PREFERENTIAL TRANSFERS/FRAUDULENT TRANSFERS
Within 90 days of the Petition Date, Nu-kote made a number of payments
to creditors. Each of these payments is potentially an avoidable preference or
fraudulent transfer. These payments will be analyzed by the Reorganized Debtors
or the Litigation Trustee, as the case may be, and pursued to the extent it is
determined that the payment may be avoidable. A list of the payments made by
each of the Debtors within the 90 day period preceding the Petition Date is
attached to each of the Statements of Financial Affairs filed by each Debtor as
Attachment 3.A.
2. POTENTIAL CLAIMS AGAINST GLASS & ASSOCIATES
Glass & Associates was the workout company employed by Nu-kote to
provide interim management services in December, 1997. The services of Messrs.
Shaun K. Donnellan and William R. Ligon were made available to Nu-kote pursuant
to a consulting agreement between Glass & Associates and Nu-kote. While Nu-kote
did not compensate Messrs. Donnellan and Ligon directly for their services,
Nu-kote paid Glass & Associates $1,766,315 during the one year immediately
preceding the commencement of this case. These services represented operational,
sales, financial, marketing and management consulting services provided by
Messrs. Donnellan and Ligon and other associates of Glass & Associates.
Additionally, the above amount includes the reimbursement of actual and
reasonable expenses incurred by Glass & Associates in performing services for
Nu-kote. Pursuant to the consulting agreement executed between Holding and Glass
& Associates, Nu-kote paid a deposit to Glass & Associates for services to be
rendered. Nu-kote reassigned the responsibilities of Glass & Associates, and
Glass & Associates then severed its relationship with Nu-kote in October, 1998,
but $125,000 of the deposit has not been returned.
Nu-kote may also possess claims against Glass & Associates, Donnellan,
Ligon and other employees due to acts or omissions in connection with services
to Nu-kote provided pursuant to the consulting agreement. Upon confirmation of
the Joint Plan, other than the obligations under the Joint Plan, the Debtors and
their related affiliates shall release all claims that they may hold or come to
hold as of the effective date of the Plan, or if no such effective date shall
occur or be in prospect by March 30, 2000, then on March 30, 2000, claims
against Glass & Associates, Inc., and its officers, directors, members,
representatives, agents, attorneys and accountants, including Shaun K.
Donnellan, William R. Ligon, and Alan R. Tilley, shall be released specifically
excluding those claims which the Debtors assert for the return of the $125,000
deposit discussed above and provided that Glass & Associates, Inc., shall also
execute a release as set forth in the Joint Plan.
3. CLAIMS AGAINST PELIKAN HOLDING
In connection with the acquisition of the hardcopy supplies business of
Pelikan Holding in 1995, Pelikan Holding agreed to indemnify Nu-kote Holding,
Inc. for all losses, liabilities and costs resulting from or arising out of
environmental conditions existing on or prior to February 24, 1995 at the
facilities acquired from Pelikan Holding, such as Nu-kote's Derry, Pennsylvania
and Franklin, Tennessee facilities. With respect to certain potential
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 27
<PAGE> 36
pre-closing environmental liabilities and costs at the Franklin, Tennessee
facility, identified on a schedule agreed to by Nu-kote and Pelikan Holding,
Pelikan Holding's liability for environmental cleanup costs is in an amount up
to $2.5 million, which obligation is collateralized by a letter of credit.(2)
The Tennessee Department of Employment Security and the Tennessee
Department of Environment and Conservation ("T-DEC") filed an objection to the
Debtors' initial disclosure statement on the basis that the Debtors had failed
to provide adequate information regarding the voluntary environmental cleanup
program at the Franklin, Tennessee facility to which the Debtors are a party via
a Consent Order and Agreement. To provide additional information about the
environmental situation at the Franklin, Tennessee facility and the cleanup
program, the Debtors add as follows, incorporating in part the suggested
language of the above-referenced Tennessee Departments:
Pursuant to Tennessee Code Annotated ss. 68-212-224, a party who is
willing and able to conduct an investigation and cleanup of an inactive
hazardous substance site can do so by entering into a voluntary program of clean
up of that site under the supervision of the Superfund Division of the T-DEC.
International entered into such a voluntary plan indicating its willingness and
ability to provide for the clean up of Tennessee Superfund site number 94-511
situated at the Franklin, Tennessee plant location. To that end, International
signed a Consent Order and Agreement with the T-DEC. The investigation into the
extent of the contamination of soil and ground water at the Franklin site has
commenced. It is not expected, however, that this investigation, which will
provide an estimate of the cost of cleanup will be completed prior to the
Confirmation Hearing, and could take as long as two years. The Debtors intend to
comply with the Consent Order and Agreement to initiate and complete a cleanup
plan, and fully anticipate that all costs associated with same fall within the
scope and amount of the letter of credit with Pelikan Holding. Nu-kote also
possesses certain other claims against Pelikan Holding based on the purchase of
the Company's hardcopy supplies business.
- ---------------------
(2) A motion to assume or reject the Asset and Stock Purchase
Agreement between Holding and Pelikan Holding dated as of November 15, 1994 and
the Escrow Agreement referenced therein has not been filed by the Debtors. It is
the Debtors' belief that same is not necessary as the referenced agreements are
not executory in nature because Pelikan Holding has fully performed its
obligations thereunder. However, should the Debtors deem further action
necessary, all appropriate steps to assume same will be taken. Additionally,
however, in further response to certain objections by Pelikan Holding, the Plan
Proponents include the following language requested by Pelikan Holding: "The
Disclosure Statement also fails to disclose that the plan does not provide for
the assumption of the agreements with Pelikan creating the environmental
indemnity as well as that three of the claims of Pelikan against the Debtors
would have to be satisfied to assume the agreement and that some of the other
past defaults of the Debtors are not curable. The cumulative effect of the
foregoing would release the environmental indemnity obligations and render the
purported transfer of the environmental indemnity obligations to the Litigation
Trust valueless and a nullity. Alternatively, if such environmental indemnity
obligations are not to be transferred, the effect would be to render the
indemnity unavailable to protect the reorganized debtor against environmental
liability in the manner described in Sections H 2 and I of the Disclosure
Statement." The Plan Proponents dispute the foregoing statements by Pelikan
Holding.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 28
<PAGE> 37
4. SETTLEMENT OF THE DECLARATORY JUDGMENT ACTION AGAINST THE
LENDERS ASSERTED BY THE DEBTORS
On April 30, 1999, Nu-kote filed a Complaint for Declaratory Relief to
Determine the Validity of the Lender Group's Alleged Liens on Debtor's Tort
Claims Against Third Parties and the OEM Litigation against the Lenders,
Adversary No. 399-0198A. This Complaint was brought for the purpose of seeking a
determination by the Bankruptcy Court on the validity of the Lenders' assertion
that they have been assigned an interest in and/or possess perfected liens on
tort claims that are property of the estate and, specifically, the anti-trust
tort counterclaims asserted in, and/or the proceeds of those counterclaims, in
certain pending litigation involving International with the OEMs. Nu-kote's
complaint asserts that the Lenders do not possess perfected liens on those tort
claims because all of Debtors' counterclaims in the OEM Litigation are
anti-trust violations, which sound in tort. Accordingly, the Debtors assert that
the OEM Counterclaims, other causes of action and the proceeds from the OEM
Litigation, which may arise by way of settlement or otherwise, "arise out of
tort" and are excluded from the Lenders' security interest in general
intangibles by ss. 9-104(11) of the Uniform Commercial Code. Similarly, Nu-kote
asserted that the Lenders' claims that they have been assigned an interest in
the OEM Litigation proceeds must fail because there is no instrument of
assignment regarding the OEM Litigation, and the Lenders had not notified the
obligors on the interest "assigned," the OEMs, of the existence of this
purported assignment. The Lenders disagreed with all such contentions.
Nu-kote filed a Motion for Summary Judgment requesting that the
Bankruptcy Court find as a matter of law that the Lenders do not possess
security interests in and/or have not been assigned an interest in the proceeds
of the anti-trust tort counterclaims asserted in the OEM Litigation. The Lenders
filed a Cross Motion for Summary Judgment. After the return of the HP verdict,
the Bankruptcy Court stayed this adversary proceeding and has not ruled on
Nu-kote's allegations in the Complaint or either Nu-kote's or the Lenders'
respective Motions for Summary Judgment. The Bankruptcy Court has set a hearing
on the Motions for Summary Judgment for January 11, 2000. However, other than
the obligations under the Joint Plan, the Debtors and their related affiliates
shall release all claims that they may hold or come to hold against the Lenders
as of the Effective Date of the Joint Plan or, if no such Effective Date shall
occur or be in prospect by March 30, 2000, then March 30, 2000, and the
adversary proceeding shall then be moot and shall be dismissed with prejudice.
5. SETTLEMENT OF POTENTIAL SUBORDINATION OF THE LENDERS'
UNSECURED CLAIMS ASSERTED BY THE DEBTORS
To comply with the amended terms of the US Facility, a turn around
company was employed by Debtors in December of 1997. Accordingly, Messrs.
Donnellan and Ligon of Glass & Associates were put in place by Nu-kote to
provide interim management services. The Company paid Glass & Associates
$1,766,315 during the one year immediately preceding the commencement of this
case.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 29
<PAGE> 38
Further, the credit agreement evidencing the US Facility with the
Lenders was amended six times in 1997 and 1998, with fees and expenses to
Nu-kote exceeding $364,000 per amendment. In total, in just over a year
preceding the Petition Date, Nu-kote paid the Lenders in excess of $2.7 million
in fees and expenses of the Lenders and their professionals in addition to in
excess of $11.4 million in interest on funds borrowed under the Credit
Facilities.
Section 510(c) of the Code provides that a Court may subordinate the
claim of a creditor on equitable grounds. Equitable subordination is appropriate
when a three part test is met: (i) the claimant must have engaged in some type
of inequitable conduct; (ii) the misconduct must have resulted in some type of
injury to the creditors or conferred an unfair advantage on the claimant; and
(iii) equitable subordination of the claim must not be inconsistent with the
provisions of the Bankruptcy Code. The Debtors assert that the employment of
Glass & Associates per the terms of the amendment of the US Facility did not
accomplish the financial restructuring of Nu-kote but instead contributed to its
already strained cash position.
Under these circumstances, the Debtors assert that equitable
subordination of the unsecured claims of the Lenders may well be merited. The
Lenders strongly disagree with such assertion.
Pursuant to the Joint Plan, the potential cause of action for equitable
subordination of the Lenders' unsecured claim by the Debtors will not be
pursued. Upon confirmation of the Joint Plan, other than the obligations under
the Joint Plan, the Debtors, their respective officers, directors,
representatives and agents shall fully release and discharge the Lenders on the
earlier of March 30, 2000, or the Effective Date of the Joint Plan, all claims
they may hold or come to hold (which claims arise out of any dealings or
contacts by and among the Lenders, the Debtors, or the Creditors' Committees and
which relate to or are connected with the Debtors) as of the Effective Date of
the Joint Plan or, if no such Effective Date shall occur or be in prospect by
March 30, 2000, then such release shall occur on March 30, 2000.
6. POTENTIAL CAUSE OF ACTION AGAINST THE OFFICERS AND DIRECTORS
OF NU-KOTE
On March 31, 1999, the Lenders served a Notice of Claim on Nu-kote and
its officers and directors. This Notice of Claim accuses both former and current
officers and directors of the Debtors of breaches of fiduciary duty, negligence,
breaches of contract, breaches of the duties of good faith and fair dealing,
misrepresentation, corporate waste and mismanagement. Specifically, the Notice
of Claim asserts that both the current and former officers and directors of
Nu-kote have breached their fiduciary duties to the creditors by the following
actions:
(a) Pelikan Acquisition and Subsequent Actions in Europe
(b) Lemmer Litigation
(c) Decline of Impact Business
(d) Removal of Shaun Donnellan
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 30
<PAGE> 39
(e) Sixth Amendment
(f) Hewlett-Packard Litigation
(g) Bankruptcy Filing
(h) Ongoing Patent Infringement
(i) Duties to Lenders
Nu-kote asserts that any and all allegations against the Current
Officers and Directors of Nu-kote are wholly without merit. Nu-kote asserts that
the Current Officers and Directors have performed valuable services during this
Chapter 11 Case for the benefit of the Debtors, the Estates, and all Creditors.
Nu-kote believes that these services have greatly enhanced the Debtors' ability
to reorganize successfully as proposed in the Joint Plan.
Pursuant to the Joint Plan, at Richmont's option, in the event that the
Joint Plan is not confirmed for any reason by March 15, 2000, and on the earlier
of (i) completion of the transfer of the Debtors' assets or stock as
contemplated by the Joint Plan or (ii) the Effective Date, Richmont may pay to
the Lenders and the Lenders shall retain and apply to their Claims, for the
benefit of the Debtors' estates, the cash sum of $300,000 in good and collected
funds in exchange for which payment, the Debtors, their estates and the Lenders
shall execute and deliver broad, full and final releases of all claims they may
hold (which claims arise out of any dealings or contacts by and among the
Lenders or the Nu-kote Entities, and which relate to or are connected with the
Nu-kote Entities) against the Current Officers and Directors of the Debtors.
In the event that Richmont is the Successful Bidder and closes under
the Joint Plan, including payment of the amounts required under the Bidding
Procedure and the Joint Plan in good and collected funds for the benefit of the
Debtors and their creditors, at closing, the same releases shall be executed and
delivered without the requirement of the $300,000 payment, but instead, in
consideration of (a) Richmont closing under the Joint Plan, including payment of
the amounts required under the Bidding Procedure and the Joint Plan in good and
collected funds to the Lenders and for the benefit of creditors and (b) the
continued services of the Current Officers and Directors. In the event that a
Successful Bidder other than Richmont acquires the assets or stock of the
Debtors, the same releases shall be executed and delivered, but with the
requirement of the $300,000 payment. In the event Richmont shall determine not
to pay the $300,000 for the releases hereunder when required, then there shall
be no releases as provided in the Joint Plan.
K. INTERCOMPANY PAYABLES AND RECEIVABLES
Pre-petition, Nu-kote maintained a generalized, intercompany accounting
system shared between Nu-kote and all of its subsidiaries and related entities.
In the ordinary course of Nu-kote's business, numerous debt and credit
transactions thus routinely take place between the Debtors and between the
Debtor(s) and related nondebtor entities. Nu-kote was allowed to maintain this
system during the Bankruptcy Case. The schedule of Intercompany receivables,
including receivables owed by the related nondebtor entities, is as follows:
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 31
<PAGE> 40
<TABLE>
<S> <C> <C>
1. Holding: $ 84,986,520.00
-------
2. International: $ 328,114,018.00
-------------
3. Imaging: $ 28,996,196.00
-------
4. ICMI: $ 72,160,192.00
----
5. Future Graphics: $ 54,651,045.00
---------------
6. Imperial: $ 11,973,676.00
--------
7. Latin America: $ 260,730.00
-------------
</TABLE>
As a consequence of the substantive consolidation of the Debtors, all
intercompany claims between or among the Debtors are eliminated for Plan
purposes so that such claims will not be classified, will not vote and will not
receive any distribution under the Joint Plan.
ARTICLE VI. LIABILITIES OF THE DEBTORS
A. ADMINISTRATIVE EXPENSES
Administrative Claims are any claim that is defined in ss. 503(b) of
the Code as being an "administrative expense" and granted priority under ss.
507(a)(1) of the Code and including:
- a Claim for any cost or expense of administration in
connection with the Case, including, without limitation, any
actual, necessary cost or expense of preserving the Debtors'
estates and of operating the business of the Debtors incurred
on or before the Effective Date;
- the full amount of all Allowed Claims for compensation for
legal, accounting and other services or reimbursement of costs
under ss.ss. 330, 331 or 503 of the Bankruptcy Code;
- all fees and charges assessed against the Debtors' estates
under Chapter 123 of Title 28 of the United States Code; and
- any Allowed post-petition taxes and related items, including
any interest and penalties on such post-petition taxes.
1. PROFESSIONALS
Nu-kote has employed the law firm of Hance | Scarborough | Wright,
L.L.P. ("HSW") as lead bankruptcy counsel in connection with these proceedings.
Nu-kote has also employed the law firm of Harwell, Howard, Hyne, Gabbert &
Manner, P.C. ("H3GM") as local bankruptcy counsel in Nashville, Tennessee. HSW
was paid a retainer of $320,000 and H3GM was paid a retainer of $100,000.
Payment to Nu-kote's counsel throughout the Bankruptcy Case has been
accomplished pursuant to an agreed payment mechanism whereby HSW, H3GM and
certain other retained professionals have provided counsel for the three
creditors' committees, counsel for the Lenders, and the U.S. Trustee detailed
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 32
<PAGE> 41
billing statements containing a description of the services rendered, time spent
and the name and hourly rate of the attorney or paraprofessional performing the
work on a monthly basis. This process has provided a mechanism for partial
monthly payments of 85% of amounts billed to counsel for the Debtors without the
necessity of monthly hearings and without prejudice to the rights of
parties-in-interest to object to same at hearings which will, of necessity, be
held on the fee applications of the Debtors' professionals.
In addition, due to the size and complexity of the Company's business
and the amount of litigation in which Nu-kote was engaged pre-petition, Nu-kote
has employed the following additional professionals:
(a) Crooked Creek Capital, L.L.C., MacDonell Roehm: Special
Advisor to Nu-kote Holding, Inc. and Nu-kote International,
Inc.
(b) Coudert Brothers: Special Litigation Counsel for the Debtors,
OEM Litigation.
(c) Akin, Gump, Strauss, Hauer & Feld, L.L.P.: Special Counsel to
Debtors.
(d) Lain Faulkner: Special Accountants to DIP.
(e) Bryan, Pendleton, Swats & McAllister LLC: Actuarial
Consultants.
(f) Anthony Perry & Prudential Preferred Realty: Real Estate
Agents for DIP.
(g) Randal S. Mashburn: Litigation Examiner, OEM Litigation.
(h) CB Richard Ellis, Inc.: Real Estate Broker for DIP.
(i) Jaeckle Fleischman & Mugel, LLP: Special Environmental Counsel
for DIP.
(j) Fay, Sharpe, Beall, Fagan, Minnick & McKee L.L.P.: Special
Patent & Trademark Counsel for DIP.
(k) Lynn, Stodghill, Melsheimer, & Tillotson, L.L.P.: Special
Litigation Oversight Counsel, OEM Litigation.
(l) Norman E. Hall & Norman Hall & Associates: Real Estate
Appraisers for DIP.
(m) Conway, Del Genio, Gries & Co., L.L.C.: Investment Bankers.
(n) KPMG: Accountants for DIP.
The Unsecured Creditor's Committees have likewise employed certain law
firms, accounting firms, and financial advisors since the formation of the
committees. Greenebaum Doll & McDonald PLLC has been employed as counsel for the
Unsecured
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 33
<PAGE> 42
Creditor's Committee of International. Poyner & Spruill, LLP has been employed
as lead counsel and Mendes & Gonzales, PLLC has been employed as local counsel
for the Unsecured Creditor's Committee of ICMI. Kurlbaum Stoll Seaman & Mustoe,
PC has been employed as lead counsel and Ortale, Kelley, Herbert & Crawford as
local counsel for the Unsecured Creditor's Committee of Graphics. The Bankruptcy
Court also authorized the employment of Arthur Andersen LLP as accountants and
financial advisors to the Unsecured Creditor's Committee of International and
ICMI.
In addition, pursuant to the Chubb Agreement and the Chubb Order, the
U.S. Trustee was authorized to appoint Randal S. Mashburn as Litigation
Examiner. Mr. Mashburn has also been appointed as Examiner under the mandatory
provisions of ss. 1104(c)(2) of the Bankruptcy Code.
2. PAYMENT OF PROFESSIONALS EMPLOYED PURSUANT TO SS. 330 OF THE
BANKRUPTCY CODE
The professionals employed pursuant to ss. 330 of the Bankruptcy Code
have not yet filed their final fee applications, thus the amount of claims
within this category is not yet known. Under the Joint Plan, each Professional
shall file their final fee application within sixty (60) days after the
Effective Date, however, each Professional must file an estimate not later than
5 days before the Effective Date so that the estimated amounts may be reserved
by the Reorganized Debtors on the Effective Date.
Under the terms of the Joint Plan, the Fee Claims of the Committee
Professionals shall be Allowed Administrative Claims to the extent that such Fee
Claims are each approved by the Bankruptcy Court and so long as the aggregate
allowed Fee Claims of such Committees' Professionals do not exceed $450,000, and
shall be paid in full in one cash payment on the Effective Date.
3. NORWEST BUSINESS CREDIT, INC.
As detailed herein, in December 1998, the Bankruptcy Court entered an
Order approving DIP financing from Norwest Business Credit, Inc. providing for a
$7.5 million DIP Credit Facility (the "DIP FACILITY"). This DIP Facility is in
the form of a line of credit which has helped fund the Company's working capital
requirements as it reorganizes under the Bankruptcy Code. Because of an
improving cash position, the most Nu-kote has drawn down on the DIP Facility was
$3,200,000 on January 21, 1999, and the current net amount of borrowings on the
DIP Facility as of October 22, 1999, was $0. Additionally, pursuant to an Agreed
Order for Adequate Protection and extension of Order Granting Second Amended
Emergency Motion for Authority to Use Cash Collateral (the "AGREED ORDER")
entered August 20, 1999, effective nunc pro tunc to June 1, 1999, the Debtors
submitted a six month budget (the "BUDGET") and agreed that future borrowings
under the DIP Facility would be made only in accordance with the Agreed Order,
the Budget and the Court's order approving the DIP Facility.
The Norwest Claim arising from the DIP Facility will be paid in full by
the Purchaser or the Reorganized Debtor on the Effective Date without the need
for Norwest to file Proofs
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 34
<PAGE> 43
of Claim or an Application of any kind. Pursuant to Section 2.7(a) of the Credit
and Security Agreement, if the DIP Facility matures due to the confirmation of a
Chapter 11 plan, the Debtors shall be obligated to pay Norwest a prepayment fee
in an amount equal to a percentage of the Maximum Line (defined in the Credit
and Security Agreement as $7,500,000) as follows: "(i) two percent (2%) if the
termination or reduction occurs on or before October 31, 1999; and (ii) one
percent (1%) if the termination or reduction occurs thereafter." Until the
Norwest Claim is paid in full pursuant to the Joint Plan, Norwest shall retain
the Norwest Lien.
4. RETENTION AGREEMENTS WITH KEY EMPLOYEES
As detailed herein, on June 10, 1999, the Bankruptcy Court entered its
order approving the Motion to Approve Key Employee Retention Agreements filed by
the Debtors. Upon confirmation of the Joint Plan, payments to the Key Employees,
as defined in that Motion, will be paid as an administrative expense of the
Debtors. The payments due to the Key Employees equate to payments of from six
months' to one year's salary for those employees, and the total aggregate amount
of such payments is approximately $750,000.
5. ADMINISTRATIVE CLAIMS ASSERTED BY THE LITIGATING OEMS
Canon, Epson and HP have all filed proofs of claim asserting alleged
entitlement to priority in payment. The purported basis for this priority
payment status for these asserted claims of the Litigating OEMs is alleged
post-petition continuing patent infringement by the Company. The asserted amount
of Canon's proof of claim was filed under seal and Epson's proof of claim was
filed in the amount of $47,820,857, $7,445,001 of which Epson has asserted is
entitled to priority payment status. HP's two proofs of claim were filed in
unknown amounts, and recovery from the Debtors' estate by HP is limited to an
allowed unsecured claim pursuant to the Settlement Agreement. If the Settlement
Agreement is approved, HP will no longer assert an administrative claim. Nu-kote
disputes any and all such claims of "continuing patent infringement" by the
Company.
6. ADMINISTRATIVE CLAIM ASSERTED BY THE PBGC
The Pension Benefit Guaranty Corporation ("PBGC") has filed three
proofs of claim. PBGC is a wholly owned United States government corporation
that administers the defined benefit pension plan termination insurance program
under Title IV of the Employee Retirement Income Security Act of 1974 ("ERISA").
The Nu-kote International, Inc. Retirement Income Plan (the "PENSION PLAN") is a
single employer defined benefit pension plan covered by Title IV of ERISA.
International and all members of its controlled group are obligated to
contribute to the Pension Plan at least the amounts necessary to satisfy ERISA's
minimum funding standards, ERISA ss. 302, 29 U.S.C. ss. 1082; Internal Revenue
Code of 1954 ("IRC") ss. 412. In addition, in the event of a termination of the
Pension Plan, International and all members of its controlled group may be
jointly and severally liable for the unfunded benefit liabilities of the Pension
Plan, as well as any unpaid minimum funding contributions and unpaid premiums.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 35
<PAGE> 44
The minimum funding contribution to the Pension Plan is approximately
$500,000 per annum. If the Pension Plan is not terminated, the Purchaser under
the Plan will be required to continue to meet the minimum funding contribution
requirements. The PBGC has filed a claim for the alleged unfunded portion of the
Pension Plan, contingent upon the termination of the Pension Plan, asserting
entitlement to administrative status in the estimated amount of $6,359,200. If
the Pension Plan is terminated, it is the PBGC's position that this $6,359,200
asserted administrative claim is due and payable.
The PBGC has also filed an unliquidated claim for insurance premiums,
interest and penalties allegedly due from the Company under the Pension Plan
asserting entitlement to administrative claim status for any portions of that
claim arising post-petition and general unsecured status for any pre-petition
portion. Lastly, the PBGC has filed an unliquidated claim for alleged
contributions that may be owed to the Pension Plan, asserting entitlement to
administrative claim status for any portions of that claim arising post-petition
and general unsecured status for any pre-petition portion. The Claim of the PBGC
is contingent upon the termination of the Pension Plan. The Pension Plan may be
terminated only if the statutory requirements of either ERISA ss. 4041, 29
U.S.C. ss. 1341, or ERISA ss. 4029, 29 U.S.C. ss. 1342, are met. Nu-kote does
not intend to terminate the Pension Plan upon Confirmation.
If the Pension Plan remains on-going after confirmation of the Joint
Plan, International will continue to fund and administer the Pension Plan
consistent with the requirements of ERISA and the IRC. In addition, if the
Pension Plan remains on-going after confirmation of the Joint Plan, PBGC will
withdraw its claims. Nothing in the Joint Plan shall be construed as releasing
or in any way discharging PBGC's claims.
7. ADMINISTRATIVE CLAIM ASSERTED BY WAUSAU
Employers Insurance of Wausau ("WAUSAU") has filed a Claim in the total
asserted amount of $62,617,190. Documentation attached to the Claim alleges that
the Claim is based upon Nu-kote's insurance policy with Wausau, an agreement
dated August 22, 1996 between Wausau and Nu-kote, and an alleged right to
recover attorney's fees in the OEM Litigation. The Claim filed by Wausau asserts
secured claims and general unsecured claims for some portion of its total
asserted Claim. The Claim filed by Wausau also asserts entitlement to
administrative priority for portions of its claim with $1,005,000 asserted as "a
liquidated administrative priority sum" and "an unliquidated contingent
administrative priority claim which should not exceed $34,717,190."
B. SECURED CLAIMS
1. SECURED CLAIM OF THE LENDERS
The secured claim of the Lenders, comprised of the US Facility, the UK
Facility and the Swiss Facility is in the filed amount of $142,392,791.71. The
claim of the Lenders is secured by the accounts, chattel paper, inventory,
equipment, instruments, general
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 36
<PAGE> 45
intangibles, fixtures and capital stock, and any and all products and proceeds
thereof, as well as all real property and improvements and any and all products
and proceeds thereof of the Debtors.
(A) THE US FACILITY. As set forth above, International, as
Borrower, and Holding, as Guarantor, are parties to a certain
Credit Agreement dated as of July 31, 1997, referred to herein
as the US Facility. The nine lenders on the US Facility are
Barclays Bank PLC as Lender and Documentation Agent; Bank of
America, National Association, as successor in interest to
NationsBank of Texas, NA as Collateral Agent, Lender and
Administrative Agent; Commerzbank Aktiengesellschaft; Deutsche
Bank A.G., New York Branch or Cayman Islands Branch; First
National Bank of Chicago; Societe Generale; First American
National Bank; ABN AMRO Bank, N.V.; and Credit Lyonnais are
referenced herein collectively as the Lenders. The current
amount outstanding on the US Facility is approximately $95
million.
(B) THE UK AND SWISS FACILITIES. Additionally, certain of the
non-Debtor affiliates were parties to two other credit
agreements, each dated July 31, 1997, described above and
referenced as the UK Facility and the Swiss Facility. The
eight lenders on the UK Facility and the Swiss Facility are
the above-referenced Lenders under the US Facility with the
exception of First American National Bank. The current amount
outstanding on the UK Facility on the Petition Date was
approximately $10.3 million, and the current amount
outstanding on the Swiss Facility on the Petition Date was
approximately $33.6 million. The sale of the Pelikan Hardcopy
Subsidiaries, however, has reduced this amount.
2. OTHER ASSERTED SECURED CLAIMS
Other creditors have asserted secured claims totaling in excess of $63
million against the Debtors. The Debtors believe that numerous of these Claims
asserting secured status are either misfiled, are actually intended to assert
Unsecured Claims, or are duplicative of Claims listed in the Schedules.
<TABLE>
<CAPTION>
ASSERTED SECURED
CLAIMANT CLAIM AMOUNT
-------- ----------------
<S> <C> <C>
a. RSL Industrial Contracting, Inc. $ 37,022.59
b. Atlantic Molding $ 46,269.00
c. ERS Imaging Supplies, Inc. $ 16,825.50
d. Phillips - Joanna $ 164,136.38
e. GE Capital-Colonial Pacific Leasing $ 6,500.00
f. CIT Group/Equipment Financing, Inc. $ 4,003.52
</TABLE>
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 37
<PAGE> 46
<TABLE>
ASSERTED SECURED
CLAIMANT CLAIM AMOUNT
-------- ----------------
<S> <C> <C>
g. Newcourt Communications Finance Corp. $ 21,824.78
h. Border Lift $ 4,082.83
i. Tennant Company $ 4,358.04
j. Oce Printing Systems USA, Inc. $ 5,228.41
k. Precision Packaging Products, Inc. $ 18,352.49
l. Oskar Haug, AG SFR 2'596.
m. Wayne E. Moore $ 198.69
n. Employers Insurance of Wausau $62,617,190.00
o. Doris L. Crank $ 300.00
p. Dollar Bank Leasing Corp. $ 2,464.20
q. Oasis Imaging Products $ 57,603.95
r. Unisys Corporation unliquidated
============
$63,006,360.38 AND
SFR 2'596
</TABLE>
In addition, some tax claims filed as priority claims may also be
secured by liens.
C. PRIORITY CLAIMS
The Company has scheduled Unsecured Priority Claims in the amount of
$703,026.03, consisting of wage claims of employees entitled to priority of up
to approximately $4,300 per employee pursuant to ss. 507(a)(3) of the Bankruptcy
Code and the claims asserted by various taxing authorities:
1. PRIORITY WAGE CLAIMS
<TABLE>
<S> <C> <C> <C>
(a) International: $152,350.43 (Franklin, TN)
------------- $102,583.97 (Rochester, NY, Bardstown, KY)
(b) ICMI: $ 31,441.77 (Connellsville, PA)
----
(c) Future Graphics: $ 63,992.86 (Chatsworth, CA)
---------------
</TABLE>
2. PRIORITY TAX CLAIMS
<TABLE>
<S> <C> <C>
(a) International: $301,736.00
-------------
(b) ICMI: $ 24,527.00
----
(c) Imaging: $ 26,394.00
-------
</TABLE>
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 38
<PAGE> 47
Taxing authorities have filed twenty (20) proofs of claim asserting
Priority Claims in an amount in excess of $430,426.16. Nu-kote believes that
many of these Claims may in fact be duplicates, with the same Claim filed
against more than one Debtor, and may be repetitive of claims scheduled by the
Debtors. In addition Nu-kote believes all priority wage claims have been paid.
3. OTHER ASSERTED PRIORITY CLAIMS
Claimants have additionally filed fifty-eight (58) claims asserting
priority status in the amount of approximately $382,000. Nu-kote believes that
numerous of these Claims asserting priority status are misfiled and are actually
either Unsecured Claims or are intended to assert Administrative Claims.
D. UNSECURED CLAIMS
The bar date for Claims, other than Claims of governmental units, was
April 15, 1999. The bar date for Claims of governmental units was May 5, 1999,
which date was 180 days from the date of the entry of the order for relief.
1. SCHEDULED UNSECURED CLAIMS: INCLUSIVE OF INTERCOMPANY PAYABLES
Nu-kote has scheduled Unsecured Claims, inclusive of intercompany
payables, of $611,569,849.68 as follows:
<TABLE>
<S> <C>
Holding: $ 760,000.00
International: $420,087,384.68
ICMI: $ 98,596,017.00
Future Graphics: $ 64,821,395.00
Latin America: $ 1,081,326.00
Imperial: $ 1,656,248.00
Imaging: $ 24,567,479.00
</TABLE>
2. SCHEDULED UNSECURED CLAIMS: EXCLUSIVE OF INTERCOMPANY PAYABLES
Exclusive of intercompany payables, which shall receive no distribution
under the Joint Plan, the schedules reflect Unsecured Claims in the amount of $
22,513,722.68 as follows:
<TABLE>
<S> <C>
Holding: $ 760,000.00
International: $19,015,577.68
ICMI: $ 1,563,960.00
Future Graphics: $ 947,424.00
Latin America: $ 0.00
Imperial: $ 0.00
Imaging: $ 226,761.00
</TABLE>
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 39
<PAGE> 48
3. UNSECURED CLAIMS ASSERTED AGAINST THE DEBTORS
An analysis of the claims register reflects five hundred and two (502)
timely filed Unsecured Claims totaling $56,686,048.26 filed against the Debtors.
This dollar figure includes the asserted unsecured claim filed by Epson against
Holding in the amount of $40,375,856. The Debtors believe that many other of
these Claims may in fact be duplicates, with the same claim filed against more
than one Debtor and may be repetitive of claims scheduled by the Debtors. The
breakdown of Unsecured Claims filed against each Debtor is as follows:
<TABLE>
<CAPTION>
DEBTOR NO. OF UNSECURED CLAIMS
------ -----------------------
FILED AMOUNT
----- ------
<S> <C> <C>
Holding: 369 $53,123,644.02
International: 114 $ 3,248,275.16
ICMI: 6 $ 149,243.55
Future Graphics: 7 $ 37,654.10
Latin America: 0 $ 0.00
Imperial: 0 $ 0.00
Imaging: 6 $ 127,231.43
</TABLE>
4. PARTICULAR ASSERTED CLAIMS IN EXCESS OF $500,000
Included in the amount of total Unsecured Claims filed are the Claims
filed by the OEMs referenced above and the following large claims:
(A) ABDIRAHAM ADEN. Aden filed an Unsecured Claim in the amount of
$600,000 against International. The pending litigation with
Aden is discussed herein at Article VI.E.4.
(B) FAY, SHARPE, BEALL, FAGAN, MINNICH & MCKEE, LLP. The law firm
of Fay, Sharpe, Beall, Fagan, Minnich & McKee, LLP ("FAY,
SHARPE") has represented the Debtors as general patent and
trademark counsel since 1988. The Claim Fay, Sharpe filed
against Holding, in the amount of $764,964.18, asserts amounts
due from the rendition of pre-petition legal services to the
Debtors.
(C) KELLER CRESCENT COMPANY, INC. Keller Crescent Company, Inc.
has filed a Claim against Holding in the amount of
$552,611.29.
(D) COUDERT BROTHERS. Coudert Brothers is the litigation counsel
for the Debtors in the OEM Litigation. Coudert Brothers has
filed a Claim against Holding in
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 40
<PAGE> 49
the amount of $2,065,610.69 asserting amounts due from the
rendition of pre-petition legal services to the Debtors.
(E) EMPLOYERS INSURANCE OF WAUSAU. Employers Insurance of Wausau
("WAUSAU") has filed a Claim in the amount of $62,617,190.
Documentation attached to the Claim alleges that the Claim is
based upon Nu-kote's insurance policy with Wausau, an
agreement dated August 22, 1996 between Wausau and Nu-kote,
and an alleged right to recover attorney's fees in the OEM
Litigation. The Claim filed by Wausau asserts secured claims,
general unsecured claims and entitlement to administrative
priority for some portion of its total asserted Claim.
(F) PELIKAN HOLDING, AG. Pelikan Holding, an entity unrelated to
the Debtors, has filed five (5) Claims against Holding
alleging an unliquidated amount due for damages from purported
pre-petition termination by Pelikan Holding of a Trademark
License Agreement; $894,341 purportedly arising from a
pre-petition agreement with Holding; $2,424,639 purportedly
arising from a pre-petition agreement with Holding; $35,767
purportedly arising from the purchase of equipment by
International; and $160,920 plus an unliquidated amount
purportedly arising from a pre-petition agreement with
Holding.
(G) WILLIAMS DIE & MOLD, INC. Williams Die & Mold, Inc. filed an
Unsecured Claim in the amount of $674,395.95 against Holding
purportedly based upon invoices reflecting amounts due for the
pre-petition provision of goods to the Debtors.
E. PENDING LITIGATION AGAINST THE DEBTORS
A list of all lawsuits pending against each of the Debtors as of the
Petition Date was filed by each of the Debtors as an exhibit to their respective
Statements of Financial Affairs. With regard to certain of those lawsuits,
several have now been dismissed, settled or non-suited. The OEM Litigation in
which International is involved is discussed in detail above in Assets, Article
V.I. The remaining litigation in which one of the Debtors is involved is:
1. LORI LEMMER, ET AL. V. NU-KOTE HOLDING, INC, CASE NO.
3:98-CV-0161-T
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. 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, an unspecified amount of compensatory damages and reimbursement of fees
and expenses. Nu-kote denies the plaintiff's allegations and intends to defend
the suit vigorously. During the Bankruptcy Case, the Lemmer plaintiffs sought to
take examinations of representatives of the Debtors and other parties pursuant
to Federal Rule
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 41
<PAGE> 50
of Bankruptcy Procedure 2004. After a hearing on the merits, such requests were
denied by the Bankruptcy Court. On September 28, 1999, Nu-kote's lead bankruptcy
counsel was notified by the United States District Court for the Northern
District of Texas that this case was to be administratively closed.
2. SPECTRA, INC. V. NU-KOTE INTERNATIONAL, INC. & MODULAR INK I
STOCKHOLM, AB, CASE NO. 98-CV-130-JD
On March 10, 1998, Spectra, Inc. ("SPECTRA") filed suit in the United
States District Court for the District of New Hampshire alleging Patent
Infringement Claims against International and Modular Ink Technology i Stockholm
AB ("MIT"), a company duly organized and validly existing under the laws of
Sweden. Pelikan Produktions A.G. ("PPAG"), a company duly formed under the laws
of Switzerland, and formerly a wholly owned subsidiary of International, holds
all of the outstanding shares in MIT. International has asserted a counterclaim
against Spectra for tortious interference with business relations. In connection
with the Bankruptcy Court approved sale of the stock of MIT to Xaar, as
discussed herein at Article VII.N.1, International assigned to Xaar any and all
of International's rights in respect of its tortious interference counterclaim
against Spectra, Inc. Xaar has, however, agreed not to release or settle the
counterclaim without any such release or settlement in connection therewith
containing a dismissal by Spectra Inc. of its pending infringement claims
against International. The Bankruptcy Court approved the terms of the sale of
MIT on March 30, 1999, and the sale was closed on March 31, 1999.
International and MIT have additionally filed suit against Spectra,
Nu-kote International, Inc. & Modular Inc. I Stockholm, AB v. Spectra, Inc.,
Case No. 98-213-JJF, also in the United States District Court for the District
of New Hampshire, alleging patent infringement claims.
3. ROCK-TENN CO. V. NU-KOTE INTERNATIONAL, INC., CASE NO. 125633
Rock-Tenn Co. filed suit in the United States District Court for the
Middle District of Tennessee for collection of receivables allegedly due. The
case remains pending.
4. ABDIRAHMAN A. ADEN V. NU-KOTE INTERNATIONAL, INC., CASE NO.
398-0365
Abdirahman A. Aden filed suit in against International in the United
States District Court for the Middle District of Tennessee alleging employment
discrimination and seeking $600,000 in compensatory damages, punitive damages,
back pay and benefits and attorney's fees. On December 4, 1998, Aden filed a
Motion for Relief of Stay requesting the Bankruptcy Court to lift the automatic
stay to allow this litigation to proceed. Upon agreement with the Debtors, at
the final hearing on this Motion for Relief of Stay, Aden was granted relief
from the stay to proceed against parties other than International, without
prejudice to any of International's rights or defenses to the action or rights
against any other party.
In addition, Nu-kote is involved in various routine legal matters that
are incidental to their business. There are, however, no other legal proceedings
pending or threatened
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 42
<PAGE> 51
against any of the Debtors, that would, in the opinion of management, have a
material adverse impact on the successful reorganization of the Company.
F. ENVIRONMENTAL AND REGULATORY MATTERS
The Debtors are subject to regulation at the federal, state and local
levels, as well as outside of the U.S., including, in particular, regulations
relating to environmental matters. Such regulations are often complex and are
subject to change. The Debtors are required to obtain permits from a number of
governmental agencies in order to conduct various aspects of their business.
Such permits are subject to modification and revocation, which could impair the
Debtors' ability to conduct their business in the manner and at the places it is
presently conducted. Regulatory or legislative changes may cause future
increases in the Debtors' operating costs or otherwise affect their operations.
In connection with the acquisition by the Debtors in 1986 of the
Worldwide Office Supplies Division and the International Business Forms Division
of Unisys, Unisys agreed to indemnify the Debtors for liabilities resulting from
or arising out of any environmental conditions existing on or before January 16,
1987, at the Debtors' Rochester, New York, facility and at facilities located in
Macedon, New York and Bardstown, Kentucky, which have been sold by the Debtors.
The New York Department of Environmental Conservation ("NY-DEC"), with respect
to the Rochester and Macedon facilities, and the Kentucky Environmental
Protection Agency, with respect to the Bardstown facility, have alleged that
environmental contamination exists at such sites. The Debtors have been advised
that Unisys is cooperating with these state environmental agencies in connection
with the testing for and investigation of contamination and, with respect to the
Rochester and Bardstown sites, is implementing measures to complete remediation.
The Debtors have been informed that Unisys is undertaking three years of
groundwater monitoring at the Macedon facility pursuant to a consent order with
the NY-DEC, to demonstrate that the site requires no further remediation or
monitoring. As a result of the indemnification from Unisys, the Debtors'
management has expressed the opinion that the ultimate cost to resolve these
environmental matters will not have a material adverse effect on the Debtors'
financial position, results of future operations or liquidity.
In connection with the Pelikan Acquisition, Pelikan Holding agreed to
indemnify the Debtors for all losses, liabilities and costs resulting from or
arising out of environmental conditions existing on or prior to the closing on
February 24, 1995, at the facilities acquired from Pelikan Holding, such as
Debtors' Derry, Pennsylvania and Franklin, Tennessee facilities. With respect to
certain potential pre-closing environmental liabilities and costs identified on
a schedule agreed to by the Debtors and Pelikan Holding, Pelikan Holding's
liability is in an amount up to $2.5 million, which is collateralized by a
letter of credit. Pelikan Holding's liability for all other pre-closing
environmental liabilities and costs is unlimited in amount but expired on the
third anniversary of the closing, except as to the certain claims that were
asserted by the Debtors before the 30th day following the third anniversary of
the closing. The Debtors have undertaken limited environmental investigations at
the Debtors' Derry, Pennsylvania and Franklin, Tennessee facilities due to
reports of certain environmentally suspect activities having taken place
pre-closing at
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 43
<PAGE> 52
those facilities. The investigation of the environmental condition of the soil
at the Derry facility detected material contamination. The investigation of the
environmental condition of the soil and groundwater at the Franklin facility
also detected material contamination at this site as well as at certain European
facilities. The Debtors have notified Pelikan Holding of the existence of the
detected material contamination.
With regard to the Derry facility, the Debtors have requested the
Pennsylvania Department of Environmental Protection ("PA-DEP") to determine the
minimum further investigation and remediation required to bring this facility
into compliance with Pennsylvania law and to allow the Debtors to receive a
release from further liability under Pennsylvania law. After completion of the
forthcoming phase of site characterization activities to be conducted with the
occurrence of PA-DEP, the Debtors expect to enter into an administrative
agreement for the remaining investigation and remediation at this facility.
With regard to the Franklin facility, the Debtors have agreed upon the
terms of administrative Consent Order and Agreement, Index No. 94-511, with the
Tennessee Department of Environment and Conservation ("T-DEC") to facilitate the
investigation, removal and remediation of the hazardous substances, and to
reimburse the T-DEC for certain costs incurred by T-DEC at or in connection with
the Franklin facility. The Debtors have entered into an Administrative Consent
Order and Agreement with the T-DEC.
With regard to the Derry and Franklin facilities, the Debtors have not
been able to estimate the potential cleanup costs with any degree of certainty.
The Debtors, nevertheless, have obtained and notified Pelikan Holding of very
preliminary cost estimates for the cleanup associated with these facilities.
Based on the indemnification obligation of Pelikan Holding, environmental
surveys conducted by environmental consultants in connection with the Pelikan
Acquisition, and the notice of the existence of environmental contamination
given by Holding prior to the 30th day following the third anniversary of the
closing, management of the Debtors does not believe that any environmental costs
incurred in connection with the environmental matters identified on the
pre-closing schedule or during the limited environmental investigations of
Debtors' Derry and Franklin facilities will have a material impact on the
Debtors' financial condition, results of operations or liquidity.
Federal, state and local and foreign agencies regulate the disposal,
handling and storage of waste, and air and water discharges from the Debtors'
facilities. Based on current regulations and the condition of its facilities,
the Debtors do not currently anticipate a material amount of environmental
capital expenditures in excess of the amounts for which Holding is indemnified
by third parties. The Debtors have taken measures to improve monitoring of the
Debtors' emissions to the environment at the Rochester and Macedon facilities,
including the implementation of a chemical usage tracking system (which
generates incoming solvent inventory and usage data) and a mass balance method
for calculating total emissions. These measures help the Debtors to comply with
their reporting and record keeping obligations under applicable environmental
laws.
ARTICLE VII. CHAPTER 11 CASES
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 44
<PAGE> 53
A. FILING OF PETITION
On November 6, 1998, the Debtors each filed voluntary petitions. The
Debtors did not file their schedules and statement of financial affairs on the
Petition Date. On December 1, 1998, the Debtors filed their schedules and
statements of financial affairs. On February 19, 1998, the Debtors filed amended
schedules and statements of financial affairs.
B. FIRST DAY ADMINISTRATION
On the Petition Date, the Debtors filed Emergency Motions for
authorization to maintain prepetition bank accounts and use business forms, for
the use of cash collateral, and payments of prepetition compensation and
employee reimbursements. The Debtors also requested that the Court grant
emergency hearings upon these matters on the Petition Date. The Bankruptcy Court
denied the Debtors' request for emergency hearings and denied the requested
relief contained in these various motions. Subsequently, Nu-kote received
authorization to pay certain claims related to wages, salaries, benefits,
expense reports, and certain other claims as they arise in the ordinary course
of the Company's business. Nu-kote also received approval from the Bankruptcy
Court to maintain the Company's current bank accounts and cash management
system.
Also on the Petition Date, the Debtors filed a Motion for Joint
Administration of the Debtors' estates. On November 9, 1998, the Court ordered
joint administration of the Debtors' estates.
C. ADVERSARY PROCEEDING
The Debtors filed the Plaintiffs' Original Complaint and Request for
Temporary Restraining Order Preliminary and Permanent Injunction (the "ADVERSARY
COMPLAINT") on November 6, 1998, thereby beginning Adversary No. 98-428A styled
Nu-kote Holding Inc., et al v. NationsBank of Texas N.A., et al. The Adversary
Complaint requested that the Bankruptcy Court restrain the Lenders from taking
any actions against certain non-Debtor entities. Pursuant to the European
Ratification Application (defined below), on January 11, 1999, the Bankruptcy
Court entered its Agreed Order of Dismissal with Prejudice of the Adversary
Complaint.
D. CASH COLLATERAL
Cash collateral is described in ss. 363 of the Bankruptcy Code as cash,
negotiable instruments, documents of title, securities, deposit accounts, or
other cash equivalents whenever acquired in which the estate and an entity other
than the estate have an interest. Upon the commencement of these Cases, the cash
and cash equivalents in which the Lenders had pre-petition security interests
became the "cash collateral" of the Lenders.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 45
<PAGE> 54
On November 9, 1998, Judge Paine entered an Agreed Order Regarding
Limited Use of Cash Collateral, permitting the Debtors to use cash collateral in
compliance with a definitive budget, on an emergency and preliminary basis,
until November 20, 1998.
Next, on November\ 17, 1998, the Debtors filed their Second Amended
Emergency Motion for Authority to Use Cash Collateral and Request for Shortened
Notice and Expedited Hearing (the "THIRD CASH COLLATERAL MOTION"). Hearings were
held before this Court on the Third Cash Collateral Motion on November 19 and
20, 1998, and continued to Monday, November 23, 1998. Over the intervening
weekend, the Lenders and the Debtors agreed to an extension of the use of cash
collateral by the Debtors and, on November 20, 1998, the Bankruptcy Court
entered the Second Agreed Order Regarding Limit and Use of Cash Collateral
through December 11, 1998. Additionally, on November 23, 1998, the Lenders and
the Debtors announced to the Bankruptcy Court an agreement for limited interim
credit financing of the estates by one or more of the Lenders that has since
been reduced to written agreement and approved by the Bankruptcy Court. This
interim financing was paid in full with the proceeds from the DIP Facility with
Norwest, discussed below.
On January 4, 1999, the Bankruptcy Court entered an Order Granting
Second Amended Emergency Motion for Authority to Use Cash Collateral. The Court
entered the Order because the Court believed that the continued use of cash
collateral of the Lenders would benefit the Debtors, these Estates and all
Creditors, and that the ability of Nu-kote to reorganize their business was
dependant on the use of the cash collateral. To adequately protect the security
interests of the Lenders, the Court granted to the Lenders valid and
automatically perfected first priority replacement liens and security interests,
subject only to the liens and security interests of Norwest (discussed below),
in and upon those properties in which the Lenders claim pre-petition security
interests; and, to the extent of any diminution in the value of the collateral
of the Lenders, a valid and automatically perfected lien in the antitrust
counterclaims asserted in the HP Litigation, subject to the contingent fee
interest of Coudert Brothers, and liens and security interests of Wausau which
may be granted by the Court, if any, and the liens and security interests of
Norwest. Pursuant to an Agreed Order for Adequate Protection and Extension of
Order Granting Second Amended Emergency Motion for Authority to Use Cash
Collateral (the "AGREED ORDER") negotiated between the Debtors and the Lenders
and entered by the Court on August 20, 1999, effective nunc pro tunc to June 1,
1999, the Debtors submitted a six month budget (the "BUDGET"), a copy of which
is attached to the Agreed Order, and agreed to use the cash collateral of the
Lenders only as set forth in the Budget, the Agreed Order, the Norwest Financing
Order or further Order of the Court.
E. DIP FINANCING
Section 364(d) of the Bankruptcy Code provides that the Bankruptcy
Court may authorize the obtaining of credit secured by a senior or equal lien on
property of the estate only if the Debtors-in-Possession are unable to obtain
such credit anywhere else and the holder of the lien on the property of the
estate on which that senior or equal lien is being proposed is adequately
protected ("DIP FINANCING"). Accordingly, on November 17, 1998,
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 46
<PAGE> 55
the Debtors filed their Emergency Motion for Authority to Obtain Credit on
Interim and Final Basis Pursuant to 11 U.S.C. ss. 364(d) and Request for
Shortened Notice and Expedited Hearing (the "CREDIT MOTION"). The Credit Motion
requested that the Court give the Debtors authorization to borrow up to $15
million from Norwest Business Credit Corporation ("NORWEST"). The Lenders filed
their objection immediately thereafter and their Request for Shortened Notice
and Expedited Hearing and Brief in Support Thereof on November 18, 1998. On
December 10 and 11, 1998, the Court held hearings upon the Credit Motion.
On December 17, 1998, the Bankruptcy Court entered an order approving
DIP Financing from Norwest providing for a $7,500,000.00 DIP Credit Facility
(the "DIP FACILITY"). This DIP Facility is in the form of a line of credit which
has helped fund Nu-kote's working capital requirements as it reorganizes under
the Bankruptcy Code.
The DIP Facility bears interest at a floating rate which is currently
at 9.75%. The DIP 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 was
originally restricted to $400,000 of capital expenditures for the remainder of
fiscal 1999, and to $300,000 per fiscal quarter thereafter, but pursuant to an
amendment to the DIP Facility discussed below, the capital expenditures
limitation has been increased. The DIP Facility is collateralized by
substantially all of the assets of Nu-kote and its U.S. subsidiaries.
Pursuant to Section 2.7(a) of the Credit and Security Agreement, if the
DIP Facility matures due to the confirmation of a Chapter 11 plan, the Debtors
shall be obligated to pay Norwest a prepayment fee in an amount equal to a
percentage of the Maximum Line (defined in the Credit and Security Agreement as
$7,500,000) as follows: "(i) two percent (2%) if the termination or reduction
occurs on or before October 31, 1999; and (ii) one percent (1%) if the
termination or reduction occurs thereafter."
On September 15, 1999, Nu-kote filed a Motion to Approve Amendment to
Norwest Credit and Security Agreement. A summary of the material terms of the
Amendment are as follows:
1. to provide for the issuance by Norwest of letters of credit
for the Debtors' account from time to time in an amount not to exceed $1.5
million at any one time outstanding;
2. to document Norwest's release of its security interest in the
Xaar license in connection with the previously approved sale of the stock of
MIT;
3. to increase the Capital Expenditures limitation; and
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 47
<PAGE> 56
4. to waive technical defaults of certain financial covenants.
The Court entered an Order approving the proposed Amendment on October 28, 1999.
The most Nu-kote has ever drawn down on the DIP Facility was
approximately $3,200,000 on January 21, 1999. Because of an improving cash
position, the current amount borrowed as of October 22, 1999 was $0. The DIP
Facility will be paid in full as a part of the Joint Plan.
F. SUBSTANTIVE CONSOLIDATION
Substantive consolidation of two or more debtors in a bankruptcy case
is appropriate when there exists a "substantial identity" between the debtor
entities, and substantive consolidation is necessary to avoid some harm and
realize some benefit to creditors. The purpose of substantive consolidation is
to insure the equitable treatment of all creditors of all debtors. The result of
substantive consolidation of two or more debtors' estates is the pooling of the
assets and liabilities of the debtors, and the elimination of intercompany
claims and of duplicate claims by creditors.
On December 4, 1998, the Debtors filed a Motion for Substantive
Consolidation of the Debtors' Estates. On February 22, 1998, the United States
Trustee, the International and ICMI Creditors' Committees, and filed Objections
to the Motion for Substantive Consolidation. The Parties resolved these
objections prior to a hearing, and on February 25, 1999, the Court entered the
Substantive Consolidation Order. The Substantive Consolidation Order provides
that all of the Debtors' estates are substantively consolidated, except that any
recoveries on the OEM Litigation shall be distributed as if such estates had not
been consolidated.
G. EPSON'S UNSUCCESSFUL ATTEMPT TO LIFT THE AUTOMATIC STAY
The Epson Litigation has been the subject of many days of hearings in
the Bankruptcy Court. Initially, on December 1, 1998, Epson filed an Emergency
Motion for relief from the automatic stay claiming it was suffering immediate
and irreparable harm because the stay had interrupted the pending patent
litigation against International. After several continuances of the "emergency"
hearing, and after much procedural rescheduling, a preliminary hearing on
Epson's motion was held on December 22, 1998 at which time the Bankruptcy Court
found a reasonable likelihood that Nu-kote would prevail.
A final hearing on the Emergency Motion was initially scheduled for
January 8, 1999, but was once again continued at Epson's request until February
4 and 5, 1999. At the final hearing, it was revealed that the pressing trial
demands Epson had plead in its Emergency Motion never existed. Further, the
second day of the final hearing was principally characterized by Epson's
unsuccessful efforts to introduce exhibits that were not on its exhibit list and
that had not been revealed to counsel for Nu-kote before that morning. It soon
became apparent that the final hearing could not be concluded in the one and a
half days Epson had estimated. As Epson's counsel was unavailable for the next
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 48
<PAGE> 57
three consecutive weeks, Epson requested a continuance of the final hearing on
the Emergency Motion until March, 1999. Nu-kote opposed this request due to the
trial date on the HP litigation.
On February 10, 1999, the Bankruptcy Court entered an Order scheduling
the conclusion of the final hearing on Epson's Emergency Motion for relief from
stay twenty days after the completion of the presentation of evidence in the HP
trial. The Bankruptcy Court specifically found that Epson's "claims of an
`emergency' need for relief from the stay are not consistent with its behavior,
" and that "the `emergencies' Seiko-Epson alleged in December to demand a final
hearing on less than three days' notice have evaporated or have not motivated
Seiko-Epson to expeditiously prosecute its `Emergency' Motion." In light of the
non-exigent circumstances, and in order to avoid interference with the HP trial,
the Bankruptcy Court then continued the final hearing until twenty days after
the completion of the presentation of evidence in the HP trial. The Bankruptcy
Court ruled that "the stay is continued in effect pending completion of this
final hearing."
After the rendition of the verdict in the HP trial, the Debtors and
Epson reached an agreement to certain limited relief as sought in the Motion for
Relief from Stay. Believing that another prolonged hearing was not in the best
interests of the Estate, the Debtors and Epson agreed to relief from the
automatic stay, to the extent that any automatic stay exists, only to the extent
necessary to allow the Appeal (see discussion of the Epson Appeal at Article
V.I.2) to continue as and to the extent determined appropriate by the United
States Court of Appeals for the Federal Circuit, including the filing by any
party of any petitions for rehearing, for rehearing en banc and/or for writs of
certiorari subsequent to a ruling by the Federal Circuit in the Appeal. As to
all other matters set forth in the Motion for Relief from Stay, the automatic
stay, to the extent that any automatic stay exists, shall remain in effect
pending confirmation of a plan of reorganization, the closing or dismissal of
this bankruptcy case, or further order of this Court, and no further hearings
shall be conducted on the Motion for Relief from Stay until the United States
Court of Appeals for the Federal Circuit has issued its initial decision on the
Appeal, conversion of any of these bankruptcy cases to one under Chapter 7 of
the Bankruptcy Code, and/or the appointment of a Chapter 11 trustee in any of
these bankruptcy cases. To that end, the Debtors and Epson filed an Agreed
Motion Pursuant to Rule 4001(d) Regarding Seiko-Epson's Emergency Motion For
Relief from the Stay (the "AGREED MOTION"). No objections to the relief sought
in the Agreed Motion were filed, and on August 30, 1999, the Bankruptcy Court
granted the Agreed Motion. As discussed above, the Federal Circuit has now ruled
on the Appeal.
H. EPSON'S VIOLATION OF THE FIRST TO FILE RULE
On or about February 17, 1999, Coudert Brothers, trial counsel for
International in the Epson Litigation, filed a pleading entitled "Notice of the
February 10, 1999 Order of the Bankruptcy Court Continuing the Automatic Stay"
and thereby notified the California District Court and the Federal Circuit Court
of the Bankruptcy Court's Order scheduling the conclusion of the final hearing
on Epson's Emergency Motion for Relief from Stay for twenty days after the
completion of the presentation of evidence in the HP trial and continuing the
automatic stay as to the Epson Litigation in effect until that time. On or
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 49
<PAGE> 58
about February 23, 1999, Epson filed pleadings with both the California District
Court and the Federal Circuit each entitled Response of Seiko Epson Corporation
and Epson America, Inc. to "Notice" Filed by Nu-kote International, Inc. and
Pelikan Produktions, A.G. In these pleadings, Epson blatantly stated that the
Appeal proceedings in the Federal Circuit ARE NOT STAYED, and attempted to
induce action by either the Federal Circuit and/or the California District Court
to decide the very issues that Epson had already presented to the Bankruptcy
Court in the Emergency Motion for Relief from Stay: whether the appellate
proceedings or the contempt proceedings could continue, and whether the
automatic stay applies to PPAG.
On March 5, 1999, Nu-kote filed an Emergency Motion for Contempt
against Epson in the Bankruptcy Court. On March 11, 1999, the Bankruptcy Court
entered an Order and held that Epson "filed documents in the United States
District Court for the Central District of California and in the United States
Court of Appeals for the Federal Circuit asking those courts to also decide some
or all of the issues Seiko Epson is in the midst of trying in this court." The
Bankruptcy Court found that, in so doing, Epson violated the "first to file
rule" and ordered that Epson was precluded "from prosecuting in other courts the
issues ... that it has submitted to the Bankruptcy Court for the Middle District
of Tennessee in its Emergency Stay Motion."
On March 19, 1999, Epson filed an Emergency Motion to Modify Order on
Debtors' Emergency Motion for Contempt against Seiko Epson Corporation, Epson
America, Inc., William J. Robinson, Esq., and The Law Firm of Graham & James,
LLP. alleging that International had violated the first to file rule by
"prosecuting" in the California District Court the issues that Epson was
precluded from prosecuting. Epson further alleged violations of its due process
rights by the Bankruptcy Court's Order on the Contempt Motion. The Bankruptcy
Court, on March 22, 1999, denied Epson's request to modify the Order on the
Contempt Motion, and found Epson's allegation s against International unfounded
stating, "Contrary to Seiko Epson's allegations, [pleadings submitted to the
California District Court] do nothing more than inform the United States
District Court for the Central District of California of the proceedings
initiated by Seiko Epson in this court and ask the California District Court to
relieve [International and PPAG] of the obligation to respond further until the
completion of the proceeding commenced by Seiko Epson in this court. Far from
`prosecuting' the issues raised by Seiko Epson in this court, the response filed
in the United States District Court for the Central District of California asks
that court to defer adjudication of the issues that Seiko Epson has submitted to
this court and with respect to which this court is in mid-trial."
Epson has appealed the Bankruptcy Court's Order on the Contempt Motion
to the District Court in Tennessee, and this appeal was docketed by the District
Court on April 22, 1999, Civ. No. 3-99-CV-313. Both Epson and the Debtors have
submitted briefs to the District Court, but that Court has not yet issued a
ruling in this appeal.
I. FINANCING THE OEM LAWSUITS
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 50
<PAGE> 59
International is insured pursuant to policies issued by Wausau and by
Chubb Custom Insurance Company ("CHUBB") for liability coverage as well as for
defense of the HP Litigation. International is also covered by a patent
infringement insurance policy from American International Specialty Lines
("AISL") for defense and indemnity claims for patent infringement. Pre-petition,
Nu-kote had been involved in disputes with both Wausau and Chubb over the
funding of the OEM Litigation. Post-petition, initially only Wausau expressed a
willingness to negotiate terms upon which funding of the OEM Litigation would
continue.
On December 18, 1998, International filed its Emergency Motion for
Interim and Final Approval of the Financing, Assumption and Settlement Agreement
with Employers Insurance of Wausau and for Protective Orders and Request for
Shortened Notice and Expedited Hearing (the "WAUSAU MOTION"). International also
filed a Motion to Employ Coudert Brothers as special counsel. The Motion
requested authority to enter into a post-petition financing arrangement with
Employers Insurance of Wausau ("WAUSAU") for the continued funding of costs for
International's participation in the HP Litigation, the Canon Litigation and the
Litigation. On December 18, 1998, the Court entered an Order placing the
proposed agreement between Wausau (the "WAUSAU AGREEMENT") and the Debtors under
seal. The Court set the hearing upon the Wausau Motion for January 11, 1999.
On January 11, 1999, at the hearing on the funding agreement with
Wausau, the Lenders and other parties appeared and announced to the Court that
Chubb had requested an opportunity to offer a better proposal for funding the
Hewlett-Packard Litigation. The Court reset the hearing on the Wausau Motion for
January 15, 1999. A Financing, Assumption and Settlement Agreement with Chubb
(the "CHUBB AGREEMENT"), more favorable to the Debtors was then obtained and, on
January 12, 1999, the Debtors' Motion to Approve Compromise and Insurance
Coverage and Funding Agreement with Chubb Custom Insurance Company was filed
with the Chubb Agreement. On January 22, 1999, the Court entered its Order
Approving Compromise and Insurance Coverage and Funding Agreement with Chubb.
J. EXCLUSIVITY
Pursuant to ss. 1121 of the Bankruptcy Code, a Chapter 11 debtor has an
exclusive right to file a plan of reorganization for the first 120 days of a
bankruptcy case. If a debtor files a plan within this statutory exclusivity
period, exclusivity is extended for an additional sixty days to allow a debtor
to solicit acceptances of that plan pursuant to ss. 1121.
On December 8, 1998, the Lenders filed the Motion to Terminate the
Debtors' Exclusivity Periods Pursuant to 11 U.S.C. ss. 1121(d) and Brief in
Support Thereof (the "MOTION TO TERMINATE"). The Motion to Terminate was
scheduled for hearing on January 28, 1999. Subsequently, the parties agreed to
continue the hearing date on the Motion to Terminate until March 2, 1999. On
February 5, 1999, the Debtors filed their Motion to Extend Debtors' Exclusivity
to File and Obtain Acceptances of Plan of
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Reorganization (the "MOTION TO EXTEND"). The Court set the Motion to Extend for
March 2, 1999. The Debtors' Exclusivity Period was scheduled to terminate on
March 8, 1999.
On March 2, 1999, the Court held a hearing on both the Motion to
Terminate and the Motion to Extend. The Bankruptcy Court considered the size and
complexity of this case but stated that the Court had only extended a debtor's
exclusive period one time in eighteen years based on the complexity of a Chapter
11 case and declined to extend the Debtors' exclusivity. Accordingly, the Court
ordered that the Debtors' Motion to Extend would be denied and that the Debtors'
Exclusivity Period pursuant to 11 U.S.C. ss. 1121 would expire of its own terms
on March 8, 1999.
K. CLAIMS BAR DATE
On February 22, 1999, the Debtors filed their Motion to Establish
Claims Bar Date. On February 26, 1999, the Court entered its Order establishing
April 15, 1999, as the day on or before which a non-governmental claim must be
filed to be treated timely.
L. THE COMMITTEES
On November 23, 1998, and November 24, 1998, the United States Trustee
appointed an Official Committee of Unsecured Creditors in International, Future
Graphics, and ICMI (the "CREDITORS' COMMITTEES").
M. RATIFICATION OF EUROPEAN AGREEMENTS
As part of the Second Amended Facility, eight of the nine Lenders (the
"EUROPEAN LENDERS") entered into two separate Third Amended and Restated
Revolving Credit Facility Agreements (the "EUROPEAN AGREEMENTS") with three of
the European Subsidiaries: one such agreement with Pelikan Limited; and another
such agreement with Pelikan Produktions and Hardcopy. Under the terms of the
Second Amended Facility and the European Agreements, the Lenders and the
European Lenders have collectively loaned to the Debtors and the European
Subsidiaries the following amounts: (1) approximately Ninety-Five Million
Dollars ($95,000,000.00) to Nu-kote International; (2) approximately Ten Million
Dollars ($10,000,000.00) to Pelikan Scotland Limited; and (3) approximately
Thirty-Five Million Dollars ($35,000,000.00) to Pelikan Produktions AG. Since
their execution, both the Second Amended Facility and the European Agreements
have been amended several times. All of the loans, advances and indebtedness
owed to the European Lenders are unconditionally guaranteed by the Debtors.
The above obligations of the Debtors and the European Subsidiaries are
secured by substantially all of the Debtors' assets and by a significant portion
of the assets of the European Subsidiaries. Additionally, the Debtors have
guaranteed all indebtedness of the European Subsidiaries to the European Lenders
(the "EUROPEAN GUARANTEES").
In order to prevent the possible disruption of their business
operations, the Lenders agreed to execute a modification of the European
Agreements on certain terms and
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 52
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conditions. On December 23, 1998, the Debtors filed their Motion to Approve
Debtors' Ratification of the European Restructuring Agreement (the "EUROPEAN
RATIFICATION APPLICATION"). On January 11, 1999, the Court entered its Order
Approving the European Ratification Application.
However, pursuant to the sale of the Pelikan Hardcopy Subsidiaries
(discussed below), the European Lenders released the European Guarantees.
N. SALE OF CERTAIN EUROPEAN SUBSIDIARIES
1. SALE OF MIT
On March 5, 1999, Nu-kote filed a Motion to Approve Sale of Certain
Assets of the Debtors pursuant to ss. 363 of the Bankruptcy Code Free and Clear
of All Liens, Claims and Encumbrances regarding a proposed sale of all of the
outstanding shares in Modular Ink Technology i Stockholm AB ("MIT"), a company
duly organized and validly existing under the laws of Sweden. MIT was a wholly
owned subsidiary of PPAG which was formerly a wholly owned subsidiary of
International. MIT's business consists of the developments, manufacturing and
sale of piezo-electric ink jet printheads and print units and the sale of ink
and ink cartridges for use with piezo-electric ink jet printheads. The owner of
this ink-jet technology used in the business of MIT is Xaar, plc ("XAAR").
International held a non-exclusive license to use this piezo-electric ink jet
technology owned by Xaar. International sub-licensed this right to use the ink
jet technology to MIT.
PPAG, International and Xaar negotiated a sale of the stock of MIT from
PPAG to Xaar, the terms of which affected certain property rights of
International, to wit, the transfer of International's rights to the "Piezo Jet"
trademark to MIT in exchange for cancellation of an intercompany payable due to
MIT from International of approximately $300,000, the termination of
International's license to use the piezo-electric ink jet technology, and the
assignment of International's rights in the counterclaim for tortious
interference with business relations (the "COUNTERCLAIM") asserted by
International in the lawsuit styled Spectra, Inc., Plaintiff vs. Nu-kote
International, Inc. and Modular Ink i Stockholm, AB, Defendants, Civil Action
No. 98-CV-130-JD, pending in the Federal District Court in New Hampshire in
exchange for a fee of $250,000. Lastly, the terms of the MIT Sale included
forgiveness by Xaar of all outstanding royalty payments under the license
agreement with Xaar owed by International and/or MIT of approximately $800,000.
The stock of MIT was sold upon the insistence of and with the agreement of the
Lenders. While Nu-kote believes the sale price for MIT was fair and the highest
and best price under the circumstances, Nu-kote also believes the price was
influenced by the poor financial condition of MIT, pending litigation involving
MIT, and the fact that MIT had been on the market for approximately one and a
half years.
On March 30, 1999, the Bankruptcy Court approved the sale of MIT and
the sale was closed on March 31, 1999.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 53
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2. THE SALE OF EUROPEAN ENTITIES
On June 16, 1999, the Debtors filed an "Amended Motion to Approve Sale
of Pelikan Subsidiaries pursuant to ss. 363 of the Bankruptcy Code Free and
Clear of All Liens, Claims and Encumbrances" seeking to sell to Pelikan Hardcopy
Europe Limited ("PHE") the stock of certain of the European Subsidiaries, those
being PPAG, PSL, Grief-Werke, Pelikan Hardcopy Asia Pacific Limited and Dongguan
Pelikan Hardcopy Limited, (the "PELIKAN HARDCOPY SUBSIDIARIES"). PHE is a
company incorporated in Scotland and owned in part by Hans Paffhausen and Gerry
McNally, officers and directors of the Pelikan Hardcopy Subsidiaries, and other
investors.
The sale of the Pelikan Hardcopy Subsidiaries was closed effective as
of September 30, 1999. The primary terms of the sale to PHE included:
(a) PHE paid a cash purchase price of $16,500,000 which was
allocated as follows:
(1) $8,276,041.30 paid to the European Lenders;
(2) $3,500,000 paid to Pelikan Holding A.G., an unrelated
party, in connection with an amendment to a trademark
license held by one of the Debtors and the issuance
of a new trademark license to PHE;
(3) $3,940,000 placed in escrow for contingent claims,
taxes, warranties and Dongguan Pelikan Hardcopy
Limited;
(4) $533,958 paid to Debtors' professionals for fees and
expenses incurred in connection with the sale; and
(5) $250,000 retained for audit costs.
(b) release by the Pelikan Hardcopy Subsidiaries and PHE of any
and all claims they may have against the Debtors and their
respective officers and directors;
(c) release by the Debtors of any and all claims they may have
against the Pelikan Hardcopy Subsidiaries and PHE and their
respective officers and directors;
(d) a new trademark license agreement with Pelikan Holding A.G.
pursuant to which the Debtors will have the exclusive right to
use the Pelikan trademark in the United States, (including the
District of Columbia, the Commonwealth of Puerto Rico, the
Northern Mariana Islands, the Virgin Islands of the United
States, and the unincorporated United States territories of
American Samoa and Guam), Canada and Mexico and PHE will have
the right to use the trademark in the rest of the world;
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 54
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(e) the release by the European Lenders of the European
Guarantees;
(f) the release by the European Lenders of all indebtedness under
the Swiss Facility;
(g) the conversion of approximately $9.7 million of debt of PSL to
the European Lenders into equity and the transfer of such
equity to PHE for $1.00;
(h) certain non-competition and trademark and patent cross-license
agreements;
(i) a supply agreement providing for the continued supply of
certain products by PHE to the Debtors;
(j) appropriate escrow agreements; and
(k) the European Lenders shall have agreed to the retention of
$250,000 of the purchase price to pay the cost of completion
audits.
On June 22, 1999, the Bankruptcy Court entered its Order on Amended
Motion to Approve the Pelikan Sale. The sale of the Pelikan Hardcopy
Subsidiaries was closed effective as of September 30, 1999.
O. SETTLEMENT WITH BLAIR AND RIDENOUR
In October of 1994, Robert W. Blair and John Ridenour filed suit in the
Court of Common Pleas, Fayette County, PA, Robert W. Blair & John Ridenour v.
Nu-kote Holding, Inc., et al, Civ. Div. No. 1887 of 1994, for payments allegedly
due on promissory notes executed in connection with, and breach of contract
purportedly arising from, indemnity agreements and the sale contract from the
transaction when International purchased the stock of ICMI. International and
ICMI likewise filed claims against Blair and Ridenour for breach of contract in
the Court of Common Pleas, Allegheny County, PA, Nu-kote International, Inc. v.
Robert W. Blair and John Ridenour, Case No. GD 98-13981, and in the United
States District Court for the Western District of Pennsylvania styled Nu-kote
International, Inc. v. Robert W. Blair and John Ridenour, Case No. CV No.
98-1462. On the Petition Date, these suits were, pursuant to provisions in the
relevant documents mandating arbitration, pending before the American
Arbitration Association, styled Nu-kote International, Inc. v. Robert W. Blair
and John Ridenour, Case No. 16-199-00375-94.
Pre-petition settlement negotiations by Nu-kote's prior management were
unsuccessful. Subsequent to the filing of these Bankruptcy Cases, however,
Nu-kote's current management and bankruptcy counsel again entered into extensive
negotiations seeking settlement and resolution of all the outstanding matters
and lawsuits between the parties. As a result of these negotiations, an agreed
settlement was reached and approved by the Bankruptcy Court. The Debtors believe
that this settlement is fair, equitable and in the best interests of the Debtors
and all Creditors of the Estate. The settlement provided for a joint and mutual
release between the parties, dismissal with
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 55
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prejudice of all pending lawsuits and the arbitration proceedings and the
withdrawal of all Claims filed by Blair and Ridenour against the Estate. The
consideration for this settlement was the payment of two-third's of the amount
in the escrow account to Blair and Ridenour and one-third of the amount to the
Debtors. At the time settlement of the Blair and Ridenour litigation and claims
was presented to the Bankruptcy Court for approval, there was approximately
$783,000 in the escrow account representing the original amount plus continually
accruing interest.
On June 15, the Bankruptcy Court entered an Order approving the
settlement. The settlement has been fully consummated; the monies from the
escrow account have been distributed, all pending lawsuits and arbitration
proceedings have been dismissed with prejudice, and Blair and Ridenour have each
dismissed all Claims they filed against the Estate totaling in excess of $1.2
million.
P. PROPOSED SETTLEMENT WITH HEWLETT-PACKARD COMPANY
The HP Litigation went to trial on May 17, 1999. On July 22, 1999, the
jury rendered its decisions, but the verdict did not result in the monetary
damages to Nu-kote for which the Debtors had hoped. Subsequent to the rendition
of the jury verdict in the HP Litigation, Debtors' management and general
bankruptcy counsel entered into extensive negotiations seeking settlement and
resolution of the litigation between the parties. As a result of these
negotiations, an agreement (the "SETTLEMENT AGREEMENT") has been reached,
subject to approval of the Bankruptcy Court, and a Motion to Approve Compromise
and Settlement Agreement as proposed by and between Nu-kote and Hewlett-Packard
Company has been filed with the Bankruptcy Court. For a detailed discussion of
the non-confidential terms of the Settlement Agreement, see the discussion at
Article V.I.1. above.
In summary, it bears repeating here that Nu-kote firmly believes that
the Settlement Agreement negotiated between Nu-kote and HP is in the best
interests of the estate. The HP Litigation has consumed the time and resources
of the Company for in excess of four years. Unless the HP Litigation is
compromised and settled, the parties anticipate that the judgment to be entered
by the California District Court will likely be appealed, and final resolution
of the HP Litigation will be protracted. This Settlement Agreement, negotiated
with the interests' of the Debtors and the creditors of this estate as paramount
concern, brings closure to this chapter of Nu-kote's history and brings the
Debtors one step closer to reorganization.
Finally, the Debtors assert that the benefits to Nu-kote stemming from
the Settlement Agreement are substantial. Although confidentiality concerns
prevent a detailed recitation of the effect of the Settlement Agreement on the
business operations of Nu-kote, Nu-kote represents that the Patent Covenants
granted under the Settlement Agreement are crucial to the continued business
success of Nu-kote and will allow Nu-kote to continue its full line of HP
compatible products. The prompt and efficient resolution of the claims asserted
by HP in this case as pre-petition unsecured claims is also of significant
value, and the intangible benefit of the Debtors', their management and counsel
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 56
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directing their attention to other essential matters should not be undervalued.
The hearing on approval of the Motion to Approve the Settlement Agreement is
scheduled for December 2, 1999.
Q. APPOINTMENT OF EXAMINER
On October 18, 1999, security claimant Lori Lemmer filed a Motion for
Appointment of Examiner. Pursuant to 11 U.S.C. ss. 1104(c), Judge Lundin held
that the statute was mandatory and not discretionary and required the
appointment of an Examiner. Accordingly, Judge Lundin ordered the appointment of
Randal S. Mashburn as the Examiner, however, various restrictions were placed on
the Examiner. First, the Examiner is only authorized to examine the Debtors'
possible claims against Debtors' management. Second, the Examiner's costs,
including the engagement of any professionals, plus expenses, cannot exceed
$50,000. Finally, the Examiner must provide its preliminary report to the U.S.
Trustee within sixty (60) days after the order for the Examiner's appointment is
entered. As set forth in this Disclosure Statement, the Debtors do not believe
that any actionable claims exist against the Current Officers and Directors.
R. ADMINISTRATIVE CLAIMS BAR DATE
On November 12, 1999, the Court entered its Order providing that any
party seeking to assert an administrative expense payment against the Debtors
under 11 U.S.C. ss. 503 through September 30, 1999, except for case
professionals whose employment was approved by the Bankruptcy Court, must file a
request for payment of such administrative expense with the Court by December
15, 1999.
ARTICLE VIII. FINANCIAL INFORMATION AND FUTURE OPERATIONS
THE FINANCIAL INFORMATION DESCRIBED BELOW WAS COMPILED BY THE DEBTORS.
THIS FINANCIAL INFORMATION HAS NOT BEEN SUBJECTED TO AN AUDIT. THE LENDERS AND
COMMITTEES HAVE RELIED UPON THE DEBTORS AND THEIR PROFESSIONALS REGARDING THE
PREPARATION AND THE INCLUSION OF THIS INFORMATION IN THIS DISCLOSURE STATEMENT,
BUT HAD NO ROLE IN THE PREPARATION, REVIEW, OR PRESENTATION OF THE ANNUAL
PROJECTION UNDERLYING THE RESTATED PROJECTION REFLECTED HEREIN, AND MAKE NO
REPRESENTATION OR WARRANTY AS TO THE CORRECTNESS OR ACCURACY HEREOF. THE
FINANCIAL PROJECTIONS ARE FORWARD-LOOKING PROJECTIONS AND ARE BASED UPON
NUMEROUS ASSUMPTIONS, INCLUDING BUSINESS, ECONOMIC, AND OTHER MARKET CONDITIONS.
MANY OF THESE ASSUMPTIONS ARE BEYOND THE CONTROL OF THE DEBTORS, LENDERS AND THE
COMMITTEES, AND ARE INHERENTLY SUBJECT TO SUBSTANTIAL UNCERTAINTY. SUCH
ASSUMPTIONS INVOLVE SIGNIFICANT ELEMENTS OF SUBJECTIVE JUDGMENT WHICH MAY OR MAY
NOT PROVE TO BE ACCURATE, AND CONSEQUENTLY, NO ASSURANCES CAN BE MADE REGARDING
THE ANALYSES OR CONCLUSIONS DERIVED FROM ANALYSES BASED UPON SUCH ASSUMPTIONS.
THE LENDERS AND COMMITTEES ARE NOT IN A POSITION TO MAKE ASSURANCES AS TO THE
FEASIBILITY OF THE RESTATED PROJECTIONS, THE REASONABLENESS OF ASSUMPTIONS USED
IN DEVELOPING THE RESTATED PROJECTIONS, OR THE ABILITY OF THE DEBTORS TO ACHIEVE
THE PROJECTED RESULTS.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 57
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A. HISTORICAL AND POSTPETITION FINANCIAL INFORMATION: NU-KOTE'S RESULTS OF
OPERATIONS
Attached as Exhibits "C," "D," and "E" are the actual and pro forma
Income Statements, Balance Sheet and Cashflows of the North American Operations
for the fiscal years ended March 31, 1998, 1999, 2000, 2001 and 2002. While
certain portions of the attached Exhibits reflect the actual historical results
of the Company's operations, the financial projections contained on Exhibits
"C," "D," and "E" are forward-looking projections prepared by the Debtors.
Projected financial data presented thereon and elsewhere in this Disclosure
Statement is based upon numerous assumptions, including business, economic, and
other market conditions. Many of these assumptions are beyond the control of the
Debtors, and such assumptions involve elements of subjective judgment which may
prove by future events to be inaccurate, and consequently, no assurances can be
made regarding the feasibility of the projections. The financial information
presented on Exhibits "C," "D," and "E" is unaudited. Exhibits "C," "D," and "E"
have, however been prepared in accordance with generally accepted accounting
procedures, and the Debtors believe that these Exhibits are a fair and
reasonable representation of the Debtors' anticipated future operations.
The Company has forecast a significant financial turnaround as compared
to the historical results of the business for the fiscal years ended March 31,
1998 and 1999. For the six month period ended September 24, 1999, the Company
has exceeded its revenue projections by approximately 5% with net sales of $50.9
million. In addition, the Company exceeded its operating income projections by
26%, with operating income of approximately $1.0 million and projected Earnings
Before Interest, Taxes, Depreciation, Amortization and Restructuring charges
(EBITDAR) of approximately $6.0 million for the full fiscal year ending March
31, 2000.
Since the Petition Date, Nu-kote has continued to operate its business
and manage its property as a debtor-in-possession pursuant to ss.ss.1107(a) and
1108 of the Bankruptcy Code. As a result of the achievements of Nu-kote's
management team Nu-kote's financial condition has significantly improved since
the Petition Date.
The Debtors note that sales have increased at a higher than anticipated
rate of growth, gross profit has improved due to the on-going distribution,
transportation, and manufacturing cost-cutting programs, and operating income
has been higher than expected due to substantial reductions in force and the
elimination of the attendant operating expenses. Nu-kote has also obtained price
discounts and favorable credit terms from certain large vendors for the purchase
of supplies, persuaded customers to offset rebates over time, and are in the
process of negotiating long-term contracts with major customers that will
generate millions of dollars in revenue. Through extensive customer contact and
positive cash flow operations, Nu-kote has retained existing business and
instilled confidence in customers and vendors.
Nu-kote has initiated employee and other significant cost reductions,
streamlined and refocused product lines, decreased the targeted customer base,
and met or exceeded
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 58
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sales and other financial projections. Nu-kote has also begun a program of
demanding a 3% discount on cash-in-advance orders to suppliers, a 2% discount on
orders satisfied in 15 days, and no discount on orders offering 30 day terms. As
a result, Nu-kote has utilized only a small portion of the post-petition
financing line available from Norwest and is cash flowing. Nu-kote has filed
Monthly Operating Reports for the months of November and December, 1998 and
January - October, 1999 with the Office of the U.S. Trustee. These Monthly
Operating Reports further indicate the continually improving financial condition
of Nu-kote.
Finally, despite cash usage of approximately $5.0 million for one-time
charges associated with Y2K compliance, restructuring, and bankruptcy costs, the
Company has paid back its initial borrowings on the DIP Facility with Norwest
and, as of October 22, 1999, has $0 net DIP borrowings with a cash surplus of
$1.2 million.
B. FUTURE OPERATIONS OF THE REORGANIZED DEBTORS
The approval by the Bankruptcy Court of the $7.5 million
debtor-in-possession financing with Norwest has served to increase customer and
third party supplier confidence that Nu-kote will continue to provide quality
products and remit trade payables on a timely basis. Since that time, Nu-kote
has focused its energies on redirecting, reorganizing, and restructuring the
company's US-based operations. The Reorganized Debtors will continue the
improvements already implemented.
1. THE FUTURE OF THE MARKET
As set forth above, the Company has historically served and, looking to
the future, the Reorganized Debtor's continued operations will continue to
serve, both the original equipment manufacturer and aftermarket distributor
markets. Among the Reorganized Debtors' challenges is the need to offset
declining impact ribbon sales with faster growing non-impact thermal, ink jet,
toner, and laser cartridge sales. It is anticipated that Nu-kote's future impact
ribbon sales should fall at a rate somewhat less than that of the overall market
due, primarily, to the expectation of market share gains. In an effort to offset
declining impact ribbon sales, Nu-kote has identified 29 domestic accounts in
the original equipment manufacturer, office products, and retail channels of
distribution which have been targeted to provide incremental annualized sales
volume. Thermal products, ink jet accessories, monochrome and color toner, and
laser cartridge sales account for the overwhelming share of expected gains.
2. STRATEGIC GOALS & OBJECTIVES
Prospectively, if purchased by Richmont, the Reorganized Debtors will
focus on a number of strategic and operating goals and objectives in an effort
to maximize financial performance:
(a) Improve sales and marketing effectiveness;
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 59
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(b) Offset declining impact ribbon sales with faster growing
non-impact product sales;
(c) Eliminate non-performing customer accounts, the underlying
sku's, and associated infrastructure expense, implementing, in
the process, reductions in force consistent with expected
sales volume, anticipated account base, and more aggressive
levels of productivity;
(d) Generate logistics and manufacturing cost savings and,
longer-term, facility consolidations;
(e) Outsource important but marginally profitable ribbon products
to contract manufacturers, which, on the basis of scale alone,
are expected to produce product less expensively; and
(f) Improve third party supplier credit terms.
3. SALES & MARKETING
During the better part of calendar 1998, the sales and marketing
organization was focused primarily on protecting Nu-kote's existing customer
account base due to Nu-kote's then less than satisfactory line fill rate, now
corrected, and its increasingly uncertain financial condition which had lead
certain of its customers to consider dual sourcing. Prospectively, the
Reorganized Debtors will stress the importance of an understanding of end-user
needs by sales and marketing personnel; focus on the distinguishing
characteristics of the Nu-kote product line; and employ a multi-functional team
approach to address the needs of key customers. Sales and marketing personnel
will also be held accountable for performance from both a sales volume and, more
importantly, account profitability point-of-view, thus increasing incentives to
perform well.
To begin the implementation of these changes, Nu-kote recently
introduced the initial phase of what will become a comprehensive training
program to improve end-user and product knowledge. In addition, the Company has
identified key personnel from the various functional disciplines and assigned
each to a series of teams that will interface with specific large customer
accounts. Similarly, Nu-kote has restructured its sales compensation plan by
reducing base salaries on an across-the-board basis and providing a schedule of
incentives to replace lost salary income with earned commissions. The positive
impact of these efforts will be realized through continued reinforcement of the
underlying principles.
4. ACCOUNTS & SKU'S
A recent analysis of Nu-kote's existing account structure by product
line and channel of distribution indicated that approximately 25% of the
Company's domestic customer accounts and 60% of its domestic sku's generated
over 95% of its domestic sales volume. As a result, the Company has elected to
eliminate its non-performing
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 60
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accounts and the underlying sku's and, in the process, restructure certain
channels of distribution, which, in the aggregate, is expected to generate
personnel and infrastructure operating cost savings in excess of $2.1 million
annually, net of severance and other one-time costs.
5. LOGISTICS & MANUFACTURING
As an extension of the analysis of Nu-kote's existing account
structure, Nu-kote has identified approximately $0.9 million of logistics cost
savings and an estimated $2.4 million of manufacturing cost savings, both net of
severance and other one-time charges. In the aggregate, these savings are a
function of on-going reductions in force, elimination of costly overtime
expense, lower transportation rates, material cost reductions, improved scrap
and rework, manufacturing efficiency gains, and facility
consolidations/closings.
6. OUTSOURCING
Nu-kote has identified approximately 550 impact ribbon-related sku's
which lend themselves to outsourcing. Based on firm estimates from two contract
manufacturers, the Reorganized Debtors can expect to save in excess of $5.0
million over a twelve month period of time. In addition, the outsourcing
program, once completed, should lead to the elimination of associated
distribution and manufacturing facilities as indicated immediately above.
7. TRADE CREDIT
Nu-kote has initiated a planned program to expand trade credit and
obtain supplier price concessions. Concurrent with the filing of these
Bankruptcy Cases, Nu-kote suppliers overwhelmingly demanded cash in advance for
delivery of goods, which, understandingly, impacted working capital negatively.
Recently, however, Nu-kote has initiated conversations with its trade and other
suppliers and proposed a 3% discount off all invoices demanding cash in advance,
a 2% discount off all invoices requiring payment in ten days, and no discount on
invoices requiring payment in thirty days. To date, the Debtors have reduced
borrowings under Nu-kote's DIP Facility to $0 as of October 22, 1999 and should
continue to improve future cash flow.
8. INFORMATION SYSTEMS
Nu-kote completed its installation of a new, fully integrated computer
based information system on October 22, 1999, allowing ample time for testing
prior to calendar year-end. Among the features of the new system are improved
financial consolidation and reporting, improved workflow efficiency and supply
chain management, reduced software application maintenance, Y2K compliance, and
the ability to conduct electronic commerce.
9. FUTURE FINANCIAL PERFORMANCE
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 61
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The Reorganized Debtors are expected to improve operating and financial
performance substantially. Domestically, sales should increase at approximately
7-10 % per year as new and existing account growth in the faster growing
non-impact market nominally offsets a continued decline in the impact market.
Operating income, however, is expected to show an estimated four-fold increase
on the strength of wider gross margins, particularly in the aftermarket, and
significantly lower selling, general & administrative expenses. Net cash flow
remains positive throughout the forecast periods.
ARTICLE IX. DISCUSSION OF THE JOINT PLAN
THE JOINT PLAN IS ATTACHED HERETO AS EXHIBIT "G." ALL TERMS FOR
IMPLEMENTING THE JOINT PLAN, TREATMENT OF CLASSIFIED AND UNCLASSIFIED CLAIMS AND
INTERESTS, PROVISIONS REGARDING ALL PROPERTY DEALT WITH BY THE JOINT PLAN, AND
ALL OTHER IMPORTANT TERMS AND CONDITIONS ARE CONTAINED IN THE JOINT PLAN. YOU
ARE URGED TO REVIEW THE JOINT PLAN CAREFULLY.
A. SUMMARY OF THE JOINT PLAN
THE JOINT PLAN IS A COMPREHENSIVE PROPOSAL BY THE PLAN PROPONENTS THAT
PROVIDES FOR THE PAYMENT IN FULL OF ALL ALLOWED ADMINISTRATIVE CLAIMS, PRIORITY
CLAIMS AND SECURED CLAIMS, THE PAYMENT TO HOLDERS OF ALLOWED UNSECURED CLAIMS,
OTHER THAN THE CLAIMS OF THE LENDERS, THEIR PRO RATA SHARE OF THE SUM OF
$600,000, OR SUCH HIGHER AMOUNT AS IS GENERATED BY THE BIDDING PROCEDURE, AND
25% OF THE NET CASH RECEIVED ON AVOIDANCE ACTIONS.
To accomplish this, the Joint Plan contemplates:
1. The continued operation of the business of Nu-kote.
2. The transfer of ownership of the business and the Litigation
on the Effective Date of the Joint Plan either to:
(a) Richmont or such other Successful Bidder as is
selected pursuant to the Bidding Procedure; or
(b) if there is no Successful Bidder other than Richmont
and Richmont does not close, to one or more trusts
for the benefit of Creditors in which case the
business will continue to be operated pending its
contemplated sale as a going concern.
B. CLASSIFICATION AND TREATMENT OF CLAIMS
1. TREATMENT OF UNCLASSIFIED CLAIMS
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 62
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The payment of certain types of Claims asserted against the Debtors is
accomplished without the requirement of classification of those Claims into
Classes. Administrative Claims and Priority Tax Claims are not classified under
section 1123(a)(1) of the Code for purposes of voting or receiving distributions
under the Joint Plan. The procedures for payment of Administrative Claims and
Priority Tax Claims, as well as Fee Claims, fees to the Office of the U.S.
Trustee, and the Norwest Claim are detailed in the Joint Plan and summarized as
follows:
(A) DEADLINE FOR FILING ADMINISTRATIVE CLAIMS. Any person or
Entity who claims to hold an Administrative Claim (other than
an Administrative Claim representing a liability incurred in
the ordinary course of business by any of the Debtors or a Fee
Claim) shall be required to file with the Court an application
for payment of such asserted Administrative Claim and to serve
notice thereof on all parties entitled to such notice. The
failure to file timely the application as required under the
Joint Plan shall result in the Claim being forever barred and
discharged. The Bar Date for filing requests for payment of
all Administrative Claims, Priority Tax Claims and Other
Priority Claims (except Fee Claims) (i) incurred through
September 30, 1999 is December 15, 1999, and (ii) incurred
after September 30, 1999 is the date that is sixty days after
the Effective Date.
(B) PAYMENT OF ALLOWED ADMINISTRATIVE CLAIMS. Each holder of an
Administrative Claim, except as otherwise set forth in the
Joint Plan shall receive from the Reorganized Debtors either:
(i) with respect to Administrative Claims which are Allowed
Claims on the Effective Date, the amount of such holder's
Allowed Claim in one cash payment; (ii) with respect to
Administrative Claims which become Allowed Claims after the
Effective Date, the amount of such holder's Allowed Claim in
one cash payment as soon as practicable after such claim
becomes an Allowed Administrative Claim; or (iii) such other
treatment agreed upon by the Debtors and such holder;
provided, however, that any such Administrative Claim
representing a liability incurred in the ordinary course of
business by any of the Debtors shall be paid by Reorganized
Debtors in accordance with the terms and conditions of the
particular transaction giving rise to such liability and any
agreements relating thereto.
(C) FEE CLAIMS OF PROFESSIONALS OTHER THAN COMMITTEES'
PROFESSIONALS. Each professional person whose retention with
respect to the Debtors' cases has been approved by the
Bankruptcy Court or who holds, or asserts, an Administrative
Claim that is a Fee Claim shall be required to file with the
Bankruptcy Court a final fee application within sixty (60)
days after the Effective Date and to serve notice thereof on
all parties entitled to such notice pursuant to the Agreed
Order Regarding Compensation of Certain Professionals (the
"FEE ORDER"). Not later than five (5) days prior to the
Effective Date, any person intending to file a Fee Claim shall
file an estimate of such final Fee Claim on all parties
entitled to such notice pursuant to the Fee Order. No Fee
Claims shall be allowed in excess of estimated amounts.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 63
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(D) FEE CLAIMS OF THE COMMITTEES' PROFESSIONALS. Each professional
person employed by the Committees whose retention with respect
to the Debtors' cases has been approved by the Bankruptcy
Court (the "COMMITTEE PROFESSIONALS") shall be required to
file a final fee application in accordance with the Joint
Plan. Any such Fee Claim of a Committee Professional shall be
an Allowed Administrative Claim to the extent that such Fee
Claim is approved by the Bankruptcy Court and so long as the
aggregate allowed Fee Claims of such Committees' Professionals
does not exceed $450,000, and shall be paid in full in one
cash payment on the Effective Date.
(E) PAYMENT OF ADMINISTRATIVE TAX CLAIMS. Each holder of an
Administrative Claim that is an Allowed Claim for Taxes for
which the Debtors are responsible for the period during which
the Debtors' Chapter 11 Case is being administered, and any
other Taxes of the Debtors payable pursuant to Section
507(a)(1) of the Bankruptcy Code, if any, shall be paid the
Allowed Amount of such holder's Claim in cash, in full, by
Reorganized Debtors on the latest of: (i) the Effective Date,
(ii) the date such Claim is allowed by Final Order, or (iii)
the date such payment is due under applicable law.
(F) PAYMENT OF PRIORITY TAX CLAIMS. Any and all Secured or
Priority Claims of any Entity for the payment of any Taxes (a)
accorded a priority pursuant toss.ss.507(a)(8) of the Code
(but excluding all Claims for post-petition interest and
pre-petition and post-petition penalties all of which interest
and penalties, pre-confirmation and post-confirmation, shall
be (i) deemed disallowed and (ii) fully discharged on the
Confirmation Date), or (b) secured by valid Liens on assets of
any Debtor existing on the Confirmation Date (but excluding
all Claims for post-petition interest and pre-petition and
post-petition penalties, all of which interest and penalties
shall be (i) deemed disallowed and (ii) discharged on
Confirmation Date). Additionally, all Liens securing Tax
Claims shall be deemed and legally treated as released, voided
and discharged on the Confirmation Date. Each Allowed Tax
Claim shall be paid by Reorganized Debtors in accordance with
Section 1129(a)(9)(C) of the Bankruptcy Code.
(G) PAYMENT OF NORWEST CLAIM. The Norwest Claim shall be paid in
full in accordance with the Norwest Agreement and the
Bankruptcy Court's Order approving same. Until the claim of
Norwest is paid hereunder, Norwest shall retain the Norwest
Lien. At the time the Norwest Claim is paid, Norwest shall
deliver a release of the Norwest Lien in a form acceptable to
the Lenders.
(H) PAYMENT OF FEES TO U.S. TRUSTEE. All fees payable under 28
U.S.C. ss. 1930 shall be paid in cash in full. For purposes of
such payments, the Reorganized Debtor shall be treated as a
single entity.
2. TREATMENT OF CLASSIFIED CLAIMS
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 64
<PAGE> 73
Section 1122 of the Bankruptcy Code states in part that "a plan may
place a claim or an interest in a particular class only if such claim or
interest is substantially similar to the other claims or interests of such
class." The Joint Plan classifies Claims into three (3) separate Classes and
Interest Holders into one (1) Class, pursuant to ss.ss. 1122 and 1123 of the
Code. The treatment of and consideration to be received by holders of Allowed
Claims pursuant to the Joint Plan shall be in full settlement, release and
discharge of their respective Claims and any associated lien or encumbrance but
shall not affect the liability of any other Entity on such Claim or Interest..
The classification and treatment of Claims and Interests pursuant to the Joint
Plan is detailed below:
(A) CLASS 1- SECURED CLAIMS OF THE LENDERS. This Class consists of
the Secured Claims of the Lenders. If there is a Successful
Bidder who timely closes the Sale Transaction on or before the
Effective Date, then in full satisfaction of all Claims of all
Lenders, the Lenders shall be paid and receive on or before
the Effective Date $20,550,000 in good and collected funds, or
such higher amount as is generated by the Bidding Procedure.
In addition, the Reorganized Debtors or Successful Bidder, as
the case may be, shall pay to the Lenders a sum equal to
one-third (1/3) of the Net Cash Received from the OEMs, Chubb,
Wausau or their excess carriers (or any of their affiliates,
successors or assigns) on account of any claims of the Debtors
or their estates including, without limitation, claims against
the OEMs and claims of the Debtors against directors and
officers or any policy of insurance related to same, provided,
however, that the Debtors shall have the sole and absolute
discretion to pursue and either to settle or litigate all of
such claims, including, inter alia, the right to permit the
Debtors to accept zero-cash or non-cash benefits, in neither
of which shall the Lenders have any interest.
Otherwise, upon the occurrence of the Trust
Triggering Event, then each holder of an Allowed Secured Class
1 Claim shall receive on the Effective Date, its Pro Rata
share of 97% of (a) the Trust Interest and (b) the Trust
Interest (Litigation), and shall retain its assignments,
security interests, liens and other interests in the Retained
Assets and Litigation, upon which such assignments, security
interests, liens and other interests shall be deemed to be
continuously perfected and automatically remain attached to
secure the Lender's Note and Allowed Claim to the extent
applicable.
In the event the Joint Plan is subject to "cram down"
under Section 1129(b) of the Bankruptcy Code on account of
non-acceptance by Class 3, each holder of an Allowed Secured
Class 1 Claim shall, on the Effective Date: (a) receive a
promissory note in the amount of its Allowed Secured Class 1
Claim bearing interest at the Legal Rate (the "LENDER'S
NOTE"); (b) retain its assignments, security interests, liens
and other interests in the Retained Assets and Litigation,
upon which such assignments, security interests, liens and
other interests shall be deemed to be continuously
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 65
<PAGE> 74
perfected and automatically remain attached to secure the
Lender's Note and Allowed Claim to the extent applicable; (c)
receive a Pro Rata share of 100% of the Trust Interest; and
(d) receive its Pro Rata share of 100% of the Trust Interest
(Litigation) to the full extent of the claims, assignments,
security interests, liens and other interests held by each
Secured Class 1 Claim. To the extent the Lender's Note is
insufficient to fully satisfy its Allowed Secured Class 1
Claim, such holder's Allowed Secured Class 1 Claim shall be
treated as an Unsecured Class 3a Claim.
(B) CLASS 2 - OTHER SECURED CLAIMS. This Class consists of all
other allowed Secured Claims of any Creditor other than those
Secured Claims in Class 1. The following Creditors have filed
Secured Claims, and, to the extent such Secured Claims are
Allowed, each shall be treated as a separate subclass in Class
2:
Class 2A Atlantic Molding, Inc.
Class 2B: Border Lift
Class 2C: CIT Group/Equipment
Class 2D Doris L. Crank
Class 2E: Dollar Bank Leasing Corp.
Class 2F: Employers Insurance of Wausau
Class 2G: ERS Imaging Supplies, Inc.
Class 2H: GE Capital - Colonial Pacific Leasing
Class 2I: Wayne E. Moore
Class 2J: Newcourt Communication Finance Corp.
Class 2K: Oasis Imaging Products
Class 2L: Oce Printing Systems USA, Inc.
Class 2M: Oskar Haug AG
Class 2N: Phillips Joanna
Class 2O: Precision Packaging Products, Inc.
Class 2P: Tennant Company
Class 2Q: Unisys Corporation
Class 2R: RSL Industrial Contracting
Except to the extent that a Class 2 Claimant may
otherwise agree, each holder of an Allowed Secured Class 2
Claim shall be fully satisfied, at the Reorganized Debtor's
option, by one of the following:
(1) NOTE OPTION: Each holder of a Class 2 Claim shall
retain all Liens securing such Claim until such Claim
is fully paid or until such holder otherwise agrees.
The terms and provisions relating to such Liens shall
be set forth in appropriate documents agreed to
between the parties, or, in the event of
disagreement, as directed by the Court. The
Reorganized Debtor shall execute a note payable to
the Class 2 Creditor and deliver it to the holder of
such Claim, along with an appropriate mortgage and/or
security agreement, no later than the
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 66
<PAGE> 75
tenth (10th) Business Day after the later of the
Effective Date or the date that such Claim becomes an
Allowed Claim. The initial principal amount of each
Class 2 Claim shall be equal to the lesser of (i) the
amount which the Court shall determine is equal to
the value of the assets securing such Claim or (ii)
the amount of the Class 2 Claim. To the extent that
any Creditor has a Deficiency Claim in addition to
its Class 2 Claim, the Deficiency Claim shall be
treated under this Plan as an Unsecured Claim against
the Debtors.
(2) UNIMPAIRMENT OPTION: At the option of the Reorganized
Debtor, any Class 2 Claim may be deemed unimpaired.
If such election is to be made, it must be made on or
before the Effective Date. Any arrearage or other
amounts owed by the Debtors as of the Effective Date
(and any other payments which may at such date be
required to make each such Claim unimpaired) shall be
paid in cash, in full, on or before the forty-fifth
(45th) Business Day after the Effective Date or as
shall otherwise be agreed to in writing by the holder
of such Claim, and all other defaults with respect to
such Claim required to be cured by Section 1124(2) of
the Code shall be cured on or prior to the
forty-fifth (45th) Business Day after the Effective
Date as shall be agreed to in writing by the holder
of such Claim, and from and after the date of such
cure any previously accelerated indebtedness shall be
reinstated and any default rate of interest shall no
longer apply, but shall be deemed waived (not
forgiven). Each Class 2 Creditor whose claim is
unimpaired pursuant to the terms hereof shall retain
such lien as such Creditor held prior to the Petition
Date. After the reinstatement of its Class 2 Claim,
each Class 2 Creditor will receive payments in
accordance with the instruments governing such Claim
or as such Creditor may otherwise in writing agree.
Furthermore, after such unimpairment, each Class 2
Creditor will be entitled to exercise all rights,
privileges, and remedies available to it under the
instruments governing its Class 2 Claim in accordance
with the terms for such instruments, without need for
any application to or order of the Court.
(3) CASH OPTION: The Reorganized Debtor may also elect,
at any time on or before the Effective Date, to pay a
Class 2 Secured Claim in full, in cash, on or
promptly after the Effective Date.
(4) ABANDONMENT OPTION: The Reorganized Debtor may also
elect, at any time on or before the Effective Date,
to fully satisfy a Class 2 Claim by abandoning the
collateral securing such Claim to the holder of such
Claim.
(5) RELEASE OF LIEN: Upon the satisfaction of any note
given to any holder of a Class 2 Secured Claim
pursuant to any of the methods
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 67
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provided for in this Plan, the holder of such Class 2
Secured Claim shall execute all instruments and
documents necessary to release its Lien securing such
Claim or note.
(C) CLASS 3 - UNSECURED CLAIMS. This Class consists of all Allowed
Unsecured Claims. Class 3a and 3b shall have their votes
counted as a single class. The distinction of 3a and 3b is
solely for distribution purposes per the agreement reached
among the Plan Proponents in the Joint Plan and the
Stipulation. In the event that the Plan Proponents request the
Bankruptcy Court to invoke the "cram down" provisions of
Section 1129(b) of the Bankruptcy Code on account of a
non-acceptance of this Joint Plan by the Unsecured Claims in
Class 3b, Class 3 shall be treated as a single class for Pro
Rata distributions as further provided herein.
(1) CLASS 3A - UNSECURED DEFICIENCY CLAIMS OF THE
LENDERS. Class 3a consists of the Allowed Unsecured
Deficiency Claims of the Lenders calculated as that
amount by which the Allowed Claim of the Lenders
exceeds the Allowed Secured Claim of the Lenders
pursuant to 11 U.S.C. ss. 506. If the Trust
Triggering Event shall not occur on or prior to the
Effective Date, then the Lenders, as holders of all
of the Unsecured Class 3a Claims shall receive, in
full satisfaction of all of their Unsecured Claims,
their respective Pro Rata shares of the payments made
on account of the Lenders' Secured Class 1 Claims, as
provided above. Otherwise, in the event of the
occurrence of the Trust Triggering Event, if the
Joint Plan is accepted without invoking the "cram
down" provisions of Section 1129(b) of the Bankruptcy
Code on account of a non-acceptance of this Joint
Plan by the Unsecured Claims in Classes 3a and 3b
(whose votes will be counted as a single class for
acceptance of this Joint Plan), each Holder of an
Allowed Unsecured Class 3a Claim shall receive its
Pro Rata share in 97% of the (a) Trust Interest and
(b) the Trust Interest (Litigation), as set forth in
the treatment of Secured Class 1, above.
(2) CLASS 3B - GENERAL UNSECURED CLAIMS. This Class 3b
consists of the Allowed Claims of all General
Unsecured Creditors, excluding all Class 3a Claims.
If the Trust Triggering Event does not occur prior to
the Effective Date, then the holders of all Unsecured
Class 3b Claims shall each receive their Pro Rata
Share of (i) the sum of $600,00 to be paid on or
before the Effective Date by the Successful Bidder,
in good and collected funds to the Reorganized
Debtors, or such other Entity as directed by the
Committees, for the benefit of the Class 3b
Creditors, or (ii) such higher amount as is generated
by the Bidding Procedure. In addition, Unsecured
Class 3b Claims shall receive a Pro Rata share of 25%
of the Net Cash Received by the Reorganized Debtors
from recoveries on Avoidance Actions.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 68
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Otherwise, upon the occurrence of the Trust
Triggering Event (a) if the Joint Plan is accepted
without invoking the "cram down" provisions of
Section 1129(b) of the Bankruptcy Code on account of
a non-acceptance of the Joint Plan by the unsecured
claims in Class 3a and 3b, each holder of an Allowed
Unsecured Class 3b Claim shall receive its Pro Rata
share of 3% of (a) the Trust Interest and (b) the
Trust Interest (Litigation) or (b) in the event that
the Plan Proponents request to invoke the "cram down"
provisions of Section 1129(b) of the Bankruptcy Code
provided in Section 12.1 of the Joint Plan is
activated on account of a non-acceptance of the Joint
Plan by the unsecured claims in Class 3a and 3b, the
sharing arrangement between Secured Class 1 (i.e. 97%
of the Trust Interest and Trust Interest
(Litigation)) and Class 3b (i.e. 3% of the Trust
Interest and Trust Interest (Litigation)) shall be
eliminated and of no force and effect. In such event,
Class 3a and 3b shall then be treated as a single
class to receive their Pro Rata share of
distributions from the Litigation Trust, if any,
after the treatment of Secured Class 1 as provided
for by the Joint Plan.
(D) CLASS 4 - COMMON STOCK. This Class consists of: (i) the Record
Holders of Interests of Holding Common Stock and the Record
Holders of Interests of the Debtors common stock (other than
Holding) owned by entities other than the Debtors or
affiliates of the Debtors' as of the Distribution Record Date
and (ii) Holders of Claims arising from rescission of a
purchase or sale of a security of the debtor or of an
affiliate of the debtor, for Claims arising from the purchase
or sale of such a security, or for reimbursement or
contribution allowed under section 502 on account of such a
Claim. The holders of Allowed Class 4 Interests shall have
their respective Interests terminated and canceled and shall
not be entitled to receive any distribution of other benefit
on account of their Interests.
C. IMPLEMENTATION OF THE JOINT PLAN: A SUCCESSFUL BIDDER
The Joint Plan provides for the sale of the stock or assets of the
Debtors (which will include indirectly ownership of all assets and intellectual
property of the Debtors and the Litigation) to the Successful Bidder. The entity
with the Lead Bid under the Joint Plan is Richmont (as defined below). The
Successful Bidder will be selected by means of the Bidding Procedure.
1. THE PROPOSED PURCHASER: RICHMONT
A newly-formed affiliate of Richmont Capital Partners I, L.P., a
Delaware limited partnership, is the proposed purchaser of the stock of
Reorganized Holding. Richmont Capital Partners I, L.P. and its affiliates own
and operate portfolio businesses in industries such as financial services,
apparel, sports products, and food services. Richmont Capital Partners I, L.P.
owns beneficially 2,559,360 shares of the outstanding common stock of Holding,
which is approximately 11.8% of that class. John P. Rochon, a director of
Nu-kote
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 69
<PAGE> 78
and the chief executive officer of the managing general partner of Richmont
Capital Partners I, L.P. has shared voting and investment power over these
shares.
The proposed purchaser of the stock of Reorganized Holding ("RICHMONT")
will be an affiliate of Richmont Capital Partners I, L.P. The net worth of
Richmont upon formation will be at least sufficient to qualify as financially
able to be the Purchaser under the Joint Plan, and Richmont is willing to be the
Purchaser contemplated in the Plan. The senior management of Richmont is
anticipated to include John P. Rochon and Patrick E. Howard. While Richmont has
expressed an interest and willingness to be the Purchaser contemplated by the
Joint Plan, the ultimate Purchaser will be the entity which is determined by
Nu-kote to have the highest and/or best bid for the purchase of the stock of the
Reorganized Holding. It is contemplated that the current management of Nu-kote
will receive an equity incentive of some form in Richmont if Richmont is the
Purchaser.
2. RICHMONT'S OBLIGATION TO CLOSE
Richmont will have no obligation to close the Sale Transaction and
Richmont shall have no liability, obligation or responsibility to the Debtors,
their Estates, the Lenders, the Creditors, or any other party in interest as to
such Sale Transaction or under this Joint Plan unless the Closing Conditions are
satisfied. The calculation of whether or not the aggregate allowance of all
Administrative Claims and Priority Claims is less than or equal to $3,000,000
shall include all Administrative Claims and Allowed Priority Claims that have
been Allowed as of the Effective Date, all Filed Administrative Claims and
Priority Claims that have not been Allowed as of the Effective Date whether or
not objected to unless such objection has been resolved by Final Order, and
reserves for any Administrative Claims or Priority Claims that have not been
filed as of the Effective Date but which the Debtors believe will be filed by
the Bar Date for such claims. Through and until 4:00 p.m. (EST) on January 25,
2000, Richmont shall be subject to a higher bid of any other Successful Bidder
under the Bidding Procedure and shall have no right to object to or prevent such
a higher bid irrespective of the amount of Administrative Claims, resolution of
the OEM Claims or occurrence of a Material Adverse Change (as defined below),
any one or all of which may be acceptable to such Successful Bidder.
3. THE LETTER OF CREDIT
In the event Richmont is the Successful Bidder and fails to close the
Sale Transaction on or before the Effective Date, other than on account of any
one or more of the Closing Conditions, the Lenders shall be immediately entitled
to draw upon the full amount of the Letter of Credit and apply the proceeds
thereof to their Claims without notice of any kind as the sole remedy available
for any party in interest for non-performance by Richmont under this Joint Plan.
In the event Richmont is not the Successful Bidder, no demand for funding will
be made against the Letter of Credit and the Letter of Credit shall be promptly
returned to Richmont on the earlier of the selection of the Successful Bidder or
the Confirmation Date, unless such date shall be extended in writing by and
among Richmont, the Debtors and the Lenders.
4. THE BIDDING PROCEDURE
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 70
<PAGE> 79
Richmont shall be the initial bidder, and has submitted the Lead Bid as
provided in the Joint Plan.(3) The Bidding Procedure shall be administered by
the investment banking firm of Conway, Del Genio Gries & Co., LLC ("Conway Del
Genio"), which firm has previously been employed by the Debtors as their
investment bankers in connection with the sale of the company. The Bidding
Procedure shall be as follows:
(A) SOLICITATION. The Debtors shall, and the Lenders may (provided
they direct any solicited parties to Conway Del Genio) seek
higher and better offers than the Lead Bid from any entity
that constitute, or would reasonably be expected to lead to an
Overbid (as defined below).
(B) INFORMATION TO THIRD PARTIES. The Debtors shall (a) furnish,
in addition to the confidential memorandum provided to
prospective bidders who have signed confidentiality
agreements, non-public information (other than trade secrets
or proprietary information) with respect to the Debtors to any
entity seeking to be a successful bidder who first (i) has
executed a letter of interest in a range in excess of that of
the Lead Bid, (ii) has executed a confidentiality agreement in
a form mutually acceptable to the Debtors and the Lenders and
(iii) has delivered to the Debtors and the Lenders its current
financial statements and such other information as Debtors
shall reasonably require, which demonstrate, to the Debtors'
reasonable satisfaction, the financial capability of such
entity to consummate the transactions contemplated by the
Overbid and (b) participate in negotiations or discussions
concerning such Overbid. The Lenders shall receive biweekly
reporting from Conway Del Genio commencing on December 3, 1999
regarding the sale process and other information reasonably
requested by the Lenders.
(C) OVERBIDS. The Debtors shall solicit higher and better offers
("Overbids") in accordance with the following procedure.
(I) OVERBID DEADLINE. All Overbids shall be submitted in
writing to and received by Conway Del Genio no later
than 4:00 p.m. (EST) on, January 25, 2000 (the "Bid
Date"), with copies simultaneously sent to Debtors
through their undersigned counsel
(Hance/Scarborough/Wright), Richmont through its
undersigned counsel (Creel, Sussman & Moore, L.L.P.)
and the Lenders through their undersigned counsel
(Vinson & Elkins L.L.P.).
(II) OVERBID REQUIREMENTS. To be considered, all Overbids
must, in the reasonable judgment of the Debtors,
consist of terms no less favorable to Debtors,
Lenders and the Debtors' other creditors than the
Lead Bid and must satisfy the following minimum
requirements (such Overbid, a "Qualified Overbid"):
- ---------------
(3) The Lenders assert they hold a valid and perfected security
interest in the OEM Litigation. The Debtors, however, dispute this assertion.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 71
<PAGE> 80
- the initial Overbid shall meet all other
payment requirements of the Lead Bid and
provide at least $1,000,000 of additional
cash available for payment of the $600,000
Break-up Fee to Richmont and payments to the
Lenders and Unsecured Creditors, with
successive bids (a "Subsequent Overbid")
thereafter exceeding one another by minimum
increments of at least $250,000.
- all Overbids by bidders other than Richmont
shall be accompanied by a cash deposit of
$500,000 or letter of credit acceptable to
the Debtors and Lenders in the amount of
$500,000 (the "Deposit"), which Deposit
shall be held by Conway Del Genio and which
shall be forfeitable to the Lenders in the
event the bidder is selected as the
Successful Bidder and does not timely close
for any reason other than that, on or before
March 15, 2000, (i) the aggregate allowance
of all Administrative Claims and Priority
Claims is greater than $3,000,000, (ii) the
OEM Claims are not resolved in a manner
which does not cause or, with the passage of
time, will not cause, a Material Adverse
Change, (iii) an adverse Material Adverse
Change shall have occurred or (iv) the Joint
Plan shall not have been confirmed by Final
Order of the Bankruptcy Court (the "Closing
Conditions");
- the Overbid shall provide for the purchase
of the assets and/or stock of the Debtors
and shall not be conditional on the outcome
of any unperformed due diligence by the
bidder, (b) the receipt of equity or debt
financing, (c) the approval of any Board of
Directors, shareholder, or other corporate
approval, or (d) any other condition
preceding closing other than the Closing
Conditions;
- the bidder shall provide evidence reasonably
satisfactory to the Debtors and the Lenders
demonstrating that the bidder has the
financial ability to close and consummate
the sale transaction contemplated hereunder
on or prior to the Effective Date; and if
patent covenants with Hewlett-Packard
Company ("HP") (in the event a settlement
with HP is approved and effected) related to
the Debtors' inkjet business are to be
acquired, such Overbid shall also be by an
entity acceptable to HP.
(III) RICHMONT DEPOSIT REQUIREMENT. The Term Sheet requires
Richmont to immediately post, as its Deposit, a
$500,000 letter of credit contemporaneously with the
filing of the Joint Plan as (i) an indication of its
good faith and (ii) a limit on its financial risks in
the
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 72
<PAGE> 81
event of its non-performance. Richmont's offer and
all other timely submitted Qualified Bids shall
remain open and irrevocable through 4:OO P.M., EST,
January 28, 2000 (the "Selection Date") on which date
the Debtors shall select the bid that in their
reasonable judgment represents the highest and best
offer for all of the stock or assets of the company
and is in the best interests of the Debtors, the
estates and their creditors from the bidder making
such bid (the "Successful Bidder") for presentation
at the confirmation hearing in the Bankruptcy Court.
Once accepted, such bid shall be binding on the
Successful Bidder and the Movants, subject to the
Closing Conditions, and approval by the Court. At the
confirmation hearing, the Debtors shall seek the
approval of the Bankruptcy Court of the Successful
Bid. Within three (3) business days after the
Selection Date, the Deposit, together with all
interest accrued thereon, shall be returned to any
bidder whose bid is not the Successful Bid. The
Deposit submitted by the Successful Bidder, together
with all interest thereon, shall be applied against
the payment of the Purchase Price at the closing of
the sale to the Successful Bidder. If the Successful
Bidder fails to consummate the purchase of the assets
and/or stock of the Debtors on or before the
Effective Date for any reason other than on account
of a Closing Condition, then the Debtors shall
promptly direct Conway Del Genio to transfer the
Deposit of such Successful Bidder to the Lenders. In
the event the Debtors determine that the Successful
Bidder will not close on the purchase of the stock or
assets of the Debtors, the Debtors shall, after
communication by Conway Del Genio with all bidders
who submitted the Lead bid and any Overbids that the
Debtors are seeking an alternative bidder, close with
the bidder who in their reasonable judgment
represents the highest and best offer for all of the
stock or assets of the company (which is higher and
better than the Lead Bid), is in the best interests
of the Debtors, the estates and their creditors and
is willing to close, provided such closing is still
effected by the Effective Date (the "Alternative
Successful Bidder Procedure").
(IV) OVERBID PROCESS. If there are no Overbids meeting the
Overbid Requirements by 4:00 p.m. (EST) on the Bid
Date, then Richmont shall be declared the Successful
Bidder on such Bid Date and the sales process shall
be concluded. However, if there is such an Overbid
then Conway Del Genio and the Debtors shall arrange a
reasonably convenient meeting place and time to which
Richmont, all bidders with qualifying Overbids and a
representative of the Lenders shall be invited, and
shall commence an auction process to be concluded on
or before the Selection Date. The Debtors shall
conduct the auction such that all invited bidders
will have reasonable opportunity to achieve the
highest and best bid for the benefit of all parties
in interest in the reasonable judgment of the
Debtors.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 73
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(D) RIGHT TO REJECT BIDS. The Debtors may, at any time before
entry of an Order of the Court approving a Successful Bid,
reject any purported bid or Overbid that, in the Debtors'
reasonable judgment, is (a) inadequate or insufficient, (b)
not in conformity with the requirements of the Bankruptcy Code
or the Overbid Procedures, or (c) contrary to the best
interests of the Debtors, their estates and their creditors.
The Debtors shall notify the Lenders of any such rejected bid
and provide adequate information to the Lenders regarding the
reasons for such rejection.
(E) BIDDING PROCEDURE DISPUTES. If any dispute shall arise with
respect to the auction process or any bid received from a
qualified bidder, any rejection thereof, or selection of a
bidder pursuant to the Alternative Successful Bidder
Procedure, the dispute shall be submitted to the Bankruptcy
Court for resolution, after notice and hearing, with the goal
to be resolution of all issues sufficiently in advance of the
Effective Date to permit timely confirmation within the
timeframe suggested in the Joint Plan.
5. FAILURE OF THE SUCCESSFUL BIDDER TO CLOSE.
Upon the failure of (i) the Successful Bidder to close on or before the
Effective Date and (ii) the Alternative Successful Bidder Procedure to produce
an alternative highest and best bid reasonably acceptable to the Debtors, all
property of the Debtors' estates shall be transferred by the Debtors to the
trusts or other entities provided for, and in accordance with, the Joint Plan.
6. ENCUMBRANCES.
If the Joint Plan is not confirmed, then the assets of the Debtors
shall be transferred by the Debtors to trusts or other entities acceptable to
the Lenders and the Committees pursuant to 11 U.S.C. ss.ss.363 and 365 free of
all claims but subject only to (i) valid, prior, perfected, enforceable and
unavoidable liens, security interests, or subrogation rights, and (ii) surcharge
claims, if any, under 11 U.S.C. ss. 506(c)(4), to the extent allowed by final
non-appealable Order of the Bankruptcy Court (the "Encumbrances"). Such
transfers shall be deemed to be authorized, as applicable, pursuant to 11 U.S.C.
ss.ss.363 and 365, and the automatic stay of 11 U.S.C. ss.362 shall be modified
without further Order or action of the Bankruptcy Court as of the Effective Date
to permit the transfers described herein.
7. SATISFACTION OF ENCUMBRANCES.
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(4) The Lenders have not and do not consent to any surcharge of
their collateral in these cases and nothing in this Disclosure Statement may be
construed to indicate such consent. The Lenders have filed their Notice of
Non-Consent to Surcharge Under 11 U.S.C. ss. 506(c), the contents of which are
referenced and incorporated herein.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 74
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The Encumbrances may be satisfied by the following options, as
selected by the Lenders:
(A) Each holder of an Encumbrance shall retain its Encumbrance
until its claim is fully paid in cash or other means to which
such holder agrees.
(B) Any arrearage or other amounts owed by the Debtors shall be
paid in cash, in full, and all other defaults with respect to
such Encumbrance shall be cured on or before the forty-fifth
(45th) business day after the assets subject to such
Encumbrance are transferred or as shall otherwise be agreed
to in writing by the holder of such Encumbrance, and from and
after the date of such cure any previously accelerated
indebtedness shall be reinstated and any default rate of
interest shall no longer apply, but shall be deemed waived
(not forgiven).
(C) The holder of such Encumbrance may be satisfied by abandoning
the property subject to such Encumbrance to the holder of
such Encumbrance.
(D) Upon the satisfaction of any Encumbrance, the holder thereof
shall execute all instruments and documents necessary to
release such Encumbrance.
Upon satisfaction of an Encumbrance, the trust or other entity owning the
property subject to such Encumbrance shall have no further liability or
obligation to the holder of such Encumbrance.
8. DISTRIBUTION OF ASSETS.
Additionally, in the event a Joint Plan is not confirmed and following
the transfers of the assets and/or stock of the Debtors to trusts or other
vehicles acceptable to the Lenders and the Committees, all net proceeds from
the sale or other disposition of the assets shall be distributed by 97% to the
Lenders and 3% to the other unsecured creditors.
9. THE REORGANIZED DEBTORS
On the Effective Date, all of the existing stock of Holding will be
cancelled. Reorganized Holding will be authorized to issue such new stock as
the Successful Bidder shall direct provided the Successful Bidder timely closes
the Sale Transaction on the Effective Date. The Successful Bidder may
determine, at any time on or before the Effective Date, (i) that any Interest
of any Entity in any of the Debtors should or should not be canceled and
extinguished and (ii) which and how many shares of Plan Stock should be
authorized and issued and to whom. Such determination by the Successful Bidder
shall control in all respects, without notice or hearing of any kind. The
Successful Bidder may determine in its sole discretion the corporate structure
for the Reorganized Debtors, including, but not limited to, which of the
Debtors corporate entities will continue to exist
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 75
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and which will be dissolved and the ownership of the Debtors' assets by the
Reorganized Debtors.
10. OFFICERS AND DIRECTORS
Provided Richmont is the Successful Bidder, the executive officers of
the Reorganized Debtors will be Patrick E. Howard, Chief Executive Officer; C.
Ronald Baiocchi, President and Chief Operating Officer; and Phillip L.
Theodore, Senior Vice President and Chief Financial Officer. The initial
Directors of the Reorganized Debtors will be Patrick E. Howard and John P.
Rochon.
11. BAIOCCHI RETENTION
Baiocchi has been instrumental in the successful turnaround of the
Debtors during the bankruptcy proceedings to date. The Debtors believe that his
continued involvement is essential to the success of the Company. The Joint
Plan provides for the promotion of Baiocchi to President in the event that
Richmont is the Successful Bidder and for the execution by Baiocchi of a three
year employment agreement with the Reorganized Debtors. Baiocchi reserves the
right to decline to remain with the Company in the event the Company is sold to
a Successful Bidder that is not acceptable to Baiocchi.
12. FUNDING OF THE CAUSES OF ACTION
The Reorganized Debtors will be responsible for evaluating, funding
and pursuing the Litigation based on their reasonable business judgment for the
benefit of the Lenders, the Unsecured Creditors and the Reorganized Debtors.
However, the Reorganized Debtors shall only be liable to fund such amounts as
the Reorganized Debtors, in their sole and absolute discretion, shall deem
appropriate and reasonable. Such advances shall be reimbursed to the
Reorganized Debtors from the first recoveries prior to any distributions of the
Net Cash Received.
13. AUTHORITY FOR SETTLEMENT OF CAUSES OF ACTION AND RELEASES
The Reorganized Debtors shall, in their sole and absolute discretion,
be authorized to compromise and settle any of the Litigation, without Court
approval, at any time, and for any consideration that the Reorganized Debtors
believes to be in their best interest (and not necessarily in the best interest
of the Creditors) including, inter alia, the right to permit the Reorganized
Debtors to accept zero-cash or non-cash benefits. The Reorganized Debtors shall
have the sole and absolute discretion to pursue or not pursue and either to
settle or litigate all of such claims including, inter alia, the right to
permit the Reorganized Debtors to accept zero-cash or non-cash benefits, in
neither of which zero-cash or non-cash benefits shall the Creditors have any
interest.
D. IMPLEMENTATION OF THE JOINT PLAN: THE TRUST TRIGGERING EVENT
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 76
<PAGE> 85
If the Trust Triggering Event shall occur, then the following means
shall be employed to implement this Joint Plan.
1. EFFECTIVE DATE ENTITIES
On the Effective Date, the Trust and the Litigation Trust shall be
formed pursuant to the Trust Agreement and the Litigation Trust Agreement,
respectively. Also, on the Effective Date, Reorganized Debtors shall be formed
by the filing of the Charter Amendments for Reorganized Debtors. Likewise, any
additional entities determined by the Trustee to be necessary to effectuate
this Joint Plan shall be formed whether by formation, merger, acquisition or
otherwise.
2. TRANSFER OF THE LITIGATION BY THE DEBTORS TO THE LITIGATION
TRUST
On the Effective Date, the Litigation owned by the respective Debtors
shall be conveyed to the Litigation Trust free and clear of all liens, claims
and encumbrances except those liens, claims or encumbrances created or
preserved in the treatment of Creditors under Article IV of the Joint Plan. It
is further provided that, to the extent either Chubb or Wausau has a valid,
enforceable, perfected and unavoidable interest or subrogation right in or
superior to the Estates' interest in any particular Litigation (the "CW
INTEREST"), such CW Interest shall be preserved, but shall remain subject to
all rights and remedies of the Debtors, Reorganized Debtors, Trust, Litigation
Trust and the Lenders, all of which are expressly preserved to the fullest
extent provided by applicable law and this Joint Plan. All Litigation is being
transferred to the Litigation Trust to be owned and pursued by the Litigation
Trust, at its option, in the name of the Debtors and for the benefit of the
Creditors of these Estates. All benefits, privileges and other rights of the
Debtors and of these Estates shall be transferred with the Litigation Claims.
(A) PURPOSES FOR THE LITIGATION TRUST. The primary purposes of
the Litigation Trust shall be:
(1) to own, hold, pursue and manage the Litigation for
the benefit of the creditors of the Estates.
(2) to litigate, prosecute, settle or otherwise resolve
the Litigation;
(3) to defend any counterclaims relating to the
Litigation; or
(4) to do anything necessary, related or incidental to
the foregoing.
(B) PROSECUTION OF THE LITIGATION TRUST. The Litigation Trust
shall have the sole responsibility for prosecuting the
Litigation.
(C) MANAGEMENT OF THE LITIGATION TRUST AND LITIGATION ADVISORY
BOARD. The Litigation Trust shall be administered by a
Litigation Trustee supervised by the Litigation Advisory
Board. The Litigation Advisory Board shall consist of
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 77
<PAGE> 86
five (5) members, up to four (4) of whom shall be appointed
by the Lenders and one (1) of whom shall be appointed by the
Committees.
(D) BENEFICIARIES OF THE LITIGATION TRUST. The beneficiaries of
the Litigation Trust shall be the holders of Allowed Secured
Class 1 Claims and Allowed Unsecured Class 3 Claims who shall
receive the Trust Interest (Litigation) in accordance with
their treatment under the terms of this Joint Plan.
3. TRANSFER OF TRUST SHARES TO THE TRUST
On the Effective Date, the Trust Shares shall be conveyed to the
Trust, free and clear of all liens, claims and encumbrances, except those
liens, claims or encumbrances created or preserved in the treatment of
Creditors under Article IV of the Joint Plan, or which existed and were
enforceable, valid and perfected prior to the Petition Date.
(A) PURPOSES FOR THE TRUST. The primary purposes of the Trust
shall be:
(1) to hold and own the Trust Shares;
(2) to prepare, market and sell the Trust Shares
(subject to applicable securities regulations) and
the Retained Assets of these Estates; or
(3) to do anything necessary, related or incidental to
the foregoing.
(B) MANAGEMENT OF THE TRUST AND TRUST ADVISORY BOARD. The Trust
shall be administered by a Trustee and supervised by the
Trust Advisory Board. The Advisory Board shall consist of
five (5) members appointed by the Lenders.
(C) INCORPORATION OF INK JET SUBSIDIARY AND TRANSFER OF ASSETS.
The Reorganized Debtors shall take all steps necessary to
incorporate a wholly owned subsidiary of Reorganized Holding
to operate the Debtors' Ink Jet Business (the "INK JET
SUBSIDIARY") including filing articles of incorporation and
bylaws. On the Effective Date, Reorganized Debtors shall
transfer all of their respective assets related to the
Debtors' manufacture and distribution of ink jet cartridges
for ink jet printers (the "INK JET BUSINESS") from the
Debtors to the Ink Jet Subsidiary. Such transfers of the Ink
Jet Business shall be free and clear of all liens, claims and
encumbrances except those liens, claims or encumbrances
created or preserved in the treatment of creditors under
Article IV of this Joint Plan.
(D) SALE OF THE TRUST SHARES AND THE RETAINED ASSETS. The Trust
shall have the responsibility for preparing, marketing and
selling the Trust Shares and the Retained Assets.
(E) BENEFICIARIES OF THE TRUST. The beneficiaries of the Trust
shall be the holders of Allowed Secured Class 1 Claims and
Allowed Unsecured Class
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 78
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3 Claims who shall receive their respective Trust Interest in
accordance with their treatment under terms of the Joint
Plan.
4. EFFECTIVE DATE FINANCING
On the Effective Date, Reorganized Debtors shall obtain the Effective
Date Financing for the purpose of financing the Effective Date transactions
contemplated by this Plan, including, but not limited to, the payment of: (i)
Administrative Claims and Priority Claims which shall not exceed $3,000,000,
including Fee Claims, Other Administrative Claims and Administrative Tax
Claims, (ii) the payment of the Norwest Commitment, and (iii) financing for the
payments required under the Joint Plan and continued operation of Reorganized
Debtors and their affiliates.
5. BOARD OF DIRECTORS AND OFFICERS
Upon the Effective Date, the By-laws of Reorganized Debtors shall provide that
Reorganized Debtors shall each have a board of directors, odd in number, and
consisting of between 3 and 7 members. The initial board of directors (the
"INITIAL BOARD") shall be selected by the Trustee at least five (5) days prior
to the Effective Date. From and after the Effective Date, Directors shall be
selected in accordance with Reorganized Debtors' By-laws. The Trustee shall
provide the names of the officers of Reorganized Debtors at least five (5) days
prior to the Effective Date.
E. RELEASES
The Term Sheet provides for certain releases (the "Releases") of (a)
all current officers and directors of the Debtors in exchange for cash
consideration of $300,000 payable by Richmont, at Richmont's election and (b)
certain other parties in interest including, Richmont, the Lenders, the
Committees, Glass & Associates, the Debtors' case professionals (subject to fee
objections in the Bankruptcy Court) and non-Debtor Nu-kote Entities (the
"Release Parties"). The Releases are to be effective regardless of whether or
not the Joint Plan is confirmed. The Release parties will execute forms of
release reasonably acceptable to the Release Parties to effectuate such
releases in accordance with the Term Sheet.
The Releases provide for the release of any claims against the Debtors
current officers and directors in consideration for the payment of $300,000.00
at Richmont's option in the event there is no closing under the Joint Plan. The
claims to be released include those in the nature of claims for breach of
fiduciary duty which were alleged by the Lenders and are referenced in more
detail in the joint disclosure statement. The Debtors and their officers and
directors dispute that any such claims exist. The Lenders and the Debtors have
agreed that the current officers and directors will be released upon the
payment of $300,000 if there is no closing and for no additional payment if
there is a closing with Richmont.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 79
<PAGE> 88
The Releases include a release for Richmont. The Debtors assert that
they are aware of no claims against Richmont. Richmont asserts that no claims
exist against it.
The Releases include a release of any claims against the Lenders. The
claims to be released would include claims, if any, asserted by the Debtors to
(a) avoid payments to or for the benefit of the Lenders in the year prior to
the bankruptcy filing (asserted by the Debtors to be approximately $20
million), (b) to avoid liens asserted by the Debtors to have been given to the
Lenders in July 1997, (c) equitable subordination or (d) lender liability. The
Lenders dispute that any such claims exist.
The Releases include a release of any claims against Glass &
Associates, Inc. The claims to be released do not include claims to recover a
retainer paid to Glass & Associates in the amount of $125,000. The claims to be
released would include claims that Glass & Associates and their officers
breached their fiduciary duty to the Debtors in connection with their
employment as turnaround professionals for the Debtors.
The Releases include a release of any claims against the Committees.
The claims to be released relate to the Committees' involvement in these cases.
The releases do not extend to the members in their capacity as creditors.
The Releases include a release of any claims the Lenders may have
against any professionals employed by the Debtors other than the Coudert
Brothers law firm. Such releases are subject to fee objections in the
Bankruptcy Court.
THE PLAN PROPONENTS BELIEVE THAT THE JOINT PLAN PROVIDES THE ONLY
VEHICLE BY WHICH HOLDERS OF ALLOWED UNSECURED CLAIMS CAN MAXIMIZE THE RECOVERY
ON THEIR ALLOWED CLAIMS. A COPY OF THE JOINT PLAN IS ATTACHED AS EXHIBIT "G."
THE PLAN PROPONENTS URGE YOU TO REVIEW CAREFULLY AND THEN VOTE TO ACCEPT THE
JOINT PLAN.
F. ACCEPTANCE AND CONFIRMATION OF THE JOINT PLAN
1. REQUIREMENTS FOR CONFIRMATION
At the Confirmation Hearing, the Court will determine whether the
provisions of section 1129 of the Code have been satisfied. Section 1129 of the
Bankruptcy Code, as applicable here, provides as follows:
The Joint Plan must comply with the applicable provisions of the Code,
including section 1123 which specifies the mandatory contents of a plan and
section 1122 which requires that Claims and Interests be placed in Classes with
"substantially similar" Claims and Interests (section 1129(a)(1)).
The proponents of the Joint Plan must comply with the applicable
provisions of the Code (section 1129(a)(2)).
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 80
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The Joint Plan must have been proposed in good faith and not by any
means forbidden by law (section 1129(a)(3)).
Any payment made or to be made by the Plan Proponents, by the Debtors,
or by a person issuing securities or acquiring property under the Joint Plan,
for services or for costs and expenses in or in connection with the Case, or in
connection with the Joint Plan and incident to the Case, must be disclosed to
the Court and approved or be subject to the approval of the Court as reasonable
(section 1129(a)(4)).
The Plan Proponents must disclose the identity and affiliations of any
individual proposed to serve, after Confirmation of the Joint Plan, as a
director, officer, or voting trustee of the Reorganized Debtor, of an affiliate
of the Debtors participating in a joint plan with the Debtors, or of a
successor to the Debtors under the Joint Plan. The appointment to, or
continuance in, such office of such individual must be consistent with the
interests of the Debtors' creditors, equity holders, and with public policy.
The proponents must also disclose the identity of any insider that will be
employed or retained by the Reorganized Debtor and the nature of any
compensation for such insider (section 1129(a)(5)).
The Joint Plan must meet the "best interest of creditors" test which
requires that each holder of a Claim or Interest of a Class of Claims or
Interests that is impaired under the Joint Plan either accept the Joint Plan or
receive or retain under the Joint Plan on account of such Claim or Interest
property of a value as of the Effective Date of the Joint Plan, that is not
less than the amount that such holder would receive or retain if the Debtors
were liquidated on such date under Chapter 7 of the Code. If the holders of a
Class of Secured Claims make an election under section 1111(b) of the Code,
each holder of a Claim in such electing Class must receive or retain under the
Joint Plan on account of its Claim property of a value, as of the Effective
Date of the Joint Plan, that is not less than the value of its interest in the
Debtors' interest in the property that secures its Claim (section 1129(a)(7)).
To calculate what non-accepting holders would receive if the Debtors were
liquidated under Chapter 7, the Court must determine the dollar amount that
would be generated upon disposition of the Debtors' assets and reduce such
amount by the costs of liquidation. Such costs would include the fees of a
Trustee (as well as those of counsel and other professionals) and all expenses
of sale.
Each Class of Claims or Interests must either accept the Joint Plan or
not be impaired under the Joint Plan (section 1129(a)(8)). Alternatively, as
discussed herein, a Joint Plan may be confirmed over the dissent of a Class of
Claims or Interests if the "cramdown" requirements of section 1129(b) of the
Code are met.
Except to the extent that the holder of a particular Claim has agreed
to a different treatment of such Claim, the Joint Plan must provide that
holders of Administrative Claims and Priority Claims (other than tax claims)
will be paid in full in cash on the Effective Date of the Joint Plan, and that
holders of priority tax Claims will receive on account of such Claims deferred
cash payments, over a period not exceeding six (6) years after the date of
assessment of such tax, of a value, as of the Effective Date of the Joint Plan,
equal to the Allowed amount of such Claim (section 1129(a)(9)).
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 81
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At least one impaired Class must accept the Joint Plan, determined
without including the acceptance of the Joint Plan by any insider holding a
Claim of such Class (section 1129(a)(10)).
The Joint Plan must be "feasible". In other words, it can not be
likely that confirmation of the Joint Plan will be followed by the liquidation,
or the need for further financial reorganization, of the Debtors or any
successor to the Debtors under the Joint Plan, unless such liquidation is
proposed in the Joint Plan (section 1129(a)(11)).
All fees required to be paid under the Code have been paid or the
Joint Plan provides for such payment on its Effective Date (section
1129(a)(12)).
The Joint Plan must provide for the continuation after the Effective
Date of the payment of all Retiree Benefits at the level established prior to
Confirmation, pursuant to the provisions of ss.1114 of the Code (section
1129(a)(13)).
G. THE JOINT PLAN MEETS ALL OF THE REQUIREMENTS FOR CONFIRMATION
The Plan Proponents believe that the Joint Plan satisfies all of the
statutory requirements of Chapter 11 of the Code and therefore should be
confirmed. More specifically:
1. The Joint Plan complies with all of the applicable provisions
of the Code;
2. Each of the Plan Proponents have complied with the Code and
have proposed the Joint Plan in good faith;
3. All disclosure requirements concerning (a) payments made or
to be made for services rendered in connection with the
Chapter 11 case or the Joint Plan and (b) the identity and
affiliations of individuals who will serve the Reorganized
Debtor after confirmation have been, or will be met prior to
or at the Confirmation Hearing, including the identities of
those persons necessary under the Joint Plan upon the
occurrence of a Trust Triggering Event; and
4. Administrative Claims, Priority Claims, and fees required to
be paid under the Code are appropriately treated under the
Joint Plan.
ARTICLE X. ALTERNATIVES TO THE JOINT PLAN
The Plan Proponents believe that the Joint Plan affords creditors the
potential for the greatest realization from the Debtors' assets, and,
therefore, is in the best interests of creditors. The Plan Proponents have
considered alternatives to the Joint Plan, such as alternative Chapter 11 plans
and a liquidation in the context of a Chapter 7 case. In the
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 82
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opinion of the Plan Proponents, such alternatives would not afford the holders
of Claims a return as great as may be achieved under the Joint Plan.
A. ANALYSIS OF LIQUIDATION UNDER CHAPTER 7
An alternative to the confirmation of the Joint Plan would be
conversion of these Cases to liquidation proceedings under Chapter 7 of the
Bankruptcy Code. Under Chapter 7, a trustee would be appointed to administer
the Estates, to resolve pending controversies including Disputed Claims against
the Debtors and Claims of the Estates against other parties, and to make
distribution to Creditors. If the Cases were converted to cases under Chapter
7, significant additional Administrative Expenses would be incurred, any
distributions to holders of Claims would be substantially delayed and, in all
likelihood, reduced as compared to the anticipated results of confirmation of
the Joint Plan. A Chapter 7 trustee would be entitled to compensation in
accordance with the scale set forth in ss. 326 of the Bankruptcy Code. A
Chapter 7 trustee might also seek to retain new professionals, including
attorneys and accountants, in order to resolve any disputed Claims and possibly
to pursue claims of the Estates against other parties.
There is a strong probability that such Chapter 7 trustee would not
possess any particular knowledge of the property owned by the Debtors. The
trustee and any such new professionals retained by the trustee would need to
expend time familiarizing themselves with the Cases, which could result in
duplication of effort, increased expense, and delay in payment to Creditors.
Under the Bankruptcy Rules, a new bar date for the filing of proofs of claim
would have to be set, and additional Claims against the Estates that might now
be time-barred (because they were not filed before the applicable bar dates set
in the Cases) could be asserted.
In order to determine whether or not the Joint Plan complies with the
"best interest of creditors" test of section 1129(a)(7) of the Code, it is
necessary to do an analysis of the liquidation of Nu-kote's assets in a Chapter
7. A chart depicting the likely consequences of a liquidation analysis is
attached hereto as Exhibit "F." This chart analyzes the differences between the
book value and the liquidation value of the Debtors' assets. Book values are as
of September 24, 1999. Liquidation values were calculated using varying
percentages or anticipated recovery based on the Company's historical
experience in liquidating assets in connection with the downsizing of the
Company's operations. The Debtors assert that the Company would not likely have
any actual cash on hand in a liquidation after paying off the Norwest debt and
outstanding payables. Receivables would have to be reduced by outstanding
rebates owed to customers and anticipated product returns as customers would
immediately shift their business to Nu-kote's competitors and restock their
shelves with the competitors' products. The Debtors further assert that the
returned inventory would be liquidated for an estimated $0.20 on the dollar but
in actuality the recovery could be far less as there would be little demand for
the returned inventory. After deducting the Norwest debt and current payables
the liquidation value would be approximately $19.5 million before deducting the
costs of the liquidation which could easily be in the $2 million range. This
would result in a net liquidation value of approximately $17.5 million.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 83
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The liquidation chart does not include any value for Causes of Action
since any recoveries on Causes of Action are speculative and therefore not
quantifiable. Further, the most valuable of the Causes of Action, the antitrust
claims against Hewlett-Packard, have now been determined by a jury verdict to
be zero. Further, since the Lenders assert liens on all of the Company's Causes
of Action, none of the liquidation value would be available for payment of
Claims of Unsecured Creditors until such asserted liens of the Lenders are
resolved. In addition, Nu-kote firmly believes that any Chapter 7 trustee would
have great difficulty in preserving the value of the OEM Litigation. Upon
appointment of a Chapter 7 trustee, many of the employees of the Company would
likely resign, greatly reducing the value and altering inexorably the
negotiating strategy in the OEM Litigation, with the OEMs believing that a
Chapter 7 trustee's goal is merely to liquidate quickly the assets at any
price. In summary, the appointment of a Chapter 7 trustee would in all
likelihood result in no meaningful recovery for the Creditors.
Further, all of the estates' assets, with the possible exception of
the OEM Litigation(5), are subject to Lenders' liens and security interests. The
Lenders' claim is an amount far in excess of the value of these assets.
Additionally, conversion to Chapter 7 would result in the discontinuation of
the Debtors' business operations and destroy the "going concern" value of the
present business assets. Thus, the Joint Plan affords creditors the potential
for the greatest realization from the Debtors' assets, and, therefore, is in
the best interests of creditors.
Due to the numerous uncertainties and time delays associated with
liquidation under Chapter 7 of the Bankruptcy Code, it is not possible to
predict with certainty the outcome of any Chapter 7 liquidation of the Debtors
or the timing of any distributions to Creditors. However, Nu-kote has concluded
that a complete liquidation of the Debtors under Chapter 7 of the Bankruptcy
Code would result in lesser distributions to Creditors than that provided for
in the Joint Plan.
B. ALTERNATIVES UNDER CHAPTER 11
The Plan Proponents or other parties in interest could attempt to
formulate different plans. Such plans might involve reorganization or
continuation of some or all of the Debtors' businesses. The Plan Proponents
believe that the necessary financing for continued operations of the Debtors'
business in Chapter 11 can not be achieved without the support of the Debtors
and the Lenders, and the Joint Plan represents the better alternative.
Additionally, the Plan Proponents do not believe that an alternative plan under
Chapter 11 can meet the necessary requirements under 11 U.S.C. ss. 1129.
THE PLAN PROPONENTS BELIEVE THAT CONFIRMATION AND IMPLEMENTATION OF
THE JOINT PLAN IS PREFERABLE TO ANY OF THE
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(5) The Lenders assert they hold a valid and perfected security interest in
the OEM Litigations. The Debtors, however, dispute this assertion.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 84
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ALTERNATIVES DESCRIBED HEREIN BECAUSE IT SHOULD PROVIDE GREATER RECOVERIES THAN
THOSE AVAILABLE IN LIQUIDATION TO THE HOLDERS OF UNSECURED CLAIMS WHO WOULD
LIKELY RECEIVE LESS IN AN IMMEDIATE LIQUIDATION. IN ADDITION, OTHER
ALTERNATIVES WOULD INVOLVE DELAY, UNCERTAINTY, AND SUBSTANTIAL ADMINISTRATIVE
COSTS.
ARTICLE XI. VOTING PROCEDURES
ACCEPTANCE OR REJECTION OF THE JOINT PLAN WILL BE DETERMINED, PURSUANT
TO THE BANKRUPTCY CODE, BASED UPON THE ALLOWED CLAIMS AND ALLOWED INTERESTS
THAT ACTUALLY VOTE ON THE JOINT PLAN. THEREFORE, IT IS IMPORTANT THAT CLAIMANTS
EXERCISE THEIR RIGHT TO VOTE TO ACCEPT OR REJECT THE JOINT PLAN.
A. CLASSES ENTITLED TO VOTE ON THE JOINT PLAN
All members of Impaired Classes who hold Allowed Claims are entitled
to vote to accept or reject the Joint Plan. Section 1124 of the Bankruptcy Code
generally provides that a class of claims or interests is considered to be
Impaired under a plan unless the plan does not alter the legal, equitable and
contractual rights of the holders of such claims or interest. As discussed in
Discussion of the Joint Plan, for purposes of the Joint Plan solicitation all
of the Classes of Claims are impaired and therefore entitled to vote on the
Joint Plan. Interest Class 5 is deemed to have rejected the Joint Plan and is
therefore not entitled to vote on the Joint Plan.
B. PERSONS ENTITLED TO VOTE ON THE JOINT PLAN
Any holder of an Impaired or deemed Impaired Claim which is an Allowed
Claim against the Debtors on __________________, the Voting Record Date
established by the Bankruptcy Court, is entitled to vote to accept or reject
the Joint Plan, unless such Class has been deemed to reject the Joint Plan.
For purposes of the Joint Plan, an Allowed Claim is a Claim against
the Debtors which (a) has been scheduled by the Debtors pursuant to the Code as
undisputed, noncontingent, and liquidated and as to which no objection has been
filed within the time allowed for the filing of objections, (b) as to which a
timely proof of claim or application for payment has been filed and as to which
no objection has been filed within the time allowed for filing of objections,
(c) has been Allowed by Final Order, or (d) has been Allowed under the Joint
Plan. Therefore, although the holders of Disputed Claims will receive ballots,
these votes will not be counted unless such Claims become Allowed Claims as
provided under the Joint Plan or are temporarily allowed for voting purposes by
the Court.
THE CLAIMS IN CLASSES 1 THROUGH 3 ARE IMPAIRED UNDER THE JOINT PLAN
AND ARE ENTITLED TO VOTE WITH RESPECT TO ACCEPTANCE OR REJECTION OF THE JOINT
PLAN. SINCE HOLDERS OF INTERESTS IN CLASS 4
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 85
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WILL NOT RECEIVE ANYTHING UNDER THE JOINT PLAN, THEY ARE DEEMED TO HAVE
REJECTED THE JOINT PLAN AND ARE NOT ENTITLED TO VOTE.
C. VOTE REQUIRED FOR CLASS ACCEPTANCE
During the Confirmation Hearing, the Bankruptcy Court will determine
whether the Classes voting on the Joint Plan have accepted the Joint Plan by
determining whether sufficient acceptances have been received from the holders
of Allowed Claims actually voting in such Classes. A Class of Claims will be
determined to have accepted the Joint Plan if the holders of Allowed Claims in
the Class casting votes in favor of the Joint Plan (i) hold at least two-thirds
of the total amount of the Allowed Claims of the holders in such Class who
actually vote and (ii) constitute more than one-half in number of holders of
the Allowed Claims in such Class who actually vote on the Joint Plan. A Class
of Interests will be determined to have accepted the Joint Plan if the holders
of such Interests casting votes in favor of the Joint Plan hold at least
two-thirds of the amount of the Interests of such Class as to which votes are
cast.
As a condition to Confirmation, the Bankruptcy Code requires that each
impaired Class of Claims or Interests accept the Joint Plan, subject to the
exception of ss. 1129(b) described herein. At least one impaired Class of
Claims must accept the Joint Plan.
D. VOTING INSTRUCTIONS
1. BALLOTS AND VOTING
Holders of Allowed Claims entitled to vote on the Joint Plan have been
sent a Ballot, together with instructions for voting, with this Disclosure
Statement. Claimants should read the Ballot carefully and follow the
instructions contained therein. In voting for or against the Joint Plan, please
use only the Ballot(s) that accompanies this Disclosure Statement.
If you have Claims in more than one Class, you will receive multiple
Ballots. IF YOU RECEIVE MORE THAN ONE BALLOT, YOU SHOULD ASSUME THAT EACH
BALLOT IS FOR A SEPARATE CLAIM OR INTEREST AND SHOULD COMPLETE AND RETURN EACH
BALLOT.
IF YOU ARE A MEMBER OF A CLASS ENTITLED TO VOTE ON THE JOINT PLAN AND
DID NOT RECEIVE A BALLOT FOR SUCH CLASS, OR IF YOUR BALLOT IS DAMAGED OR LOST,
OR IF YOU HAVE ANY QUESTIONS CONCERNING VOTING PROCEDURES, YOU SHOULD CONTACT
COUNSEL FOR THE DEBTORS:
FRANK J. WRIGHT
C. ASHLEY ELLIS
HANCE | SCARBOROUGH | WRIGHT
2900 RENAISSANCE TOWER
1201 ELM STREET
DALLAS, TEXAS 75270
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 86
<PAGE> 95
BALLOTS OF CLAIMANTS THAT ARE SIGNED AND RETURNED, BUT NOT EXPRESSLY
VOTED EITHER FOR ACCEPTANCE OR REJECTION OF THE JOINT PLAN, SHALL BE COUNTED AS
BALLOTS FOR THE ACCEPTANCE OF THE JOINT PLAN IF PERMITTED BY THE BANKRUPTCY
COURT.
2. RETURNING BALLOTS AND VOTING DEADLINE
You should complete and sign each Ballot that you receive and return
it in the pre-addressed envelope enclosed with each Ballot to the Tabulation
Agent, Lain Faulkner & Co., by the Voting Deadline (as hereinafter defined).
All Ballots will be tabulated by the Tabulation Agent.
THE VOTING DEADLINE IS 4:00 P.M., CENTRAL STANDARD TIME, ON
_________________. IN ORDER TO BE COUNTED, BALLOTS MUST BE ACTUALLY RECEIVED BY
THE TABULATION AGENT ON OR BEFORE 4:00 P.M., CENTRAL STANDARD TIME, ON THE
VOTING DEADLINE AT THE ADDRESS SET FORTH IN THE BALLOT INSTRUCTIONS WHICH
ACCOMPANY THE ENCLOSED BALLOT. EXCEPT TO THE EXTENT ALLOWED BY THE BANKRUPTCY
COURT, BALLOTS RECEIVED AFTER THE VOTING DEADLINE MAY NOT BE ACCEPTED OR USED
IN CONNECTION WITH THE PLAN PROPONENTS' REQUEST FOR CONFIRMATION OF THE JOINT
PLAN OR ANY MODIFICATION THEREOF.
3. INCOMPLETE OR IRREGULAR BALLOTS
Ballots which fail to designate the Class to which they apply shall be
counted in the appropriate Class as determined by the Plan Proponents, subject
only to contrary determinations by the Bankruptcy Court.
BALLOTS OF CLAIMANTS THAT ARE SIGNED AND RETURNED, BUT DO NOT INDICATE
A VOTE EITHER FOR ACCEPTANCE OR REJECTION OF THE JOINT PLAN SHALL BE COUNTED AS
BALLOTS FOR THE ACCEPTANCE OF THE JOINT PLAN IF PERMITTED BY THE BANKRUPTCY
COURT.
4. CHANGING VOTES
Bankruptcy Rule 3018(a) permits a Claimant, for cause, to move the
Bankruptcy Court to permit such claimant to change or withdraw its acceptance
or rejection of a plan of reorganization.
E. CONTESTED AND UNLIQUIDATED CLAIMS
Contested Claims are not entitled to vote to accept or reject the
Joint Plan. If you are the holder of a Contested Claim, you may ask the
Bankruptcy Court pursuant to Bankruptcy Rule 3018 to have your Claim
temporarily Allowed for the purpose of voting.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 87
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F. POSSIBLE RECLASSIFICATION OF CREDITORS AND INTEREST HOLDERS
The Plan Proponents are required pursuant to ss. 1122 of the
Bankruptcy Code to place Claims and Interests into Classes that contain
substantially similar Claims or Interests. While the Plan Proponents believe
they have classified all Claims and Interests in compliance with ss. 1122, it
is possible that a Claimant or Interest holder may challenge the classification
of its Claim or Interest. If the Plan Proponents are required to reclassify any
Claims or Interests of any Claimants or Interest holders under the Joint Plan,
the Plan Proponents, to the extent permitted by the Bankruptcy Court, intend to
continue to use the acceptances received from such Claimants or Interest
holders pursuant to the solicitation of acceptances using this Disclosure
Statement for the purpose of obtaining the approval of the Class or Classes of
which such Claimants or Interest holders are ultimately deemed to be a member.
Any reclassification of Claimants or Interest holders should affect the Class
in which such Claimants or Interest holders were initially a member, or any
other Class under the Joint Plan, by changing the composition of such Class and
the required vote thereof for approval of the Joint Plan.
ARTICLE XII. MISCELLANEOUS PROVISIONS
A. REQUEST FOR RELIEF UNDER SECTION 1129(B)
In the event any Impaired Class of Claims shall fail to accept the
Joint Plan in accordance with ss. 1129(a) of the Bankruptcy Code, the Plan
Proponents shall request the Bankruptcy Court to confirm the Joint Plan in
accordance with the provisions of ss. 1129(b) of the Bankruptcy Code.
The Court may confirm a plan, even if it is not accepted by all
impaired Classes, if the Joint Plan has been accepted by at least one impaired
Class of Claims and the Joint Plan meets the "cramdown" provisions set forth in
ss. 1129(b) of the Code. The "cramdown" provisions require that the Court find
that a plan "does not discriminate unfairly" and is "fair and equitable" with
respect to each non-accepting impaired Class. In the event that all impaired
Classes do not vote to accept the Joint Plan, the Debtors will request that the
Bankruptcy Court nonetheless confirm the Joint Plan pursuant to the provisions
of ss. 1129(b) of the Code.
The Court may find that the Joint Plan is "fair and equitable" with
respect to a Class of non-accepting impaired Interests only if (a) the holder
of an Interest will receive or retain under the Joint Plan property of a value
as of the Joint Plan's Effective Date equal to the greatest of any fixed
liquidation preference or redemption price or the value of such Interest or (b)
the holder of any Interest that is junior to such Interest will not receive or
retain any property under the Joint Plan.
The Court may find that the Joint Plan is "fair and equitable" with
respect to a Class of non-accepting impaired Unsecured Claims only if (a) each
impaired unsecured Creditor receives or retains under the Joint Plan property
of a value as of the Effective Date of such Joint Plan equal to the amount of
its Allowed Claim, or (b) the holder of any Claim or
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 88
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Interest that is junior to the Claims of the dissenting Class will not receive
or retain any property under the Joint Plan.
The Court may find that the Joint Plan is "fair and equitable" with
respect to a Class of non-accepting Secured Claims, only if, under the Joint
Plan, (a) the holder of each Secured Claim in such Class retains such holder's
lien and receives deferred cash payments totaling at least the Allowed amount
of such Secured Claim and having a value, as of the Effective Date of the Joint
Plan, equal to or in excess of the value of such holder's interest in the
estate's interest in the collateral for the Secured Claim, (b) the collateral
for such Secured Claim is sold, the lien securing such Claims attached to the
proceeds, and such liens on proceeds are afforded the treatment described under
clause (a) or (c) of this sentence, or (c) the holders of such Secured Claims
realize the "indubitable equivalent" of their claims.
If all of the provisions of section 1129 are met, the Court may enter
an order confirming the Joint Plan.
B. THE JOINT PLAN IS CONFIRMABLE UNDER SS. 1129(B) OF THE BANKRUPTCY CODE
The Joint Plan also meets the "best interest of creditors" test and is
"feasible". In addition, if any Class of Claims rejects the Joint Plan, the
Joint Plan can nevertheless be confirmed because it meets the "cramdown"
standard with respect to such Class.
1. THE JOINT PLAN MEETS THE "BEST INTEREST OF CREDITORS" TEST
The "best interest of creditors" test requires that the Court find
that the Joint Plan provides to each non-accepting holder of a Claim or
Interest treated under the Joint Plan a recovery which has a present value at
least equal to the present value of the distribution that such person would
receive from the debtor if the debtor were liquidated under Chapter 7 of the
Code. An analysis of the likely recoveries and affect on Creditors in the event
of liquidation under Chapter 7 of the Code is contained herein at Article X.
2. THE JOINT PLAN IS FEASIBLE
The Code requires that, as a condition to Confirmation of a plan, the
Court find that Confirmation is not likely to be followed by a liquidation or a
need for further financial reorganization except as proposed in that plan.
Richmont is financially able and willing to be the Purchaser contemplated under
the Joint Plan. Any other proposed purchaser will similarly have to demonstrate
such financial ability and a commitment to Nu-kote's reorganization efforts.
The Reorganized Debtors will benefit from the significant improvements in
business operations, the streamlined and refocused product lines already
achieved post-petition, and will undertake to meet the demands of the changing
industry. The combination of these elements and the reorganization contemplated
in the Joint Plan amply meets the feasibility requirements of the Bankruptcy
Code. For an extended discussion of the future operations of the Reorganized
Debtors, see Article VIII.B.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 89
<PAGE> 98
3. THE JOINT PLAN MEETS THE CRAMDOWN STANDARD WITH RESPECT TO
ANY IMPAIRED CLASS OF CLAIMS REJECTING THE JOINT PLAN
In the event any impaired Class of Claims rejects the Joint Plan, the
Joint Plan can nevertheless be confirmed. The Joint Plan satisfies the
provisions for cramdown under ss.1129(b)(2) of the Code. Secured Creditors are
either retaining their liens and receiving the value of their interest in the
Debtors' property in deferred cash payments totaling the allowed amount of
their Claims, or receiving the indubitable equivalent of their Claims. Interest
Holders are not receiving or retaining any property under the Joint Plan on
account of their Interests. In the event an impaired Class rejects the Joint
Plan, the Joint Plan shall be deemed a motion for cramdown of such Class under
ss.1129(b)(2) of the Code.
C. MODIFICATION
The Joint Plan shall not be modified except upon the agreement of all
Plan Proponents, which consent shall not be unreasonably withheld.
D. FURTHER ASSURANCES AND AUTHORIZATIONS
Reorganized Debtors or their affiliates or the Trust or Litigation
Trust, if and to the extent necessary, shall seek such orders, judgments,
injunctions, and rulings that may be required to carry out further the
intentions and purposes, and to give full effect to the provisions, of the
Joint Plan.
E. AGREEMENTS BETWEEN THE PLAN PROPONENTS
This Joint Plan contemplates and provides for certain accommodations
and compromises between the Plan Proponents. If this Joint Plan is not
Confirmed, the Joint Plan shall not bind the Plan Proponents to the
accommodations and compromises contained in this Joint Plan.
ARTICLE XIII. SECURITIES LAW CONSIDERATIONS
Under Section 1145(a) of the Bankruptcy Code, the distribution
pursuant to the Joint Plan of the Reorganized Holding Common Stock and the
issuance of notes pursuant to the Joint Plan, in the event of the occurrence of
a Trust Triggering Event, are exempt from registration under the Securities Act
of 1933, as amended (the "SECURITIES ACT"), and applicable state securities
laws. Under Section 1145 of the Bankruptcy Code, the exercise of warrants will
also be exempt from the registration requirements of the Securities Act.
HOLDERS OF ALLOWED CLAIMS RECEIVING CERTAIN SECURITIES ISSUED UNDER THE JOINT
PLAN MAY BE DEEMED TO BE "AFFILIATES" AND, AS A RESULT, RESALES OF SUCH
SECURITIES WILL BE SUBJECT TO CERTAIN RESTRICTIONS.
Section 1145(b) of the Bankruptcy Code defines a person or entity that
may be an "underwriter," and thus restricted in the resale of securities
received, as any person or entity that (i) purchases a Claim, including an
Administrative Claim, or Interest with a view
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 90
<PAGE> 99
towards distribution of any security received or to be received under a plan of
reorganization in exchange for such a Claim, Interest, or Administrative Claim,
(ii) offers to sell securities offered or sold under a plan of reorganization
for the holders of such securities, (iii) offers to buy securities offered for
sale under a plan of reorganization from the holders of such securities, if
such offer to buy is with a view towards distribution of such securities under
an agreement made either in connection with such plan, with the consummation of
such plan, or with the offer or sale of securities under such plan, or (iv) is
an "issuer" of the securities offered or sold under a plan of reorganization as
that term is defined in Section 2(11) of the Securities Act, with respect to
such securities. Under Section 2(11) of the Securities Act, an "issuer"
includes any person directly or indirectly controlling or controlled by an
issuer, or any person under direct or indirect common control with an issuer.
An "underwriter," as defined in Section 1145(b) of the Bankruptcy
Code, with respect to the securities issued under the Joint Plan received
pursuant to the Joint Plan would be required, in connection with any resale of
such securities, either to (i) have its securities to be sold registered under
the Securities Act or (ii) rely on an applicable exemption, if any, from
registration. The Securities and Exchange Commission has promulgated Rule 144
under the Securities Act to permit resales by affiliates of the issuer under
certain specified conditions, and if such conditions are satisfied, such
affiliates are not deemed to be statutory underwriters. Among such conditions
is the requirement that certain current information regarding the issuer be
publicly available. As discussed below, it is contemplated that, upon
confirmation of the Joint Plan, and, in the event of the occurrence of a Trust
Triggering Event, Reorganized Holding will register the Reorganized Holding
Common Stock pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"). As a result of such registration, Reorganized
Holding will be required to file the information contemplated by Rule 144 with
the Securities and Exchange Commission, and therefore make it publicly
available. It is an integral part of the Joint Plan that Rule 144 be available
to any party deemed to be an affiliate of Reorganized Holding for purposes of
permitting resales of Reorganized Holding Common Stock in accordance with the
provisions of Rule 144.
RECIPIENTS OF JOINT PLAN SECURITIES UNDER THE JOINT PLAN ARE ADVISED
TO CONSULT THEIR COUNSEL AS TO THEIR ABILITY TO RESELL, WITHOUT REGISTRATION,
THE SECURITIES THEY RECEIVE UNDER THE JOINT PLAN.
A. REGISTRATION OF PLAN SECURITIES/REPORTING REQUIREMENTS
RECIPIENTS OF SECURITIES UNDER THE JOINT PLAN ARE ADVISED TO CONSULT
THEIR COUNSEL AS TO THEIR REPORTING OBLIGATIONS, IF ANY, ARISING UPON THE
REGISTRATION BY REORGANIZED HOLDING.
ARTICLE XIV. CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE JOINT PLAN
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 91
<PAGE> 100
The following discussion summarizes certain possible federal income
tax consequences of the Joint Plan to the Debtors, and to the holders of Claims
and Interests. It is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, and administrative and judicial
interpretations thereof which are now in effect, but which could change, even
retroactively, at any time. This discussion does not address all aspects of
federal, state and local tax laws that could impact the various classes of
Claimants, the holders of Interests or the Debtors.
The tax discussion below assumes (i) items treated by the Debtors as
their indebtedness would, if challenged, be characterized as debt for federal
income tax purposes; and (ii) all of the interest which has accrued on
obligations classified as debt by the Debtors was properly accrued and if
deducted, was properly deducted. In addition, the tax consequences of the Joint
Plan will be subject to final determination of tax attributes, such as net
operating loss ("NOL") carryovers and the basis in stock of the Debtors'
subsidiaries, which in turn could be affected by future adjustments made
pursuant to Internal Revenue Service ("IRS") audits of prior or future tax
returns of the Debtor and its subsidiaries. Other assumptions are stated
elsewhere in this discussion.
NO RULING HAS BEEN SOUGHT OR OBTAINED FROM THE IRS WITH RESPECT TO ANY
OF THE TAX ASPECTS OF THE JOINT PLAN AND NO OPINION OF COUNSEL HAS BEEN
OBTAINED BY THE DEBTORS WITH RESPECT THERETO. NO REPRESENTATIONS OR ASSURANCES
ARE BEING MADE WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES AS DESCRIBED
HEREIN. CERTAIN TYPES OF CLAIMANTS AND INTEREST HOLDERS MAY BE SUBJECT TO
SPECIAL RULES NOT ADDRESSED IN THIS SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES.
FURTHER, STATE, LOCAL, OR FOREIGN TAX CONSIDERATIONS MAY APPLY TO A HOLDER OF A
CLAIM OR INTEREST WHICH ARE NOT ADDRESSED HEREIN. BECAUSE THE TAX CONSEQUENCES
OF THE JOINT PLAN ARE COMPLEX AND MAY VARY BASED ON INDIVIDUAL CIRCUMSTANCES,
EACH HOLDER OF A CLAIM OR INTEREST AFFECTED BY THE JOINT PLAN MUST CONSULT, AND
RELY UPON, HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES
OF THE JOINT PLAN WITH RESPECT TO THAT HOLDER'S CLAIM OR INTEREST. THIS
INFORMATION MAY NOT BE USED OR QUOTED IN WHOLE OR IN PART IN CONNECTION WITH
THE OFFERING FOR SALE OF SECURITIES.
A. FEDERAL INCOME TAX CONSEQUENCES IF THERE IS A SUCCESSFUL BIDDER.
This section describes certain possible material federal income tax
consequences to the Debtors and holders of Claims and Interests under the Joint
Plan if a Successful Bidder is selected. As discussed in detail above, if a
Successful Bidder is selected, Claimants of the Debtors will receive cash,
notes, or a right to recovery in certain of the Litigation, or some combination
thereof, in satisfaction of their Claims.
1. TAX CONSEQUENCES TO THE DEBTORS.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 92
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(A) GAIN OR LOSS ON NON-CASH PAYMENTS. The Debtors will generally
recognize gain or loss on the transfer of any non-cash
property in satisfaction of Claims equal to the difference
between the fair market value of the property transferred and
the adjusted tax basis to the Debtors in such property.
However, the Debtors will not recognize gain or loss on the
issuance of their own stock or debt, except to the extent of
any discharge of indebtedness income, discussed below.
Provided that the transfer of the right to receive a
portion of the recovery in certain of the Litigation is
treated as the issuance of a contingent debt instrument by
the Debtors, the Debtors will not recognize gain or loss on
such transfer except to the extent of any discharge of
indebtedness income.
(B) DISCHARGE OF INDEBTEDNESS. As a general rule, the discharge
of all or a portion of a debt by its holder results in the
debtor's recognition of taxable income. Section 108 of the
Code sets forth certain exceptions to this general rule.
Section 108(e)(2) of the Code provides that a taxpayer does
not recognize income from the discharge of indebtedness to
the extent that satisfaction of the liability would have
given rise to a deduction. Section 108(a)(1)(A) of the Code
provides an exception to the required recognition of income
from the discharge of indebtedness when the discharge occurs
in a case under the Bankruptcy Code if the taxpayer is under
the jurisdiction of the court and the debt discharge is
granted by the court or is pursuant to a plan approved by the
court. If Section 108(a)(1)(A) of the Code applies to exclude
from gross income the discharged indebtedness, the "tax
attributes" of the taxpayer are reduced, unless the taxpayer
affirmatively elects to first reduce the tax bases of its
depreciable assets. Section 108(b) of the Code reduces tax
attributes in the following order: NOLs, general business
credit carryovers, minimum tax credits, capital loss
carryovers, basis of depreciable property and foreign tax
credit carryovers.
If the exceptions provided for in Section 108 of the
Code were inapplicable, the Debtors would recognize discharge
of indebtedness income with respect to any Allowed Claims
that are satisfied to the extent that the aggregate amount of
such satisfied Allowed Claims exceeds the amounts transferred
in satisfaction thereof, i.e., the sum of (i) the amount of
cash, (ii) the fair market value of the rights to recover in
certain of the Litigation and (iii) the issue price of the
notes received by holders of such Allowed Claims. The
exceptions provided for in Section 108 of the Code should
apply to exclude such discharge of indebtedness income from
the gross income of the Debtors, and instead require the
Debtors to reduce their tax attributes, as described above,
by such amount. However, if the amount of the discharge of
indebtedness exceeds the tax attributes of the Debtors, such
excess is nevertheless excluded from gross income and no
additional tax liability arises.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 93
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(C) LIMITATIONS ON NET OPERATING LOSSES. Section 382 of the Code
limits the ability of a corporation to utilize NOLs in
instances where the corporation's ownership has changed
significantly. As a general rule, if a shareholder or a group
of shareholders increases its ownership interest by more than
50 percentage points, during any three year period, in a
corporation which has an NOL, the amount of NOL carryovers
available for use by the corporation following such ownership
change is restricted.
In general, if an ownership change occurs, the
amount of income that can be offset by the NOL carryovers in
any one year is limited to the value of the corporation
immediately before the change multiplied by the long-term
tax-exempt interest rate established monthly by the federal
government (the "Annual Limitation"). Subject to the
limitations period on NOL carryovers, any available but
unused NOL carryover in a year is added to the amount
available for use in the next year. Any NOL incurred after
the date of an ownership change (other than an NOL resulting
from the realization of "net unrealized built-in loss," as
noted below) is not subject to the limitations of Section 382
of the Code.
Under the Joint Plan, all outstanding Interests
together with any options, rights or warrants to purchase
Interests will be canceled and the Successful Bidder will
acquire all of the common stock of Reorganized Holding.
Accordingly, an ownership change for purposes of Section 382
of the Code would occur. Therefore, the Debtors' right to
utilize its NOL (as determined after taking into account any
reduction of tax attributes required by the application of
Section 108) will be limited to the Annual Limitation. For
purposes of Section 382, the Debtors' NOL includes its "net
unrealized built-in loss." Generally speaking, the "net
unrealized built-in loss" is the excess of the Debtors'
adjusted bases in its assets over their fair market value on
the date of the ownership change.
However, under Section 382(h) of the Code, the
Annual Limitation does not apply to certain built-in gains of
the Debtors. It is the Debtors' opinion that the gain that is
realized from a positive recovery in the Litigation will be
able to be sheltered, to some degree, by the Debtors' NOL,
without the application of the limitations set forth in
Section 382 of the Code, due to the special rules for
built-in gains set forth in Section 382(h) of the Code.
However, the above issues are subject to examination by the
IRS and could be challenged in such an examination.
2. TAX CONSEQUENCES TO CREDITORS
(A) OVERVIEW. The federal income tax consequences of the
implementation of the Joint Plan to a holder of a Claim will
depend, among other things, on the origin of the holder's
Claim, when the holder's Claim becomes an Allowed Claim, when
the holder receives payment in respect of his Claim, whether
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 94
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the holder reports income using the accrual or cash method of
accounting, whether the holder has taken a bad debt deduction
or worthless security deduction with respect to his Claim,
and whether the holder's Claim constitutes a "security" for
federal income tax purposes.
(B) REALIZATION AND RECOGNITION OF GAIN OR LOSS IN GENERAL. Under
the Joint Plan if there is a Successful Bidder, a holder of
an Allowed Claim will receive cash, a note issued by
Reorganized Debtor, and/or a right to recovery in certain
Litigation. A holder of an Allowed Claim will generally
recognize gain or loss as the case may be upon receipt of
such cash in an amount equal to the difference between (i)
the amount realized by the holder in respect of its Claim and
(ii) the holder's adjusted tax basis in its Claim. The amount
realized by a holder in respect of his claim will generally
equal the amount of any cash, plus the issue price of any
note, and plus the fair market value of any other property
received by the holder. The character of any gain recognized,
whether capital or ordinary, must be determined by examining
the nature of the Allowed Claim in the hands of its holder.
However, even if the Allowed Claim was a capital asset in the
hands of an exchanging holder, and such gain would be
long-term capital gain if the holder's holding period for the
Allowed Claim surrendered exceeded one year at the time of
the exchange, the gain may be recharacterized as ordinary
income to the extent the gain is attributable to accrued but
unpaid interest or accrued market discount. Any loss
recognized by a holder of an Allowed Claim will be either an
ordinary loss or a capital loss, depending on the nature of
the Allowed Claim. The loss would be a capital loss if the
Claim constitutes a "security" for federal income tax
purposes. For this purpose, a "security" includes a debt
instrument with interest coupons or in registered form.
Otherwise, the loss is generally ordinary.
The extent to which gain or loss may be recognized
by a Claimant upon implementation of the Joint Plan may be
significantly affected by any bad debt deduction that may
have been taken by the Claimant in a prior year with respect
to the debt on which the Claim is based. If the Claimant took
a bad debt deduction in a prior year which is recovered in
whole or part through a payment made to the Claimant pursuant
to the Joint Plan, the Claimant will generally be required to
include in income the amount recovered in the year the
Claimant receives the payment. An exception to this rule
permits exclusion of a recovery of a prior bad debt deduction
to the extent that the earlier bad debt deduction did not
produce a tax benefit to the Claimant.
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3. TAX CONSEQUENCES TO HOLDERS OF INTERESTS
A holder of an Interest who does not receive consideration for his or
her Interest in the Joint Plan will generally be entitled to a deduction for
his or her loss under Section 165 of the Code. Section 165(g) of the Code
provides generally for capital loss treatment where any security, including
shares of stock in a corporation, becomes worthless during the taxable year.
The loss is generally equal to the holder's tax basis in his or her Interest.
Holders of Interests should contact their own tax advisors to determine if, and
to what extent, they might have tax basis in shares held.
B. FEDERAL INCOME TAX CONSIDERATIONS IF THERE IS A TRUST TRIGGERING EVENT
This section describes certain possible material federal income tax
consequences to the Debtors and holders of Claims and Interests under the Joint
Plan if there is a Trust Triggering Event. As discussed in detail above, upon a
Trust Triggering Event the Debtors will transfer the Trust shares to the Trust
and the Litigation to the Litigation Trust. Claimants will receive cash, notes,
interests in the Trust and Litigation Trust, or other property, or some
combination thereof, in satisfaction of their Claims.
1. FEDERAL INCOME TAX CONSEQUENCES TO THE DEBTORS
(A) GAIN OR LOSS ON NON-CASH PAYMENTS. The Debtors will generally
recognize gain or loss on the transfer of any non-cash
property in satisfaction of Claims equal to the difference
between the fair market value of the property transferred and
the adjusted tax basis to the Debtors in such property.
However, the Debtors will not recognize gain or loss on the
issuance of their own stock or debt, except to the extent of
any discharge of indebtedness income, discussed below.
The transfer of the Litigation to the Litigation
Trust will be a taxable transaction whereby the Debtors will
recognize gain or loss equal to the fair market value of the
Litigation less the Debtors' tax basis, if any, in the
Litigation. The Debtors may utilize their NOLs to offset any
gain recognized upon the transfer of the Litigation. The
determination of the fair market value of the Litigation is
factual in nature and the IRS may challenge the value of the
Litigation as determined by the Debtors.
The transfer of the Trust Shares to the Trust will
generally not result in the recognition by the Debtors of any
gain or loss, except to the extent of any discharge of
indebtedness, as discussed below.
(B) DISCHARGE OF INDEBTEDNESS. As a general rule, the discharge
of all or a portion of a debt by its holder results in the
debtor's recognition of taxable income. Section 108 of the
Code sets forth certain exceptions to this general rule.
Section 108(e)(2) of the Code provides that a taxpayer does
not recognize income from the discharge of indebtedness to
the extent that
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satisfaction of the liability would have given rise to a
deduction. Section 108(a)(1)(A) of the Code provides an
exception to the recognition of income from the discharge of
indebtedness when the discharge occurs in a case under the
Bankruptcy Code, if the taxpayer is under the jurisdiction of
the court and the debt discharge is granted by the court or
is pursuant to a plan approved by the court. If Section
108(a)(1)(A) of the Code applies to exclude from gross income
the discharged indebtedness, the "tax attributes" of the
taxpayer are reduced, unless the taxpayer affirmatively
elects to first reduce the tax bases of its depreciable
assets. Section 108(b) of the Code reduces tax attributes in
the following order: NOLs, general business credit
carryovers, minimum tax credits, capital loss carryovers,
basis of depreciable property and foreign tax credit
carryovers.
If the exceptions provided for in Section 108 of the
Code were inapplicable, the Debtors would recognize discharge
of indebtedness income with respect to any Allowed Claims
that are satisfied by the issuance of Trust Interests, Trust
Interests (Litigation), cash, notes or other property to the
extent that the aggregate amount of such satisfied Allowed
Claims exceeds the sum of (i) the amount of cash, (ii) the
fair market value of the Trust Interests, Trust Interests
(Litigation) and other property and (iii) the issue price of
the notes received by holders of such Allowed Claims. The
exceptions provided for in Section 108 of the Code should
apply to exclude such discharge of indebtedness from the
gross income of the Debtors, and instead require the Debtors
to reduce their tax attributes, as described above, by such
amount. However, if the amount of the discharge of
indebtedness exceeds the tax attributes of the Debtors, such
excess is nevertheless excluded from gross income and no
additional tax liability arises.
(C) LIMITATIONS ON NET OPERATING LOSSES. Section 382 of the Code
limits the ability of a corporation to utilize NOLs in
instances where the corporation's ownership has changed
significantly. As a general rule, if a shareholder or a group
of shareholders increases its ownership interest by more than
50 percentage points, during any three year period, in a
corporation which has an NOL, the amount of NOL carryovers
available for use by the corporation following such ownership
change is restricted.
In general, if an ownership change occurs, the
amount of income that can be offset by the NOL carryovers in
any one year is limited to the value of the corporation
immediately before the change multiplied by the long-term
tax-exempt interest rate established monthly by the federal
government (the "Annual Limitation"). Subject to the
limitations period on NOL carryovers, any available but
unused NOL carryover in a year is added to the amount
available for use in the next year. Any NOL incurred after
the date of an ownership change (other than an NOL resulting
from the realization of "net
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 97
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unrealized built-in loss," as noted below) is not subject to
the limitations of Section 382 of the Code.
Under the Joint Plan, all outstanding Interests
together with any options, rights or warrants to purchase
Interests will be canceled and Reorganized Holding will issue
the Trust Shares to the Trust. Accordingly, an ownership
change for purposes of Section 382 would occur. Therefore,
the Debtors' right to utilize its NOL (as determined after
taking into account any reduction of tax attributes required
by the application of Section 108) will be limited to the
Annual Limitation. For purposes of Section 382, the Debtors'
NOL includes its "net unrealized built-in loss." Generally
speaking, the "net unrealized built-in loss" is the excess of
the Debtors' adjusted bases in its assets over their fair
market value on the date of the ownership change.
An alternative approach to the Annual Limitation is
available for certain corporations in bankruptcy. Under this
alternative (the "Attribute Reduction"), the amount of the
debtor corporation's NOL carryover which can be utilized in
any one year is not limited if such corporation is under the
jurisdiction of a court in a Title 11 case, and the
continuing shareholders and qualified creditors of the
corporation own immediately after the court approved
reorganization, stock of the corporation representing at
least 50% in value and voting power. Only those creditors who
have held the debt of the debtor corporation for at least 18
months or whose debt arose in the ordinary course of the
debtor's business are considered qualified creditors. The
Debtors have not determined whether this requirement will be
satisfied as of the Effective Date under the Joint Plan. The
Attribute Reduction approach is automatically applied unless
the debtor affirmatively elects for it not to apply. If the
Attribute Reduction applies and a second ownership change
occurs during the two-year period immediately following such
ownership change, then the Annual Limitation applies to
taxable years ending after such ownership change but before
the second ownership change and the debtor corporation's NOL
limitation is reduced to zero for any taxable year ending
after the second ownership change.
If the Attribute Reduction alternative is utilized,
however, the debtor corporation's NOL carryovers must be
reduced by an amount equal to the sum of:
(1) the interest paid or accrued by the debtor
corporation on indebtedness which was
converted to stock in the year in which the
court approved reorganization occurs; and
(2) the interest paid or accrued by the debtor
corporation on indebtedness which was
converted to stock during the three years
preceding the taxable year in which the
court approved reorganization occurs.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 98
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If a debtor in bankruptcy elects not to have the
Attribute Reduction apply then, for purposes of calculating
the Annual Limitation, the value of the debtor corporation is
determined after the occurrence of the ownership change
rather than before, as required under the general rules
described above. Treasury Regulations provide that the value
of the debtor corporation for this purpose would be the
lesser of the value of the stock of the corporation
immediately after the ownership change or the value of the
corporation's assets (determined without regard to
liabilities) immediately before the ownership change. The
Debtors will not determine whether to make such election, if
available, until after the Effective Date.
2. TAX CONSEQUENCES TO CREDITORS
(A) OVERVIEW. The federal income tax consequences of the
implementation of the Joint Plan to a holder of a Claim will
depend on, among other things, the origin of the holder's
Claim, when the holder's Claim becomes an Allowed Claim, when
the holder receives payment in respect of his Claim, whether
the holder reports income using the accrual or cash method of
accounting, whether the holder has taken a bad debt deduction
or worthless security deduction with respect to his Claim,
and whether the holder's Claim constitutes a "security" for
federal income tax purposes.
(B) REALIZATION AND RECOGNITION OF GAIN OR LOSS IN GENERAL.
Generally, a holder of an Allowed Claim will recognize
income, gain or loss on the exchange under the Joint Plan of
his Allowed Claim for cash and other property in an amount
equal to the difference between (i) the sum of the amount of
any cash, the issue price of any notes, and the fair market
value on the date of the exchange of any other property
received by the holder (other than any consideration
attributable to accrued but unpaid interest on the Allowed
Claim), and (ii) the adjusted tax basis of the Allowed Claim
exchanged therefor. The character of any gain recognized,
whether capital or ordinary, must be determined by examining
the nature of the Allowed Claim in the hands of its holder.
However, if the Allowed Claim was a capital asset in the
hands of an exchanging holder, and such gain would be
long-term capital gain if the holder's holding period for the
Allowed Claim surrendered exceeded one year at the time of
the exchange, the gain may be recharacterized as ordinary
income to the extent the gain is attributable to accrued but
unpaid interest or accrued market discount. Any loss
recognized by a holder of an Allowed Claim will be either an
ordinary loss or a capital loss, depending on the nature of
the Allowed Claim. The loss would be a capital loss if the
Claim constitutes a "security" for federal income tax
purposes. For this purpose, a "security" includes a debt
instrument with interest coupons or in registered form.
Otherwise, the loss is generally ordinary.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 99
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(C) CERTAIN TAX CONSEQUENCES OF THE JOINT PLAN TO CREDITORS. The
Trust and the Litigation Trust will be treated as grantor
trusts for federal income tax purposes. Therefore, upon the
creation of the Trust and the Litigation Trust, each
beneficiary thereof will be treated as having received and as
owning an undivided interest in the assets of each respective
trust (i.e., the Trust Shares and the Litigation) in exchange
for surrendering all or a portion of such beneficiary's
Allowed Claim. The bases of each such beneficiary's interest
in the Trust Shares and the Litigation will be equal to their
fair market value as of the Effective Date. The determination
of the fair market value of an Allowed Claim holder's
beneficial interest in the assets of the Trust and the
Litigation Trust is factual in nature and the IRS may
challenge any such determination.
The holder of a Claim will generally recognize gain
or loss, if any, equal to the difference between the amount
realized (i.e., cash, issue price of any notes and fair
market value of the Trust Shares, Litigation and other
property received by the holder) in the exchange and the
holder's adjusted tax basis in the Claim. The character of
such gain or loss will depend on the nature of the Claim in
the hands of the holder. A holder of an Allowed Claim that
recognizes an ordinary loss upon the exchange of an Allowed
Claim for an interest in the Trust Shares must generally
recapture as ordinary income any gain realized on the
subsequent disposition of such Trust Shares to the extent of
such loss. The basis of any notes received by a holder of an
Allowed Claim will equal their issue price, and the basis of
any other property received will equal its fair market value.
Other tax consequences of the Joint Plan to the
holder of a Claim will depend on whether the holder reports
income on the accrual or cash basis method, and whether the
holder receives distributions under the Joint Plan in more
than one taxable year.
The extent to which gain or loss may be recognized
by a Claimant upon implementation of the Joint Plan may be
significantly affected by any bad debt deduction that may
have been taken by the Claimant in a prior year with respect
to the debt on which the Claim is based. If the Claimant took
a bad debt deduction in a prior year which is recovered in
whole or part through a payment made to the Claimant pursuant
to the Joint Plan, the Claimant will generally be required to
include in income the amount recovered in the year the
Claimant receives the payment. An exception to this rule
permits exclusion of a recovery of a prior bad debt deduction
to the extent that the earlier bad debt deduction did not
produce a tax benefit to the Claimant.
C. CERTAIN TAX CONSEQUENCES OF THE JOINT PLAN TO HOLDERS OF INTERESTS
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 100
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A holder of an Interest who does not receive consideration for his or
her Interest in the Joint Plan will generally be entitled to a deduction for
his or her loss under Section 165 of the Code. Section 165(g) of the Code
provides generally for capital loss treatment where any security, including
shares of stock in a corporation, becomes worthless during the taxable year.
The loss is generally equal to the holder's tax basis in his or her Interest.
Holders of Interests should contact their own tax advisors to determine if, and
to what extent, they might have tax basis in shares held.
THE FOREGOING IS INTENDED TO BE A SUMMARY ONLY AND NOT A SUBSTITUTE
FOR CAREFUL TAX PLANNING OR CONSULTATION WITH A TAX ADVISOR. THE FEDERAL,
STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE JOINT PLAN ARE COMPLEX AND,
IN SOME CASES, UNCERTAIN. SUCH CONSEQUENCES MAY ALSO VARY BASED UPON THE
INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF A CLAIM OR INTEREST. ACCORDINGLY,
EACH HOLDER OF A CLAIM OR INTEREST IS STRONGLY URGED TO CONSULT WITH HIS OR HER
OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES OF THE JOINT PLAN.
ARTICLE XV. EFFECTIVE DATE TRANSACTIONS
Prior to the Confirmation Hearing, a detailed list of the Effective
Date Transactions shall be filed with the Bankruptcy Court.
ARTICLE XVI. RESPONSES TO OBJECTIONS TO
PRIOR DISCLOSURE STATEMENTS
On November 1, 1999, the Lenders and Creditors (the "CREDITOR
PROPONENTS") filed a disclosure statement in connection with their Third
Amended Plan of Reorganization (the "CREDITORS' DISCLOSURE STATEMENT") and on
November 2, 1999, the Debtors filed a disclosure statement in connection with
the First Amended Nu-kote/Baiocchi Plan of Reorganization (the "DEBTORS'
DISCLOSURE STATEMENT"). Various parties in interest have filed objections to
one or both of these disclosure statements and/or the disclosure statements
that preceded them. Certain of those objections have been resolved by agreement
between the Plan Proponents and the objecting party. Thus, this Article XVII
will reflect, in some cases, additional information that such objecting parties
asked to have included in this Disclosure Statement and the sections in which
such language may be found. In other cases in which the objections cannot be
addressed to the satisfaction of the objecting parties, this Article XVII will
disclose the existence and nature of such objections. The objections will be
addressed seriatim.
A. RESPONSE TO OBJECTIONS BY CANON
1. CREDITORS' RESPONSE
In Canon's objection to the Creditors' Disclosure Statement, Canon
correctly notes that "a disclosure statement should...contain all material
information relating to the risks
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 101
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posed to creditors and equity interest holders under the proposed plan of
reorganization." In re Cardinal Congregate I, 121 B.R. 760 (Bankr. S.D. Ohio
1990). However, Canon fails to include the fact that courts have held that a
disclosure statement should include the factors and pertinent information
presently known to the plan proponents. In re Ligon, 50 B.R. 127 (Bankr. M.D.
Tenn. 1985); Cardinal Congregate One, 121 B.R. 760 (S.D. Ohio 1990); In re
Microwave Prods. of America, Inc., 100 B.R. 376 (Bankr. W.D. Tenn. 1989).
Moreover, conclusory allegations and opinions are insufficient for purposed of
adequate information pursuant to section 1125(a). In re Ligon, 50 B.R. at 130.
Many of Canon's objections are about issues which have not been
determined at this time. Accordingly, it is impossible for the Plan Proponents
to include more detailed information about issues which are unknown to the Plan
Proponents. For example, Canon requests additional information concerning the
manner in which the litigation trust would resolve the Canon litigation and
disclosure of exactly what rights and obligations are being transferred to the
litigation trust. Whether Canon's claims will be liquidated in the claims
objection process in the Bankruptcy Court, estimated by the Bankruptcy Court
for confirmation purposes, whether relief from the stay will be sought, or some
combination of the above will be employed through a bifurcated procedure is not
known nor required to be known at this time. With regards to the litigation to
be transferred to the Litigation Trust, the disclosure statement has been
amended at page 61 to list the litigation which will be transferred to the
Litigation Trust.
With regards to Canon's request for fuller disclosure concerning
operation of the Litigation Trust, the Plan Proponents intend to send a copy of
the Litigation Trust to Canon prior to the Plan Confirmation hearing.
In addition, Canon requested disclosure of whether and to what extent
Nu-kote's insurers are responsible for the satisfaction of the OEM's claim. The
Plan Proponents assert that such a disclosure is not necessary for approval of
the Disclosure Statement as the standard is adequate information such that a
reasonable investor may make an informed decision about the plan.
Canon also requested confirmation that Plan Proponents were not
attempting to eliminate Canon's rights and defenses (including rights of setoff
and recoupment), disclosure of whether the post-confirmation business
activities of the reorganized entity will include infringing activities, and
confirmation that the post-confirmation injunctive power will not be utilized
to hamper Canon's ability to protect its intellectual property in the event the
reorganized Debtor engages in post-confirmation infringing activities. The
Disclosure Statement has been amended to state that all litigation transferred
to the Litigation Trust is subject to rights of setoff and recoupment under the
Bankruptcy Code. Concerning any post-confirmation infringement, the Plan
Proponents have been assured by the Debtors that no post-bankruptcy infringing
has occurred. In addition, the Plan Proponents have no intention of the
Reorganized Debtors infringing on any of Canon's patents, trademarks, etc.
Finally, the Plan Proponents inform Canon that section 524(a) of the Bankruptcy
Code has no post-confirmation effect. Accordingly, the section 524(a)
injunction would not preclude Canon from protecting its intellectual property
post-confirmation.
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2. DEBTORS' RESPONSE
Canon objected to the Debtors' Disclosure Statement saying that it
failed to describe adequately the differences between the three cases which
comprise the OEM Litigation, and that creditors need more information to
understand more fully the "unique nature" of these claims. As stated below in
response to a similar objection by Epson, the Debtors refute the notion that a
prolonged discussion of the history of each of the OEM Litigation cases is
necessary to provide adequate information about the OEM Litigation. The claims
asserted against International in the OEM Litigation by Canon, HP and Epson are
indeed similar in design, and the Debtors dispute the idea that a
cross-comparison of the claims asserted by each of the OEMs would be useful to
a creditor in deciding whether to vote to accept the Joint Plan, or is even
relevant. The descriptions of the OEM Litigation cases in the Disclosure
Statement include a synopsis of the several different claims and counterclaims
asserted and the progress made in each case. The Debtors maintain that these
descriptions are more than adequate to describe the nature, extent and
importance of the OEM Litigation. Further, the Plan Proponents have now
requested any language Canon would like inserted into the Disclosure Statement
in an effort to resolve this objection.
Canon's next concern centers around the alleged lack of information
concerning the procedures the Debtors will employ to liquidate the claims Canon
has filed. Canon has not moved to lift the automatic stay to allow the Canon
Litigation to proceed. Canon has, however, filed proofs of claim in this
bankruptcy case, asserting administrative claim priority to at least some
portion of its claims as filed. Canon apparently desires a definitive answer as
to the mechanics of the liquidation of its particular claims. This definitive
answer is not, however, known or necessary at this pre-confirmation stage of
the proceedings. Settlement of the Canon Litigation in its entirety is a
possibility that will be explored. Alternatively, whether Canon's claims will
be liquidated in the claims objection process as set forth in the Joint Plan in
the Bankruptcy Court, estimated by the Bankruptcy Court for confirmation
purposes, whether Canon or the Debtors will deem it prudent to move for relief
from the automatic stay to proceed with the Canon Litigation to liquidate the
claims, or some combination of the above will be employed through a bifurcated
procedure is not known nor required to be known at this time. This Disclosure
Statement, as well as the procedural and substantive provisions in the
Bankruptcy Code itself, adequately delineate these several alternatives.
Adequate information as to the alternate procedures by which Canon's asserted
claim could be liquidated is provided. Finally, the Debtors are mindful of the
provisions of ss. 553 of the Bankruptcy Code regarding setoff, and will comply
with same to the extent applicable in resolution of the claims asserted by
Canon. In further response to Canon's allegation that the foregoing statement
is "ambiguous, "the Debtors' add that to the extent that section is
applicable, the Debtors' "obligations under ss. 553" are established by the
Bankruptcy Code and do not need to be further "qualified" by the Debtors; the
Debtors are aware of same and will comply with same.
B. RESPONSE TO OBJECTIONS BY EPSON
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 103
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1. CREDITORS' RESPONSE
Among other things, Epson argues that the Creditors' Disclosure
Statement failed to adequately deal with administrative claims and what Epson
believes to be the likely administrative insolvency of the Debtors' estates.
The Creditor Proponents disagree with this contention at this time. Epson also
objects to the failure of the Creditors' Disclosure Statement to describe the
administrative claim (which Epson estimates at $7 million) that Epson is
asserting in this case. The Creditor Proponents believe that at this point it
is not practical to list and quantify each potential administrative claim.
Epson further alleges that the Creditors' Disclosure Statement failed to
address where, how, and when Epson's claims would be adjudicated. Whether
Epson's claims will be liquidated in the claims objection process in the
Bankruptcy Court, estimated by the Bankruptcy Court for confirmation purposes,
whether relief from the stay will be sought, or some combination of the above
employed through a bifurcated procedure is not required to be known at this
time. Further, this is a confirmation issue relating to the adequacy of the
terms of the Creditors' Plan itself, and such an issue should be resolved at
the Confirmation Hearing.
Moreover, Epson objects that the description of the OEM Litigation in
the Creditors' Disclosure Statement was not full, objective, and current. The
detail required to be provided in a disclosure statement is only such detail as
is necessary for a hypothetical creditor to make an informed decision whether
to vote to accept a proposed plan of reorganization. The level of detail
suggested as required by Epson not only far exceeds the accepted standard for
adequate information, but also would serve to confuse the hypothetical
creditor. The descriptions of the OEM Litigation cases in the Disclosure
Statement include a synopsis of the several different claims and counterclaims
asserted and the progress made in each case. The Plan Proponents maintain that
these descriptions are more than adequate to describe the nature, extent and
importance of the OEM Litigation. Moreover, the Creditor Proponents assert that
much of the issues raised by Epson will be resolved by way of litigation and it
is inappropriate to prejudge issues which may require additional litigation in
the content of a disclosure statement. However, as an additional response to
Epson's objection, the Plan Proponents included Epson's language in a footnote
in the moot recent Disclosure Statement.
Epson also objects that the Creditor Proponents have not provided a
copy of the Litigation Trust Agreement to Epson and that the Creditors'
Disclosure Statement failed to discuss what would happen if any or all of the
OEM Litigation is resolved unfavorably from the Debtors' perspective. Epson
believes that the risk and consequences of such a result need to be disclosed.
The Plan Proponents intend to forward Epson a copy of the Litigation Trust
prior to Plan Confirmation. Moreover, the risks of an unfavorable result in the
remaining OEM Litigation are disclosed and the consequence is obviously that
the amount available to creditors would be reduced.
Epson further objects that the Creditors' Disclosure Statement failed
to address the reorganized Debtors' future operations. Epson believes that such
information is necessary to enable claimants to determine the feasibility of
the Creditors' Plan. In particular, Epson
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 104
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believes that further disclosure is necessary with respect to the formation of
an ink jet subsidiary under the Creditors' Plan. Epson believes that the
purpose of the creation of such a subsidiary needs to be disclosed, and that
the assets that will be directed into that subsidiary need to be identified.
Moreover, Epson believes that to the extent the reorganized Debtors' business
will be carried on by legally separate entities, any financial projections need
to be broken down by entity, and that the Creditor Proponents need to disclose
what the Lenders intend to do as the new shareholders of the reorganized
Debtors. The Creditor Proponents are unable to respond to this request with
specific numbers because they are not known at this time. See In re Ligon, 50
B.R. 127 (M.D. Tenn 1985; Cardinal Congregate One, 121 B.R. 760 (S.D. Ohio
1990); In re Microwave Prods. of America, 100 B.R. 376 (W.D. Tenn. 1989)
(stating that the Disclosure Statement should contain information presently
known to Plan Proponents.) The Creditor Proponents point Epson to the
discussion of the Debtors' business, supra. Moreover, Epson believes even
though PPAG was sold, the Creditor Proponents must disclose the reorganized
Debtors' post-sale supply source. The Plan Proponents respond by noting that,
at this time, the post-sale supply source is not known.
Epson also believes that further disclosure regarding potential claims
against the Debtors' management and professionals, including its attorneys, is
necessary. The potential Officer and Director's Claim is discussed at Article
V.J.62. Such a discussion is adequate to enable a reasonable investor to make
an informed decision about the Plan.
Epson further objects to the Plan Proponents' disclaimers with regard
to the financial information listed in the Disclosure Statement. Such
disclaimers do not effect the ability of the parties to make an informed
judgment about the Plan.
Also, Epson alleges that the Creditors' Disclosure Statement failed to
adequately discuss the "effective date financing" for administrative expenses
under the Creditors' Plan. According to Epson, the Lender, the term of such
financing, the proposed collateral, and the maximum amount of such financing,
etc., must be disclosed. The Plan Proponents respond by noting that no
agreements regarding effective date financing have been entered into by Plan
Proponents and any lenders. The inclusion of possible lenders would be improper
as they would include opinions and not facts. See Ligon, 50 B.R. at 130. Epson
further objects to the requirement that as a condition to Confirmation, all
Administrative and Priority Claims shall not exceed $3,000,000.00. The Plan
Proponents respond by noting that the $3,000,000.00 cap can be increased by
Plan Proponents. Moreover, a Motion for Administrative Bar Date has been filed.
This will assist in the estimation of amounts of administrative claims. The
remaining objections are confirmation issues and should be addressed at
Confirmation. Specifically, Epson raises issues relating to the classification
of claims under the Creditors' Plan and the absolute priority rule.
2. DEBTORS' RESPONSE
Epson objected to the Debtors' Disclosure Statement by asserting the
"likely administrative insolvency" of these estates. The Debtors dispute
Epson's contention and believe that same is not well-founded. Epson also
claimed that with regard to treatment
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 105
<PAGE> 114
of Allowed Administrative Claims, the Debtors' Disclosure Statement and prior
proposed plan were inconsistent. The Debtors do not believe that there is any
inconsistency between the provisions of the Joint Plan and the provisions of
this Disclosure Statement related thereto. The Joint Plan's Allowed
Administrative Claim limitation is mirrored in the Disclosure Statement.
Epson also asserted that portions of the Debtors' Disclosure Statement
were objectionable due to lack of disclosure of potential administrative
claims. The Debtors believe that they are not required to, nor would it be
possible to at this juncture, quantify and list each potential administrative
claim that may be asserted against the estate. The Court has now established
December 15, 1999 as the date by which all requests for payment of an
administrative claim, calculated through September 30, 1999 must be filed, thus
some degree of certainty as to the amount of asserted administrative claims
will be had. Further, the Debtors maintain that the specific $3 million
limitation on Allowed Administrative Claims and Priority Claims, unless waived
or altered by the Successful Bidder is designed to and does provide assurance
of the nature of the obligations to which the Successful Bidder under the Joint
Plan will be bound, and that same is adequate disclosure of the obligations of
the Successful Bidder. Finally, Epson alleges that the payments due under the
Retention Agreements and the "lawyers', accountants', brokers', and other
professionals' fees alone will exceed $1 million" and that the Joint Plan is
therefore administratively insolvent. The Debtors would point out that the
limitation on Allowed Administrative Claims, which includes such Fee Claims,
has now been increased to $3 million. The Joint Plan is neither
administratively insolvent nor unconfirmable on its face.
Epson also objected to the Debtors' Disclosure Statement by saying
that the Debtors failed to describe adequately the Epson Litigation and the
other cases which comprise the OEM Litigation. The Debtors refute the notion
that a prolonged discussion of the history of each of the OEM Litigation cases
is necessary to provide adequate information about the OEM Litigation. The
detail required to be provided in a disclosure statement is only such detail as
is necessary for a hypothetical creditor to make an informed decision whether
to vote to accept a proposed plan of reorganization. The level of detail
suggested as required by Epson not only far exceeds the accepted standard for
adequate information, but also, the Debtors maintain, would serve not to
elucidate, but instead to confuse the hypothetical creditor. The descriptions
of the OEM Litigation cases in the Disclosure Statement include a synopsis of
the several different claims and counterclaims asserted and the progress made
in each case. A disclosure statement is not the appropriate venue to tout one's
past litigation successes or set forth litigation strategy. The Debtors
maintain that these descriptions are more than adequate to describe the nature,
extent and importance of the OEM Litigation.
As a means of addressing Epson's objection, however, the Debtors have
incorporated numerous portions of the text of Epson's objection describing the
Epson Litigation in response to Epson's objection and as a statement of Epson's
position on the status of the Epson Litigation above at Article E(i).
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 106
<PAGE> 115
Epson next objected to the Debtors' Disclosure Statement claiming that
it failed to address the Reorganized Debtor's future operations. For an
extended discussion of this topic, the Debtors' would refer to Article H(b) of
the Disclosure Statement. These several pages discuss the future of the
marketplace, the Reorganized Debtors' place in that marketplace, sales and
marketing strategies and projections of future financial performance. Further,
the corporate structure of the Reorganized Debtors if Richmont is the
Successful Bidder is discussed in detail in the Joint Plan.
In response to Epson's objection to classification of creditors, the
Debtors assert that the classification scheme established under the Joint Plan
is appropriate pursuant to ss. 1122 of the Bankruptcy Code. In any event, these
objections raised by Epson are more properly raised as confirmation objections.
Epson does not object to the level of detail in the information provided on
classification, only to the classification itself.
Epson's statements that "management will be the initial `Purchaser'
... at the auction for the stock of the Reorganized Debtors and will be the
sole arbiter of the winning bid" are in contradiction to the express provisions
of the Joint Plan. The Joint Plan specifically states that Conway, Del Genio,
Gries & Co., L.L.P. has been employed as the contemplated investment banker and
the process of soliciting the Successful Bidder is ongoing. For a detailed
discussion of the bidding procedure, see Article I(c)(1). Additionally,
contemporaneously with the filing of this Disclosure Statement, the Plan
Proponents have filed a "Joint Motion for Approval of Compromise and Settlement
by and Among the Debtors, The Lenders and the Committees" which further sets
forth and explains the bidding procedure.
Finally, the fact that the Lenders previously served a Notice of Claim
asserting alleged causes of action against the officers and directors of
Nu-kote is disclosed herein.
C. DEBTORS' RESPONSE TO OBJECTIONS BY HEWLETT-PACKARD
1. CREDITORS' RESPONSE
Hewlett-Packard objects to the Creditors' Disclosure Statement's
discussion of the HP Litigation. Given that the jury in the HP Litigation has
rendered its verdict, the objection by HP is largely moot. Nonetheless, the
Disclosure Statement contains a revised and updated description of such
litigation and its outcome.
2. DEBTORS' RESPONSE
Hewlett-Packard's objections to the Debtors' Disclosure Statement
generally consisted of objections regarding the adequacy and accuracy of the
description by the Debtors of the litigation between HP and Nu-kote. Given that
the jury in the HP Litigation has rendered its verdict, the objection by HP is
moot. The Disclosure Statement does, however, contain a revised description of
the HP Litigation and its outcome. Any further description or discussion of the
HP Litigation is unnecessary as a settlement, subject to approval of the
Bankruptcy Court, has been reached with HP.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 107
<PAGE> 116
D. RESPONSE TO OBJECTIONS BY WAUSAU
1. CREDITORS' RESPONSE
Employers Insurance of Wausau ("WAUSAU") objects first to the
Creditors' Disclosure Statement's failure to adequately describe what, if any,
treatment is proposed with respect to rights of subrogation asserted by Wausau
to be held by Wausau and Chubb. Wausau contends that its rights of subrogation
arise as a matter of law by reason of payments made by Wausau under the policy
prior to the filing of the bankruptcy proceeding as well as pursuant to the
Wausau Agreement. Wausau, moreover, believes that further disclosure is
necessary regarding Wausau's rights of subrogation under the American
International Specialty Lines ("AISL") policy for which Wausau had funded
sufficient monies prior to the filing of the bankruptcy to exhaust the full
amount of the policy.
The Creditor Proponents' response is that nothing in the Creditors'
Plan does or is intended to effect Wausau's subrogation rights, if any. Such
clarification is stated in the Third Amended Creditors' Plan. Wausau contends
that the Creditors' Plan cannot be confirmed without the consent of Wausau.
Wausau believes that this perceived shortcoming of the Creditors' Plan needs to
be disclosed to those voting on the Creditors' Plan. Such allegation is
disclosed by the insertion of Wausau's objection herein.
Wausau's objection also argues that the Creditors' Plan is not
confirmable. The Creditor Proponents will not specifically address this
argument and note that this is a confirmation issue and, thus, is better
addressed at Confirmation.
Wausau further objects that the Creditors' Disclosure Statement failed
to adequately describe the probable recoveries to the various classes of
creditors, and that the liquidation analysis is inadequate. Creditor Proponents
disagree. The Disclosure Statement discloses as much information about
recoveries in the OEM Litigation as can be reasonably disclosed. Moreover,
Wausau objected that the Creditors' Disclosure Statement should be amended to
discuss whether the Creditor Proponents intend to reject the Wausau agreement
and to discuss the size and classification of any damage claim arising from
such a rejection, if rejection is anticipated. The Plan Proponents do not
believe such agreements are executory and therefore no assumption or rejection
is necessary.
Wausau further objected to the Creditors' Disclosure Statement because
Wausau did not receive a copy of the Litigation Trust Agreement, and because
the Disclosure Statement did not provide names or information concerning the
identity or experience of (1) the Litigation Trustee, (2) the Litigation
Advisory Committee, or (3) the directors, officers, or other management of
Reorganized Holding, and did not adequately disclose how the litigation trustee
or his successor would be selected. The Creditor Proponents intend to provide a
copy of the Litigation Trust to Wausau prior to the Plan Confirmation hearing.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 108
<PAGE> 117
Wausau further objects to the Creditors' Disclosure Statement's
discussion regarding judgment reduction and offsets and to the Creditors'
Disclosure Statement's discussion of the permanent injunction. The Creditor
Proponents address this issue in their Amended Plan.
Wausau also objected that the Creditors' Disclosure Statement did not
disclose Wausau's contention that the Debtors' rights under the Chubb Agreement
and the Chubb Order cannot be transferred to the Litigation Trust without the
Litigation Trust also assuming the obligations to Wausau under the Chubb
Agreement and the Chubb Order. Such language has been included in the Amended
Disclosure Statement.
Wausau also objects that the Creditors' Disclosure Statement failed to
adequately disclose the amount of taxes that would be triggered by the transfer
of assets to the Litigation Trust and further failed to disclose whether the
Bankruptcy Court would be asked to resolve this issue, whether that issue would
be resolved at confirmation, and whether these taxes would be incurred in a
Chapter 7 liquidation if there were no Litigation Trust. The Creditor
Proponents respond by noting that the Disclosure Statement at Article XIV
discusses various tax considerations. Such disclosure is sufficient for a
reasonable investor to make an informed judgment. See 11 U.S.C. ss. 1125.
Wausau also asserted that the Creditors' Disclosure Statement was
deficient in the following respects:
(a) the Creditors' Disclosure Statement did not describe how the
future defense of the Canon and Epson litigation would be
funded;
(b) the Creditors' Disclosure Statement did not describe the
existence or status of the litigation between the Lenders and
the Debtors regarding the Lenders' claimed security interest
and proceeds of the OEM Litigation;
(c) the Creditors' Disclosure Statement does not disclose
Wausau's contention that any interest of the Lenders in the
AISL policy is subordinated to the subrogation rights of
Wausau;
(d) the Creditors' Disclosure Statement did not disclose
standards for settlement and mechanisms to avoid potential
conflict of interest with respect to the exercise of control
by the Lenders over the Litigation Trust or the Litigation
Advisory Board, which would have authority to compromise the
Debtors' preference, fraudulent conveyance, or equitable
subordination claims against the Lenders or other parties;
and
(e) the Creditors' Disclosure Statement did not disclose the
reason for the releases of the Creditor Proponents, or the
consideration being paid for the release of such claims.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 109
<PAGE> 118
The Creditor Proponents respond to these objections by noting that
most, if not all, of such objections have been addressed in either the
Creditors' Third Amended Plan or the Amended Disclosure Statement. The Plan
Proponents assert that no further response is needed with relation to the
objections.
2. DEBTORS' RESPONSE
Wausau's objections to the initial Debtors' disclosure statement
generally related to its subrogation rights. Wausau has expressed concern that
a plan somehow affects its subrogation rights against recovery of attorneys
fees in the OEM Litigation and against American International Specialty Lines
on its insurance policy. In response, Nu-kote states that nothing in the Joint
Plan does or is intended to affect Wausau's subrogation rights, if any. Nu-kote
would note that the Chubb Agreement, which was approved by the Court,
specifically provides for Wausau and Chubb to retain their rights to any
recoveries of attorneys fees in connection with the HP Litigation. The payment
of attorneys' fees and costs would include any valid subrogation claims.
Subrogation rights, in the context of an insurer, permit the insurer
to "stand in the shoes" of its insured. See Reliance National Indemnity Co., v.
General Star Indemnity Co., 72 Cal.App.4th 1063, 1078 85 Cal. Rptr.2d 627, 635
(1999). The insurer is basically in the same position as "an assignee of the
insured's claim, and succeeds only to the rights of the insured." Id. This
concept of subrogation is memorialized in the Wausau Commercial Liability
Policy. In its Objection, Wausau cites case law for the proposition that
"equitable subrogation rights are superior in priority to perfected bank liens,
even in the absence of UCC filing." The Debtors submit that Wausau's
subornation rights, to the extent valid and existing, do not give rise to a
Secured Claim by Wausau within the meaning of the Bankruptcy Code.
Subrogation does not include or encompass the phrase "equitable
contribution." In fact, equitable contribution exists independently of the
rights of the insured. Id. "Equitable contribution permits reimbursement to the
insurer that paid on the loss for the excess it paid over its proportionate
share of the obligation, on the theory that the debt it paid was equally and
concurrently owed by the other insurers and should be shared by them pro rata
in proportion to their respective coverage of the risk." Id. Wausau and Chubb
are obligated to indemnify or defend the same loss or claim, and as such, may
well have independent rights against each other for equitable contribution.
State Farm Fire and Casualty v. Cooperative of American Physicians, Inc., 163
Cal.App.3d 199, 205, 209 Cal.Rptr. 251, 252 (1984). The Joint Plan and this
Disclosure Statement can do nothing to impact those rights.
Wausau further objects that Nu-kote failed adequately to disclose the
probable recoveries to Creditors. Nu-kote disagrees. The Disclosure Statement
discloses as much information about recoveries on the OEM Litigation as can
reasonably be disclosed considering the confidential nature of such
information.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 110
<PAGE> 119
Wausau further objects that the Disclosure Statement does not disclose
whether or not Nu-kote intends to assume or reject the pre-petition agreements
with Wausau. The Debtors do not believe these agreements are executory and
therefore no assumption/rejection is necessary.
Wausau further objected to the failure of the Debtors to disclose the
purchase price to be paid potentially by Richmont if Richmont is the Successful
Bidder for the stock of the Reorganized Holding. The price to be paid by
Richmont if Richmont is the Successful Bidder is disclosed in the Joint Plan as
$21,150,000, plus up to $3,000,000, or such other amount as Richmont may agree,
for payment of Allowed Administrative Claims, plus the cost associated with
satisfaction of the Other Secured Claims in Class 2 of the Joint Plan, if any.
If Richmont is not the Successful Bidder, the winning bid will be determined by
the Bidding Procedure detailed in the Joint Plan and in this Disclosure
Statement. Based on Nu-kote's analysis of the value of the assets being
purchased in connection with the stock, the liquidation analysis prepared by
the Lenders and Nu-kote's analysis of the administrative and priority claims,
Nu-kote believes that the purchase price will be in the range of $23-25
million.
Wausau further objected that the Debtors' Disclosure Statement
inaccurately indicated that Wausau's claims are against Holding instead of
International. Such clerical error has been corrected.
E. RESPONSE TO THE OBJECTION AND COMMENTS BY THE SEC
1. CREDITORS' RESPONSE
The SEC raised several points. In response, the Creditor Proponents
state first that no warrants are being issued pursuant to the Creditors' Plan.
Additionally, the Disclosure Statement now states that "the availability of
Rule 144 to parties deemed affiliates of Reorganized Holding is dependent on
compliance with the conditions set forth in Rule 144 by each person seeking to
avail himself or herself of the protection set forth in Rule 144." Moreover,
the Disclosure Statement, after deletion of a sentence, now unambiguously
discloses that Interest Holders will receive no distributions under the
Creditors' Plan, and the introductory portion of the Disclosure Statement now
states that holders of equity interests are deemed to have rejected each of the
Competing Plans (by virtue of the cancellation of their interests under each
plan) and are therefore not permitted to vote on either of the Competing Plans.
Article IX, Section I.8(g) reflects a clarification that Allowed Unsecured
Class 4 and 5 Claims are the beneficiaries of the Litigation Trust.
The SEC also expresses a concern regarding the applicability of
securities laws to the interests in the Litigation Trust. Because the interests
in the Litigation Trust are not represented by certificates, the Creditor
Proponents believe that there is no need for registration under the Securities
Exchange Act of 1934.
The SEC also identified a number of additional items that it believed
to be necessary to enable the Creditors' Disclosure Statement to provide the
requisite adequate information:
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 111
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(a) summary information for each class of claimants, including
the number of claimants in the class, the amount of claims of
each class, and the distributions to be received by each
class;
(b) the valuation evidence that the Creditor Proponents intend to
offer at the confirmation hearing to show the zero value of
shareholder interests for purposes of cramdown;
(c) an indication of whether the Creditor Proponents have
prepared a valuation of the Debtors' on a going-concern
basis; and
(d) further disclosure of significant risk factors attendant to
the Creditors' Plan, including any risk factors associated
with the OEM Litigation.
2. DEBTORS' RESPONSE
While not filing a formal objection to the Debtors' Disclosure
Statement, the SEC has expressed concern over the adequacy of disclosures of
current or prior relationships and transactions between Richmont or its control
persons and the Debtors. Nu-kote believes that adequate disclosure has been
given as to Richmont's stock ownership and its officers' positions as directors
of Holding. Richmont has not engaged in any other transactions with the Debtors
other than that Richmont has provided Patrick E. Howard to the Debtors as their
CEO at no cost to the Debtors.
The SEC further questioned the adequacy of the information in the
Debtors' initial disclosure statement regarding the terms of the proposed sale
and the method by which the sale will be determined to be fair and reasonable.
If Richmont is the Purchaser, the terms of the sale are all cash at closing.
The means of determining that the purchase price is fair and reasonable is
four-fold: (1) the Debtors have employed an investment banker (Conway, Del
Genio, Gries) to market actively the Company to determine if there are any
higher and better offers; (2) the Debtors' period of exclusivity has expired
thereby allowing any parties-in-interest to file competing plans with higher
and better offers; (3) the Debtors' liquidation analysis which is a part of the
Disclosure Statement; and (4) the Bidding Procedure established under the Joint
Plan.
The SEC further questioned the adequacy of the information in the
Debtors' Disclosure Statement regarding the release of claims against certain
officers and directors. As disclosed herein, the Lenders previously conducted
their own investigation of such claims and prepared a Notice of Claim which is
described in this Disclosure Statement. The Notice of Claim has been sent to
the Debtors' D&O insurance carriers. The releases for certain of the officers
and directors are also detailed in this Disclosure Statement. Further, the
Examiner has also been appointed to investigate any claims the Debtors might
have against their officers and directors, and the Examiner's report will
provide additional information.
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 112
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F. RESPONSE TO COMMENTS BY PBGC
1. CREDITORS' RESPONSE
The Plan Proponents note that they do not intend to terminate the
pension plan upon Confirmation. The appropriate language regarding this
treatment is incorporated in this Disclosure Statement. Further, the Disclosure
Statement now discloses that International is the "contributing sponsor" of the
Nu-kote International, Inc. Retirement Income Plan (the "PENSION PLAN") and
that, if the Pension Plan terminates, the unfunded benefit liabilities of the
Pension Plan under 29 USC ss.1301(a)(18) and 29 USC ss.1362(b) asserted by the
PBGC are estimated to be $6.3 million. The Disclosure Statement also discloses
that a pension plan covered by Title 4 of ERISA may be terminated in accordance
with the provisions of 29 USC ss.ss. 1341 and 1342, and that (1) the PBGC
administers the mandatory pension plan termination insurance program
established under Title 4 of ERISA; (2) upon termination of an underfunded
pension plan covered by Title 4, the PBGC typically becomes trustee of the plan
and, within certain statutory limits, guarantees the payment of pension
benefits to participants and beneficiaries; and (3) on April 14, 1999, PBGC
filed three claims in the substantively consolidated bankruptcy cases. See
Article VI.A.6.
Moreover, the Disclosure Statement discloses that, under ERISA,
International and each member of its "controlled group," as that term is
defined in 29 USC ss. 1301(a)(14), are jointly and severally liable to the PBGC
for: (1) the "total amount of unfunded benefit liabilities" of the Pension
Plan; (2) the payment of premiums due with respect to the Pension Plan; and (3)
any minimum funding contributions necessary to satisfy the funding standards of
ERISA and the Internal Revenue Code. The PBGC also believes that the Disclosure
Statement should disclose that the sale of the European subsidiaries would
remove those subsidiaries from International's present controlled group and
could deprive the PBGC of the opportunity to recover from them any unfunded
obligations of the Pension Plan if the Pension Plan terminates
post-confirmation, which could place the responsibility for meeting any
unfunded obligations of the Pension Plan solely on the reorganized Debtors. The
PBGC also objects that the Creditors' Disclosure Statement failed to disclose
the impact that termination of the Pension Plan would have on the anticipated
amount of administrative expenses, priority claims, and general unsecured
claims in this case.
2. DEBTORS' RESPONSE
Via a letter to Debtors' counsel, the PBGC requested the insertion of
certain language in the Disclosure Statement. The language requested by the
PBGC has been incorporated above at Article F(a)(6).
G. RESPONSES TO OBJECTIONS BY LEMMER
1. CREDITORS' RESPONSE
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 113
<PAGE> 122
Lori Lemmer, individually and on behalf of a class of securities
claimants, objected to both the Debtors' and Creditors' Disclosure Statements.
In response to the objections to the Creditors' Disclosure Statement, the
Creditor Proponents state that the objection regarding the HP Litigation is now
moot. The Disclosure Statement now identifies the beneficiaries of the
litigation trust as "holders of Allowed Unsecured Class 4 Claims." Moreover,
the Disclosure Statement has been revised to eliminate the language suggesting
that interest holders would receive distributions under the Joint Plan.
Finally, the Disclosure Statement has been revised by the insertion of the
following language after the word "all" in the first line of that section: "of
the Debtors".
2. DEBTORS' RESPONSE
The Lemmer plaintiffs filed an objection to the Debtors' Disclosure
Statement basically alleging two grounds for objection. Initially, the Lemmer
plaintiffs object to the failure to name the price for which the stock of
Holding will be sold. In response, the Debtors assert that while it is not
possible to know the purchase price at this time, the amount of the Lead Bid by
Richmont has been disclosed in the Joint Plan. The Joint Plan establish
detailed Procedures by which an investment banker has been employed to solicit
interest in the purchase of the stock of Holding, and further establishes the
Bidding Procedure by which the stock will be sold. It is this Bidding Procedure
that will ultimately determine both the Successful Bidder and the purchase
price. However, based on Nu-kote's analysis of the value of the assets being
purchased in connection with the stock, the liquidation analysis prepared by
the Lenders and Nu-kote's analysis of the administrative and priority claims,
Nu-kote believes that the purchase price will be in the range of $15-25
million.
Next, the Lemmer plaintiffs object to the distribution order and the
relative priority of their class and the class into which the Lenders'
unsecured claim would be placed if the Debtors commence and succeed on an
equitable subordination action against the Lenders. As set forth above, ss.
510(c) of the Bankruptcy Code provides for subordination "for purposes of
distribution all or part of an allowed claim to all or part of another allowed
claim or all or part of an allowed interest to all or part of another allowed
interest." The Lemmer plaintiffs, as shareholders of Holding, are the holders
of interests. The Lenders, even if their unsecured claims were subordinated
pursuant to ss. 510(c) would still be holders of unsecured claims. Thus, the
unsecured claim of the Lenders could potentially have only been subordinated to
other Allowed Unsecured Claims, not the interests of the Lemmer plaintiffs.
Finally, as set forth above, upon confirmation of the Joint Plan, mutual
releases shall be granted by and between the Debtors and the Lenders.
H. CREDITORS' RESPONSE TO OBJECTIONS OF WELLS FARGO BUSINESS CREDIT,
INC., FORMERLY NORWEST BUSINESS CREDIT, INC.
In connection with its objection, Wells Fargo Business Credit, Inc.,
formerly Norwest Business Credit, Inc. ("WELLS FARGO") provided the Plan
Proponents with several passages of additional language to be inserted into the
Creditors' Plan and the Creditors' Disclosure Statement, along with several
specified changes to those documents. To the extent it
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 114
<PAGE> 123
incorporates the referenced objectionable provisions of the Creditors'
Disclosure Statement, the Disclosure Statement incorporates the additions and
changes specified by Wells Fargo except as stated below.
Wells Fargo also requested language concerning the postpetition
financing claim of Norwest in Article 7, ss. C2(d). The requested language was
added, except for the last sentence now reads, "At the time the Norwest claim
is paid in full, Norwest shall deliver a release of the Norwest lien."
Wells Fargo further objects to the Creditors' Disclosure Statement
because of the failure to provide an initial summary section outlining the
various classes of creditors and their respective treatments. The Plan
Proponents assert that no such initial summary section is needed because the
table of contents includes a section titled Treatment of Classified Claims and
Interests Under the Creditors' Plan, and shows that this section begins on page
57 of the Disclosure Statement.
In addition, Wells Fargo objects because the Disclosure Statement does
not state what entity shall provide the effective date financing under the
Plan. At this time, the Plan Proponents do not have a definitive entity who
will provide the effective date financing. Finally, Wells Fargo requests
certain language be included in Article 7, ss. I.4 be included regarding
Norwest's indemnification rights under the Norwest Agreement. The Plan
Proponents are not required to include such language because ss. 1141(d)(1) of
the Bankruptcy Code states that, except as otherwise provided in the subsection
in the plan or the order confirming the plan, the confirmation of the plan
discharges the debtor from any debt that arose before the date of such
confirmation. The Plan Proponents likewise refute Wells Fargo's assertion that
Article 7, ss. 1.4 needs to be modified to permit the pursuit of administrative
claims.
I. CREDITORS' RESPONSE TO OBJECTIONS OF SPECTRA, INC.
Spectra, Inc. ("SPECTRA"), objected to the description of certain
litigation involving Spectra and International, but these objections are
addressed in the Disclosure Statement. The Disclosure Statement, throughout,
reflects that International, rather than Holding, is the Debtor involved in
this litigation. Moreover, at several places, the Disclosure Statement reflects
the fact that in connection with the court-approved sale of Modular, Inc.
Technology Stockholm, AB ("MIT"), International's rights in respect of its
tortious interference counterclaim against Spectra have been assigned to the
purchaser, and such counterclaims are therefore excluded from the Litigation
Trust under the Creditors' Plan. These facts are reflected in this Disclosure
Statement. In addition, many of the issues raised by Spectra will be resolved
by way of litigation and it is inappropriate to prejudge issues which may
require additional litigation in the content of a disclosure statement.
J. RESPONSES TO PELIKAN HOLDING A.G.'S OBJECTIONS
1. CREDITORS' RESPONSE
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 115
<PAGE> 124
Pelikan Holding A.G. ("PELIKAN") objects first to the Creditors'
Disclosure Statement's failure to attach a copy of the Litigation Trust
Agreement. Creditor Proponents intend to provide Pelikan a copy of the
Litigation Trust prior to the Plan Confirmation hearing.
Pelikan further objects to the failure of the Creditors' Disclosure
Statement to identify the individual who would serve as trustee of the
Litigation Trust and his or her experience, and fails to identify the
individuals who would serve on the Litigation Advisory Committee which would
oversee the trustee as well as their experience. The Creditor Proponents are
unable to respond to this objection with specific names and further information
at this time because such persons are not currently known. This Court, along
with others, has stated that a disclosure statement should contain all
pertinent information presently known to plan proponents. In re Ligon, 50 B.R.
127 (Bankr. M.D. Tenn. 1985) (citing In re Stanley Hotel, Inc., 13 B.R. 926
(Bankr. D.Colo. 1981)). See also In re Cardinal Congregate One, 121 B.R. 760
(S.D. Ohio 1990); In re Microwave Prods. of America, Inc., 100 B.R. 376 (Bankr.
W.D. Tenn. 1989); In re Scioto Valley Mortgage Co., 88 B.R. 168 (Bankr. S.D.
Ohio 1989).
Pelikan also objects that the Creditors' Disclosure Statement fails to
provide a description of the claims that are to be transferred to the Litigation
Trust and contains only a cursory identification of the types of claims which
might exist. With regard to the litigation claims that are to be transferred to
the Litigation Trust, the Disclosure Statement contains all information
presently known to the Plan Proponents. Accordingly, such description is
sufficient to enable a reasonable and typical investor to make an informed
judgment about the Plan. See id.
With regard to Pelikan's objection that the Disclosure Statement fails
to identify the asserted and unasserted claims against the Plan Proponents that
are being released under the Plan, the Plan Proponents note that the lenders
interfered with management at the Debtors during the year prior to the filing
of these cases. The Lenders strongly refute such an allegation; however, such
disclosure is included in the Joint Disclosure Statement.
Pelikan further objects that the Disclosure Statement fails to address
Creditors' rights of set-off and recoupment with regard to claims being
transferred to the Litigation Trust. The Plan Proponents have amended their
Disclosure Statement to address this issue. See Article 7, P. G(2)(d).
Pelikan also objects to the Disclosure Statement because: (1) the
failure to disclose which contracts will be assumed under the proposed Plan
what past defaults of the Debtors will be cured and the source of funds for
curing the defaults, (2) the Plan does not provide for the assumption of the
agreements with Pelikan creating the environmental indemnity as well as that
three of the claims of Pelikan against the Debtors would have to be satisfied
to assume the agreement and that some of the other past defaults of the Debtors
are not curable, (3) the effect on the value of business tort and similar
potential damage claims to be transferred to the Litigation Trust of the
separation of such claims from the operating business, (4) any estimate of the
size of the unsecured Class 4A claims, (5) the source of funds for payment of
administrative claims or expenses. The Plan
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 116
<PAGE> 125
Proponents respond by noting that at this time it is unknown which executory
contracts will be assumed under the Plan. Accordingly, the Plan Proponents
cannot make more detailed disclosures with regard to executory contracts and
unexpired leases. See id. The Plan Proponents further assert that there will be
no effect on the value of the business when the tort claims are transferred to
the Litigation Trust. In addition, it is not necessary for the Plan Proponents
to estimate the size of the unsecured Class 4A claims as any such estimation is
not known at this time. Further, the Plan Proponents do not have a definitive
lender for exit financing at this time.
Pelikan also objects that the Disclosure Statement does not disclose
the effect of Texas law on the ability of the Debtors to assign tort claims to
the Litigation Trust. The Plan Proponents respond by noting that to the extent
that any tort claim cannot be transferred to the Litigation Trust, it will be
retained by the Reorganized Debtors.
Finally, Pelikan objects that the Disclosure Statement does not
disclose the effect of the lack of an agreement by the Lenders to vote the
unsecured Class 4A claims in favor of a plan, which would allow Lenders to
alter the effect of the Plan through voting their Class 4A claims against the
Plan. The Plan Proponents respond by noting that the Creditors' Plan already
addresses this issue in Article 4, ss. 4.1(b).
2. DEBTORS' RESPONSE
Pelikan Holding objected to the Debtors' Disclosure Statement
asserting an (1) alleged failure to disclose which contracts will be assumed
under the proposed Joint Plan what alleged past defaults of the Debtors will be
cured and the source of funds for curing the defaults, (2) alleged failure of
the Joint Plan to provide for the assumption of the agreements with Pelikan
Holding creating the environmental indemnity as well as that three of the
claims of Pelikan Holding against the Debtors would, according to Pelikan
Holding, have to be satisfied to assume the agreement and that some of the
other past defaults of the Debtors are not curable, (3) alleged lack of
disclosure of defenses to the environmental indemnity obligations of Pelikan
Holding, and (4) alleged lack of discussion of the claims against management
which are to be released under the Joint Plan.
In response, the Debtors point to the discussion at Article E(j)(3)
including the discussion at footnote 2. This discussion sets forth the Debtors
position that the Debtors' do not believe that assumption of the referenced
agreements is necessary as they are not executory in nature because Pelikan
Holding has fully performed its obligations thereunder. However, should the
Debtors deem further action necessary, all appropriate steps to assume same
will be taken. The Joint Plan does not specifically list all contracts the Plan
Proponents believe to be executory. To the extent further action with regard to
the pre-petition agreements with Pelikan Holding is deemed necessary, same will
be taken in accordance with the provisions for assumption of executory
contracts in Article IX of the Joint Plan. Further, the process seeking a
potential resolution of all claims and defenses asserted by Pelikan Holding, in
the context of resolution of the motion for relief from stay filed by Pelikan
Holding, is ongoing. Finally, as disclosed herein, the Lenders previously
conducted their own investigation of such claims and prepared a Notice of Claim
which,
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 117
<PAGE> 126
along with the allegations made therein, is described in this Disclosure
Statement. The Notice of Claim has been sent to the Debtors' D&O insurance
carriers. The releases for certain of the officers and directors are also
detailed in this Disclosure Statement. Further, the Examiner has also been
appointed to investigate any claims the Debtors might have against their
officers and directors, and the Examiner's report will provide additional
information.
K. CREDITORS' RESPONSE TO OBJECTIONS OF PATRICK E. HOWARD AND JOHN P.
ROCHON
Patrick E. Howard ("HOWARD") and John P. Rochon ("ROCHON") filed
numerous objections to the Creditors' Disclosure Statement. A majority of the
objections are now moot because they are discussed more fully in the Disclosure
Statement or the Second Amended Creditors' Plan of Reorganization. These moot
objections include Howard and Rochon's statements that:
(a) The Disclosure Statement provides an inaccurate and outdated
description of certain litigation.
(b) The Disclosure Statement provides no disclosure of any basis
for disparate distribution of net recoveries between Class 4
and 5 Claims.
(c) The Disclosure Statement fails to disclose adequate
information regarding purported claims under the D and O
insurance policies.
(d) The Disclosure Statement provides inadequate disclosure
regarding Effective Date Financing.
(e) The Disclosure Statement provides inadequate information
regarding the treatment of Norwest's Claim.
(f) The Disclosure Statement contains inconsistent and confusing
statements regarding distribution to Class 6 Interests.
(g) The Disclosure Statement provides inadequate information
regarding the release afforded to Plan Proponents.
(h) The Disclosure Statement contains an inaccurate or misleading
description of the factors precipitating the Chapter 11 case.
(i) The Disclosure Statement contains inaccurate or misleading
statements regarding the value of Debtors' assets and
operations.
Howard and Rochon also believe that the Creditors' Disclosure
Statement provides misleading information respecting the consensus between the
Creditors and the Lenders, that the Disclosure Statement provides no disclosure
of any basis for the Lenders' assertion of a lien against tort actions, that
the Disclosure Statement provides inadequate
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 118
<PAGE> 127
disclosure regarding the treatment of the secured claims of the Lenders, that
the Disclosure Statement fails to disclose potential claims for substantial
contribution, and that the Disclosure Statement provides inadequate information
regarding the release afforded to the Plan Proponents.
Howard and Rochon further object that the Disclosure Statement fails
to provide adequate information regarding any expectation of anticipated value
from the Litigation. The Plan Proponents respond by noting that Howard is the
CEO, and Howard and Rochon are the proposed purchasers of the Debtors under the
Debtors' Plan; accordingly, Howard and Rochon are aware of the fact that any
estimation of anticipated value from the liquidation is difficult, if not
impossible. With regard to Howard and Rochon's objection that the Disclosure
Statement provides no disclosure of the expected claims base which will
participate in the Net Recoveries from the Litigation Trust, the Plan
Proponents note that at this time, the parties listed in Debtors' Schedule F is
the best estimate of this group. In addition, the Plan Proponents respond to
Howard and Rochon's objections that the Disclosure Statement provides no
estimate of administrative expenses and provides no analysis of avoidance
actions, that again, Howard and Rochon, as insiders of the Debtors, are aware
of the fact that such estimations are difficult, if not impossible, to make at
this time. Any additional objections by Howard and Rochon are confirmation
issues and are not relevant to the hearing on the Disclosure Statement.
Howard and Rochon listed three objections to the Creditors' Disclosure
Statement in a Supplemental Objection. Howard and Rochon first stated that the
Creditors' Disclosure Statement did not contain up-to-date information
regarding the Debtors' post-petition operations.
Howard and Rochon further objected that the Disclosure Statement
failed to disclose proposed new management and the persons in control of the
proposed Trust and Litigation Trust. In addition, Howard and Rochon objected
that the Plan discriminates unfairly against the holders of Class 4(b) Claims.
Moreover, the Plan Proponents believe the above objections are moot due to the
agreement between the Lenders, the Committees, Richmont and the Debtors as
evidenced by the Creditors' and Debtors' Joint Plan of Reorganization.
L. DEBTORS' RESPONSE TO OBJECTIONS BY PAGLIARA
Mr. Pagliara, a shareholder of Holding, objected to the Debtors'
Disclosure Statement on three bases: the failure to provide recent financial
information, an inadequate discussion of the HP Litigation, and a delay in
distribution of information to the shareholders of Holding due to the fact that
they hold their stock in street name. In response, the Debtors believe that the
financial information provided in the Disclosure Statement is the most recent
and most accurate information available for the purposes for which it is
provided. For example, numerous references are made to assets as they existed
on the Petition Date. To the extent that Mr. Pagliara desires additional
financial information, access to the Debtors' Six Month Budget and Monthly
Operating Reports is available to the public from the filings with the
Bankruptcy Court and the Office of the
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 119
<PAGE> 128
United States Trustee. Secondly, Mr. Pagliara's objections regarding the HP
Litigation description are largely moot. Finally, the stock of Holding is
contemplated to be canceled under the Debtors' Plan. The shareholders of
Holding are numerous and, as Mr. Pagliara's objection indicates, contacting
each and every one might prove extremely difficult as much of the stock is held
in street name. In such a situation, notice to shareholders is often limited or
subjected to procedures fashioned and deemed sufficient by the Bankruptcy
Court. Often, under these circumstances, notice of the existence of documents
as opposed to copies of the documents themselves and the effect on the subject
stock are provided to the shareholders and/or the clearing houses through which
they can be contacted. Delivery of a copy of the Disclosure Statement to every
shareholder of Holding would be cost prohibitive, is not necessary given that
all shareholders of Holding are deemed to have rejected the Joint Plan and the
solicitation of shareholder votes is thus unnecessary, and notice to Mr.
Pagliara of the existence and filing of the Joint Plan is therefore sufficient.
M. DEBTORS' RESPONSE TO OBJECTIONS BY STATE OF TENNESSEE
The Tennessee Department of Employment Security and the Tennessee
Department of Environment and Conservation filed an objection to the Debtors'
Disclosure Statement on the stated basis that the Debtors failed to provide
adequate information regarding the voluntary environmental cleanup program to
which the Debtors are a party via a Consent Order and Agreement. To provide
additional information about the environmental situation at the Franklin,
Tennessee facility and the cleanup program, the Debtors added an extended
discussion at Article E(j)(3) above, incorporating in large part the suggested
language of the above-referenced Tennessee Departments.
ARTICLE XVII. RECOMMENDATION OF PLAN PROPONENTS
The Plan Proponents believe that the Joint Plan is in the best
interests of the Debtors' Creditors. Accordingly, the Plan Proponents
unanimously recommend that you vote for acceptance of the Joint Plan and hereby
solicit your acceptance of the Joint Plan.
DATED: NOVEMBER _______, 1999.
THE DEBTORS:
NU-KOTE HOLDING, INC.; NU-KOTE IMPERIAL, LTD.;
NU-KOTE INTERNATIONAL, INC.; NU-KOTE IMAGING
INTERNATIONAL, INC.; INTERNATIONAL COMMUNICATION
MATERIALS, INC.; FUTURE GRAPHICS, INC.; NU-KOTE
LATIN AMERICA, INC., JOINTLY AND SEVERALLY
By:
------------------------------------------------
Patrick E. Howard, President
DISCLOSURE STATEMENT FOR JOINT PLAN OF REORGANIZATION FOR NU-KOTE 120
<PAGE> 129
HANCE | SCARBOROUGH | WRIGHT
By:
--------------------------------
Frank J. Wright
C. Ashley Ellis
2900 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270-2101
(214) 742-2900 - Telephone
(214) 748-6815 - Facsimile
and
HARWELL HOWARD HYNE GABBERT
& MANNER, P.C.
BY:
--------------------------------
Craig V. Gabbert, Jr.
Barbara D. Holmes
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238
(615) 256-0500 - Telephone
(615) 251-1059 - Facsimile
ATTORNEYS FOR THE DEBTORS
THE LENDERS:
VINSON & ELKINS L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, TX 75201
Tel: (214) 220-7700
By:
-------------------------------
Daniel C. Stewart SBT #19206500
DISCLOSURE STATEMENT FOR JOINT PLAN OF
REORGANIZATION FOR NU-KOTE 121
<PAGE> 130
William L. Wallander SBT #20780750
and
BASS, BERRY & SIMS PLC
2700 First American Center
Nashville, Tennessee 37238
Tel. (615) 742-6267
By:
-------------------------------------------
Paul Jennings
AUTHORIZED ATTORNEYS IN FACT FOR THE
LENDERS
THE COMMITTEES
GREENEBAUM DOLL & MCDONALD PLC
3300 National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
Tel: (502) 587-3656
By:
-------------------------------------------
John W. Ames
ATTORNEYS FOR UNSECURED CREDITORS
COMMITTEE FOR NU-KOTE INTERNATIONAL, INC.
POYNER & SPRUILL, LLP
100 N. Tryon Street, Suite 4000
Charlotte, NC 28202-4010
Tel: (704) 342-5250
By:
-------------------------------------------
Judy Thompson
ATTORNEYS FOR UNSECURED CREDITORS
COMMITTEE FOR INTERNATIONAL
COMMUNICATION MATERIALS, INC.
DISCLOSURE STATEMENT FOR JOINT PLAN OF
REORGANIZATION FOR NU-KOTE 122
<PAGE> 131
KURLBAUM STOLL SEAMAN & MUSTOE, P.C.
1100 Main Street, Suite 2001
Kansas City, MO 64105
Tel: (816) 221-5444
By:
-------------------------------------------
Thomas G. Stoll
and
ORTALE, KELLEY, HERBERT & CRAWFORD
Third Floor, Noel Place
200 Fourth Avenue North
P. O. Box 198985
Nashville, TN 37219-8985
Tel: (615) 656-9999
By:
-------------------------------------------
John C. Rochford
ATTORNEYS FOR UNSECURED CREDITORS
COMMITTEE FOR FUTURE GRAPHICS, INC.
DISCLOSURE STATEMENT FOR JOINT PLAN OF
REORGANIZATION FOR NU-KOTE 123
<PAGE> 1
EXHIBIT 99.2
UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
IN RE: .
.
.
NU-KOTE HOLDING, INC. .
.
NU-KOTE IMPERIAL, LTD. .
.
NU-KOTE INTERNATIONAL, INC. .
.
NU-KOTE IMAGING INTERNATIONAL, .
INC. . JOINTLY ADMINISTERED AND
. SUBSTANTIVELY CONSOLIDATED
. UNDER CASE NO. 398-10600
INTERNATIONAL COMMUNICATION .
MATERIALS, INC. . CHAPTER 11
.
FUTURE GRAPHICS, INC. . JUDGE KEITH M. LUNDIN
.
NU-KOTE LATIN AMERICA, INC. .
.
DEBTORS .
.
SECOND AMENDED DISCLOSURE STATEMENT FOR SECOND AMENDED
JOINT PLAN OF REORGANIZATION FOR NU-KOTE
(DATED: MARCH 2, 2000)
SECOND AMENDED DISCLOSURE STATEMENT
<PAGE> 2
TABLE OF CONTENTS
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INTRODUCTION..................................................................................................1
ARTICLE I. FACTORS PRECIPITATING CHAPTER 11 CASE.............................................................4
ARTICLE II. PURPOSE OF CHAPTER 11............................................................................7
ARTICLE III. CERTAIN RISK FACTORS............................................................................7
A. Factors Relating to Chapter 11 and the Joint Plan...............................................7
1. Insufficient Acceptances...............................................................7
2. Confirmation Risks.....................................................................8
3. Business Risks.........................................................................8
4. Litigation Risks.......................................................................8
ARTICLE IV. DESCRIPTION OF DEBTORS' BUSINESS................................................................9
A. Summary.........................................................................................9
B. Background and Structure of the Company.........................................................9
1. Nu-kote Holding, Inc..................................................................10
2. Nu-kote Imperial, Ltd.................................................................11
3. Nu-kote International, Inc............................................................12
4. Nu-kote Imaging International, Inc....................................................12
5. International Communication Materials, Inc............................................12
6. Future Graphics, Inc..................................................................12
7. Nu-kote Latin America, Inc............................................................12
C. Current Officers and Directors of Nu-kote......................................................13
D. Historical And Renewed Retention Agreements with Key Nu-kote
Employees......................................................................................14
1. Historical Retention Agreements.......................................................14
2. New and Renewed Retention Agreements..................................................14
E. Prepetition Information: Historical Perspective on the Industry...............................15
F. Nu-kote's Place in the Office Products Market..................................................16
G. Nu-kote's Market Segmentation..................................................................17
ARTICLE V. ASSETS OF NU-KOTE..............................................................................18
A. Cash...........................................................................................18
B. Inventory......................................................................................18
C. Trademarks.....................................................................................19
D. Patents........................................................................................19
E. Receivables....................................................................................19
F. Real Property..................................................................................19
G. Machinery, Fixtures and Equipment..............................................................20
H. Stock..........................................................................................20
I. The OEM Litigation.............................................................................20
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SECOND AMENDED DISCLOSURE STATEMENT ii
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1. Hewlett-Packard Company...............................................................20
2. Seiko Epson Corp......................................................................24
3. Canon USA, Inc........................................................................26
J. Other Claims and Causes of Action..............................................................27
1. Preferential Transfers/Fraudulent Transfers...........................................27
2. Potential Claims Against Glass & Associates...........................................27
3. Claims Against Pelikan Holding........................................................28
4. Settlement of the Declaratory Judgment Action Against the
Lenders Asserted by the Debtors.......................................................29
5. Settlement of Potential Subordination of the Lenders'
Unsecured Claims Asserted by the Debtors..............................................29
6. Potential Cause of Action Against the Officers and Directors
of Nu-kote............................................................................30
K. Intercompany Payables and Receivables..........................................................31
ARTICLE VI. LIABILITIES OF THE DEBTORS.....................................................................32
A. Administrative Expenses .......................................................................32
1. Professionals.........................................................................32
2. Payment of Professionals Employed Pursuant to ss.330
of the Bankruptcy Code................................................................34
3. Norwest Business Credit, Inc..........................................................34
4. Retention Agreements with Key Employees...............................................35
5. Administrative Claims Asserted by the Litigating OEMs.................................35
6. Administrative Claim Asserted by the PBGC.............................................35
7. Administrative Claim Asserted by Wausau...............................................36
8. Other Asserted Administrative Claims..................................................36
B. Secured Claims.................................................................................37
1. Secured Claim of the Lenders..........................................................37
(a) The US Facility..............................................................37
(b) The UK and Swiss Facilities..................................................38
2. Other Asserted Secured Claims.........................................................38
C. Priority Claims................................................................................39
1. Priority Wage Claims..................................................................39
2. Priority Tax Claims...................................................................39
3. Other Asserted Priority Claims........................................................39
D. Unsecured Claims...............................................................................40
1. Scheduled Unsecured Claims: Inclusive of Intercompany
Payables..............................................................................40
2. Scheduled Unsecured Claims: Exclusive of Intercompany
Payables..............................................................................40
3. Unsecured Claims Asserted Against the Debtors.........................................40
4. Particular Asserted Claims in Excess of $500,000......................................41
(a) Abdiraham Aden...............................................................41
(b) Fay, Sharpe, Beall, Fagan, Minnich & McKee, LLP..............................41
(c) Keller Crescent Company, Inc.................................................41
(d) Coudert Brothers.............................................................41
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SECOND AMENDED DISCLOSURE STATEMENT iii
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(e) Employers Insurance of Wausau................................................41
(f) Pelikan Holding, AG..........................................................42
(g) Williams Die & Mold, Inc.....................................................42
E. Pending Litigation Against the Debtors.........................................................42
1. Lori Lemmer, et al. v. Nu-kote Holding, Inc,
Case No. 3:98-CV-0161-T...............................................................42
2. Spectra, Inc. v. Nu-kote International, Inc. & Modular Ink I
Stockholm, AB, Case No. 98-CV-130-JD..................................................42
3. Rock-Tenn Co. v. Nu-kote International, Inc.,
Case No. 125633.......................................................................43
4. Abdirahman A. Aden v. Nu-kote International, Inc.,
Case No. 398- 0365....................................................................43
F. Environmental and Regulatory Matters...........................................................43
ARTICLE VII. CHAPTER 11 CASES...............................................................................45
A. Filing of Petition.............................................................................45
B. First Day Administration.......................................................................46
C. Adversary Proceeding...........................................................................46
D. Cash Collateral................................................................................46
E. DIP Financing..................................................................................47
F. Substantive Consolidation......................................................................49
G. Epson's Unsuccessful Attempt to Lift the Automatic Stay........................................49
H. Epson's Violation of the First to File Rule....................................................50
I. Financing the OEM Lawsuits.....................................................................51
J. Exclusivity....................................................................................52
K. Retention of Conway, Del Genio Gries & Co., LLC................................................52
L. Claims Bar Date................................................................................53
M. The Committees.................................................................................53
N. Ratification of European Agreements............................................................53
O. Sale of Certain European Subsidiaries..........................................................54
1. Sale of MIT...........................................................................54
2. The Sale of European Entities.........................................................54
P. Settlement with Blair and Ridenour.............................................................56
Q. Settlement with Hewlett-Packard Company........................................................57
R. Appointment of Examiner........................................................................57
S. Administrative Claims Bar Date.................................................................58
ARTICLE VIII. FINANCIAL INFORMATION AND FUTURE OPERATIONS....................................................58
A. Historical and Postpetition Financial Information: Nu-kote's
Results of Operations..........................................................................58
B. Future Operations of the Reorganized Debtors...................................................60
1. The Future of the Market..............................................................60
2. Strategic Goals & Objectives..........................................................60
3. Sales & Marketing.....................................................................61
4. Accounts & Sku's......................................................................61
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SECOND AMENDED DISCLOSURE STATEMENT iv
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5. Logistics & Manufacturing.............................................................61
6. Outsourcing...........................................................................61
7. Trade Credit..........................................................................62
8. Information Systems...................................................................62
9. Future Financial Performance..........................................................62
ARTICLE IX. DISCUSSION OF THE JOINT PLAN...................................................................62
A. Summary of the Joint Plan......................................................................62
B. Classification and Treatment of Claims.........................................................63
1. Treatment of Unclassified Claims......................................................63
(a) Deadline for Filing Administrative Claims....................................63
(b) Payment of Allowed Administrative Claims.....................................63
(c) Fee Claims of Professionals Other than Committees, Professionals.............64
(d) Fee Claims of the Committees' Professionals..................................64
(e) Payment of Administrative Tax Claims.........................................64
(f) Payment of Priority Tax Claims...............................................64
(g) Payment of Norwest Claim.....................................................65
(h) Payment of Fees to U.S. Trustee..............................................65
2. Treatment of Classified Claims........................................................65
(a) Class 1 - Secured Claims of the Lenders......................................65
(b) Class 2 - Other Secured Claims...............................................66
(c) Class 3 - Unsecured Claims...................................................68
(d) Class 4 - Common Stock.......................................................69
C. Implementation of the Joint Plan: A Successful Bidder.........................................70
1. The Proposed Purchaser: Richmont......................................................70
2. Richmont's Obligation to Close........................................................70
3. The Letter of Credit..................................................................71
4. The Bidding Procedure.................................................................71
(a) Solicitation.................................................................71
(b) Information to Third Parties.................................................71
(c) Overbids.....................................................................72
(i) Overbid Deadline.....................................................72
(ii) Overbid Requirements.................................................72
(iii) Richmont Deposit Requirement.........................................73
(iv) Overbid Process......................................................74
(d) Right to Reject Bids.........................................................74
(e) Bidding Procedure Disputes...................................................74
5. Failure of the Successful Bidder to Close.............................................74
6. Failure of the Joint Plan to be Confirmed.............................................75
7. Distribution of Assets................................................................75
8. The Reorganized Debtors...............................................................75
9. Officers and Directors................................................................75
10. Funding of the Causes of Action .....................................................75
11. Authority for Settlement of Causes of Action and Releases.............................76
12. Payment of Fees to the U.S. Trustee...................................................76
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SECOND AMENDED DISCLOSURE STATEMENT v
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D. Implementation of the Joint Plan: The Trust Triggering Event...................................76
1. Effective Date Entities...............................................................76
2. Transfer of the Litigation by the Debtors to the Litigation Trust.....................76
(a) Purposes for the Litigation Trust............................................77
(b) Prosecution of the Litigation Trust..........................................77
(c) Management of the Litigation Trust and Litigation Advisory Board.............77
(d) Beneficiaries of the Litigation Trust........................................77
3. Transfer of Trust Shares to the Trust.................................................77
(a) Purposes for the Trust.......................................................77
(b) Management of the Trust and Trust Advisory Board.............................78
(c) Incorporation of Ink Jet Subsidiary and Transfer of Assets...................78
(d) Sale of the Trust Shares and the Retained Assets.............................78
(e) Beneficiaries of the Trust...................................................78
4. Effective Date Financing..............................................................78
5. Board of Directors and Officers.......................................................78
6. Payment of Fees to the U.S. Trustee...................................................79
E. Releases.......................................................................................79
F. Permanent Injunction...........................................................................80
G. Acceptance and Confirmation of the Joint Plan..................................................81
1. Requirements for Confirmation.........................................................81
H. The Joint Plan Meets All of the Requirements for Confirmation..................................82
ARTICLE X. ALTERNATIVES TO THE JOINT PLAN.................................................................83
A. Analysis of Liquidation under Chapter 7........................................................83
B. Alternatives under Chapter 11..................................................................84
ARTICLE XI. VOTING PROCEDURES..............................................................................85
A. Classes Entitled to Vote on the Joint Plan.....................................................85
B. Persons Entitled to Vote on the Joint Plan.....................................................85
C. Vote Required for Class Acceptance.............................................................86
D. Voting Instructions............................................................................86
1. Ballots and Voting....................................................................86
2. Returning Ballots and Voting Deadline.................................................87
3. Incomplete or Irregular Ballots.......................................................87
4. Changing Votes........................................................................88
E. Contested and Unliquidated Claims..............................................................88
F. Possible Reclassification of Creditors and Interest Holders....................................88
ARTICLE XII. MISCELLANEOUS PROVISIONS.......................................................................88
A. Request for Relief under Section 1129(b).......................................................88
B. The Joint Plan is Confirmable Under ss.1129(b) of the Bankruptcy
Code...........................................................................................89
1. The Joint Plan Meets the "Best Interest of Creditors" Test............................89
2. The Joint Plan is Feasible............................................................89
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3. The Joint Plan Meets the Cramdown Standard With Respect
to Any Impaired Class of Claims Rejecting the Joint Plan..............................90
C. Modification...................................................................................90
D. Further Assurances and Authorizations..........................................................90
E. Agreements between the Plan Proponents.........................................................90
ARTICLE XIII. SECURITIES LAW CONSIDERATIONS..................................................................90
A. Registration of Plan Securities/Reporting Requirements.........................................92
ARTICLE XIV. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE JOINT PLAN......................................92
A. Federal Income Tax Consequences if There is a Successful Bidder................................93
1. Tax Consequences to the Debtors.......................................................93
(a) Gain or Loss on Non-cash Payments............................................93
(b) Discharge of Indebtedness....................................................93
(c) Limitations on Net Operating Losses..........................................94
2. Tax Consequences to Creditors.........................................................95
(a) Overview.....................................................................95
(b) Realization and Recognition of Gain or Loss in
General......................................................................95
3. Tax Consequences to Holders of Interests..............................................96
B. Federal Income Tax Considerations if There is a Trust Triggering
Event..........................................................................................96
1. Federal Income Tax Consequences to the Debtors........................................96
(a) Gain or Loss on Non-cash Payments............................................96
(b) Discharge of Indebtedness....................................................96
(c) Limitations on Net Operating Losses..........................................97
2. Tax Consequences to Creditors.........................................................99
(a) Overview.....................................................................99
(b) Realization and Recognition of Gain or Loss
in General...................................................................99
(c) Certain Tax Consequences of the Joint Plan
to Creditors.................................................................99
C. Certain Tax Consequences of the Joint Plan to Holders of Interests............................100
ARTICLE XV. EFFECTIVE DATE TRANSACTIONS...................................................................101
ARTICLE XVI. RESPONSES TO OBJECTIONS TO PRIOR DISCLOSURE STATEMENTS........................................101
A. Response to Objections by Canon...............................................................101
1. Creditors' Response..................................................................101
2. Debtors' Response....................................................................102
B. Response to Objections by Epson...............................................................104
1. Creditors' Response..................................................................104
2. Debtors' Response....................................................................106
C. Debtors' Response to Objections by Hewlett-Packard............................................112
</TABLE>
SECOND AMENDED DISCLOSURE STATEMENT vii
<PAGE> 8
<TABLE>
<S> <C> <C>
1. Plan Proponents' Response............................................................112
D. Response to Objections by Wausau..............................................................112
1. Creditors' Response..................................................................112
2. Debtors' Response....................................................................114
E. Response to the Objection and Comments by the SEC.............................................118
1. Creditors' Response..................................................................118
2. Debtors' Response....................................................................119
3. The Plan Proponents Additional Response to the SEC...................................120
F. Response to Comments by PBGC..................................................................120
1. Creditors' Response..................................................................120
2. Debtors' Response....................................................................120
G. Responses to Objections by Lemmer.............................................................121
1. Creditors' Response..................................................................121
2. Debtors' Response....................................................................121
H. Creditors' Response to Objections of Wells Fargo Business Credit,
Inc., Formerly Norwest Business Credit, Inc...................................................123
I. Creditors' Response to Objections of Spectra, Inc.............................................123
J. Responses to Pelikan Holding A.G.'s Objections................................................124
1. Creditors' Response..................................................................124
2. Debtors' Response....................................................................125
K. Debtors' Response to Objections by Pagliara...................................................126
L. Debtors' Response to Objections by State of Tennessee.........................................126
M. Plan Proponents Response to Objections by Coudert Brothers....................................127
N. Plan Proponents Response to Objections by the U.S. Trustee....................................127
ARTICLE XVII. RECOMMENDATION OF PLAN PROPONENTS.............................................................128
</TABLE>
SECOND AMENDED DISCLOSURE STATEMENT viii
<PAGE> 9
INTRODUCTION
This Disclosure Statement ("DISCLOSURE STATEMENT") and the accompanying
Ballots are being furnished by the Debtors, the Lenders and the Committees
(collectively referred to as the "PLAN PROPONENTS") to the holders of Claims
against and Interests in the Debtors pursuant to Section 1125 of the United
States Bankruptcy Code in connection with the solicitation of ballots for the
acceptance of the Joint Plan of Reorganization for Nu-kote (the "JOINT PLAN")
under Chapter 11 ("CHAPTER 11") of Title 11 of the United States Code (the
"BANKRUPTCY CODE") filed by the Plan Proponents. Capitalized terms used in this
Disclosure Statement and not defined herein shall have their respective meanings
set forth in the Joint Plan or, if not defined in the Joint Plan, as defined in
the Bankruptcy Code.
On November 6, 1998, the Debtors filed their Voluntary Petitions for
Relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court,
Middle District of Tennessee, Nashville Division (the "BANKRUPTCY COURT"). On
March 2, 2000, the Plan Proponents filed the Joint Plan. On _______________,
2000, after notice and hearing, the Bankruptcy Court approved this Disclosure
Statement and authorized the Plan Proponents to solicit votes with respect to
the Joint Plan.
The purpose of this Disclosure Statement is to enable those persons
whose Claims against and Interests in the Debtors are Impaired and entitled to
vote under the Joint Plan to make an informed decision with respect to the Joint
Plan before exercising their rights to vote to accept or reject the Joint Plan.
On ______________, 2000, after notice and a hearing, this Disclosure Statement
was approved by the Bankruptcy Court as containing information, of a kind and in
sufficient detail, to enable persons whose votes are being solicited to make an
informed judgment with respect to acceptance or rejection of the Joint Plan. A
copy of the Bankruptcy Court's order approving this Disclosure Statement and
establishing procedures for voting on the Joint Plan (the "APPROVAL ORDER") is
attached as Exhibit "A" to this Disclosure Statement. The Bankruptcy Court's
approval of this Disclosure Statement does not constitute either a guarantee of
the accuracy or completeness of the information contained herein or an
endorsement of any of the information contained in this Disclosure Statement or
the Joint Plan.
Holders of Claims should read this Disclosure Statement and the Joint
Plan in their entirety before voting on the Joint Plan. No solicitation of votes
with respect to the Joint Plan may be made except pursuant to this Disclosure
Statement. No statement or information concerning the Debtors (particularly as
to results of operations or financial condition, or with respect to
distributions to be made under the Joint Plan) or any of the respective assets,
properties or businesses of the Debtors that is given for the purpose of
soliciting acceptances or rejections of the Joint Plan is authorized, other than
as set forth in this Disclosure Statement. In the event of any inconsistencies
between the provisions of the Joint Plan and this Disclosure Statement, the
provisions of the Joint Plan shall control. A copy of the Joint Plan is attached
hereto as Exhibit "G" to this Disclosure Statement.
SECOND AMENDED DISCLOSURE STATEMENT 1
<PAGE> 10
After carefully reviewing this Disclosure Statement and all exhibits
and schedules attached hereto, please indicate your acceptance or rejection of
the Joint Plan by voting in favor of or against the Joint Plan on the enclosed
Ballot. Then, except as provided below, RETURN THE BALLOT TO LAIN FAULKNER &
CO., P.C. (THE "TABULATION AGENT") IN THE ENCLOSED, POSTAGE-PAID, RETURN
ENVELOPE IN SUFFICIENT TIME TO BE RECEIVED NO LATER THAN 4:00 P.M., CENTRAL
STANDARD TIME, ON _______________, 2000 (THE "VOTING DEADLINE").
THE PLAN PROPONENTS BELIEVE THAT ACCEPTANCE OF THE JOINT PLAN IS IN THE
BEST INTERESTS OF ALL CLAIMANTS OF THE DEBTORS AND, CONSEQUENTLY, THE PLAN
PROPONENTS URGE ALL CLAIMANTS TO VOTE TO ACCEPT THE JOINT PLAN.
Any Ballots received after the Voting Deadline will not be counted
(unless otherwise ordered by the Bankruptcy Court). Ballots that are received
after the Voting Deadline may not be used in connection with the Plan
Proponents' request for confirmation of the Joint Plan or any modification
thereof, except to the extent allowed by the Bankruptcy Court. See "Voting
Procedures--Voting Instructions--Returning Ballots and Voting Deadline."
This Disclosure Statement has been compiled by the Plan Proponents to
accompany the Joint Plan based upon information provided by the Debtors. The
factual statements, projections, financial information, and other information
contained in this Disclosure Statement have been taken from documents prepared
by the Debtors, including the Debtors' March 31, 1998 and March 31, 1997 Form
10K's publicly filed with the Securities & Exchange Commission, the Debtors'
unaudited Amended Schedules and Statement of Financial Affairs, the Debtors'
Monthly Operating Reports, pleadings filed in the Bankruptcy Cases, and
information obtained in the Chapter 11 Case. The Lenders and Committees have
relied upon the Debtors and their professionals regarding the inclusion of
certain information in this Disclosure Statement, and therefore make no
representations or warranties to the correctness or accuracy thereof. Any
information provided in the Disclosure Statement should not be relied upon
unless such information has been independently verified. Nothing contained in
this Disclosure Statement shall have any preclusive effect against the Plan
Proponents (whether by waiver, admission, estoppel or otherwise) in any cause or
proceeding which may exist or occur in the future. This Disclosure Statement
shall not be construed or deemed to constitute an acceptance of fact or an
admission by the Plan Proponents as regards any of the statements made herein,
and all rights and remedies of the Plan Proponents are expressly reserved in
this regard. This Disclosure Statement contains statements which constitute the
Debtors', Lenders, Committees or other third parties view of certain facts. All
such disclosures should be read as assertions of such parties. To the extent any
paragraph does not contain an express reference that it constitutes an assertion
of a particular party, it should be read as an assertion of the party indicated
by the context and meaning of such paragraph.
The statements contained in this Disclosure Statement are made as of
the Petition Date hereof unless another time is specified herein, and neither
delivery of this Disclosure Statement nor any exercise of rights granted in
connection with the Joint Plan shall, under
SECOND AMENDED DISCLOSURE STATEMENT 2
<PAGE> 11
any circumstances, create an implication that there has been no change in the
information set forth herein since the date of this Disclosure Statement.
Certain of the information contained in this Disclosure Statement, by
its nature, is forward looking, contains estimates and assumptions which may
prove to be inaccurate, and contains projections which may prove to be wrong, or
which may be materially different from actual future results.
Each Claimant should independently verify and consult its individual
attorney and accountant as to the effect of the Joint Plan on such individual
Claimant or Interest holder.
For convenience of all parties, material terms of the Joint Plan are
summarized in this Disclosure Statement. Although the Plan Proponents believe
that this Disclosure Statement accurately describes the material provisions of
the Joint Plan, all summaries of the Joint Plan contained in this Disclosure
Statement are qualified by the Joint Plan itself, the exhibits thereto, and the
documents described therein, which control in the event of any inconsistency or
incompleteness. Accordingly, the Plan Proponents strongly urge each recipient
entitled to vote on the Joint Plan to review carefully the contents of this
Disclosure Statement, the Plan, and the other documents that accompany or are
referenced in this Disclosure Statement in their entirety before making a
decision to accept or reject the Joint Plan.
IT IS OF THE UTMOST IMPORTANCE TO THE PLAN PROPONENTS THAT YOU VOTE
PROMPTLY TO ACCEPT THE JOINT PLAN BY COMPLETING AND SIGNING THE BALLOT ENCLOSED
HEREWITH AND RETURNING IT TO THE TABULATION AGENT, LAIN FAULKNER & CO., P.C. AT
THE ADDRESS SET FORTH IN THE BALLOT INSTRUCTIONS THAT ACCOMPANY SUCH BALLOT.
SHOULD YOU HAVE ANY QUESTIONS REGARDING THE VOTING PROCEDURES, YOUR BALLOT, OR
THE BALLOT INSTRUCTIONS, OR IF YOUR BALLOT IS DAMAGED OR LOST, CONTACT COUNSEL
FOR THE DEBTORS AT THE FOLLOWING ADDRESS:
FRANK J. WRIGHT
C. ASHLEY ELLIS
HANCE | SCARBOROUGH | WRIGHT
2900 RENAISSANCE TOWER
1201 ELM STREET
DALLAS, TEXAS 75270
The Approval Order fixes _________________, 2000, at _______ Central
Standard Time, in the Courtroom of the Honorable Keith M. Lundin, United States
Bankruptcy Judge, United States Bankruptcy Court for the Middle District of
Tennessee, Nashville Division, 207 Customs House, 701 Broadway, Nashville,
Tennessee 37203, as the date, time, and place for the hearing on Confirmation of
the Joint Plan, and fixes ________________, 2000, as the date by which all
objections to Confirmation of the Joint Plan must be filed with the Bankruptcy
Court and received by the respective counsel for each of the Plan Proponents and
certain other persons identified in the Approval Order. See Exhibit "A" to
SECOND AMENDED DISCLOSURE STATEMENT 3
<PAGE> 12
this Disclosure Statement. The Plan Proponents will request Confirmation of the
Joint Plan at the Confirmation Hearing.
As used herein, the terms "Nu-kote", the "Company" and the "Debtors"
are used interchangeably to mean one or more of the Debtors and their
affiliates.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED
HEREIN.
ARTICLE I. FACTORS PRECIPITATING CHAPTER 11 CASE
Nu-kote sought bankruptcy protection in part due to an historical
proliferation of customer accounts, products, and packaging alternatives which,
in retrospect generated relatively little unit volume, proved to be of marginal
profitability, and incurred unwarranted infrastructure cost, and a series of
strategically sound, conceptually correct, but disappointing acquisitions.
Primary among the reasons precipitating the filing of the Bankruptcy
Case was Nu-kote's worsening financial situation in large part due to the
continued litigation between Nu-kote International, Inc. ("INTERNATIONAL"), the
Hewlett-Packard Company ("HP"), Seiko Epson Corporation and Epson America, Inc.
(collectively, "EPSON"), Canon Computer Systems, Inc., Canon USA, Inc. and
Canon, Inc. (collectively "CANON"). As discussed in detail below, the finished
products of the Company are sold at both the retail level to consumers under the
"Nu-kote" and "Pelikan" brand names and directly to original equipment
manufacturers of printing equipment. When referring to the industry generally,
the complete term "original equipment manufacturers" will be used. When
referring to HP, Epson and Canon specifically, the definition "OEM" will be
used.
The products manufactured for the original equipment manufacturers are
manufactured to their specifications and sold both with the original hardware
and in the aftermarket. Nu-kote manufactures and distributes a variety of
compatible ink jet cartridges for use in the HP, Epson and Canon ink jet
printers, as well as a line of HP compatible cartridge refill kits designed for
the home or small business user, and provides a cartridge remanufacturing
service similar to the one employed for remanufactured laser toner cartridges.
The nature of the products manufactured and distributed by Nu-kote has
resulted in a variety of litigation with the OEMs. The litigation with HP, Canon
and Epson is referred to herein collectively as the "OEM LITIGATION" or
individually as the "HP LITIGATION," the "EPSON LITIGATION," or the "CANON
LITIGATION." Pre-petition, HP, Epson and Canon all filed lawsuits against
International and certain subsidiaries alleging numerous claims of patent
infringement, trademark infringement, false advertising and unfair competition.
This litigation forced the Company to incur substantial legal expenses in its
defense, and diverted senior and middle management attention from the day-to-day
needs of the
SECOND AMENDED DISCLOSURE STATEMENT 4
<PAGE> 13
business to defense of these lawsuits. Nu-kote has filed answers asserting
numerous affirmative defenses to the claims asserted by the OEMs in each of
these respective lawsuits including that several of the subject patents are
invalid, unenforceable and/or not infringed. Additionally, International has
asserted counterclaims including monopolization and attempted monopolization of
the aftermarket for replacement cartridges for the printers manufactured by the
OEMs. Although the trial stage of the HP Litigation has concluded and a
Settlement Agreement has been approved by the Bankruptcy Court as discussed
herein, the Canon and Epson Litigations remain pending.
Nu-kote and management have been compelled to expend much time and
effort in vigorous defense of the allegations in the OEM Litigation. The HP
Litigation has to date commanded the most time and attention of management.
Nu-kote employed the law firm of Coudert Brothers as trial counsel in its
defense of the claims brought by the OEMs and in prosecution of the
counterclaims against them. Nu-kote continues to defend the patent infringement
allegations in the Epson Litigation and the Canon Litigation, and to pursue its
antitrust actions against these OEMs. Discussions with Epson and Canon are
ongoing, and a settlement has now been reached with HP. The on-going litigation
and the corresponding disruption of operations, however, will continue to impact
the Company negatively until such time as settlement or court resolution is
reached in all of the OEM Litigation. The impact of the OEM Litigation, was a
major precipitating factor in the commencement of the Bankruptcy Case.
Another triggering factor in the filing of Nu-kote's Chapter 11
petitions was the need for the Company to obtain additional financing and to
recapitalize. Nu-kote International, Inc., as Borrower, and Nu-kote Holding,
Inc., as Guarantor, are parties to a certain Second Amended and Restated Credit
Agreement dated as of July 31, 1997 (the "US FACILITY"). The nine lenders on the
US Facility are Barclays Bank PLC as Lender and Documentation Agent; Bank of
America, National Association, as successor in interest to NationsBank of Texas,
NA as Collateral Agent, Lender and Administrative Agent; Commerzbank
Aktiengesellschaft; Deutsche Bank A.G., New York Branch or Cayman Islands
Branch; First National Bank of Chicago; Societe Generale; First American
National Bank; ABN AMRO Bank, N.V.; and Credit Lyonnais (collectively, the
"LENDERS"). The current amount outstanding on the US Facility is approximately
$95 million.
Additionally, certain of the non-debtor affiliates were, on the
Petition Date, parties to two other credit agreements, a Third Amended and
Restated Revolving Credit Facility Agreement dated July 31, 1997 by Pelikan
Scotland Limited as borrower ("the UK FACILITY"), and a Third Amended and
Restated Revolving Credit Facility Agreement dated July 31, 1997 by Pelikan
Produktions AG and Pelikan Hardcopy International AG as borrowers (the "SWISS
FACILITY"). The eight lenders on the UK Facility and the Swiss Facility are
Barclays Bank PLC; Bank of America, National Association, as successor in
interest to NationsBank of Texas NA; Commerzbank Aktiengesellschaft; Deutsche
Bank A.G.; First National Bank of Chicago; Societe Generale; ABN AMRO Bank,
N.V.; and Credit Lyonnais, the same above-referenced Lenders with the exception
of First American National Bank. On the Petition Date, the amount outstanding on
the UK Facility was approximately $10.3 million, and the amount outstanding on
the Swiss Facility was approximately $33.6 million. The post-petition sale of
the Pelikan Hardcopy Subsidiaries,
SECOND AMENDED DISCLOSURE STATEMENT 5
<PAGE> 14
however, has reduced the amounts outstanding on the UK and Swiss Facilities by
$8,276,041.30 and $9,700,000 of debt was converted to equity.
Incident to the US Facility, UK Facility and Swiss Facility
(collectively, the "CREDIT FACILITIES"), certain of the Debtors and their
affiliates executed various guaranties, security agreements, and stock pledge
agreements pursuant to which they have pledged to the Lenders substantially all
of the assets of the Debtors and their affiliates. In particular, the Debtors
have pledged all of their accounts, chattel paper, inventory, equipment,
instruments, general intangibles, fixtures and capital stock, and any and all
products and proceeds thereof, as well as all real property and improvements and
any and all products and proceeds thereof. Interest payments alone on the Credit
Facilities exceeded $11.4 million from August 1, 1997 through the Petition Date.
In December of 1997, to comply with the amended terms of the US
Facility, Nu-kote employed the turn around company Glass & Associates, Inc.
("GLASS & ASSOCIATES") to provide interim management services. Shaun K.
Donnellan became President, Chief Executive Officer and Chief Operating Officer
of the Company in December, 1997, and William R. Ligon General Manager, North
American operations in January, 1998. Mr. Donnellan is the President and Mr.
Ligon an associate of Glass & Associates. The services of Messrs. Shaun K.
Donnellan and William R. Ligon were made available to the Company pursuant to a
consulting agreement between Glass & Associates and the Company. While the
Company did not compensate Messrs. Donnellan and Ligon directly for their
services, the Company paid Glass & Associates $1,766,315 during the one year
immediately preceding the commencement of this case. These services represented
operational, sales, financial, marketing and management consulting services
provided by Messrs. Donnellan and Ligon and other associates of Glass &
Associates. Additionally, the above amount includes the reimbursement of
expenses incurred by Glass & Associates in performing services for the Company.
Even with the employment of a workout firm, Nu-kote's financial
condition did not materially improve. The credit agreement evidencing the US
Facility was amended six times in 1997 and 1998, requiring payment by Nu-kote of
the fees and expenses of the Lenders' professionals averaging in excess of
approximately $364,000 per amendment. These attempts to restructure and
refinance the Credit Facilities in the year preceding bankruptcy placed a
further burden on the Company's already strained cash position created by the
Company's obligation to service its required interest payments and fees and
expenses associated with the debt owed to the Lenders. In total, from August 1,
1997 through the Petition Date, Nu-kote paid in excess of $2.7 million in
restructuring fees and expenses, $2.8 million in principal payments and $11.4
million in interest. An interest payment in excess of $1 million was to come due
on November 9, 1998.
Finally, Nu-kote's need for additional financing and to recapitalize
was made critical by the cumulative effect on the Company's cash position of
customers taking rebates in the fall of 1998. Historically in the Company's
business, certain customers were entitled to rebates based on their purchases
throughout the calendar year which traditionally accumulated during the calendar
year and were utilized by customers in the fall in the form
SECOND AMENDED DISCLOSURE STATEMENT 6
<PAGE> 15
of offsets on receivables. Immediately prior to the Petition Date, Nu-kote's
cash situation became critical due to an increase in CODs, cash requirements
incident to servicing continuing sales, and certain customers setting off their
rebates against receivables owed to the Company that came due in November and
early December. Nu-kote was further concerned that if a default under the Credit
Facilities occurred, the Lenders would attempt to foreclose on the stock of
Nu-kote's subsidiaries.
Faced with the litigation with the OEMs, the mounting prospective costs
of a debt workout and restructuring, and the threat of foreclosure by the
Lenders, all compounded by the rebate issue and the impending interest payment
to the Lenders, Nu-kote asserts it had no alternative but to file for protection
under Chapter 11 of the Bankruptcy Code.
ARTICLE II. PURPOSE OF CHAPTER 11
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. The commencement of a Chapter 11 case creates an "estate"
comprised of all the legal and equitable interests of the debtor. Sections 1101,
1107, and 1108 of the Bankruptcy Code provide that a debtor may remain in
possession of its property and continue to operate its business as a "debtor in
possession" ("DIP"). These Chapter 11 Cases were commenced with the filing of
voluntary petitions under Chapter 11 by the Debtors on November 6, 1998. Since
the filing of the Chapter 11 Case, the Debtors have been authorized to operate
and manage their business as debtors in possession.
Formulation of a plan of reorganization is the principal purpose of a
Chapter 11 case. The plan is the vehicle for satisfying the holders of claims
against and equity interests in a debtor. The Joint Plan was developed by the
Plan Proponents as an alternative to the pursuit of competing plans. See
"Discussion of the Joint Plan."
Under the Bankruptcy Code, when soliciting acceptance or rejection of a
plan of reorganization, a debtor must transmit to the holders of claims or
interests a disclosure statement approved by the court as containing "adequate
information." On ___________, 2000, the Bankruptcy Court found that this
Disclosure Statement contained information that is in compliance with the
adequate information requirement of the Bankruptcy Code. The Disclosure
Statement describes various transactions contemplated under the Joint Plan and
is supplied to you for purposes of assisting in your evaluation of, and your
decision of how to vote on, the Joint Plan.
ARTICLE III. CERTAIN RISK FACTORS
A. FACTORS RELATING TO CHAPTER 11 AND THE JOINT PLAN
The following is intended as a summary of certain risks associated with
the Joint Plan, but is not exhaustive and must be supplemented by the analysis
and evaluation of the Joint Plan and this Disclosure Statement made by each
Claimant as a whole in consultation with such Claimant's own advisors.
SECOND AMENDED DISCLOSURE STATEMENT 7
<PAGE> 16
1. INSUFFICIENT ACCEPTANCES
The Joint Plan may not be confirmed without sufficient accepting votes.
Each impaired Class of Claims and Interests receiving a distribution under the
Joint Plan is given the opportunity to vote to accept or reject the Joint Plan.
The Joint Plan will be accepted by a Class of impaired Claims if the Joint Plan
is accepted by Claimants in such Class actually voting on the Joint Plan who
hold at least two-thirds (2/3) in amount and more than one-half (1/2) in number
of the total Allowed Claims of that Class which actually vote. The Joint Plan
will be accepted by a Class of impaired Interests if it is accepted by holders
of Interests in such Class actually voting on the Joint Plan who hold at least
two-thirds (2/3) in amount of the total Allowed Interests of the Class which
actually vote. However, an Interest Holder in Class 5 of the Joint Plan is
deemed to have rejected the Joint Plan and is therefore not entitled to vote on
the Joint Plan. Only those members of a Class who vote to accept or reject the
Joint Plan will be counted for voting purposes.
If any impaired Class of Claims under the Joint Plan fails to provide
acceptance levels sufficient to meet the minimum Class vote requirements but at
least one impaired Class of Claims accepts the Joint Plan, then, subject to the
provisions of the Joint Plan, the Plan Proponents intend to request confirmation
of the Joint Plan under Section 1129(b) of the Bankruptcy Code.
2. CONFIRMATION RISKS
Over $17 million in Administrative Claims have been filed against the
Debtors. Additional Administrative Claims have been filed by Canon and Epson
under seal. The allowance of Administrative Claims in excess of the amounts that
either the Successful Bidder or the Lenders are willing to pay would prevent
confirmation of the Joint Plan. One of the conditions for Richmont to purchase
the Plan Stock is that the Administrative Claims not exceed $3 million. While
the Debtors are confident that they will be successful in defeating these
Administrative Claims, there is a risk that they will not be successful or that
the outcome will be appealed. In addition, even if the total Administrative
Claims is less than $3 million, the Successful Bidder still does not have to
close if the resolution of the Administrative Claims will result in a Material
Adverse Change. Since the allowance of any Administrative Claim to Canon or
Epson would suggest that the Debtors are infringing their patents and could
therefore lead to an injunction against the manufacture of products for either
Canon or Epson printers, the Allowance of even a small Administrative Claim to
Epson or Canon could be an impediment to a closing by the Successful Bidder.
Further, any objection to the Joint Plan filed in the Chapter 11 Case by a
Claimant or Interest Holder could either prevent Confirmation of the Joint Plan
or delay such Confirmation for a significant period of time.
3. BUSINESS RISKS
As with any business venture, risks are an inherent part of the process
and success can not be guaranteed. The Joint Plan contains projections that are
naturally estimations of future revenues and expenses which may not be realized.
It should be noted that all risk factors cannot be anticipated, that some events
develop in ways that were not foreseen
SECOND AMENDED DISCLOSURE STATEMENT 8
<PAGE> 17
and that many or all of the assumptions which have been used in connection with
this Disclosure Statement and the Joint Plan will not transpire exactly as
assumed. Some or all of such variations may be material. While significant
efforts have been made to be reasonable in this regard, there can be no
assurance that subsequent events will bear out the analyses set forth herein.
This Disclosure Statement contains a detailed analysis of the market in which
Nu-kote's business operates and a discussion of recent changes therein. While
Nu-kote believes it has taken all prudent measures to address the future needs
of this changing market, no assurance of future success can be made.
4. LITIGATION RISKS
Finally, litigation is speculative and unpredictable. While Nu-kote
asserts that it is confident in the merits of the Canon and Epson Litigation,
the HP Litigation did not result in a monetary recovery as Nu-kote had hoped,
and Nu-kote can not guarantee a successful recovery on the anti-trust claims
asserted against Canon and Epson.
ARTICLE IV. DESCRIPTION OF DEBTORS' BUSINESS
A. SUMMARY
Nu-kote 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, Canada and
Mexico 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.
B. BACKGROUND AND STRUCTURE OF THE COMPANY
Holding was formed as a Delaware corporation in 1986 by Clayton,
Dubilier & Rice, Inc. to acquire substantially all the assets and certain
liabilities of Worldwide Office Supplies Division and International Business
Forms Division of Unisys Corporation ("UNISYS"). Holding has two wholly owned
subsidiaries, International and Imperial.
The Company acquired ICMI in February 1992, Future Graphics in February
1993, and the worldwide hardcopy supplies business (the "PELIKAN HARDCOPY
DIVISION") of Pelikan Holding AG of Zug, Switzerland ("PELIKAN HOLDING") in
February 1995 (the "PELIKAN ACQUISITION"). ICMI is an independent manufacturer
of toner for non-impact printers and copiers and Future Graphics is a
remanufacturer of laser printer cartridges. Both are located in the United
States. In December 1997, the Company disposed of the
SECOND AMENDED DISCLOSURE STATEMENT 9
<PAGE> 18
Future Graphics cartridge components division. The Company's Pelikan Hardcopy
Division is a European manufacturer of supplies for impact and non-impact
printers. As detailed in Article VII.N.2., the sale of the Pelikan Hardcopy
Subsidiaries was closed effective as of September 30, 1999.
The Debtors, their relationships to each other and their subsidiaries
are as follows, with the seven Debtor entities appearing in bold type:
- NU-KOTE HOLDING, INC., and its subsidiaries,
(i) NU-KOTE IMPERIAL, LTD.
(ii) NU-KOTE INTERNATIONAL, INC.
- NU-KOTE INTERNATIONAL, INC., and its U.S. subsidiaries,
(i) NU-KOTE IMAGING, INC.
(ii) INTERNATIONAL COMMUNICATION MATERIALS, INC.
(iii) Viro-kote, Inc.
(iv) FUTURE GRAPHICS, INC.
and its international subsidiaries,
<TABLE>
<CAPTION>
ENTITY JURISDICTION
------ ------------
<S> <C> <C>
(a) Interfas Holding, S.A. France
(b) NU-KOTE LATIN AMERICA, INC., and its subsidiary, Mexico
Nu-kote Internacional de Mexico,
S.A. de C.V. (35% stock ownership)
(c) Nu-kote Internacional de Mexico, SA (65% stock ownership) Mexico
</TABLE>
As detailed below, Holding is a publicly traded company with over 3,000
shareholders. Holding owns the stock of International and Imperial.
International, ICMI and Future Graphics are the operating entities for the U.S.
operations of the Company. Imperial holds the trademarks. ICMI was acquired in
1992. ICMI manufactures toner for non-impact printers and copiers. Future
Graphics manufactures laser printer cartridges.
The Company manufactures and/or distributes over 1,500 products in more
than 3,000 different packaging configurations for use in over 30,000 different
models of impact and non-impact printing mechanisms. The products can be broken
down into five main categories: laser cartridges, impact ribbons, toner, ink jet
cartridges and non-impact ribbons. The products are used in over 30,000
different models of impact and non-impact printing mechanisms, and the laser
products are compatible with over 90% of the low to mid-range laser printers now
on the market. The Company sells its products primarily
SECOND AMENDED DISCLOSURE STATEMENT 10
<PAGE> 19
throughout the United States, Canada, and Mexico. The Company employs
approximately 800 persons worldwide.
The Debtors and the non-debtor affiliates in the U.S. operate as a
single economic and business unit. The Debtors operate under a centralized
accounting system, with all books and records kept, all collections made and all
payments generated from one central location in Franklin, Tennessee. The
Debtors' financial reporting is done on a consolidated basis, and the Debtors
file their federal tax returns on a consolidated basis. The business address for
each of the Debtors is 200 Beasley Drive, Franklin, TN 37064. A brief
individualized description of each Debtor and its function within the Company is
as follows:
1. NU-KOTE HOLDING, INC.
Nu-kote Holding, Inc. ("HOLDING") is a public company with over 3,000
shareholders. Holding holds 100% of the stock of Nu-kote International, Inc. and
Nu-kote Imperial, Ltd. The stock of International and Imperial is valued at $0
as the claims against these entities greatly exceed the value of their assets.
As of February 5, 1999, Holding had 21,775,302 shares of Class A common stock,
$.01 par value, outstanding. The following table reflects stock ownership of
Holding by parties with significant ownership percentages, i.e. approximately
10% or greater, and stock ownership of officers and directors of the Debtors as
of December 15, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS TITLE NATURE AND PERCENTAGE OF STOCK
OWNERSHIP (a)(b)
<S> <C> <C>
Richard A. Larsen Sr. VP, General Counsel & *
200 Beasley Dr. Secretary (f)
Franklin, TN 37064
Phillip L. Theodore Sr. VP, CFO, Treasurer & Asst. *
200 Beasley Dr. Secretary
Franklin, TN 37064
John P. Rochon (d) (e) Director 11.9%
Richmont Capital Partners I LP
4300 Westgrove Dr.
Addison, TX 75001
Patrick E. Howard CEO, President and Director *
4300 Westgrove Dr.
Addison, TX 75001
C. Ronald Baiocchi Sr. VP and General manager, North *
200 Beasley Dr. American Operations
Franklin, TN 37064
Ligapart AG Stockholder 21.1%
Neuhofstrasse 4
6340 Bear, Switzerland
Oppenheimer Group (c) Stockholder 9.5%
Oppenheimer Tower
World Financial Center
New York, NY 10281
</TABLE>
* Less than 1% of Class
SECOND AMENDED DISCLOSURE STATEMENT 11
<PAGE> 20
(a) Data as of December 15, 1999
(b) Unless otherwise indicated, such shares of common stock are owned with
sole voting and investment powers.
(c) Represents the aggregate shares held by the Oppenheimer Group, Inc. and
its subsidiaries and affiliates, including Oppenheimer Financial Corp.,
Oppenheimer Equities, Inc., Oppenheimer Holding, Inc., Oppenheimer &
Co., Inc. And Oppenheimer Capital, L.P., Oppenheimer Group, Inc. Is a
parent holding company and disclaims beneficial ownership and
dispositive power over the shares held by its subsidiaries and their
clients.
(d) Includes 2,559,360 shares owned by Richmont Capital Partners, L.P. as
to which shares Mr. Rochon has shared voting and investment power.
(e) Includes 24,000 shares that may be acquired through exercise of stock
options.
(f) Richard A. Larsen resigned from the Company effective October 31, 1999.
The above chart reflects the most current information readily available
regarding the stock ownership of Holding. As all outstanding stock of Holding is
to be canceled and 100% of the outstanding shares of common stock of Holding
sold to the Successful Bidder pursuant to the Joint Plan, the Plan Proponents
believe that this chart provides adequate information and it is not necessary or
in the best interests of the creditors to expend the Debtors' resources to
update further this information.
2. NU-KOTE IMPERIAL, LTD.
Nu-kote Imperial, Ltd. ("IMPERIAL") holds various of the trademarks of
the Company, including the Pelikan trademark and trade name which the Company
has the right to use pursuant to terms of a trademark license agreement entered
into in 1995 in connection with the purchase of the hardcopy supplies business
of Pelikan Holding A.G., an unrelated Swiss company. As of the Petition Date,
the Pelikan trademark and the associated covenant-not-to-compete were valued
(book value) at $6,876,000 and $4,558,000, respectively. Imperial receives
royalty income, approximately $885,413 for fiscal year 1999 through the Petition
Date, on the Pelikan trademark. As a result of the sale of the Pelikan Hardcopy
Subsidiaries, the license on the Pelikan trademark has been limited to North
America and there are no provisions for ongoing royalty income. The stock of
Imperial is owned 100% by Holding.
3. NU-KOTE INTERNATIONAL, INC.
Nu-kote International, Inc. ("INTERNATIONAL") along with ICMI and
Future Graphics, is the operating entity for all of the US operations.
International manufactures and distributes ribbons, inkjet cartridges, ink rolls
and toner. International owns 100% of the stock of Imaging, ICMI, Viro-kote,
Inc., Future Graphics, Latin America, Interfas Holding S.A. International owns
65% of the stock of Nu-kote Internacional de Mexico, S.A. International is the
named defendant in each of the OEM lawsuits.
4. NU-KOTE IMAGING INTERNATIONAL, INC.
Nu-kote Imaging International, Inc. ("IMAGING") was formed to acquire
certain US hardcopy assets of Pelikan Holding A.G., an unrelated entity in 1995.
The stock of Imaging is owned 100% by International.
SECOND AMENDED DISCLOSURE STATEMENT 12
<PAGE> 21
5. INTERNATIONAL COMMUNICATION MATERIALS, INC.
International Communication Materials, Inc. ("ICMI") manufactures toner
for non-impact printers and copiers. The stock of ICMI is owned 100% by
International. International purchased the stock of ICMI on or about February
24, 1992. ICMI and private label branded laser and copier toners are marketed to
distributors serving the laser cartridge remanufacturing market and to large
original equipment manufacturers.
6. FUTURE GRAPHICS, INC.
Future Graphics, Inc. ("FUTURE GRAPHICS") manufactures laser printer
cartridges. On December 31, 1997, Future Graphics transferred all of the assets
of its components division to Future Graphics, L.L.C. (an unrelated transferee)
for approximately $3,700,000 in a combination of cash and assumed liabilities.
The stock of Future Graphics is owned 100% by International.
7. NU-KOTE LATIN AMERICA, INC.
Nu-kote Latin America, Inc. ("LATIN AMERICA") has no independent
operations and holds no assets, except that Latin America owns 35% of the stock
of Nu-kote Internacional de Mexico, S.A., valued at $1.00. The stock of Latin
America is owned 100% by International.
C. CURRENT OFFICERS AND DIRECTORS OF NU-KOTE
There are currently only two directors of Nu-kote. While there may
exist certain other officers of the Company, the officers with primary
operational and decisional responsibilities for the business operations of the
Company are listed below:
PATRICK E. HOWARD, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr.
Howard, age 52, has been the Chief Executive Officer of the Company since
October, 1998. Previously, Mr. Howard served as Chief Operating Officer and
Chief Executive Officer of the Company from February, 1997 and August, 1997,
respectively, until December, 1997. Mr. Howard has been a director of the
Company continuously since August, 1997. Mr. Howard has been the Chief Executive
Officer of the Richmont Group since January, 1996. Prior to joining the Company,
Mr. Howard served as Executive Vice President of Mary Kay, Inc. from December,
1985 until January, 1996. Mr. Howard receives no compensation from the Company
and has waived all director's fees from the Company.
JOHN P. ROCHON, DIRECTOR. Mr. Rochon, age 48, has been a director of
the Company since 1994. Mr. Rochon has been Chairman of the Richmont Corporation
since 1990 and Chief Executive Officer of Mary Kay Holding Corporation since
1991. Previously, Mr. Rochon served in positions of increasing responsibility
with Mary Kay Holding Corporation, including Vice Chairman from 1987 to 1991.
Through Richmont Corporation and its predecessor and affiliated companies, Mr.
Rochon has built a large, diversified
SECOND AMENDED DISCLOSURE STATEMENT 13
<PAGE> 22
portfolio of companies and investments strongly focused on consumer goods and
services. Mr. Rochon also serves as a director of Royal Appliance Manufacturing
Company. Mr. Rochon receives no compensation from the Company and has waived all
director's fees from the Company.
C. RONALD BAIOCCHI, SENIOR VICE-PRESIDENT, GENERAL MANAGER, NU-KOTE
INTERNATIONAL, INC. Mr. Baiocchi, age 56, has been Vice President, Nu-kote
International, Inc. since January 1987. Prior to joining the Company, Mr.
Baiocchi worked at Burroughs Corporation (now Unisys) since October 1978 and has
held a number of executive positions in manufacturing, product management, sales
and marketing and business planning. Mr. Baiocchi's base annual compensation is
$225,000. Pursuant to the Retention Agreement approved by the Bankruptcy Court
on June 10, 1999, Mr. Baiocchi is expected to receive a retention payment in the
amount of $225,000 upon confirmation of a plan of reorganization or sale of the
Debtors' assets. It is also contemplated that Mr. Baiocchi may receive an equity
incentive in some form and undetermined amount from the Successful Bidder.
PHILLIP L. THEODORE, SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
TREASURER, ASST. SECRETARY AND DIRECTOR. Mr. Theodore, age 32, has been Senior
Vice President, Chief Financial Officer, Treasurer and Assistant Secretary since
March 1998. He joined the Company in June 1994 to serve as controller of the
North American Operations. Prior to joining the Company, Mr. Theodore was a
manager at Coopers & Lybrand L.L.P. and worked in the business assurance group
where he specialized in mergers and acquisitions. Mr. Theodore is a Certified
Public Accountant. Mr. Theodore's base annual compensation is $160,000. Pursuant
to the Retention Agreement approved by the Bankruptcy Court on June 10, 1999,
Mr. Theodore is expected to receive a retention payment in the amount of
$160,000 upon confirmation of a plan of reorganization or sale of the Debtors'
assets. It is also contemplated that Mr. Theodore may receive an equity
incentive in some form and undetermined amount from the Successful Bidder.
IAN ELLIOTT, VICE PRESIDENT, PRODUCT DEVELOPMENT, NU-KOTE
INTERNATIONAL, INC. Mr. Elliott, age 42, has been Vice President, Product
Development, Nu-kote International, Inc. since September 1996. He joined
Burroughs Corporation (now Unisys) in the United Kingdom in 1978 and has served
in positions of increasing responsibility primarily in sales and product
management functions, within Europe and the U.S. From April 1994 to September
1996 he served as Vice President, Business Development and Director, Product
Management - North American Supplies Group. Mr. Elliott's base annual
compensation is $140,000. In addition to his base annual compensation, Mr.
Elliott has at times been entitled to performance bonuses. Pursuant to the
Retention Agreement approved by the Bankruptcy Court on June 10, 1999, Mr.
Elliott is expected to receive a retention payment in the amount of $140,000
upon confirmation of a plan of reorganization or sale of the Debtors' assets. It
is also contemplated that Mr. Elliott may receive an equity incentive in some
form and undetermined amount from the Successful Bidder.
RICHARD A. LARSEN, SENIOR VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY. Mr. Larsen, age 50, has been Senior Vice President and General
Counsel of the Company
SECOND AMENDED DISCLOSURE STATEMENT 14
<PAGE> 23
since June 1995 and has also been Secretary of the Company since March 1998.
Prior to joining Nu-kote, Mr. Larsen was Vice President, General Counsel and
Secretary of Harris Adacom Corporation for five years. As stated above, Mr.
Larsen has resigned from the Company effective October 31, 1999.
D. HISTORICAL AND RENEWED RETENTION AGREEMENTS WITH KEY NU-KOTE EMPLOYEES
1. HISTORICAL RETENTION AGREEMENTS
None of the Company's executive officers have written employment
agreements. In May 1998, however, Messrs. Baiocchi, Larsen, Theodore and Elliott
entered into retention agreements with Nu-kote which are triggered upon a change
in control or a restructuring of Nu-kote's long-term financing agreement with
its lenders.
2. NEW AND RENEWED RETENTION AGREEMENTS
Additionally, on April 21, 1999, Nu-kote filed a Motion to Approve Key
Employee Retention Agreements (the "EMPLOYEE RETENTION MOTION"). Nu-kote filed
the Employee Retention Motion in recognition of what Nu-kote believes to be the
efforts of certain Key Employees who have been instrumental to Nu-kote's
reorganization efforts. Under the terms of the retention agreements, a retention
payment to the individuals designated in the Employee Retention Motion will be
payable only upon confirmation of a plan for the Debtors, a sale of
substantially all of the assets of the Debtors or a termination of a key
employee without cause. On June 10, 1999, the Bankruptcy Court entered its order
approving the Employee Retention Motion.
E. PREPETITION INFORMATION: HISTORICAL PERSPECTIVE ON THE INDUSTRY
The market for supplies for typewriters and other impact printers has
been declining in recent years and is expected to continue to decline as
non-impact printing devices become more popular and replace many of the impact
printers now in service. During fiscal 1998, the Debtors experienced a decline
of approximately 9.8% in their sales from impact products. While the Debtors
expect the market for supplies for typewriters and other impact printers to
continue to decline as a whole, the Debtors believe there will continue to be an
important market for its ribbon products for the foreseeable future. The selling
prices for the Debtors' impact products have come under pressure as competitors
have reduced prices in an attempt to preserve their portion of a declining
market.
The printing supplies market is extremely competitive. In both the
impact and non-impact markets, the Debtors' biggest competitors are the original
equipment manufacturers, most of which are substantially larger and have greater
financial resources than the Debtors. In the impact supplies business, some
original equipment manufacturers manufacture their own ribbon products. Other
original equipment manufacturers buy ribbons from outside suppliers. In
addition, there are currently over 100 independent ribbon manufacturers in the
United States and over 200 worldwide, ranging from small local producers to
national and international companies.
SECOND AMENDED DISCLOSURE STATEMENT 15
<PAGE> 24
Original equipment manufacturers currently dominate the market for the
majority of toner products and ink jet supplies. However, the market for
compatible toner supplies is still developing, and there are currently several
independent competitors in this market. The willingness of the original
equipment manufacturers to offer ink jet products at very low prices, and the
possibility of substantial price reductions by one or more original equipment
manufacturers, could have a material adverse effect on the portion of the
Debtors' business affected thereby. The remanufactured laser printer cartridge
market and the cartridge remanufacturing and refilling market have historically
consisted of numerous small independent producers. Recently, however, various
original equipment manufacturers have entered these markets resulting in a
significant increase in competition.
During the past five years, the U.S. office products industry has
undergone a series of significant changes. Although the original equipment
manufacturer channel of distribution, which includes such well known brand name
manufacturers as Xerox, Brother, Canon, HP, Pitney Bowes, Ricoh, Unisys and
Epson, has remained relatively constant, consolidation in the aftermarket has
led to the emergence of a limited number of large, well capitalized wholesalers,
dealers, and mass merchandisers. Today, in fact, the wholesale channel of
distribution is dominated by two national resellers, S. P. Richards and United
Stationers. Similarly, the dealer channel of distribution is dominated by Boise
Cascade, BT Office Products, Corporate Express, Office Depot Business Services
Division, Staples Business Advantage, and U. S. Office Products, all of which
have sales offices and distribution centers on a nationwide basis. In addition,
a secondary segment of the dealer channel of distribution is dominated by five
large buying groups which, in turn, represent approximately 4,000 smaller dealer
participants. Similarly, the mass merchandise, or retail channel of
distribution, is dominated by Kmart, Office Depot, Office Max, Sams Club,
Staples, and Walmart, all of which have outlets throughout the United States.
As these aftermarket leaders focused on improving market share,
end-user product prices declined, reseller margins narrowed, and third party
suppliers, like Nu-kote, were squeezed. As the market stabilized, however, these
large, well capitalized companies began to focus on supply chain management and
more effective end-user merchandising in an effort to improve what had become
thinner margins. These companies recognized that the original equipment
manufacturers' brand name products were drivers of consumer traffic and
generators of sales volume. At the same time, however, they recognized that the
original equipment manufacturers' brand name products provided very little in
the way of gross profits. As a result, these market leaders became more enamored
with private label products of comparable quality, selling at significantly
lower price points and generating significantly higher profit margins, as
important alternatives to original equipment manufacturers' brand name products.
As a result, aftermarket suppliers, such as Nu-kote, began to see, albeit only
recently, an easing of the intense third party supplier price pressures of the
past.
During the past five years, too, the U.S. office products industry has
seen a declining level of demand for impact products in favor of non-impact
products or, alternatively, has seen a migration from the old technology to the
new technology where
SECOND AMENDED DISCLOSURE STATEMENT 16
<PAGE> 25
the products are protected by more complex patents and demand a more
sophisticated level of knowledge vis-a-vis the end-user purchasing decision.
<TABLE>
<CAPTION>
NEW TECHNOLOGY:
OLD TECHNOLOGY: NON-IMPACT PRODUCTS
IMPACT PRODUCTS (Thermal, Inkjet,
(Ribbons) Toner & Laser Cartridges)
- --------------------------------------- ----------------------------------------
<S> <C> <C> <C>
- - Declining Markets - Growing Markets
- - Low Barriers to Entry - High Barriers to Entry
- - Excess Manufacturing Capacity - Insufficient Manufacturing Capacity
- - Shrinking Profit Margins - Expanding Profit Margins
- - Unsophisticated Purchasing Decision - Sophisticated Purchasing Decision
</TABLE>
F. NU-KOTE'S PLACE IN THE OFFICE PRODUCTS MARKET
Nu-kote operates in an approximately $20 billion office products market
which includes impact ribbons, thermal products, ink jet accessories, monochrome
and color toners, and recycled laser cartridges. While impact ribbon sales have
been declining at 16%-18% per year, thermal ribbons, ink jet accessories,
toners, and laser cartridges have been growing at 8%-20% per year depending on
the particular product. Nu-kote intends to offset the continued decline of
impact ribbon sales with faster growing non-impact thermal, ink jet, toner, and
laser cartridge sales, the latter of which demand a more sophisticated level of
end-user knowledge vis-a-vis the end-user purchasing decision. Impact ribbon
sales, however, should fall at a rate somewhat less than that of the overall
market due, primarily, to market share gains.
G. NU-KOTE'S MARKET SEGMENTATION
Nu-kote has historically served and intends to continue to serve both
the original equipment manufacturers and the aftermarket distributors, namely
the wholesalers, dealers, and retailers. Both have similar product offerings.
Each, however, is driven by distinctly different operating characteristics and,
as a result, provides suppliers with significantly different profit margins.
<TABLE>
<CAPTION>
ORIGINAL EQUIPMENT AFTERMARKET DISTRIBUTORS
MANUFACTURERS (Wholesalers, Dealers, Retailers)
------------- ---------------------------------
<S> <C> <C> <C>
- - Technology & Engineering Driven - End User & Distribution Driven
- - Long Lead Times - Short Lead Times
- - No Product Returns - Significant Product Returns
- - On Time Collection of A/R - Extended Collection of A/R
- - No Rebates - Rebates
- - No Advertising Expense - Advertising Expense
- - Modest Supporting Infrastructure - Significant Supporting Infrastructure
- - No Hidden Costs - Hidden Costs
- - Longer Term Stable Contracts - Less Certain Annual Bid Process
</TABLE>
SECOND AMENDED DISCLOSURE STATEMENT 17
<PAGE> 26
In serving the original equipment manufacturers, Nu-kote must be
sensitive to the technological and engineering content of the original equipment
manufacturers' products and become, therefore, integrally involved with the
original equipment manufacturers' new printer development programs from a
research and development point of view. In addition, Nu-kote must deliver
innovative packaging and create end-user merchandising programs if the company
is to become a preferred supplier.
In addressing the aftermarket, however, namely the wholesalers,
dealers, and retailers, Nu-kote must be sensitive to supply chain and end user
considerations. In all three of these channels of distribution, the company must
provide quality products, aggressive prices and superior line fill rates. In the
wholesaler and dealer channels of distribution, however, Nu-kote must offer
marketing incentive programs to ensure that the Nu-kote label is promoted at the
expense of the original equipment manufacturer label and, in the retail channel
of distribution, Nu-kote must offer point-of-sale merchandising programs to
ensure that the end-user is fully conversant with the advantages of a Nu-kote
product versus an original equipment manufacturer product.
Similarly, the original equipment manufacturers are distinctly
different from the aftermarket distributors in terms of lead times, pricing,
infrastructure support, and credit terms. The original equipment manufacturers,
for example, offer long lead times, which reduces the need for on-hand
inventory; purchase printer supplies at prices which are not impacted by
rebates, advertising allowances and/or product returns; demand less in support
of their products; and remit trade payables on a timely basis. The aftermarket
distributors, however, are at the opposite end of the spectrum. They demand
three-to-five day delivery, prices which include rebates and advertising
allowances, and the right to return product as an inventory management tool. In
addition, they require extensive support in terms of supplier personnel and
infrastructure and tend to stretch trade payables well beyond due dates.
Accordingly, original equipment manufacturers provide better profit margins and
lower break-even levels in terms of sales volume.
Nu-kote has historically functioned well in both the original equipment
manufacturer and the aftermarket distributors markets. Among Nu-kote's core
competencies which have contributed to its historical success are:
1. Strong engineering and technical skills, which are critical to
success in the original equipment manufacturer market;
2. Quality products and good line fill rates, which are critical
to success in the wholesale, dealer, and retail markets;
3. Excellent manufacturing facilities which, domestically, have
been consolidated and reorganized by product line;
SECOND AMENDED DISCLOSURE STATEMENT 18
<PAGE> 27
4. A streamlined transportation program, which has reduced the
number of common carriers from over one hundred to under ten; and
5. Broad channels of distribution, excellent customer service,
and a loyal customer base.
ARTICLE V. ASSETS OF NU-KOTE
The following is a summary description of Nu-kote's principal assets.
The information has been compiled from Nu-kote's audited and unaudited records,
Schedules and Statements of Financial Affairs, and Monthly Operating Reports
filed by Nu-kote. Many of the amounts listed with respect to the descriptions of
the assets are listed at the book values on Nu-kote's financial statements which
values generally do not reflect the actual value of those assets. The Debtors
have historically operated as one company, filed their federal tax returns and
done all financial reporting on a consolidated basis, and the Bankruptcy Court
previously ordered that the assets of the Debtors shall be treated as a single
consolidated estate save and except that any recoveries on the OEM Litigation
shall be distributed as if such estates had not been consolidated. Pursuant to
the terms of the Joint Plan, a claim against any one of the Debtors shall be
treated as a claim against the consolidated estate, including any recoveries on
the OEM Litigation, and the assets of the Debtors are therefore discussed on a
consolidated basis.
A. CASH
As of October 22, 1999, the books and records of Nu-kote reflect on a
consolidated basis cash and cash equivalents totaling $3,675,000.
B. INVENTORY
As of October 22, 1999, the Debtors had inventory at book value (lower
of cost or market) of $29,432,000. In addition, the Debtors' had prepaid
expenses and deposits of $5,804,000, which essentially represents prepaid
inventory.
C. TRADEMARKS
Nu-kote (Imperial) owns the rights to the Pelikan trademark and the
associated covenant-not-to-compete which were listed on Nu-kote's financial
statements at $6,876,000 and $4,558,000, respectively, less accumulated
amortization of $4,698,943, for a total book value of $6,735,057 as of February
19, 1999. In connection with the sale of the Pelikan Hardcopy Subsidiaries, the
Pelikan trademark license was restricted to North America. Although the Pelikan
trademark is listed on Nu-kote's books at a substantial book value, Nu-kote does
not believe that the trademark has any significant fair market value.
D. PATENTS
SECOND AMENDED DISCLOSURE STATEMENT 19
<PAGE> 28
Subject to certain changes incident to the sale of the Pelikan Hardcopy
Subsidiaries, Nu-kote holds numerous patents, certain of which are subject to
the security interests of the Lenders. International, Imaging and ICMI are the
owners of record of numerous patents of the Company, as listed in the charts
attached hereto as Exhibit "B". These patents together with Nu-kote's trademarks
consist of Nu-kote's intellectual property or intangibles and are listed on
Nu-kote's financial statements for the period ending October 22, 1999 at
$9,915,000. As with the trademarks, Nu-kote does not believe that the patents
have any significant fair market value.
E. RECEIVABLES
Nu-kote had gross trade receivables in the amount of $18,737,000 as of
October 22, 1999. Against this amount Nu-kote had made allowance for doubtful
accounts of $3,295,000. Thus, Nu-kote had net trade receivables on October 22,
1999 in the amount of $15,441,000. Against these net trade receivables Nu-kote
had accumulated rebates owing to customers in the amount of approximately
$5,500,000. Although Nu-kote has encouraged its customers to take these rebates
quarterly, many are still applying them on an annual basis.
The intercompany receivables, including receivables owed by the related
nondebtor entities, were $271,717,000 as of October 22, 1999. Since the Debtors
have been substantively consolidated by order of the Bankruptcy Court, the
intercompany receivables have no value.
F. REAL PROPERTY
As of the Petition Date, the real property of the Debtors was as follows:
1. Connellsville, Pennsylvania facility: a manufacturing,
research and development and distribution facility used in connection with the
manufacture of toner listed on Nu-kote's financial statements at a book value of
$740,613 and located at Rt. 119 South, Connellsville, PA 15425 (ICMI). This book
value approximates the fair market value of the real estate and improvements.
2. Derry, Pennsylvania facility: a 108,000 square foot industrial
manufacturing, research and development facility at One Imaging Lane in Derry,
Pennsylvania which has a fair market value of approximately $500,000 (Imaging).
This fair market value does not take into account the cost of the cleanup of the
environmental contamination at the property as discussed elsewhere in this
Disclosure Statement. The Debtors have this property listed as an asset for sale
as it is the Debtors' present intention to sell this property.
3. Franklin, Tennessee facility: a 144,154 square foot metal
manufacturing warehouse located in Franklin, TN listed on Nu-kote's financial
statements at $3,827,896 (less accumulated depreciation of $611,895)
(International). The Debtors estimate the fair market value of the real estate
and improvements to be $3,250,000.
SECOND AMENDED DISCLOSURE STATEMENT 20
<PAGE> 29
G. MACHINERY, FIXTURES AND EQUIPMENT
As of October 22, 1999, the Debtors owned machinery, furniture and
equipment with a book value, net of accumulated depreciation, of $18,720,000.
The Debtors estimate the fair market value of the machinery, furniture and
equipment to be $1,872,000, which is the same as the liquidation value due to
the unique characteristics of this property.
H. STOCK
Holding holds 100% of the stock of International and Imperial.
International owns 100% of the stock of Future Graphics, ICMI, Imaging, Latin
America, Viro-kote, Inc., Interfas Holding, S.A., and 65% of the stock of
Nu-kote Internacional de Mexico, S.A. All of these stock interests of
International are pledged as collateral to secure the claims of the Lenders and
are of no value as the claims against each entity exceed the total value of such
entities' assets. Latin America owns 35% of the stock of Nu-kote Internacional
de Mexico, S.A., valued at $1.00. Of all of these entities the only one that has
value that is not in bankruptcy is Interfas Holding, S.A. The Debtors believe
that Interfas Holding, S.A. has a fair market value of approximately $1,000,000.
However, as previously stated the stock of this entity has also been pledged to
secure the claims of the Lenders.
I. THE OEM LITIGATION
The finished products of Nu-kote are sold at both the retail level to
consumers under the Nu-kote and Pelikan brand names and directly to the original
equipment manufacturers of printing equipment. Products are manufactured to the
original equipment manufacturers' specifications and sold both with the original
hardware and in the aftermarket. Nu-kote also manufactures and distributes a
variety of compatible ink jet cartridges for use in the HP, Epson and Canon ink
jet printers, as well as a line of HP compatible cartridge refill kits designed
for the home or small business user, and provides a cartridge remanufacturing
service similar to the one employed for remanufactured laser toner cartridges.
The nature of the products manufactured and distributed by Nu-kote and the OEMs
has resulted in a variety of litigation. International is the named defendant in
each of the OEM Litigation cases.
1. HEWLETT-PACKARD COMPANY. HEWLETT-PACKARD CO. V. NU-KOTE
INTERNATIONAL, INC., Case No. C94-20647 JW (EIA):
HISTORY OF THE HP LITIGATION: On September 19, 1994, HP filed a lawsuit
against Nu-kote in the United States District Court for the Northern District of
California (the "CALIFORNIA DISTRICT COURT"), San Jose Division, Case No.
C94-20647 JW (EIA), (the "HP LITIGATION") alleging patent and trademark
infringement, unfair competition and false advertising. Nu-kote asserted
affirmative defenses to claims brought by HP, and asserted seven counterclaims
against HP, including inter alia: violations of the Lanham Act, Sherman and
Clayton Antitrust Acts. Nu-kote sought compensatory, punitive and treble
damages, court costs and attorneys' fees, as well as injunctive relief.
SECOND AMENDED DISCLOSURE STATEMENT 21
<PAGE> 30
On November 13, 1998, Nu-kote filed a motion for relief from stay to
allow the HP Litigation to continue despite the pendency of these bankruptcy
cases. Nu-kote felt that continuation of the HP Litigation was appropriate as
the litigation was large and complex, had been the subject of years of extensive
preparation, and was then on the eve of trial. The Bankruptcy Court found that
"cause" under ss. 362 of the Bankruptcy Code existed to lift the automatic stay
to allow the HP Litigation to proceed to trial.
Prior to trial the California District Court dismissed certain of HP's
patent claims and certain of Nu-kote's antitrust and other claims. The remaining
claims in the HP Litigation went to trial on May 17, 1999. On July 22, 1999, the
jury rendered its verdict. The jury found that Nu-kote infringed three HP
patents and certain of HP's trademarks, and engaged in false advertising. The
jury found that Nu-kote's conduct was willful. The jury awarded HP damages in
the amounts of $456,937.80, $434,120.00 and $1,138,394.00 for damages suffered
by HP for patent infringement claims, trademark/unfair competition claims and
false advertising claims. The jury found in Nu-kote's favor on one of HP's
patent claims and certain of HP's trademark claims. The jury also found that
Nu-kote's use of its current green and white packaging does not violate HP's
trademarks. The jury rejected all of Nu-kote's remaining antitrust claims and
awarded Nu-kote no damages. There remain before the California District Court
issues not addressed by the jury including those concerning HP's claims for
attorneys' fees, enhanced damages, costs and injunctive relief, and Nu-kote's
equitable defenses, claims for attorneys' fees and other relief. The California
District Court must resolve certain issues before entering judgment on the jury
verdict.
SETTLEMENT OF THE HP LITIGATION: Subsequent to the rendition of the
jury verdict in the HP Litigation, Debtors' management and general bankruptcy
counsel have entered into extensive good faith arms length negotiations seeking
settlement and resolution of the litigation between the parties. As a result of
these negotiations, an agreement (the "SETTLEMENT AGREEMENT") has been reached
and approved by the Court. Due to the confidential and proprietary nature of
certain portions of the Settlement Agreement, a redacted version of same is
attached to the Motion to Approve Compromise and Settlement Agreement as
proposed by and between Nu-kote and Hewlett-Packard Company, filed of record
with the Bankruptcy Court.
The principal material terms of the proposed Settlement Agreement which
have not been redacted due to concerns of confidentiality include:
(a) JUDGMENTS: HP shall be granted judgments and claims in its
favor dismissing Nu-kote's antitrust claims and awarding
damages on HP's claims on trademark infringement, unfair
competition, false advertising, attorneys' fees and costs in
the following amounts: $1,500,000.00 for awardable costs
incurred by HP in the HP Litigation, plus $456,937.80 for
damages suffered by HP on HP's patent infringement claims,
plus $434,120.00 and $1,138,394.00 for damages suffered by HP
on HP's trademark/unfair competition claims and false
advertising claims, plus
SECOND AMENDED DISCLOSURE STATEMENT 22
<PAGE> 31
$2,000,000.00 for HP's awardable attorney's fees in the HP
Litigation, for a sum total of $5,529,451.80. The judgments
and claims shall be treated as allowed liquidated, undisputed,
non-contingent, unsecured pre-petition claims in the
Bankruptcy Case. The judgments will not be entered until the
Patent Covenants become effective.
(b) INJUNCTIONS: Subject to the Patent Covenants granted by HP,
Nu-kote agrees to the entry of certain injunctions against
further patent infringement, trademark infringement, and false
advertising. The injunctions will not be entered until after
the Patent Covenants become effective.
(c) VACATUR OF PATENT RULINGS AND FINDINGS: The parties agree to
the vacatur of certain of the District Court's orders and
certain of the jury's findings regarding the validity,
invalidity or infringement of certain of HP's patents. In
addition, Nu-kote acknowledges the validity, enforceability
and infringement of certain HP patents.
(d) PATENT COVENANTS: HP grants to Nu-kote Patent Covenants, which
are covenants not to sue Nu-kote for infringement of certain
patents as set forth in the confidential portions of the
Settlement Agreement, which shall become effective upon
receipt by HP of the duly executed Certificates of Compliance
relating to the Document Escrow contemplated by the Settlement
Agreement. The Patent Covenants will allow Nu-kote to continue
to market its full line of HP compatible inkjet products.
(e) DOCUMENT ESCROW: Placement in escrow under seal, as agreed by
Nu-kote and HP, by Nu-kote and the persons and entities
defined as Nu-kote Persons under the Settlement Agreement of
all Discovery Materials, including but not limited to HP
Discovery Materials and Nu-kote Discovery Materials,
Deposition Materials, and Privileged Materials (Nu-kote alone
shall not be required to search for or turn over Privileged
Materials) that are in the possession, custody or control of
Nu-kote or any Nu-kote Persons or that Nu-kote or any Nu-kote
Persons know to be in the possession, custody or control of
any Litigation Vendors. Nu-kote Persons will be enjoined to
turn over all Discovery Materials that are currently in their
possession or that come into their possession in the future.
These Discovery Materials shall be placed in a storage
facility mutually acceptable to the parties to be held under
seal for the Retention Period as defined in the Settlement
Agreement, and verification of the placement of such Discovery
Materials by Nu-kote by execution of Certificates of
Compliance as contemplated in the Settlement Agreement.
Interested parties will have access to the Discovery Materials
only pursuant to Bankruptcy Court Order after notice and a
hearing, and only under the conditions set forth in the
Settlement Agreement as specified by the applicable Bankruptcy
Court Order. All Discovery Materials must be returned to the
escrow within the Retention Period, and at the end of the
Retention Period the Discovery Materials will be destroyed.
SECOND AMENDED DISCLOSURE STATEMENT 23
<PAGE> 32
(f) MUTUAL RELEASES: Mutual releases executed by and between
Nu-kote for itself and for any and all Subsidiaries,
predecessors, successors, assigns, and, to the extent
permitted by law, for its related companies, officers,
directors, employees, agents, shareholders, customers,
attorneys and consultants and HP for itself and for any and
all Subsidiaries, predecessors, successors, assigns, and, to
the extent permitted by law, for its related companies,
officers, directors, employees, agents, shareholders,
customers, attorneys and consultants.
(g) FUTURE DISPUTES: An agreement between HP and Nu-kote that each
will give the other written notice of and endeavor to resolve
any potential future disputes between themselves prior to
resorting to litigation, unless such issues or questions have
immediate adverse legal implications relative to the trademark
or trade dress rights of the offended party. The Bankruptcy
Court will retain exclusive jurisdiction to enforce the
Settlement Agreement and to resolve any disputes that might
arise under the Settlement Agreement.
(h) RESTRICTIONS ON TRANSFER: The agreement restricts who can
benefit from the Patent Covenants and requires HP's consent if
more than 20% of the stock or assets of Nu-kote are to be sold
to a third party.
This summary is not intended to supersede or replace any of the terms
of the Settlement Agreement and shall not be used to interpret the Settlement
Agreement. If there is any inconsistency between this summary and the terms of
the Settlement Agreement, the terms of the Settlement Agreement shall control.
Nothing in the Disclosure Statement or the Joint Plan modifies, alters
or changes in any way whatsoever, or at all, any of the terms and provisions of
the Settlement Agreement between HP and International or the Order Approving
Settlement Agreement Between Nu-kote International, Inc. and Hewlett-Packard,
ordered and entered on December 3, 1999. Neither the Disclosure Statement nor
Joint Plan are intended, nor do they, supersede or replace any of the terms of
the Settlement Agreement. Should the Disclosure Statement or Joint Plan or any
order approving same be inconsistent with the Settlement Agreement in any way
whatsoever, the terms of the Settlement Agreement shall control.
Nu-kote firmly believes that the Settlement Agreement negotiated
between Nu-kote and HP is in the best interests of the estate. The HP Litigation
has consumed the time and resources of the Company for in excess of four years.
If the HP Litigation had not been compromised and settled, the parties
anticipate that the judgment to be entered by the California District Court
would likely have been appealed, and final resolution of the HP Litigation would
have been protracted. Approval of the Settlement Agreement, negotiated with the
interests' of the Debtors and the creditors of this estate as a paramount
concern, has brought closure to this chapter of Nu-kote's history and has
brought the Debtors one step closer to reorganization.
SECOND AMENDED DISCLOSURE STATEMENT 24
<PAGE> 33
Finally, the benefits to Nu-kote stemming from the Settlement Agreement
are substantial. Although confidentiality concerns prevent a detailed recitation
of the effect of the Settlement Agreement on the business operations of Nu-kote,
Nu-kote represents that the Patent Covenants granted under the Settlement
Agreement are crucial to the continued business success of Nu-kote and will
allow Nu-kote to continue its full line of HP compatible products. The prompt
and efficient resolution of the claims asserted by HP in this case as
pre-petition unsecured claims instead of administrative claims is also of
significant value, and the intangible benefit of the Debtors, their management
and counsel directing their attention to other essential matters should not be
undervalued. The hearing on the Motion to Approve the Settlement Agreement was
held before the Bankruptcy Court on December 2, 1999, and the Order Approving
Settlement Agreement Between Nu-kote International, Inc. and Hewlett-Packard was
entered on December 3, 1999.
2. SEIKO EPSON CORP. SEIKO EPSON CORP. AND EPSON AMERICA, INC.,
PLAINTIFFS AND COUNTER-DEFENDANTS VS. NU-KOTE INTERNATIONAL, INC. AND PELIKAN
PRODUKTIONS, A.G., DEFENDANTS AND COUNTER-CLAIMANTS, Case No. CV95-2734RTJH
("EPSON I") and SEIKO-EPSON CORP. AND EPSON AMERICA, INC., PLAINTIFFS AND
COUNTER-DEFENDANTS VS. NU-KOTE INTERNATIONAL INC., AND PELIKAN PRODUKTIONS,
A.G., DEFENDANTS AND COUNTER-CLAIMANTS, pending in the U.S. District for Central
District of California under Case No. CV97-9587TJH ("EPSON II") (consolidated);
SEIKO EPSON CORP. AND EPSON AMERICA, INC., PLAINTIFFS/APPELLANTS VS. NU-KOTE
INTERNATIONAL, INC. AND PELIKAN PRODUKTIONS, A.G., DEFENDANTS/APPELLEES, Appeal
from Orders of U.S. District Court for Central District of California to the
U.S. Court of Appeals for the Federal Circuit under Docket Nos.
97-1313-1548-1566-1588 and 98-1015 ("APPEAL"):
On April 25, 1995, Epson commenced Epson I (which involves actions
which were included in the Appeal) alleging patent infringement, trademark
infringement, false advertising and unfair competition. International and PPAG
have filed answers that assert nine affirmative defenses to the claims alleged
in Epson's complaint. Both International and PPAG have asserted counterclaims in
an unspecified amount involving invalidity, unenforceability and
non-infringement of patent rights, together with violations of the Sherman and
Lanham Acts. International seeks damages and an injunction for false
advertising, trade libel, disparagement of goods, defamation, and unfair
competition. Epson II was filed on October 15, 1997 involving a second action
for patent infringement and has now been consolidated with Epson I by
stipulation. Little or no action has taken place regarding the pertinent matters
involved in Epson II.
International and PPAG were initially successful in disposing of six
out of seven patents alleged to be infringed through summary judgment action. In
a series of rulings in 1997, the District Court held six (6) out of seven (7) of
Epson's patents-in-suit in Epson I to be either invalid or unenforceable. The
District Court also held Nu-kote and PPAG in contempt for violating the PI. The
District Court's contempt ruling is memorialized in two written orders. The
first order directs Nu-kote and PPAG to pay Epson's lost profits of $1,050,849
and attorneys' fees of $31,413. The second order does not quantify a monetary
award. The District Court also issued an amended preliminary injunction (the
SECOND AMENDED DISCLOSURE STATEMENT 25
<PAGE> 34
"API"), which enjoins Nu-kote and PPAG from, among other things, infringing
certain patents that were not part of the PI. On or about September 28, 1998,
Epson filed a motion to hold Nu-kote and PPAG in contempt for violation of the
API. Pre-petition, the motion had not been decided by the District Court.
Epson appealed the District Court's invalidity and unenforceability
rulings. Nu-kote and PPAG appealed the District Court's contempt rulings. The
Appeal was fully briefed and oral argument was conducted before the Federal
Circuit on November 2, 1998, prior to the Petition Date.
The litigation with Epson has been the subject of many days of hearings
in the Bankruptcy Court. Initially, on December 1, 1998, Epson filed an
Emergency Motion for relief from the automatic stay claiming it was suffering
immediate and irreparable harm because the stay had interrupted the pending
patent litigation against International. Disposition of this Emergency Motion is
discussed in detail in this Disclosure Statement. In summary, the final hearing
on Epson's Emergency Motion commenced, after much rescheduling, on February 4
and 5, 1999. This hearing was not completed, and on February 10, 1999, the
Bankruptcy Court entered an Order scheduling the conclusion of the final hearing
for twenty days after the completion of the presentation of evidence in the HP
trial. The Bankruptcy Court specifically found that Epson's "claims of an
`emergency' need for relief from the stay are not consistent with its behavior,"
and that "the `emergencies' Seiko-Epson alleged in December to demand a final
hearing on less than three days' notice have evaporated or have not motivated
Seiko-Epson to expeditiously prosecute its `Emergency' Motion." In light of the
non-exigent circumstances, and in order to avoid interference with the HP trial,
the Bankruptcy Court then continued the final hearing until twenty days after
the completion of the presentation of evidence in the HP trial. The Bankruptcy
Court ruled that "the stay is continued in effect pending completion of this
final hearing." As set forth below, upon rendition of the verdict in the HP
Litigation, in order to avoid another prolonged hearing, the Debtors and Epson
agreed to limited relief from the automatic stay only to the extent necessary to
allow the Appeal to continue as and to the extent determined appropriate by the
United States Court of Appeals for the Federal Circuit, and the Federal Circuit
has now issued its opinion.
The California District Court has stayed all further proceedings in the
Epson Litigation. On April 1, 1999, the California District Court entered an
Order Deferring Decision on Application of Bankruptcy Stay to the United States
Bankruptcy Court for the Middle District of Tennessee, and Deferring Any Further
Proceedings in this Matter Pending Decision on that Issue. The California
District Court held "that there shall be no further proceedings in this action
until a decision on whether the bankruptcy stay applies to Pelikan Produktions,
A.G. issues from the United States Bankruptcy Court for the Middle District of
Tennessee."
The Debtors and Epson reached an agreement to certain limited relief
regarding the Appeal as sought in the Motion for Relief from Stay filed by
Epson. The Debtors and Epson agreed to relief from the automatic stay only to
the extent necessary to allow the Appeal to continue as and to the extent
determined appropriate by the United States Court
SECOND AMENDED DISCLOSURE STATEMENT 26
<PAGE> 35
of Appeals for the Federal Circuit. On September 8, 1999, the Federal Circuit
Court issued its opinion remanding the issues concerning the contempt orders to
the California District Court for further consideration, reversing the
invalidity and unenforceability summary judgment rulings on certain Epson
patents placing those patents back into the Epson Litigation, and stating that
Court's opinion that the automatic stay did not apply to PPAG. On October 29,
1999, the Federal Circuit issued an additional decision stating that Court's
opinion that its prior decision as to all issues, including vacatur and remand
of the assessment of sanctions, is fully applicable to Nu-kote as to Pelikan. No
trial date for the Epson litigation has been set by the California District
Court.
3. CANON USA, INC. CANON USA, INC. V. NU-KOTE INTERNATIONAL,
INC., Case No. SA CV-95-288 (the "CANON LITIGATION"):
On April 3, 1995, Canon, Inc., a Japan corporation, and its U.S.
affiliates, Canon Computer Systems, Inc. and Canon USA, Inc. (collectively,
"CANON") filed a lawsuit in the United States District Court for the Central
District of California styled Canon Computer Systems, Inc. v. Nu-kote
International, Inc. seeking, among other things, to have the Court enjoin
International and its affiliates from infringing its patents and from making
false designations of origin or false descriptions regarding International's
cartridges and kits, and, seeking compensatory, punitive and treble damages,
court costs and attorney's fees. In July 1996 Canon filed a second and related
lawsuit, alleging infringement of an additional patent, bringing the total
number of patents at issue in the Canon case to six.
International filed an answer asserting twelve affirmative defenses to
the claims alleged in Canon's complaint. These include, among others, defenses
that Canon's patents are invalid, unenforceable and/or not infringed by
International, that Canon has defrauded the U.S. Patent and Trademark Office and
trademark misuse. Additionally, International has alleged counterclaims in an
unspecified amount which include claims of monopolization and attempted
monopolization of the aftermarket for replacement cartridges for Canon printers.
International is also seeking declaratory relief asking the Court to find that
it has not infringed any valid claim of Canon's right in the six patents in the
suits, cancellation of Canon's patents because of fraud on the U.S. Patent and
Trademark Office, damages and an injunction for intentional interference with
business relations, trade liable, disparagement of goods, defamation and unfair
competition.
By Order dated April 18, 1997, the Court construed the claims of the
1994 patent as requested by Nu-kote, not as requested by Canon. Nu-kote filed a
Motion for Summary Judgment on the basis that the 1994 Patent is anticipated by
prior art. Canon also filed a Motion for Summary Judgment on the 1994 Patent. On
May 26, 1998, the Court held the claims of the 1994 Patent invalid because they
are anticipated by the prior art. This was a significant victory for Nu-kote,
and Canon has appealed this ruling, Appeal Nos. 98-1445 - 1453, is also pending
in the United States District Court of Appeals for the Federal Circuit
On June 16, 1997, the Court granted Canon's Motion for Summary Judgment
on the issues of inventorship, obviousness and enforceability of the `928
patent, but denied
SECOND AMENDED DISCLOSURE STATEMENT 27
<PAGE> 36
Canon's MSJ with respect to the key issue of whether patented features of that
same patent are primarily ornamental or functional. A design patent is invalid
if the patented features are primarily functional rather than primarily
ornamental. Because it denied Canon's Motion as to that issue, the Court ruled
that it was premature to rule on whether this particular patent has been
infringed. The Court granted Canon's Motion for Summary Judgment on the `140
patent, but only as to two discontinued versions of Nu-kote's products. The
Court confirmed that the current version of the Nu-kote cartridge, which is a
design around introduced by Nu-kote on receiving notice of this subject patent,
does not infringe the patent.
J. OTHER CLAIMS AND CAUSES OF ACTION
In addition to the counter-claims asserted in the OEM Litigation,
Nu-kote owns the following claims and causes of action:
1. PREFERENTIAL TRANSFERS/FRAUDULENT TRANSFERS
Within 90 days of the Petition Date, Nu-kote made a number of payments
to creditors. Each of these payments is potentially an avoidable preference or
fraudulent transfer. These payments will be analyzed by the Reorganized Debtors
or the Litigation Trustee, as the case may be, and pursued to the extent it is
determined that the payment may be avoidable. A list of the payments made by
each of the Debtors within the 90 day period preceding the Petition Date is
attached to each of the Statements of Financial Affairs filed by each Debtor as
Attachment 3.A.
2. POTENTIAL CLAIMS AGAINST GLASS & ASSOCIATES
Glass & Associates was the workout company employed by Nu-kote to
provide interim management services in December, 1997. The services of Messrs.
Shaun K. Donnellan and William R. Ligon were made available to Nu-kote pursuant
to a consulting agreement between Glass & Associates and Nu-kote. While Nu-kote
did not compensate Messrs. Donnellan and Ligon directly for their services,
Nu-kote paid Glass & Associates $1,766,315 during the one year immediately
preceding the commencement of this case. These services represented operational,
sales, financial, marketing and management consulting services provided by
Messrs. Donnellan and Ligon and other associates of Glass & Associates.
Additionally, the above amount includes the reimbursement of actual and
reasonable expenses incurred by Glass & Associates in performing services for
Nu-kote. Pursuant to the consulting agreement executed between Holding and Glass
& Associates, Nu-kote paid a deposit to Glass & Associates for services to be
rendered. Nu-kote reassigned the responsibilities of Glass & Associates, and
Glass & Associates then severed its relationship with Nu-kote in October, 1998,
but $125,000 of the deposit has not been returned.
Nu-kote may also possess claims against Glass & Associates, Donnellan,
Ligon and certain other of its officers, directors, members, representatives,
agents, attorneys, accountants, and employees (the "Glass Group") due to acts or
omissions in connection
SECOND AMENDED DISCLOSURE STATEMENT 28
<PAGE> 37
with services to Nu-kote provided pursuant to the consulting agreement. Upon
confirmation of the Joint Plan, other than the obligations under the Joint Plan,
the Debtors and their related affiliates shall release all claims that they may
hold or come to hold as of the Effective Date of the Plan, against the Glass
Group specifically excluding those claims which the Debtors assert for the
return of the $125,000 deposit plus interest discussed above and provided that
the Glass Group shall also execute a release as set forth in the Joint Plan.
Notwithstanding the above, the release of the Glass Group is not intended to and
shall not apply to any claims Coudert Brothers may have against the Glass Group.
3. CLAIMS AGAINST PELIKAN HOLDING
In connection with the acquisition of the hardcopy supplies business of
Pelikan Holding in 1995, Pelikan Holding agreed to indemnify Nu-kote Holding,
Inc. for all losses, liabilities and costs resulting from or arising out of
environmental conditions existing on or prior to February 24, 1995 at the
facilities acquired from Pelikan Holding, such as Nu-kote's Derry, Pennsylvania
and Franklin, Tennessee facilities. With respect to certain potential
pre-closing environmental liabilities and costs at the Franklin, Tennessee
facility, identified on a schedule agreed to by Nu-kote and Pelikan Holding,
Pelikan Holding's liability for environmental cleanup costs is in an amount up
to $2.5 million, which obligation is collateralized by a letter of credit.(1)
The Tennessee Department of Employment Security and the Tennessee
Department of Environment and Conservation ("T-DEC") filed an objection to the
Debtors' initial disclosure statement on the basis that the Debtors had failed
to provide adequate information regarding the voluntary environmental cleanup
program at the Franklin, Tennessee facility to which the Debtors are a party via
a Consent Order and Agreement. To provide additional information about the
environmental situation at the Franklin, Tennessee facility and the cleanup
program, the Debtors add as follows, incorporating in part the suggested
language of the above-referenced Tennessee Departments:
- --------
(1) A motion to assume or reject the Asset and Stock Purchase Agreement
between Holding and Pelikan Holding dated as of November 15, 1994 and the Escrow
Agreement referenced therein has not been filed by the Debtors. It is the
Debtors' belief that same is not necessary as the referenced agreements are not
executory in nature because Pelikan Holding has fully performed its obligations
thereunder. However, should the Debtors deem further action necessary, all
appropriate steps to assume same will be taken. Additionally, however, in
further response to certain objections by Pelikan Holding, the Plan Proponents
include the following language requested by Pelikan Holding: "The Disclosure
Statement also fails to disclose that the plan does not provide for the
assumption of the agreements with Pelikan creating the environmental indemnity
as well as that three of the claims of Pelikan against the Debtors would have to
be satisfied to assume the agreement and that some of the other past defaults of
the Debtors are not curable. The cumulative effect of the foregoing would
release the environmental indemnity obligations and render the purported
transfer of the environmental indemnity obligations to the Litigation Trust
valueless and a nullity. Alternatively, if such environmental indemnity
obligations are not to be transferred, the effect would be to render the
indemnity unavailable to protect the reorganized debtor against environmental
liability in the manner described in Sections H 2 and I of the Disclosure
Statement." The Plan Proponents dispute the foregoing statements by Pelikan
Holding.
SECOND AMENDED DISCLOSURE STATEMENT 29
<PAGE> 38
Pursuant to Tennessee Code Annotated ss. 68-212-224, a party who is
willing and able to conduct an investigation and cleanup of an inactive
hazardous substance site can do so by entering into a voluntary program of clean
up of that site under the supervision of the Superfund Division of the T-DEC.
International entered into such a voluntary plan indicating its willingness and
ability to provide for the clean up of Tennessee Superfund site number 94-511
situated at the Franklin, Tennessee plant location. To that end, International
signed a Consent Order and Agreement with the T-DEC. The investigation into the
extent of the contamination of soil and ground water at the Franklin site has
commenced. It is not expected, however, that this investigation, which will
provide an estimate of the cost of cleanup will be completed prior to the
Confirmation Hearing, and could take as long as two years. The Debtors intend to
comply with the Consent Order and Agreement to initiate and complete a cleanup
plan, and fully anticipate that all costs associated with same fall within the
scope and amount of the letter of credit with Pelikan Holding. Nu-kote also
possesses certain other claims against Pelikan Holding based on the purchase of
the Company's hardcopy supplies business, which Pelikan Holding contends are
subject to setoff.
4. SETTLEMENT OF THE DECLARATORY JUDGMENT ACTION AGAINST THE
LENDERS ASSERTED BY THE DEBTORS
On April 30, 1999, Nu-kote filed a Complaint for Declaratory Relief to
Determine the Validity of the Lender Group's Alleged Liens on Debtor's Tort
Claims Against Third Parties and the OEM Litigation against the Lenders,
Adversary No. 399-0198A. This Complaint was brought for the purpose of seeking a
determination by the Bankruptcy Court on the validity of the Lenders' assertion
that they have been assigned an interest in and/or possess perfected liens on
tort claims that are property of the estate and, specifically, the anti-trust
tort counterclaims asserted in, and/or the proceeds of those counterclaims, in
certain pending litigation involving International with the OEMs. Nu-kote's
complaint asserts that the Lenders do not possess perfected liens on those tort
claims because all of Debtors' counterclaims in the OEM Litigation are
anti-trust violations, which sound in tort. Accordingly, the Debtors assert that
the OEM Counterclaims, other causes of action and the proceeds from the OEM
Litigation, which may arise by way of settlement or otherwise, "arise out of
tort" and are excluded from the Lenders' security interest in general
intangibles by ss. 9-104(11) of the Uniform Commercial Code. Similarly, Nu-kote
asserted that the Lenders' claims that they have been assigned an interest in
the OEM Litigation proceeds must fail because there is no instrument of
assignment regarding the OEM Litigation, and the Lenders had not notified the
obligors on the interest "assigned," the OEMs, of the existence of this
purported assignment. The Lenders disagreed with all such contentions.
Nu-kote filed a Motion for Summary Judgment requesting that the
Bankruptcy Court find as a matter of law that the Lenders do not possess
security interests in and/or have not been assigned an interest in the proceeds
of the anti-trust tort counterclaims asserted in the OEM Litigation. The Lenders
filed a Cross Motion for Summary Judgment. After the return of the HP verdict,
the Bankruptcy Court stayed this adversary proceeding and has not ruled on
Nu-kote's allegations in the Complaint or either Nu-kote's or the Lenders'
SECOND AMENDED DISCLOSURE STATEMENT 30
<PAGE> 39
respective Motions for Summary Judgment. The Bankruptcy Court has continued the
hearing on the Motions for Summary Judgment until after consideration of the
Joint Plan. However, other than the obligations under the Joint Plan, the
Debtors and their related affiliates shall release all claims that they may hold
or come to hold against the Lenders as of the Effective Date of the Joint Plan,
and the adversary proceeding shall then be moot and shall be dismissed with
prejudice.
5. SETTLEMENT OF POTENTIAL SUBORDINATION OF THE LENDERS'
UNSECURED CLAIMS ASSERTED BY THE DEBTORS
To comply with the amended terms of the US Facility, a turn around
company was employed by Debtors in December of 1997. Accordingly, Messrs.
Donnellan and Ligon of Glass & Associates were put in place by Nu-kote to
provide interim management services. The Company paid Glass & Associates
$1,766,315 during the one year immediately preceding the commencement of this
case.
Further, the credit agreement evidencing the US Facility with the
Lenders was amended six times in 1997 and 1998, with fees and expenses to
Nu-kote exceeding $364,000 per amendment. In total, in just over a year
preceding the Petition Date, Nu-kote paid the Lenders in excess of $2.7 million
in fees and expenses of the Lenders and their professionals in addition to in
excess of $11.4 million in interest on funds borrowed under the Credit
Facilities.
Section 510(c) of the Code provides that a Court may subordinate the
claim of a creditor on equitable grounds. Equitable subordination is appropriate
when a three part test is met: (i) the claimant must have engaged in some type
of inequitable conduct; (ii) the misconduct must have resulted in some type of
injury to the creditors or conferred an unfair advantage on the claimant; and
(iii) equitable subordination of the claim must not be inconsistent with the
provisions of the Bankruptcy Code. The Debtors assert that the employment of
Glass & Associates per the terms of the amendment of the US Facility did not
accomplish the financial restructuring of Nu-kote but instead contributed to its
already strained cash position.
Under these circumstances, the Debtors assert that equitable
subordination of the unsecured claims of the Lenders may well be merited. The
Lenders strongly disagree with such assertion.
Pursuant to the Joint Plan, the potential cause of action for equitable
subordination of the Lenders' unsecured claim by the Debtors will not be
pursued. Upon confirmation of the Joint Plan, other than the obligations under
the Joint Plan, the Debtors, their respective officers, directors,
representatives and agents shall fully release and discharge the Lenders on the
Effective Date of the Joint Plan, all claims they may hold or come to hold
(which claims arise out of any dealings or contacts by and among the Lenders,
the Debtors, or the Creditors' Committees and which relate to or are connected
with the Debtors) as of the Effective Date of the Joint Plan.
SECOND AMENDED DISCLOSURE STATEMENT 31
<PAGE> 40
6. POTENTIAL CAUSE OF ACTION AGAINST THE OFFICERS AND DIRECTORS
OF NU-KOTE
On March 31, 1999, the Lenders served a Notice of Claim on Nu-kote and
its officers and directors. This Notice of Claim accuses both former and current
officers and directors of the Debtors of breaches of fiduciary duty, negligence,
breaches of contract, breaches of the duties of good faith and fair dealing,
misrepresentation, corporate waste and mismanagement. Specifically, the Notice
of Claim asserts that both the current and former officers and directors of
Nu-kote have breached their fiduciary duties to the creditors by the following
actions:
(a) Pelikan Acquisition and Subsequent Actions in Europe
(b) Lemmer Litigation
(c) Decline of Impact Business
(d) Removal of Shaun Donnellan
(e) Sixth Amendment
(f) Hewlett-Packard Litigation
(g) Bankruptcy Filing
(h) Ongoing Patent Infringement
(i) Duties to Lenders
Nu-kote asserts that any and all allegations against the Current
Officers and Directors of Nu-kote are wholly without merit. Nu-kote asserts that
the Current Officers and Directors have performed valuable services during this
Chapter 11 Case for the benefit of the Debtors, the Estates, and all Creditors.
Nu-kote believes that these services have greatly enhanced the Debtors' ability
to reorganize successfully as proposed in the Joint Plan.
In the event that Richmont is the Successful Bidder and closes under
the Joint Plan, including payment of the amounts required under the Bidding
Procedure and the Joint Plan in good and collected funds for the benefit of the
Debtors and their creditors, at closing the Debtors, their estates and the
Lenders shall execute and deliver broad, full and final releases of all claims
they may hold (which claims arise out of any dealings or contacts by and among
the Lenders or the Nu-kote Entities, and which relate to or are connected with
the Nu-kote Entities) against the Current Officers and Directors of the Debtors.
"Current Officers and Directors" is a defined term under the Joint Plan that
means "for purposes of the releases contemplated in the Joint Plan, all current
officers and directors of the Debtors, as of the date of filing of this Joint
Plan including John Rochon, Patrick Howard, Phillip Theodore, Ian Elliott and C.
Ronald Baiocchi." There is no time restriction for the releases to be executed
for the Current Officers and Directors. Such releases shall be in consideration
of (a) Richmont closing under the Joint Plan, including payment of the amounts
required under the Bidding Procedure and the Joint Plan in good and collected
funds to the Lenders and for the benefit of creditors and (b) the continued
services of the Current Officers and Directors. In the event that a Successful
Bidder other than Richmont acquires the assets or stock of the Debtors, the same
releases shall be executed and delivered, but with the requirement of a $300,000
payment. In the event Richmont shall
SECOND AMENDED DISCLOSURE STATEMENT 32
<PAGE> 41
determine not to pay the $300,000 for the releases hereunder when required,
then there shall be no releases as provided in the Joint Plan.
K. INTERCOMPANY PAYABLES AND RECEIVABLES
Pre-petition, Nu-kote maintained a generalized, intercompany accounting
system shared between Nu-kote and all of its subsidiaries and related entities.
In the ordinary course of Nu-kote's business, numerous debt and credit
transactions thus routinely take place between the Debtors and between the
Debtor(s) and related nondebtor entities. Nu-kote was allowed to maintain this
system during the Bankruptcy Case. The schedule of Intercompany receivables,
including receivables owed by the related nondebtor entities, is as follows:
<TABLE>
<S> <C> <C>
1. Holding: $ 84,986,520.00
-------
2. International: $ 328,114,018.00
-------------
3. Imaging: $ 28,996,196.00
-------
4. ICMI: $ 72,160,192.00
----
5. Future Graphics: $ 54,651,045.00
---------------
6. Imperial: $ 11,973,676.00
--------
7. Latin America: $ 260,730.00
-------------
</TABLE>
As a consequence of the substantive consolidation of the Debtors, all
intercompany claims between or among the Debtors are eliminated for Plan
purposes so that such claims will not be classified, will not vote and will not
receive any distribution under the Joint Plan.
ARTICLE VI. LIABILITIES OF THE DEBTORS
A. ADMINISTRATIVE EXPENSES
Administrative Claims are any claim that is defined in ss. 503(b) of
the Code as being an "administrative expense" and granted priority under ss.
507(a)(1) of the Code and including:
- a Claim for any cost or expense of administration in
connection with the Case, including, without limitation, any
actual, necessary cost or expense of preserving the Debtors'
estates and of operating the business of the Debtors incurred
on or before the Effective Date;
- the full amount of all Allowed Claims for compensation for
legal, accounting and other services or reimbursement of costs
under ss.ss. 330, 331 or 503 of the Bankruptcy Code;
- all fees and charges assessed against the Debtors' estates
under Chapter 123 of Title 28 of the United States Code; and
SECOND AMENDED DISCLOSURE STATEMENT 33
<PAGE> 42
- any Allowed post-petition taxes and related items, including
any interest and penalties on such post-petition taxes.
1. PROFESSIONALS
Nu-kote has employed the law firm of Hance | Scarborough | Wright,
L.L.P. ("HSW") as lead bankruptcy counsel in connection with these proceedings.
Nu-kote has also employed the law firm of Harwell, Howard, Hyne, Gabbert &
Manner, P.C. ("H3GM") as local bankruptcy counsel in Nashville, Tennessee. HSW
was paid a retainer of $320,000 and H3GM was paid a retainer of $100,000.
Payment to Nu-kote's counsel throughout the Bankruptcy Case has been
accomplished pursuant to an agreed payment mechanism whereby HSW, H3GM and
certain other retained professionals have provided counsel for the three
creditors' committees, counsel for the Lenders, and the U.S. Trustee detailed
billing statements containing a description of the services rendered, time spent
and the name and hourly rate of the attorney or paraprofessional performing the
work on a monthly basis. This process has provided a mechanism for partial
monthly payments of 85% of amounts billed to counsel for the Debtors without the
necessity of monthly hearings and without prejudice to the rights of
parties-in-interest to object to same at hearings which will, of necessity, be
held on the fee applications of the Debtors' professionals.
In addition, due to the size and complexity of the Company's business
and the amount of litigation in which Nu-kote was engaged pre-petition, Nu-kote
has employed the following additional professionals:
(a) Crooked Creek Capital, L.L.C., MacDonell Roehm: Special
Advisor to Nu-kote Holding, Inc. and Nu-kote International,
Inc.
(b) Coudert Brothers: Special Litigation Counsel for the Debtors,
OEM Litigation.
(c) Akin, Gump, Strauss, Hauer & Feld, L.L.P.: Special Counsel to
Debtors.
(d) Lain Faulkner: Special Accountants to DIP.
(e) Bryan, Pendleton, Swats & McAllister LLC: Actuarial
Consultants.
(f) Anthony Perry & Prudential Preferred Realty: Real Estate
Agents for DIP.
(g) Randal S. Mashburn: Litigation Examiner, OEM Litigation.
(h) CB Richard Ellis, Inc.: Real Estate Broker for DIP.
(i) Jaeckle Fleischman & Mugel, LLP: Special Environmental Counsel
for DIP.
(j) Fay, Sharpe, Beall, Fagan, Minnick & McKee L.L.P.: Special
Patent & Trademark Counsel for DIP.
SECOND AMENDED DISCLOSURE STATEMENT 34
<PAGE> 43
(k) Lynn, Stodghill, Melsheimer, & Tillotson, L.L.P.: Special
Litigation Oversight Counsel, OEM Litigation.
(l) Norman E. Hall & Norman Hall & Associates: Real Estate
Appraisers for DIP.
(m) Conway, Del Genio, Gries & Co., L.L.C.: Investment Bankers.
(n) KPMG: Accountants for DIP.
The Unsecured Creditor's Committees have likewise employed certain law
firms, accounting firms, and financial advisors since the formation of the
committees. Greenebaum Doll & McDonald PLLC has been employed as counsel for the
Unsecured Creditor's Committee of International. Poyner & Spruill, LLP has been
employed as lead counsel and Mendes & Gonzales, PLLC has been employed as local
counsel for the Unsecured Creditor's Committee of ICMI. Kurlbaum Stoll Seaman &
Mustoe, PC has been employed as lead counsel and Ortale, Kelley, Herbert &
Crawford as local counsel for the Unsecured Creditor's Committee of Graphics.
The Bankruptcy Court also authorized the employment of Arthur Andersen LLP as
accountants and financial advisors to the Unsecured Creditor's Committee of
International and ICMI.
In addition, pursuant to the Chubb Agreement and the Chubb Order, the
U.S. Trustee was authorized to appoint Randal S. Mashburn as Litigation
Examiner. Mr. Mashburn has also been appointed as Examiner under the mandatory
provisions of ss. 1104(c)(2) of the Bankruptcy Code.
2. PAYMENT OF PROFESSIONALS EMPLOYED PURSUANT TO SS. 330 OF THE
BANKRUPTCY CODE
The professionals employed pursuant to ss. 330 of the Bankruptcy Code
have not yet filed their final fee applications, thus the amount of claims
within this category is not yet known. Under the Joint Plan, each Professional
shall file their final fee application within sixty (60) days after the
Effective Date, however, each Professional must file an estimate not later than
5 days before the Effective Date so that the estimated amounts may be reserved
by the Reorganized Debtors on the Effective Date.
Under the terms of the Joint Plan, the Fee Claims of the Committee
Professionals shall be Allowed Administrative Claims to the extent that such Fee
Claims are each approved by the Bankruptcy Court and so long as the aggregate
allowed Fee Claims of such Committees' Professionals do not exceed $450,000, and
shall be paid in full in one cash payment on the Effective Date.
Based upon the filings thus far in this case and the number of
professionals employed by the debtors, the Plan Proponents assert that a
reasonable estimate of the Fee Claims that will be accrued yet unpaid at the
Confirmation Date will be approximately $1,000,000. Additionally, under the
terms of the Bankruptcy Court's Order employing
SECOND AMENDED DISCLOSURE STATEMENT 35
<PAGE> 44
Conway, Del Genio, Gries & Co., L.L.C. ("CONWAY, DEL GENIO") as investment
bankers for the Debtors, Conway, Del Genio will receive a 1 1/2% transaction fee
upon the closing of the sale of the stock or assets of the Debtors. Also
pursuant to that Order, Conway, Del Genio has already received monthly payments
totaling $100,000 to be credited against the 1 1/2% transaction fee and
reimbursement of expenses on a monthly basis.
3. NORWEST BUSINESS CREDIT, INC.
As detailed herein, in December 1998, the Bankruptcy Court entered an
Order approving DIP financing from Norwest Business Credit, Inc. providing for a
$7.5 million DIP Credit Facility (the "DIP FACILITY"). This DIP Facility is in
the form of a line of credit which has helped fund the Company's working capital
requirements as it reorganizes under the Bankruptcy Code. Because of an
improving cash position, the most Nu-kote has drawn down on the DIP Facility was
$3,200,000 on January 21, 1999, and the current net amount of borrowings on the
DIP Facility as of October 22, 1999, was $0. Additionally, pursuant to an Agreed
Order for Adequate Protection and extension of Order Granting Second Amended
Emergency Motion for Authority to Use Cash Collateral (the "AGREED ORDER")
entered August 20, 1999, effective nunc pro tunc to June 1, 1999, the Debtors
submitted a six month budget (the "BUDGET") and agreed that future borrowings
under the DIP Facility would be made only in accordance with the Agreed Order,
the Budget and the Court's order approving the DIP Facility.
The Norwest Claim arising from the DIP Facility will be paid in full by
the Purchaser or the Reorganized Debtor on the Effective Date without the need
for Norwest to file Proofs of Claim or an Application of any kind. Pursuant to
Section 2.7(a) of the Credit and Security Agreement, if the DIP Facility matures
due to the confirmation of a Chapter 11 plan, the Debtors shall be obligated to
pay Norwest a prepayment fee in an amount equal to a percentage of the Maximum
Line (defined in the Credit and Security Agreement as $7,500,000) as follows:
"(i) two percent (2%) if the termination or reduction occurs on or before
October 31, 1999; and (ii) one percent (1%) if the termination or reduction
occurs thereafter." Until the Norwest Claim is paid in full pursuant to the
Joint Plan, Norwest shall retain the Norwest Lien.
4. RETENTION AGREEMENTS WITH KEY EMPLOYEES
As detailed herein, on June 10, 1999, the Bankruptcy Court entered its
order approving the Motion to Approve Key Employee Retention Agreements filed by
the Debtors. Upon confirmation of the Joint Plan, payments to the Key Employees,
as defined in that Motion, will be paid as an administrative expense of the
Debtors. The payments due to the Key Employees equate to payments of from six
months' to one year's salary for those employees, and the total aggregate amount
of such payments is $737,500. In recognition of the Retention Agreement payments
as previously allowed Administrative Claims, the Debtors filed a Notice of
Previously Allowed Administrative Claims on or about December 15, 1999.
5. ADMINISTRATIVE CLAIMS ASSERTED BY THE LITIGATING OEMS
SECOND AMENDED DISCLOSURE STATEMENT 36
<PAGE> 45
Canon, Epson and HP have all filed proofs of claim asserting alleged
entitlement to priority in payment. The purported basis for this priority
payment status for these asserted claims of the Litigating OEMs is alleged
post-petition continuing patent infringement by the Company. The asserted amount
of Canon's proof of claim was filed under seal and Epson's proof of claim was
filed in the amount of $47,820,857, $7,445,001 of which Epson has asserted is
entitled to priority payment status. Epson and Canon have each subsequently
filed under seal requests for administrative claims as set forth below. HP's two
proofs of claim were filed in unknown amounts, and recovery from the Debtors'
estate by HP is limited to an allowed unsecured claim pursuant to the Settlement
Agreement. Now that the Settlement Agreement has been approved, and provided
that it becomes effective, HP will no longer assert an administrative claim.
Nu-kote disputes any and all such claims of "continuing patent infringement" by
the Company.
6. ADMINISTRATIVE CLAIM ASSERTED BY THE PBGC
The Pension Benefit Guaranty Corporation ("PBGC") has filed three
proofs of claim. PBGC is a wholly owned United States government corporation
that administers the defined benefit pension plan termination insurance program
under Title IV of the Employee Retirement Income Security Act of 1974 ("ERISA").
The Nu-kote International, Inc. Retirement Income Plan (the "PENSION PLAN") is a
single employer defined benefit pension plan covered by Title IV of ERISA.
International and all members of its controlled group are obligated to
contribute to the Pension Plan at least the amounts necessary to satisfy ERISA's
minimum funding standards, ERISA ss. 302, 29 U.S.C. ss. 1082; Internal Revenue
Code of 1986 ("IRC") ss. 412. In addition, in the event of a termination of the
Pension Plan, International and all members of its controlled group may be
jointly and severally liable for the unfunded benefit liabilities of the Pension
Plan, as well as any unpaid minimum funding contributions and unpaid premiums.
The minimum funding contribution to the Pension Plan is approximately
$500,000 per annum. If the Pension Plan is not terminated, the Reorganized
Debtors will be required to continue to meet the minimum funding contribution
requirements. The PBGC has filed a claim for the alleged unfunded portion of the
Pension Plan, contingent upon the termination of the Pension Plan, asserting
entitlement to administrative status in the estimated amount of $6,359,200. If
the Pension Plan is terminated, it is the PBGC's position that this $6,359,200
asserted administrative claim is due and payable.
The PBGC has also filed an unliquidated claim for insurance premiums,
interest and penalties allegedly due from the Company under the Pension Plan
asserting entitlement to administrative claim status for any portions of that
claim arising post-petition and general unsecured status for any pre-petition
portion. Lastly, the PBGC has filed an unliquidated claim for alleged
contributions that may be owed to the Pension Plan, asserting entitlement to
administrative claim status for any portions of that claim arising post-petition
and general unsecured status for any pre-petition portion. The Claim of the PBGC
is contingent upon the termination of the Pension Plan. The Pension Plan may be
terminated only if the statutory requirements of either ERISA ss. 4041, 29
U.S.C. ss. 1341,
SECOND AMENDED DISCLOSURE STATEMENT 37
<PAGE> 46
or ERISA ss. 4042, 29 U.S.C. ss. 1342, are met. Nu-kote does not intend to
terminate the Pension Plan upon Confirmation.
If the Pension Plan remains on-going after confirmation of the Joint
Plan, the Reorganized Debtors will continue to fund and administer the Pension
Plan consistent with the requirements of ERISA and the IRC. In addition, if the
Pension Plan remains on-going after confirmation of the Joint Plan, PBGC will
withdraw its claims. Nothing in the Joint Plan shall be construed as releasing
or in any way discharging PBGC's claims.
7. ADMINISTRATIVE CLAIM ASSERTED BY WAUSAU
Employers Insurance of Wausau ("WAUSAU") has filed a Claim in the total
asserted amount of $62,617,190. Documentation attached to the Claim alleges that
the Claim is based upon Nu-kote's insurance policy with Wausau, an agreement
dated August 22, 1996 between Wausau and Nu-kote, and an alleged right to
recover attorney's fees in the OEM Litigation. The Claim filed by Wausau asserts
secured claims and general unsecured claims for some portion of its total
asserted Claim. The Claim filed by Wausau also asserts entitlement to
administrative priority for portions of its claim with $1,005,000 asserted as "a
liquidated administrative priority sum" and "an unliquidated contingent
administrative priority claim which should not exceed $34,717,190."
Subsequently, Wausau filed a request for administrative claim in the amount of
$16,256,209.00.
8. OTHER ASSERTED ADMINISTRATIVE CLAIMS
On November 12, 1999, the Court entered its Order providing that any
party seeking to assert an administrative expense payment against the Debtors
under 11 U.S.C. ss. 503 through September 30, 1999, except for case
professionals whose employment was approved by the Bankruptcy Court, must file a
request for payment of such administrative expense with the Court by December
15, 1999. In response to this Order, the following parties filed requests for
administrative expense payments:
<TABLE>
<CAPTION>
CLAIMANT ASSERTED ADMINISTRATIVE
CLAIM AMOUNT
<S> <C>
Air Products & Chemicals, Inc. $1,083.63
Bank of America (Lenders) undetermined; contingent upon failure
of adequate protection
Canon $ [filed under seal]
PBGC [unliquidated]
Retention Agreement $737,500.00
Epson $ [filed under seal]
Unisys $13,736.74
Wausau $16,256,209.00
Wells Fargo Business Credit, Inc. f/k/a undetermined
Norwest Business Credit, Inc.
</TABLE>
SECOND AMENDED DISCLOSURE STATEMENT 38
<PAGE> 47
B. SECURED CLAIMS
1. SECURED CLAIM OF THE LENDERS
The secured claim of the Lenders, comprised of the US Facility, the UK
Facility and the Swiss Facility is in the filed amount of $142,392,791.71. The
claim of the Lenders is secured by the accounts, chattel paper, inventory,
equipment, instruments, general intangibles, fixtures and capital stock, and any
and all products and proceeds thereof, as well as all real property and
improvements and any and all products and proceeds thereof of the Debtors.
(a) THE US FACILITY. As set forth above, International, as
Borrower, and Holding, as Guarantor, are parties to a certain
Credit Agreement dated as of July 31, 1997, referred to herein
as the US Facility. The nine lenders on the US Facility are
Barclays Bank PLC as Lender and Documentation Agent; Bank of
America, National Association, as successor in interest to
NationsBank of Texas, NA as Collateral Agent, Lender and
Administrative Agent; Commerzbank Aktiengesellschaft; Deutsche
Bank A.G., New York Branch or Cayman Islands Branch; First
National Bank of Chicago; Societe Generale; First American
National Bank; ABN AMRO Bank, N.V.; and Credit Lyonnais are
referenced herein collectively as the Lenders. The current
amount outstanding on the US Facility is approximately $95
million.
(b) THE UK AND SWISS FACILITIES. Additionally, certain of the
non-Debtor affiliates were parties to two other credit
agreements, each dated July 31, 1997, described above and
referenced as the UK Facility and the Swiss Facility. The
eight lenders on the UK Facility and the Swiss Facility are
the above-referenced Lenders under the US Facility with the
exception of First American National Bank. The current amount
outstanding on the UK Facility on the Petition Date was
approximately $10.3 million, and the current amount
outstanding on the Swiss Facility on the Petition Date was
approximately $33.6 million. The sale of the Pelikan Hardcopy
Subsidiaries, however, has reduced this amount by
$8,276,041.30 and $9,700,000 of debt was converted to equity.
2. OTHER ASSERTED SECURED CLAIMS
Other creditors have asserted secured claims totaling in excess of $63
million against the Debtors. The Debtors believe that numerous of these Claims
asserting
SECOND AMENDED DISCLOSURE STATEMENT 39
<PAGE> 48
secured status are either misfiled, are actually intended to assert Unsecured
Claims, or are duplicative of Claims listed in the Schedules.
<TABLE>
<CAPTION>
CLAIMANT ASSERTED SECURED
-------- CLAIM AMOUNT
------------
<S> <C> <C>
a. RSL Industrial Contracting, Inc. $ 37,022.59
b. Atlantic Molding $ 46,269.00
c. ERS Imaging Supplies, Inc. $ 16,825.50
d. Phillips - Joanna $ 164,136.38
e. GE Capital-Colonial Pacific Leasing $ 6,500.00
f. CIT Group/Equipment Financing, Inc. $ 4,003.52
g. Newcourt Communications Finance Corp. $ 21,824.78
h. Border Lift $ 4,082.83
i. Tennant Company $ 4,358.04
j. Oce Printing Systems USA, Inc. $ 5,228.41
k. Precision Packaging Products, Inc. $ 18,352.49
l. Oskar Haug, AG SFR 2'596
m. Wayne E. Moore $ 198.69
n. Employers Insurance of Wausau $ 62,617,190.00
o. Doris L. Crank $ 300.00
p. Dollar Bank Leasing Corp. $ 2,464.20
q. Oasis Imaging Products $ 57,603.95
r. Unisys Corporation unliquidated
=============
$63,006,360.38 AND
SFR 2'596
</TABLE>
In addition, some tax claims filed as priority claims may also be
secured by liens.
C. PRIORITY CLAIMS
The Company has scheduled Unsecured Priority Claims in the amount of
$703,026.03, consisting of wage claims of employees entitled to priority of up
to approximately $4,300 per employee pursuant to ss. 507(a)(3) of the Bankruptcy
Code and the claims asserted by various taxing authorities:
SECOND AMENDED DISCLOSURE STATEMENT 40
<PAGE> 49
1. PRIORITY WAGE CLAIMS
(a) International: $ 152,350.43 (Franklin, TN)
$ 102,583.97 (Rochester, NY,
Bardstown, KY)
(b) ICMI: $ 31,441.77 (Connellsville, PA)
(c) Future Graphics: $ 63,992.86 (Chatsworth, CA)
2. PRIORITY TAX CLAIMS
(a) International: $ 301,736.00
(b) ICMI: $ 24,527.00
(c) Imaging: $ 26,394.00
Taxing authorities have filed twenty (20) proofs of claim asserting
Priority Claims in an amount in excess of $430,426.16. Nu-kote believes that
many of these Claims may in fact be duplicates, with the same Claim filed
against more than one Debtor, and may be repetitive of claims scheduled by the
Debtors. In addition Nu-kote believes all priority wage claims have been paid.
3. OTHER ASSERTED PRIORITY CLAIMS
Claimants have additionally filed fifty-eight (58) claims asserting
priority status in the amount of approximately $382,000. Nu-kote believes that
numerous of these Claims asserting priority status are misfiled and are actually
either Unsecured Claims or are intended to assert Administrative Claims.
D. UNSECURED CLAIMS
The bar date for Claims, other than Claims of governmental units, was
April 15, 1999. The bar date for Claims of governmental units was May 5, 1999,
which date was 180 days from the date of the entry of the order for relief.
1. SCHEDULED UNSECURED CLAIMS: INCLUSIVE OF INTERCOMPANY PAYABLES
Nu-kote has scheduled Unsecured Claims, inclusive of intercompany
payables, of $611,569,849.68 as follows:
<TABLE>
<S> <C>
Holding: $ 760,000.00
International: $ 420,087,384.68
ICMI: $ 98,596,017.00
Future Graphics: $ 64,821,395.00
Latin America: $ 1,081,326.00
Imperial: $ 1,656,248.00
Imaging: $ 24,567,479.00
</TABLE>
SECOND AMENDED DISCLOSURE STATEMENT 41
<PAGE> 50
2. SCHEDULED UNSECURED CLAIMS: EXCLUSIVE OF INTERCOMPANY PAYABLES
Exclusive of intercompany payables, which shall receive no distribution
under the Joint Plan, the schedules reflect Unsecured Claims in the amount of
$22,513,722.68 as follows:
<TABLE>
<S> <C>
Holding: $ 760,000.00
International: $ 19,015,577.68
ICMI: $ 1,563,960.00
Future Graphics: $ 947,424.00
Latin America: $ 0.00
Imperial: $ 0.00
Imaging: $ 226,761.00
</TABLE>
3. UNSECURED CLAIMS ASSERTED AGAINST THE DEBTORS
An analysis of the claims register reflects five hundred and two (502)
timely filed Unsecured Claims totaling $56,686,048.26 filed against the Debtors.
This dollar figure includes the asserted unsecured claim filed by Epson against
Holding in the amount of $40,375,856. The Debtors believe that many other of
these Claims may in fact be duplicates, with the same claim filed against more
than one Debtor and may be repetitive of claims scheduled by the Debtors. The
breakdown of Unsecured Claims filed against each Debtor is as follows:
<TABLE>
<CAPTION>
NO. OF UNSECURED CLAIMS
-----------------------
DEBTOR FILED AMOUNT
------ ----- ------
<S> <C> <C>
Holding: 369 $ 53,123,644.02
International: 114 $ 3,248,275.16
ICMI: 6 $ 149,243.55
Future Graphics: 7 $ 37,654.10
Latin America: 0 $ 0.00
Imperial: 0 $ 0.00
Imaging: 6 $ 127,231.43
</TABLE>
4. PARTICULAR ASSERTED CLAIMS IN EXCESS OF $500,000
Included in the amount of total Unsecured Claims filed are the Claims
filed by the OEMs referenced above and the following large claims:
(a) ABDIRAHAM ADEN. Aden filed an Unsecured Claim in the amount of
$600,000 against International. The pending litigation with
Aden is discussed herein at Article VI.E.4.
SECOND AMENDED DISCLOSURE STATEMENT 42
<PAGE> 51
(b) FAY, SHARPE, BEALL, FAGAN, MINNICH & MCKEE, LLP. The law firm
of Fay, Sharpe, Beall, Fagan, Minnich & McKee, LLP ("FAY,
SHARPE") has represented the Debtors as general patent and
trademark counsel since 1988. The Claim Fay, Sharpe filed
against Holding, in the amount of $764,964.18, asserts amounts
due from the rendition of pre-petition legal services to the
Debtors.
(c) KELLER CRESCENT COMPANY, INC. Keller Crescent Company, Inc.
has filed a Claim against Holding in the amount of
$552,611.29.
(d) COUDERT BROTHERS. Coudert Brothers is the litigation counsel
for the Debtors in the OEM Litigation. Coudert Brothers has
filed a Claim against Holding in the amount of $2,065,610.69
asserting amounts due from the rendition of pre-petition legal
services to the Debtors.
(e) EMPLOYERS INSURANCE OF WAUSAU. Employers Insurance of Wausau
("WAUSAU") has filed a Claim in the amount of $62,617,190.
Documentation attached to the Claim alleges that the Claim is
based upon Nu-kote's insurance policy with Wausau, an
agreement dated August 22, 1996 between Wausau and Nu-kote,
and an alleged right to recover attorney's fees in the OEM
Litigation. The Claim filed by Wausau asserts secured claims,
general unsecured claims and entitlement to administrative
priority for some portion of its total asserted Claim.
(f) PELIKAN HOLDING, AG. Pelikan Holding, an entity unrelated to
the Debtors, has filed five (5) Claims against Holding
alleging an unliquidated amount due for damages from purported
pre-petition termination by Pelikan Holding of a Trademark
License Agreement; $894,341 purportedly arising from a
pre-petition agreement with Holding; $2,424,639 purportedly
arising from a pre-petition agreement with Holding; $35,767
purportedly arising from the purchase of equipment by
International; and $160,920 plus an unliquidated amount
purportedly arising from a pre-petition agreement with
Holding.
(g) WILLIAMS DIE & MOLD, INC. Williams Die & Mold, Inc. filed an
Unsecured Claim in the amount of $674,395.95 against Holding
purportedly based upon invoices reflecting amounts due for the
pre-petition provision of goods to the Debtors.
E. PENDING LITIGATION AGAINST THE DEBTORS
A list of all lawsuits pending against each of the Debtors as of the
Petition Date was filed by each of the Debtors as an exhibit to their respective
Statements of Financial Affairs. With regard to certain of those lawsuits,
several have now been dismissed, settled or non-suited. The OEM Litigation in
which International is involved is discussed in detail above in Assets, Article
V.I. The remaining litigation in which one of the Debtors is involved is:
SECOND AMENDED DISCLOSURE STATEMENT 43
<PAGE> 52
1. LORI LEMMER, ET AL. V. NU-KOTE HOLDING, INC, CASE NO.
3:98-CV-0161-T
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. 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, an unspecified amount of compensatory damages and reimbursement of fees
and expenses. Nu-kote denies the plaintiff's allegations and intends to defend
the suit vigorously. During the Bankruptcy Case, the Lemmer plaintiffs sought to
take examinations of representatives of the Debtors and other parties pursuant
to Federal Rule of Bankruptcy Procedure 2004. After a hearing on the merits,
such requests were denied by the Bankruptcy Court. On September 28, 1999,
Nu-kote's lead bankruptcy counsel was notified by the United States District
Court for the Northern District of Texas that this case was to be
administratively closed.
2. SPECTRA, INC. V. NU-KOTE INTERNATIONAL, INC. & MODULAR INK I
STOCKHOLM, AB, CASE NO. 98-CV-130-JD
On March 10, 1998, Spectra, Inc. ("SPECTRA") filed suit in the United
States District Court for the District of New Hampshire alleging Patent
Infringement Claims against International and Modular Ink Technology i Stockholm
AB ("MIT"), a company duly organized and validly existing under the laws of
Sweden. Pelikan Produktions A.G. ("PPAG"), a company duly formed under the laws
of Switzerland, and formerly a wholly owned subsidiary of International, holds
all of the outstanding shares in MIT. International and MIT additionally filed
suit against Spectra, Nu-kote International, Inc. & Modular Inc. I Stockholm, AB
v. Spectra, Inc., Case No. 98-213-JJF, in the United States District Court for
the District of Delaware (collectively, these two cases are referred to herein
as the "Spectra Litigation"). In the Spectra Litigation, International has
asserted a claim and counterclaim against Spectra for tortious interference with
business relations. In connection with the Bankruptcy Court approved sale of the
stock of MIT to Xaar, as discussed herein at Article VII.N.1, International
assigned to Xaar any and all of International's rights in respect of its
tortious interference claim and counterclaim against Spectra. Xaar has, however,
agreed not to release or settle the claim or counterclaim without any such
release or settlement in connection therewith containing a dismissal by Spectra
of its pending infringement claims against International. Any and all other
claims and causes of action of International in connection with the Spectra
Litigation are retained by International. The Bankruptcy Court approved the
terms of the sale of MIT on March 30, 1999, and the sale was closed on March 31,
1999.
3. ROCK-TENN CO. V. NU-KOTE INTERNATIONAL, INC., CASE NO. 125633
SECOND AMENDED DISCLOSURE STATEMENT 44
<PAGE> 53
Rock-Tenn Co. filed suit in the United States District Court for the
Middle District of Tennessee for collection of receivables allegedly due. The
case remains pending.
4. ABDIRAHMAN A. ADEN V. NU-KOTE INTERNATIONAL, INC., CASE NO.
398- 0365
Abdirahman A. Aden filed suit in against International in the United
States District Court for the Middle District of Tennessee alleging employment
discrimination and seeking $600,000 in compensatory damages, punitive damages,
back pay and benefits and attorney's fees. On December 4, 1998, Aden filed a
Motion for Relief of Stay requesting the Bankruptcy Court to lift the automatic
stay to allow this litigation to proceed. Upon agreement with the Debtors, at
the final hearing on this Motion for Relief of Stay, Aden was granted relief
from the stay to proceed against parties other than International, without
prejudice to any of International's rights or defenses to the action or rights
against any other party.
In addition, Nu-kote is involved in various routine legal matters that
are incidental to their business. There are, however, no other legal proceedings
pending or threatened against any of the Debtors, that would, in the opinion of
management, have a material adverse impact on the successful reorganization of
the Company.
F. ENVIRONMENTAL AND REGULATORY MATTERS
The Debtors are subject to regulation at the federal, state and local
levels, as well as outside of the U.S., including, in particular, regulations
relating to environmental matters. Such regulations are often complex and are
subject to change. The Debtors are required to obtain permits from a number of
governmental agencies in order to conduct various aspects of their business.
Such permits are subject to modification and revocation, which could impair the
Debtors' ability to conduct their business in the manner and at the places it is
presently conducted. Regulatory or legislative changes may cause future
increases in the Debtors' operating costs or otherwise affect their operations.
In connection with the acquisition by the Debtors in 1986 of the
Worldwide Office Supplies Division and the International Business Forms Division
of Unisys, Unisys agreed to indemnify the Debtors for liabilities resulting from
or arising out of any environmental conditions existing on or before January 16,
1987, at the Debtors' Rochester, New York, facility and at facilities located in
Macedon, New York and Bardstown, Kentucky, which have been sold by the Debtors.
The New York Department of Environmental Conservation ("NY-DEC"), with respect
to the Rochester and Macedon facilities, and the Kentucky Environmental
Protection Agency, with respect to the Bardstown facility, have alleged that
environmental contamination exists at such sites. The Debtors have been advised
that Unisys is cooperating with these state environmental agencies in connection
with the testing for and investigation of contamination and, with respect to the
Rochester and Bardstown sites, is implementing measures to complete remediation.
The Debtors have been informed that Unisys is undertaking three years of
groundwater monitoring at the Macedon facility pursuant to a consent order with
the NY-DEC, to demonstrate that the site requires no further remediation or
monitoring. As a result of the indemnification from Unisys, the Debtors'
management has expressed the opinion that the ultimate cost to
SECOND AMENDED DISCLOSURE STATEMENT 45
<PAGE> 54
resolve these environmental matters will not have a material adverse effect on
the Debtors' financial position, results of future operations or liquidity.
In connection with the Pelikan Acquisition, Pelikan Holding agreed to
indemnify the Debtors for all losses, liabilities and costs resulting from or
arising out of environmental conditions existing on or prior to the closing on
February 24, 1995, at the facilities acquired from Pelikan Holding, such as
Debtors' Derry, Pennsylvania and Franklin, Tennessee facilities. With respect to
certain potential pre-closing environmental liabilities and costs identified on
a schedule agreed to by the Debtors and Pelikan Holding, Pelikan Holding's
liability is in an amount up to $2.5 million, which is collateralized by a
letter of credit. Pelikan Holding's liability for all other pre-closing
environmental liabilities and costs is unlimited in amount but expired on the
third anniversary of the closing, except as to the certain claims that were
asserted by the Debtors before the 30th day following the third anniversary of
the closing. The Debtors have undertaken limited environmental investigations at
the Debtors' Derry, Pennsylvania and Franklin, Tennessee facilities due to
reports of certain environmentally suspect activities having taken place
pre-closing at those facilities. The investigation of the environmental
condition of the soil at the Derry facility detected material contamination. The
investigation of the environmental condition of the soil and groundwater at the
Franklin facility also detected material contamination at this site as well as
at certain European facilities. The Debtors have notified Pelikan Holding of the
existence of the detected material contamination.
With regard to the Derry facility, the Debtors have requested the
Pennsylvania Department of Environmental Protection ("PA-DEP") to determine the
minimum further investigation and remediation required to bring this facility
into compliance with Pennsylvania law and to allow the Debtors to receive a
release from further liability under Pennsylvania law. After completion of the
forthcoming phase of site characterization activities to be conducted with the
occurrence of PA-DEP, the Debtors expect to enter into an administrative
agreement for the remaining investigation and remediation at this facility.
With regard to the Franklin facility, the Debtors have agreed upon the
terms of administrative Consent Order and Agreement, Index No. 94-511, with the
Tennessee Department of Environment and Conservation ("T-DEC") to facilitate the
investigation, removal and remediation of the hazardous substances in a time
frame as agreed upon with T-DEC, and to reimburse the T-DEC for certain costs
incurred by T-DEC at or in connection with the Franklin facility. The Debtors
have entered into an Administrative Consent Order and Agreement with the T-DEC.
With regard to the Derry and Franklin facilities, the Debtors have not
been able to estimate the potential cleanup costs with any degree of certainty.
The Debtors, nevertheless, have obtained and notified Pelikan Holding of very
preliminary cost estimates for the cleanup associated with these facilities.
Notwithstanding the indemnification obligation of Pelikan Holding, environmental
surveys conducted by environmental consultants in connection with the Pelikan
Acquisition, and the notice of the existence of environmental contamination
given by Holding prior to the 30th day following the third anniversary of the
closing, at this time, the management of the Debtors are unable to
SECOND AMENDED DISCLOSURE STATEMENT 46
<PAGE> 55
confirm whether the environmental costs incurred in connection with the
environmental matters identified on the pre-closing schedule or during the
limited environmental investigations of Debtors' Derry and Franklin facilities
will have a material impact on the Debtors' financial condition, results of
operation or liquidity without further testing by the environmental consultants.
Federal, state and local and foreign agencies regulate the disposal,
handling and storage of waste, and air and water discharges from the Debtors'
facilities. Based on current regulations and the need for further testing at the
facilities, the Debtors are unable to predict whether a material amount of
environmental capital expenditures will be necessary in excess of the amounts
for which Holding is indemnified by third parties. The Debtors have taken
measures to improve monitoring of the Debtors' emissions to the environment at
the Rochester and Macedon facilities, including the implementation of a chemical
usage tracking system (which generates incoming solvent inventory and usage
data) and a mass balance method for calculating total emissions. These measures
help the Debtors to comply with their reporting and record keeping obligations
under applicable environmental laws.
The TDEC asserts that the Debtors' obligations under the terms of the
administrative Consent Order and Agreement (Index No. 94-511) to facilitate the
investigation, removal and remediation of the hazardous substances in a time
frame as agreed upon with T-DEC, and to reimburse the T-DEC for costs are not
dischargeable upon the confirmation of the Joint Plan. The Debtors reserve the
right to dispute this contention. Finally, the Debtors acknowledge their
obligation to adhere to federal, state and local environmental regulations in
any ongoing business operations prior to and subsequent to the confirmation of
the Joint Plan.
ARTICLE VII. CHAPTER 11 CASES
A. FILING OF PETITION
On November 6, 1998, the Debtors each filed voluntary petitions. The
Debtors did not file their schedules and statement of financial affairs on the
Petition Date. On December 1, 1998, the Debtors filed their schedules and
statements of financial affairs. On February 19, 1998, the Debtors filed amended
schedules and statements of financial affairs.
B. FIRST DAY ADMINISTRATION
On the Petition Date, the Debtors filed Emergency Motions for
authorization to maintain prepetition bank accounts and use business forms, for
the use of cash collateral, and payments of prepetition compensation and
employee reimbursements. The Debtors also requested that the Court grant
emergency hearings upon these matters on the Petition Date. The Bankruptcy Court
denied the Debtors' request for emergency hearings and denied the requested
relief contained in these various motions. Subsequently, Nu-kote received
authorization to pay certain claims related to wages, salaries, benefits,
expense
SECOND AMENDED DISCLOSURE STATEMENT 47
<PAGE> 56
reports, and certain other claims as they arise in the ordinary course of the
Company's business. Nu-kote also received approval from the Bankruptcy Court to
maintain the Company's current bank accounts and cash management system.
Also on the Petition Date, the Debtors filed a Motion for Joint
Administration of the Debtors' estates. On November 9, 1998, the Court ordered
joint administration of the Debtors' estates.
C. ADVERSARY PROCEEDING
The Debtors filed the Plaintiffs' Original Complaint and Request for
Temporary Restraining Order Preliminary and Permanent Injunction (the "ADVERSARY
COMPLAINT") on November 6, 1998, thereby beginning Adversary No. 98-428A styled
Nu-kote Holding Inc., et al v. NationsBank of Texas N.A., et al. The Adversary
Complaint requested that the Bankruptcy Court restrain the Lenders from taking
any actions against certain non-Debtor entities. Pursuant to the European
Ratification Application (defined below), on January 11, 1999, the Bankruptcy
Court entered its Agreed Order of Dismissal with Prejudice of the Adversary
Complaint.
D. CASH COLLATERAL
Cash collateral is described in ss. 363 of the Bankruptcy Code as cash,
negotiable instruments, documents of title, securities, deposit accounts, or
other cash equivalents whenever acquired in which the estate and an entity other
than the estate have an interest. Upon the commencement of these Cases, the cash
and cash equivalents in which the Lenders had pre-petition security interests
became the "cash collateral" of the Lenders.
On November 9, 1998, Judge Paine entered an Agreed Order Regarding
Limited Use of Cash Collateral, permitting the Debtors to use cash collateral in
compliance with a definitive budget, on an emergency and preliminary basis,
until November 20, 1998.
Next, on November 17, 1998, the Debtors filed their Second Amended
Emergency Motion for Authority to Use Cash Collateral and Request for Shortened
Notice and Expedited Hearing (the "THIRD CASH COLLATERAL MOTION"). Hearings were
held before this Court on the Third Cash Collateral Motion on November 19 and
20, 1998, and continued to Monday, November 23, 1998. Over the intervening
weekend, the Lenders and the Debtors agreed to an extension of the use of cash
collateral by the Debtors and, on November 20, 1998, the Bankruptcy Court
entered the Second Agreed Order Regarding Limit and Use of Cash Collateral
through December 11, 1998. Additionally, on November 23, 1998, the Lenders and
the Debtors announced to the Bankruptcy Court an agreement for limited interim
credit financing of the estates by one or more of the Lenders that has since
been reduced to written agreement and approved by the Bankruptcy Court. This
interim financing was paid in full with the proceeds from the DIP Facility with
Norwest, discussed below.
SECOND AMENDED DISCLOSURE STATEMENT 48
<PAGE> 57
On January 4, 1999, the Bankruptcy Court entered an Order Granting
Second Amended Emergency Motion for Authority to Use Cash Collateral. The Court
entered the Order because the Court believed that the continued use of cash
collateral of the Lenders would benefit the Debtors, these Estates and all
Creditors, and that the ability of Nu-kote to reorganize their business was
dependant on the use of the cash collateral. To adequately protect the security
interests of the Lenders, the Court granted to the Lenders valid and
automatically perfected first priority replacement liens and security interests,
subject only to the liens and security interests of Norwest (discussed below),
in and upon those properties in which the Lenders claim pre-petition security
interests; and, to the extent of any diminution in the value of the collateral
of the Lenders, a valid and automatically perfected lien in the antitrust
counterclaims asserted in the HP Litigation, subject to the contingent fee
interest of Coudert Brothers, and liens and security interests of Wausau which
may be granted by the Court, if any, and the liens and security interests of
Norwest. Pursuant to an Agreed Order for Adequate Protection and Extension of
Order Granting Second Amended Emergency Motion for Authority to Use Cash
Collateral (the "AGREED ORDER") negotiated between the Debtors and the Lenders
and entered by the Court on August 20, 1999, effective nunc pro tunc to June 1,
1999, the Debtors submitted a six month budget (the "BUDGET"), a copy of which
is attached to the Agreed Order, and agreed to use the cash collateral of the
Lenders only as set forth in the Budget, the Agreed Order, the Norwest Financing
Order or further Order of the Court.
E. DIP FINANCING
Section 364(d) of the Bankruptcy Code provides that the Bankruptcy
Court may authorize the obtaining of credit secured by a senior or equal lien on
property of the estate only if the Debtors-in-Possession are unable to obtain
such credit anywhere else and the holder of the lien on the property of the
estate on which that senior or equal lien is being proposed is adequately
protected ("DIP FINANCING"). Accordingly, on November 17, 1998, the Debtors
filed their Emergency Motion for Authority to Obtain Credit on Interim and Final
Basis Pursuant to 11 U.S.C. ss. 364(d) and Request for Shortened Notice and
Expedited Hearing (the "CREDIT MOTION"). The Credit Motion requested that the
Court give the Debtors authorization to borrow up to $15 million from Norwest
Business Credit, Inc. ("NORWEST"). The Lenders filed their objection immediately
thereafter and their Request for Shortened Notice and Expedited Hearing and
Brief in Support Thereof on November 18, 1998. On December 10 and 11, 1998, the
Court held hearings upon the Credit Motion.
On December 17, 1998, the Bankruptcy Court entered an order approving
DIP Financing from Norwest providing for a $7,500,000.00 DIP Credit Facility
(the "DIP FACILITY"). This DIP Facility is in the form of a line of credit which
has helped fund Nu-kote's working capital requirements as it reorganizes under
the Bankruptcy Code.
The DIP Facility bears interest at a floating rate which is currently
at 9.75%. The DIP 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.
SECOND AMENDED DISCLOSURE STATEMENT 49
<PAGE> 58
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 was originally restricted to $400,000 of
capital expenditures for the remainder of fiscal 1999, and to $300,000 per
fiscal quarter thereafter, but pursuant to an amendment to the DIP Facility
discussed below, the capital expenditures limitation has been increased. The DIP
Facility is collateralized by substantially all of the assets of Nu-kote and its
U.S. subsidiaries.
Pursuant to Section 2.7(a) of the Credit and Security Agreement, if the
DIP Facility matures due to the confirmation of a Chapter 11 plan, the Debtors
shall be obligated to pay Norwest a prepayment fee in an amount equal to a
percentage of the Maximum Line (defined in the Credit and Security Agreement as
$7,500,000) as follows: "(i) two percent (2%) if the termination or reduction
occurs on or before October 31, 1999; and (ii) one percent (1%) if the
termination or reduction occurs thereafter."
On September 15, 1999, Nu-kote filed a Motion to Approve Amendment to
Norwest Credit and Security Agreement. A summary of the material terms of the
Amendment are as follows:
1. to provide for the issuance by Norwest of letters of credit
for the Debtors' account from time to time in an amount not to exceed $1.5
million at any one time outstanding;
2. to document Norwest's release of its security interest in the
Xaar license in connection with the previously approved sale of the stock of
MIT;
3. to increase the Capital Expenditures limitation; and
4. to waive technical defaults of certain financial covenants.
The Court entered an Order approving the proposed Amendment on October 28, 1999.
The most Nu-kote has ever drawn down on the DIP Facility was
approximately $3,200,000 on January 21, 1999. Because of an improving cash
position, the current amount borrowed as of October 22, 1999 was $0. The DIP
Facility will be paid in full as a part of the Joint Plan.
F. SUBSTANTIVE CONSOLIDATION
Substantive consolidation of two or more debtors in a bankruptcy case
is appropriate when there exists a "substantial identity" between the debtor
entities, and substantive consolidation is necessary to avoid some harm and
realize some benefit to creditors. The purpose of substantive consolidation is
to insure the equitable treatment of all creditors of all debtors. The result of
substantive consolidation of two or more debtors' estates is the pooling of the
assets and liabilities of the debtors, and the elimination of intercompany
claims and of duplicate claims by creditors.
SECOND AMENDED DISCLOSURE STATEMENT 50
<PAGE> 59
On December 4, 1998, the Debtors filed a Motion for Substantive
Consolidation of the Debtors' Estates. On February 22, 1998, the United States
Trustee, the International and ICMI Creditors' Committees, and filed Objections
to the Motion for Substantive Consolidation. The Parties resolved these
objections prior to a hearing, and on February 25, 1999, the Court entered the
Substantive Consolidation Order. The Substantive Consolidation Order provides
that all of the Debtors' estates are substantively consolidated, except that any
recoveries on the OEM Litigation shall be distributed as if such estates had not
been consolidated.
G. EPSON'S UNSUCCESSFUL ATTEMPT TO LIFT THE AUTOMATIC STAY
The Epson Litigation has been the subject of many days of hearings in
the Bankruptcy Court. Initially, on December 1, 1998, Epson filed an Emergency
Motion for relief from the automatic stay claiming it was suffering immediate
and irreparable harm because the stay had interrupted the pending patent
litigation against International. After several continuances of the "emergency"
hearing, and after much procedural rescheduling, a preliminary hearing on
Epson's motion was held on December 22, 1998 at which time the Bankruptcy Court
found a reasonable likelihood that Nu-kote would prevail.
A final hearing on the Emergency Motion was initially scheduled for
January 8, 1999, but was once again continued at Epson's request until February
4 and 5, 1999. At the final hearing, it was revealed that the pressing trial
demands Epson had plead in its Emergency Motion never existed. Further, the
second day of the final hearing was principally characterized by Epson's
unsuccessful efforts to introduce exhibits that were not on its exhibit list and
that had not been revealed to counsel for Nu-kote before that morning. It soon
became apparent that the final hearing could not be concluded in the one and a
half days Epson had estimated. As Epson's counsel was unavailable for the next
three consecutive weeks, Epson requested a continuance of the final hearing on
the Emergency Motion until March, 1999. Nu-kote opposed this request due to the
trial date on the HP litigation.
On February 10, 1999, the Bankruptcy Court entered an Order scheduling
the conclusion of the final hearing on Epson's Emergency Motion for relief from
stay twenty days after the completion of the presentation of evidence in the HP
trial. The Bankruptcy Court specifically found that Epson's "claims of an
`emergency' need for relief from the stay are not consistent with its behavior,"
and that "the `emergencies' Seiko-Epson alleged in December to demand a final
hearing on less than three days' notice have evaporated or have not motivated
Seiko-Epson to expeditiously prosecute its `Emergency' Motion." In light of the
non-exigent circumstances, and in order to avoid interference with the HP trial,
the Bankruptcy Court then continued the final hearing until twenty days after
the completion of the presentation of evidence in the HP trial. The Bankruptcy
Court ruled that "the stay is continued in effect pending completion of this
final hearing."
SECOND AMENDED DISCLOSURE STATEMENT 51
<PAGE> 60
After the rendition of the verdict in the HP trial, the Debtors and
Epson reached an agreement to certain limited relief as sought in the Motion for
Relief from Stay. Believing that another prolonged hearing was not in the best
interests of the Estate, the Debtors and Epson agreed to relief from the
automatic stay, to the extent that any automatic stay exists, only to the extent
necessary to allow the Appeal (see discussion of the Epson Appeal at Article
V.I.2) to continue as and to the extent determined appropriate by the United
States Court of Appeals for the Federal Circuit, including the filing by any
party of any petitions for rehearing, for rehearing en banc and/or for writs of
certiorari subsequent to a ruling by the Federal Circuit in the Appeal. As to
all other matters set forth in the Motion for Relief from Stay, the automatic
stay, to the extent that any automatic stay exists, shall remain in effect
pending confirmation of a plan of reorganization, the closing or dismissal of
this bankruptcy case, or further order of this Court, and no further hearings
shall be conducted on the Motion for Relief from Stay until the United States
Court of Appeals for the Federal Circuit has issued its initial decision on the
Appeal, conversion of any of these bankruptcy cases to one under Chapter 7 of
the Bankruptcy Code, and/or the appointment of a Chapter 11 trustee in any of
these bankruptcy cases. To that end, the Debtors and Epson filed an Agreed
Motion Pursuant to Rule 4001(d) Regarding Seiko-Epson's Emergency Motion For
Relief from the Stay (the "AGREED MOTION"). No objections to the relief sought
in the Agreed Motion were filed, and on August 30, 1999, the Bankruptcy Court
granted the Agreed Motion. As discussed above, the Federal Circuit has now ruled
on the Appeal.
H. EPSON'S VIOLATION OF THE FIRST TO FILE RULE
On or about February 17, 1999, Coudert Brothers, trial counsel for
International in the Epson Litigation, filed a pleading entitled "Notice of the
February 10, 1999 Order of the Bankruptcy Court Continuing the Automatic Stay"
and thereby notified the California District Court and the Federal Circuit Court
of the Bankruptcy Court's Order scheduling the conclusion of the final hearing
on Epson's Emergency Motion for Relief from Stay for twenty days after the
completion of the presentation of evidence in the HP trial and continuing the
automatic stay as to the Epson Litigation in effect until that time. On or about
February 23, 1999, Epson filed pleadings with both the California District Court
and the Federal Circuit each entitled Response of Seiko Epson Corporation and
Epson America, Inc. to "Notice" Filed by Nu-kote International, Inc. and Pelikan
Produktions, A.G. In these pleadings, Epson blatantly stated that the Appeal
proceedings in the Federal Circuit ARE NOT stayed, and attempted to induce
action by either the Federal Circuit and/or the California District Court to
decide the very issues that Epson had already presented to the Bankruptcy Court
in the Emergency Motion for Relief from Stay: whether the appellate proceedings
or the contempt proceedings could continue, and whether the automatic stay
applies to PPAG.
On March 5, 1999, Nu-kote filed an Emergency Motion for Contempt
against Epson in the Bankruptcy Court. On March 11, 1999, the Bankruptcy Court
entered an Order and held that Epson "filed documents in the United States
District Court for the Central District of California and in the United States
Court of Appeals for the Federal Circuit asking those courts to also decide some
or all of the issues Seiko Epson is in the midst of trying in this court." The
Bankruptcy Court found that, in so doing, Epson violated the "first to file
rule"
SECOND AMENDED DISCLOSURE STATEMENT 52
<PAGE> 61
and ordered that Epson was precluded "from prosecuting in other courts the
issues ... that it has submitted to the Bankruptcy Court for the Middle District
of Tennessee in its Emergency Stay Motion."
On March 19, 1999, Epson filed an Emergency Motion to Modify Order on
Debtors' Emergency Motion for Contempt against Seiko Epson Corporation, Epson
America, Inc., William J. Robinson, Esq., and The Law Firm of Graham & James,
LLP. alleging that International had violated the first to file rule by
"prosecuting" in the California District Court the issues that Epson was
precluded from prosecuting. Epson further alleged violations of its due process
rights by the Bankruptcy Court's Order on the Contempt Motion. The Bankruptcy
Court, on March 22, 1999, denied Epson's request to modify the Order on the
Contempt Motion, and found Epson's allegation s against International unfounded
stating, "Contrary to Seiko Epson's allegations, [pleadings submitted to the
California District Court] do nothing more than inform the United States
District Court for the Central District of California of the proceedings
initiated by Seiko Epson in this court and ask the California District Court to
relieve [International and PPAG] of the obligation to respond further until the
completion of the proceeding commenced by Seiko Epson in this court. Far from
`prosecuting' the issues raised by Seiko Epson in this court, the response filed
in the United States District Court for the Central District of California asks
that court to defer adjudication of the issues that Seiko Epson has submitted to
this court and with respect to which this court is in mid-trial."
Epson has appealed the Bankruptcy Court's Order on the Contempt Motion
to the District Court in Tennessee, and this appeal was docketed by the District
Court on April 22, 1999, Civ. No. 3-99-CV-313. Both Epson and the Debtors have
submitted briefs to the District Court, but that Court has not yet issued a
ruling in this appeal.
I. FINANCING THE OEM LAWSUITS
International is insured pursuant to policies issued by Wausau and by
Chubb Custom Insurance Company ("CHUBB") for liability coverage as well as for
defense of the HP Litigation. International is also covered by a patent
infringement insurance policy from American International Specialty Lines
("AISL") for defense and indemnity claims for patent infringement. Pre-petition,
Nu-kote had been involved in disputes with both Wausau and Chubb over the
funding of the OEM Litigation. Post-petition, initially only Wausau expressed a
willingness to negotiate terms upon which funding of the OEM Litigation would
continue.
On December 18, 1998, International filed its Emergency Motion for
Interim and Final Approval of the Financing, Assumption and Settlement Agreement
with Employers Insurance of Wausau and for Protective Orders and Request for
Shortened Notice and Expedited Hearing (the "WAUSAU MOTION"). International also
filed a Motion to Employ Coudert Brothers as special counsel. The Motion
requested authority to enter into a post-petition financing arrangement with
Employers Insurance of Wausau ("WAUSAU") for the continued funding of costs for
International's participation in the HP Litigation, the Canon Litigation and the
Litigation. On December 18, 1998, the Court entered an Order
SECOND AMENDED DISCLOSURE STATEMENT 53
<PAGE> 62
placing the proposed agreement between Wausau (the "WAUSAU AGREEMENT") and the
Debtors under seal. The Court set the hearing upon the Wausau Motion for January
11, 1999.
On January 11, 1999, at the hearing on the funding agreement with
Wausau, the Lenders and other parties appeared and announced to the Court that
Chubb had requested an opportunity to offer a better proposal for funding the
Hewlett-Packard Litigation. The Court reset the hearing on the Wausau Motion for
January 15, 1999. A Financing, Assumption and Settlement Agreement with Chubb
(the "CHUBB AGREEMENT"), more favorable to the Debtors was then obtained and, on
January 12, 1999, the Debtors' Motion to Approve Compromise and Insurance
Coverage and Funding Agreement with Chubb Custom Insurance Company was filed
with the Chubb Agreement. On January 22, 1999, the Court entered its Order
Approving Compromise and Insurance Coverage and Funding Agreement with Chubb.
J. EXCLUSIVITY
Pursuant to ss. 1121 of the Bankruptcy Code, a Chapter 11 debtor has an
exclusive right to file a plan of reorganization for the first 120 days of a
bankruptcy case. If a debtor files a plan within this statutory exclusivity
period, exclusivity is extended for an additional sixty days to allow a debtor
to solicit acceptances of that plan pursuant to ss. 1121.
On December 8, 1998, the Lenders filed the Motion to Terminate the
Debtors' Exclusivity Periods Pursuant to 11 U.S.C. ss. 1121(d) and Brief in
Support Thereof (the "MOTION TO TERMINATE"). The Motion to Terminate was
scheduled for hearing on January 28, 1999. Subsequently, the parties agreed to
continue the hearing date on the Motion to Terminate until March 2, 1999. On
February 5, 1999, the Debtors filed their Motion to Extend Debtors' Exclusivity
to File and Obtain Acceptances of Plan of Reorganization (the "MOTION TO
EXTEND"). The Court set the Motion to Extend for March 2, 1999. The Debtors'
Exclusivity Period was scheduled to terminate on March 8, 1999.
On March 2, 1999, the Court held a hearing on both the Motion to
Terminate and the Motion to Extend. The Bankruptcy Court considered the size and
complexity of this case but stated that the Court had only extended a debtor's
exclusive period one time in eighteen years based on the complexity of a Chapter
11 case and declined to extend the Debtors' exclusivity. Accordingly, the Court
ordered that the Debtors' Motion to Extend would be denied and that the Debtors'
Exclusivity Period pursuant to 11 U.S.C. ss. 1121 would expire of its own terms
on March 8, 1999.
K. RETENTION OF CONWAY, DEL GENIO GRIES & CO., LLC
By order entered on June 4, 1999 (and subsequent order entered on July
23, 1999), the Debtors retained Conway, Del Genio Gries & Co., LLC ("Conway Del
Genio") as its investment bankers in connection with the sale of the Company.
Conway Del Genio has marketed the Company by utilizing the Company's five-year
projections and business
SECOND AMENDED DISCLOSURE STATEMENT 54
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plan. Conway Del Genio did not prepare a formal valuation of the Company or
perform or obtain any appraisal of the Company's assets.
L. CLAIMS BAR DATE
On February 22, 1999, the Debtors filed their Motion to Establish
Claims Bar Date. On February 26, 1999, the Court entered its Order establishing
April 15, 1999, as the day on or before which a non-governmental claim must be
filed to be treated timely.
M. THE COMMITTEES
On November 23, 1998, and November 24, 1998, the United States Trustee
appointed an Official Committee of Unsecured Creditors in International, Future
Graphics, and ICMI (the "CREDITORS' COMMITTEES").
N. RATIFICATION OF EUROPEAN AGREEMENTS
As part of the Second Amended Facility, eight of the nine Lenders (the
"EUROPEAN LENDERS") entered into two separate Third Amended and Restated
Revolving Credit Facility Agreements (the "EUROPEAN AGREEMENTS") with three of
the European Subsidiaries: one such agreement with Pelikan Limited; and another
such agreement with Pelikan Produktions and Hardcopy. Under the terms of the
Second Amended Facility and the European Agreements, the Lenders and the
European Lenders have collectively loaned to the Debtors and the European
Subsidiaries the following amounts: (1) approximately Ninety-Five Million
Dollars ($95,000,000.00) to Nu-kote International; (2) approximately Ten Million
Dollars ($10,000,000.00) to Pelikan Scotland Limited; and (3) approximately
Thirty-Five Million Dollars ($35,000,000.00) to Pelikan Produktions AG. Since
their execution, both the Second Amended Facility and the European Agreements
have been amended several times. All of the loans, advances and indebtedness
owed to the European Lenders are unconditionally guaranteed by the Debtors.
The above obligations of the Debtors and the European Subsidiaries are
secured by substantially all of the Debtors' assets and by a significant portion
of the assets of the European Subsidiaries. Additionally, the Debtors have
guaranteed all indebtedness of the European Subsidiaries to the European Lenders
(the "EUROPEAN GUARANTEES").
In order to prevent the possible disruption of their business
operations, the Lenders agreed to execute a modification of the European
Agreements on certain terms and conditions. On December 23, 1998, the Debtors
filed their Motion to Approve Debtors' Ratification of the European
Restructuring Agreement (the "EUROPEAN RATIFICATION APPLICATION"). On January
11, 1999, the Court entered its Order Approving the European Ratification
Application.
However, pursuant to the sale of the Pelikan Hardcopy Subsidiaries
(discussed below), the European Lenders released the European Guarantees.
SECOND AMENDED DISCLOSURE STATEMENT 55
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O. SALE OF CERTAIN EUROPEAN SUBSIDIARIES
1. SALE OF MIT
On March 5, 1999, Nu-kote filed a Motion to Approve Sale of Certain
Assets of the Debtors pursuant to ss. 363 of the Bankruptcy Code Free and Clear
of All Liens, Claims and Encumbrances regarding a proposed sale of all of the
outstanding shares in Modular Ink Technology i Stockholm AB ("MIT"), a company
duly organized and validly existing under the laws of Sweden. MIT was a wholly
owned subsidiary of PPAG which was formerly a wholly owned subsidiary of
International. MIT's business consists of the developments, manufacturing and
sale of piezo-electric ink jet printheads and print units and the sale of ink
and ink cartridges for use with piezo-electric ink jet printheads. The owner of
this ink-jet technology used in the business of MIT is Xaar, plc ("XAAR").
International held a non-exclusive license to use this piezo-electric ink jet
technology owned by Xaar. International sub-licensed this right to use the ink
jet technology to MIT.
PPAG, International and Xaar negotiated a sale of the stock of MIT from
PPAG to Xaar, the terms of which affected certain property rights of
International, to wit, the transfer of International's rights to the "Piezo Jet"
trademark to MIT in exchange for cancellation of an intercompany payable due to
MIT from International of approximately $300,000, the termination of
International's license to use the piezo-electric ink jet technology, and the
assignment of International's rights in the counterclaim for tortious
interference with business relations (the "COUNTERCLAIM") asserted by
International in the lawsuit styled Spectra, Inc., Plaintiff vs. Nu-kote
International, Inc. and Modular Ink i Stockholm, AB, Defendants, Civil Action
No. 98-CV-130-JD, pending in the Federal District Court in New Hampshire in
exchange for a fee of $250,000. Lastly, the terms of the MIT Sale included
forgiveness by Xaar of all outstanding royalty payments under the license
agreement with Xaar owed by International and/or MIT of approximately $800,000.
The stock of MIT was sold upon the insistence of and with the agreement of the
Lenders. While Nu-kote believes the sale price for MIT was fair and the highest
and best price under the circumstances, Nu-kote also believes the price was
influenced by the poor financial condition of MIT, pending litigation involving
MIT, and the fact that MIT had been on the market for approximately one and a
half years.
On March 30, 1999, the Bankruptcy Court approved the sale of MIT and
the sale was closed on March 31, 1999.
SECOND AMENDED DISCLOSURE STATEMENT 56
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2. THE SALE OF EUROPEAN ENTITIES
On June 16, 1999, the Debtors filed an "Amended Motion to Approve Sale
of Pelikan Subsidiaries pursuant to ss. 363 of the Bankruptcy Code Free and
Clear of All Liens, Claims and Encumbrances" seeking to sell to Pelikan Hardcopy
Europe Limited ("PHE") the stock of certain of the European Subsidiaries, those
being PPAG, PSL, Grief-Werke, Pelikan Hardcopy Asia Pacific Limited and Dongguan
Pelikan Hardcopy Limited, (the "PELIKAN HARDCOPY SUBSIDIARIES"). PHE is a
company incorporated in Scotland and owned in part by Hans Paffhausen and Gerry
McNally, officers and directors of the Pelikan Hardcopy Subsidiaries, and other
investors.
The sale of the Pelikan Hardcopy Subsidiaries was closed effective as
of September 30, 1999. The primary terms of the sale to PHE included:
(a) PHE paid a cash purchase price of $16,500,000 which was
allocated as follows:
(1) $8,276,041.30 paid to the European Lenders;
(2) $3,500,000 paid to Pelikan Holding A.G., an unrelated
party, in connection with an amendment to a trademark
license held by one of the Debtors and the issuance
of a new trademark license to PHE;
(3) $3,940,000 placed in escrow for contingent claims,
taxes, warranties and Dongguan Pelikan Hardcopy
Limited;
(4) $533,958 paid to Debtors' professionals for fees and
expenses incurred in connection with the sale; and
(5) $250,000 retained for audit costs.
(b) release by the Pelikan Hardcopy Subsidiaries and PHE of any
and all claims they may have against the Debtors and their
respective officers and directors;
(c) release by the Debtors of any and all claims they may have
against the Pelikan Hardcopy Subsidiaries and PHE and their
respective officers and directors;
(d) a new trademark license agreement with Pelikan Holding A.G.
pursuant to which the Debtors will have the exclusive right to
use the Pelikan trademark in the United States, (including the
District of Columbia, the Commonwealth of Puerto Rico, the
Northern Mariana Islands, the Virgin Islands of the United
States, and the unincorporated United States territories of
American Samoa and Guam), Canada and Mexico and PHE will have
the right to use the trademark in the rest of the world;
SECOND AMENDED DISCLOSURE STATEMENT 57
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(e) the release by the European Lenders of the European
Guarantees;
(f) the release by the European Lenders of all indebtedness under
the Swiss Facility;
(g) the conversion of approximately $9.7 million of debt of PSL to
the European Lenders into equity and the transfer of such
equity to PHE for $1.00;
(h) certain non-competition and trademark and patent cross-license
agreements;
(i) a supply agreement providing for the continued supply of
certain products by PHE to the Debtors;
(j) appropriate escrow agreements; and
(k) the European Lenders shall have agreed to the retention of
$250,000 of the purchase price to pay the cost of completion
audits.
The geographic restrictions on the Pelikan license following the sale
of the Pelikan Hardcopy Subsidiaries are detailed above. While the sale may have
incidentally lessened the value of the license, the Debtors believe that the
value to the Debtors of the sales attributable to the geographic areas given up
as a result of the sale is inconsequential. The Debtors have retained the right
to use the license in the areas where the Debtors sell under the "Pelikan" name.
On June 22, 1999, the Bankruptcy Court entered its Order on Amended
Motion to Approve the Pelikan Sale. The sale of the Pelikan Hardcopy
Subsidiaries was closed effective as of September 30, 1999.
P. SETTLEMENT WITH BLAIR AND RIDENOUR
In October of 1994, Robert W. Blair and John Ridenour filed suit in the
Court of Common Pleas, Fayette County, PA, Robert W. Blair & John Ridenour v.
Nu-kote Holding, Inc., et al, Civ. Div. No. 1887 of 1994, for payments allegedly
due on promissory notes executed in connection with, and breach of contract
purportedly arising from, indemnity agreements and the sale contract from the
transaction when International purchased the stock of ICMI. International and
ICMI likewise filed claims against Blair and Ridenour for breach of contract in
the Court of Common Pleas, Allegheny County, PA, Nu-kote International, Inc. v.
Robert W. Blair and John Ridenour, Case No. GD 98-13981, and in the United
States District Court for the Western District of Pennsylvania styled Nu-kote
International, Inc. v. Robert W. Blair and John Ridenour, Case No. CV No.
98-1462. On the Petition Date, these suits were, pursuant to provisions in the
relevant documents mandating arbitration, pending before the American
Arbitration Association, styled Nu-kote International, Inc. v. Robert W. Blair
and John Ridenour, Case No. 16-199-00375-94.
SECOND AMENDED DISCLOSURE STATEMENT 58
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Pre-petition settlement negotiations by Nu-kote's prior management were
unsuccessful. Subsequent to the filing of these Bankruptcy Cases, however,
Nu-kote's current management and bankruptcy counsel again entered into extensive
negotiations seeking settlement and resolution of all the outstanding matters
and lawsuits between the parties. As a result of these negotiations, an agreed
settlement was reached and approved by the Bankruptcy Court. The Debtors believe
that this settlement is fair, equitable and in the best interests of the Debtors
and all Creditors of the Estate. The settlement provided for a joint and mutual
release between the parties, dismissal with prejudice of all pending lawsuits
and the arbitration proceedings and the withdrawal of all Claims filed by Blair
and Ridenour against the Estate. The consideration for this settlement was the
payment of two-third's of the amount in the escrow account to Blair and Ridenour
and one-third of the amount to the Debtors. At the time settlement of the Blair
and Ridenour litigation and claims was presented to the Bankruptcy Court for
approval, there was approximately $783,000 in the escrow account representing
the original amount plus continually accruing interest.
On June 15, the Bankruptcy Court entered an Order approving the
settlement. The settlement has been fully consummated; the monies from the
escrow account have been distributed, all pending lawsuits and arbitration
proceedings have been dismissed with prejudice, and Blair and Ridenour have each
dismissed all Claims they filed against the Estate totaling in excess of $1.2
million.
Q. SETTLEMENT WITH HEWLETT-PACKARD COMPANY
The HP Litigation went to trial on May 17, 1999. On July 22, 1999, the
jury rendered its decisions, but the verdict did not result in the monetary
damages to Nu-kote for which the Debtors had hoped. Subsequent to the rendition
of the jury verdict in the HP Litigation, Debtors' management and general
bankruptcy counsel entered into extensive negotiations seeking settlement and
resolution of the litigation between the parties. As a result of these
negotiations, an agreement (the "SETTLEMENT AGREEMENT") has been reached and
approved by the Bankruptcy Court. For a detailed discussion of the
non-confidential terms of the Settlement Agreement, see the discussion at
Article V.I.1. above.
In summary, it bears repeating here that Nu-kote firmly believes that
the Settlement Agreement negotiated between Nu-kote and HP is in the best
interests of the estate. The HP Litigation has consumed the time and resources
of the Company for in excess of four years. Unless the HP Litigation is
compromised and settled, the parties anticipate that the judgment to be entered
by the California District Court will likely be appealed, and final resolution
of the HP Litigation will be protracted. This Settlement Agreement, negotiated
with the interests' of the Debtors and the creditors of this estate as paramount
concern, brings closure to this chapter of Nu-kote's history and brings the
Debtors one step closer to reorganization.
Finally, the Debtors assert that the benefits to Nu-kote stemming from
the Settlement Agreement are substantial. Although confidentiality concerns
prevent a
SECOND AMENDED DISCLOSURE STATEMENT 59
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detailed recitation of the effect of the Settlement Agreement on the business
operations of Nu-kote, Nu-kote represents that the Patent Covenants granted
under the Settlement Agreement are crucial to the continued business success of
Nu-kote and will allow Nu-kote to continue its full line of HP compatible
products. The prompt and efficient resolution of the claims asserted by HP in
this case as pre-petition unsecured claims is also of significant value, and the
intangible benefit of the Debtors', their management and counsel directing their
attention to other essential matters should not be undervalued.
R. APPOINTMENT OF EXAMINER
On October 18, 1999, security claimant Lori Lemmer filed a Motion for
Appointment of Examiner. Pursuant to 11 U.S.C. ss. 1104(c), Judge Lundin held
that the statute was mandatory and not discretionary and required the
appointment of an Examiner. Accordingly, Judge Lundin ordered the appointment of
Randal S. Mashburn as the Examiner, however, various restrictions were placed on
the Examiner. First, the Examiner is only authorized to examine the Debtors'
possible claims against Debtors' management. Second, the Examiner's costs,
including the engagement of any professionals, plus expenses, cannot exceed
$50,000. Finally, the Examiner must provide its preliminary report to the U.S.
Trustee within sixty (60) days after the order for the Examiner's appointment
was entered. Thus, the Examiner's report must be filed with the Bankruptcy Court
by January 29, 2000. Accordingly, after January 29, 2000, any party may obtain a
copy of the Examiner's report from the Clerk of the Bankruptcy Court, 701
Broadway, Nashville, Tennessee 37203. As set forth in this Disclosure Statement,
the Debtors do not believe that any actionable claims exist against the Current
Officers and Directors.
S. ADMINISTRATIVE CLAIMS BAR DATE
On November 12, 1999, the Court entered its Order providing that any
party seeking to assert an administrative expense payment against the Debtors
under 11 U.S.C. ss. 503 through September 30, 1999, except for case
professionals whose employment was approved by the Bankruptcy Court, must file a
request for payment of such administrative expense with the Court by December
15, 1999.
ARTICLE VIII. FINANCIAL INFORMATION AND FUTURE OPERATIONS
THE FINANCIAL INFORMATION DESCRIBED BELOW WAS COMPILED BY THE DEBTORS.
THIS FINANCIAL INFORMATION HAS NOT BEEN SUBJECTED TO AN AUDIT. THE LENDERS AND
COMMITTEES HAVE RELIED UPON THE DEBTORS AND THEIR PROFESSIONALS REGARDING THE
PREPARATION AND THE INCLUSION OF THIS INFORMATION IN THIS DISCLOSURE STATEMENT,
BUT HAD NO ROLE IN THE PREPARATION, REVIEW, OR PRESENTATION OF THE ANNUAL
PROJECTION UNDERLYING THE RESTATED PROJECTION REFLECTED HEREIN, AND MAKE NO
REPRESENTATION OR WARRANTY AS TO THE CORRECTNESS OR ACCURACY HEREOF. THE
FINANCIAL PROJECTIONS ARE FORWARD-LOOKING PROJECTIONS AND ARE BASED UPON
NUMEROUS ASSUMPTIONS, INCLUDING BUSINESS, ECONOMIC, AND OTHER MARKET CONDITIONS.
MANY OF THESE ASSUMPTIONS ARE BEYOND THE CONTROL OF THE DEBTORS, LENDERS AND THE
COMMITTEES, AND ARE INHERENTLY SUBJECT TO SUBSTANTIAL UNCERTAINTY. SUCH
ASSUMPTIONS INVOLVE SIGNIFICANT ELEMENTS
SECOND AMENDED DISCLOSURE STATEMENT 60
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OF SUBJECTIVE JUDGMENT WHICH MAY OR MAY NOT PROVE TO BE ACCURATE, AND
CONSEQUENTLY, NO ASSURANCES CAN BE MADE REGARDING THE ANALYSES OR CONCLUSIONS
DERIVED FROM ANALYSES BASED UPON SUCH ASSUMPTIONS. THE LENDERS AND COMMITTEES
ARE NOT IN A POSITION TO MAKE ASSURANCES AS TO THE FEASIBILITY OF THE RESTATED
PROJECTIONS, THE REASONABLENESS OF ASSUMPTIONS USED IN DEVELOPING THE RESTATED
PROJECTIONS, OR THE ABILITY OF THE DEBTORS TO ACHIEVE THE PROJECTED RESULTS.
A. HISTORICAL AND POSTPETITION FINANCIAL INFORMATION: NU-KOTE'S RESULTS OF
OPERATIONS
Attached as Exhibits "C," "D," and "E" are the actual and pro forma
Income Statements, Balance Sheet and Cashflows of the North American Operations
for the fiscal years ended March 31, 1998, 1999, 2000, 2001 and 2002. While
certain portions of the attached Exhibits reflect the actual historical results
of the Company's operations, the financial projections contained on Exhibits
"C," "D," and "E" are forward-looking projections prepared by the Debtors.
Projected financial data presented thereon and elsewhere in this Disclosure
Statement is based upon numerous assumptions, including business, economic, and
other market conditions. Many of these assumptions are beyond the control of the
Debtors, and such assumptions involve elements of subjective judgment which may
prove by future events to be inaccurate, and consequently, no assurances can be
made regarding the feasibility of the projections. The financial information
presented on Exhibits "C," "D," and "E" is unaudited. Exhibits "C," "D," and "E"
have, however been prepared in accordance with generally accepted accounting
procedures, and the Debtors believe that these Exhibits are a fair and
reasonable representation of the Debtors' anticipated future operations.
The Company has forecast a significant financial turnaround as compared
to the historical results of the business for the fiscal years ended March 31,
1998 and 1999. For the six month period ended September 24, 1999, the Company
has exceeded its revenue projections by approximately 5% with net sales of $50.9
million. In addition, the Company exceeded its operating income projections by
26%, with operating income of approximately $1.0 million and projected Earnings
Before Interest, Taxes, Depreciation, Amortization and Restructuring charges
(EBITDAR) of approximately $6.0 million for the full fiscal year ending March
31, 2000.
Since the Petition Date, Nu-kote has continued to operate its business
and manage its property as a debtor-in-possession pursuant to ss.ss.1107(a) and
1108 of the Bankruptcy Code. As a result of the achievements of Nu-kote's
management team Nu-kote's financial condition has significantly improved since
the Petition Date.
The Debtors note that sales have increased at a higher than anticipated
rate of growth, gross profit has improved due to the on-going distribution,
transportation, and manufacturing cost-cutting programs, and operating income
has been higher than expected due to substantial reductions in force and the
elimination of the attendant operating expenses. Nu-kote has also obtained price
discounts and favorable credit terms from certain large vendors for the purchase
of supplies, persuaded customers to offset
SECOND AMENDED DISCLOSURE STATEMENT 61
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rebates over time, and are in the process of negotiating long-term contracts
with major customers that will generate millions of dollars in revenue. Through
extensive customer contact and positive cash flow operations, Nu-kote has
retained existing business and instilled confidence in customers and vendors.
Nu-kote has initiated employee and other significant cost reductions,
streamlined and refocused product lines, decreased the targeted customer base,
and met or exceeded sales and other financial projections. Nu-kote has also
begun a program of demanding a 3% discount on cash-in-advance orders to
suppliers, a 2% discount on orders satisfied in 15 days, and no discount on
orders offering 30 day terms. As a result, Nu-kote has utilized only a small
portion of the post-petition financing line available from Norwest and is cash
flowing. Nu-kote has filed Monthly Operating Reports for the months of November
and December, 1998 and January - October, 1999 with the Office of the U.S.
Trustee. These Monthly Operating Reports further indicate the continually
improving financial condition of Nu-kote.
Finally, despite cash usage of approximately $5.0 million for one-time
charges associated with Y2K compliance, restructuring, and bankruptcy costs, the
Company has paid back its initial borrowings on the DIP Facility with Norwest
and, as of October 22, 1999, has $0 net DIP borrowings with a cash surplus of
$1.2 million.
B. FUTURE OPERATIONS OF THE REORGANIZED DEBTORS
The approval by the Bankruptcy Court of the $7.5 million
debtor-in-possession financing with Norwest has served to increase customer and
third party supplier confidence that Nu-kote will continue to provide quality
products and remit trade payables on a timely basis. Since that time, Nu-kote
has focused its energies on redirecting, reorganizing, and restructuring the
company's US-based operations. The Reorganized Debtors will continue the
improvements already implemented.
1. THE FUTURE OF THE MARKET
As set forth above, the Company has historically served and, looking to
the future, the Reorganized Debtor's continued operations will continue to
serve, both the original equipment manufacturer and aftermarket distributor
markets. Among the Reorganized Debtors' challenges is the need to offset
declining impact ribbon sales with faster growing non-impact thermal, ink jet,
toner, and laser cartridge sales. It is anticipated that Nu-kote's future impact
ribbon sales should fall at a rate somewhat less than that of the overall market
due, primarily, to the expectation of market share gains. In an effort to offset
declining impact ribbon sales, Nu-kote has identified 29 domestic accounts in
the original equipment manufacturer, office products, and retail channels of
distribution which have been targeted to provide incremental annualized sales
volume. Thermal products, ink jet accessories, monochrome and color toner, and
laser cartridge sales account for the overwhelming share of expected gains.
2. STRATEGIC GOALS & OBJECTIVES
SECOND AMENDED DISCLOSURE STATEMENT 62
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Prospectively, if purchased by Richmont, the Reorganized Debtors will
focus on a number of strategic and operating goals and objectives in an effort
to maximize financial performance:
(a) Improve sales and marketing effectiveness;
(b) Offset declining impact ribbon sales with faster growing
non-impact product sales;
(c) Eliminate non-performing customer accounts, the underlying
sku's, and associated infrastructure expense, implementing, in
the process, reductions in force consistent with expected
sales volume, anticipated account base, and more aggressive
levels of productivity;
(d) Generate logistics and manufacturing cost savings and,
longer-term, facility consolidations;
(e) Outsource important but marginally profitable ribbon products
to contract manufacturers, which, on the basis of scale alone,
are expected to produce product less expensively; and
(f) Improve third party supplier credit terms.
3. SALES & MARKETING
During the better part of calendar 1998, the sales and marketing
organization was focused primarily on protecting Nu-kote's existing customer
account base due to Nu-kote's then less than satisfactory line fill rate, now
corrected, and its increasingly uncertain financial condition which had lead
certain of its customers to consider dual sourcing. Prospectively, the
Reorganized Debtors will stress the importance of an understanding of end-user
needs by sales and marketing personnel; focus on the distinguishing
characteristics of the Nu-kote product line; and employ a multi-functional team
approach to address the needs of key customers. Sales and marketing personnel
will also be held accountable for performance from both a sales volume and, more
importantly, account profitability point-of-view, thus increasing incentives to
perform well.
To begin the implementation of these changes, Nu-kote recently
introduced the initial phase of what will become a comprehensive training
program to improve end-user and product knowledge. In addition, the Company has
identified key personnel from the various functional disciplines and assigned
each to a series of teams that will interface with specific large customer
accounts. Similarly, Nu-kote has restructured its sales compensation plan by
reducing base salaries on an across-the-board basis and providing a schedule of
incentives to replace lost salary income with earned commissions. The positive
impact of these efforts will be realized through continued reinforcement of the
underlying principles.
SECOND AMENDED DISCLOSURE STATEMENT 63
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4. ACCOUNTS & SKU'S
A recent analysis of Nu-kote's existing account structure by product
line and channel of distribution indicated that approximately 25% of the
Company's domestic customer accounts and 60% of its domestic sku's generated
over 95% of its domestic sales volume. As a result, the Company has elected to
eliminate its non-performing accounts and the underlying sku's and, in the
process, restructure certain channels of distribution, which, in the aggregate,
is expected to generate personnel and infrastructure operating cost savings in
excess of $2.1 million annually, net of severance and other one-time costs.
5. LOGISTICS & MANUFACTURING
As an extension of the analysis of Nu-kote's existing account
structure, Nu-kote has identified approximately $0.9 million of logistics cost
savings and an estimated $2.4 million of manufacturing cost savings, both net of
severance and other one-time charges. In the aggregate, these savings are a
function of on-going reductions in force, elimination of costly overtime
expense, lower transportation rates, material cost reductions, improved scrap
and rework, manufacturing efficiency gains, and facility
consolidations/closings.
6. OUTSOURCING
Nu-kote has identified approximately 550 impact ribbon-related sku's
which lend themselves to outsourcing. Based on firm estimates from two contract
manufacturers, the Reorganized Debtors can expect to save in excess of $5.0
million over a twelve month period of time. In addition, the outsourcing
program, once completed, should lead to the elimination of associated
distribution and manufacturing facilities as indicated immediately above.
7. TRADE CREDIT
Nu-kote has initiated a planned program to expand trade credit and
obtain supplier price concessions. Concurrent with the filing of these
Bankruptcy Cases, Nu-kote suppliers overwhelmingly demanded cash in advance for
delivery of goods, which, understandingly, impacted working capital negatively.
Recently, however, Nu-kote has initiated conversations with its trade and other
suppliers and proposed a 3% discount off all invoices demanding cash in advance,
a 2% discount off all invoices requiring payment in ten days, and no discount on
invoices requiring payment in thirty days. To date, the Debtors have reduced
borrowings under Nu-kote's DIP Facility to $0 as of October 22, 1999 and should
continue to improve future cash flow.
8. INFORMATION SYSTEMS
Nu-kote completed its installation of a new, fully integrated computer
based information system on October 22, 1999, allowing ample time for testing
prior to calendar year-end. Among the features of the new system are improved
financial consolidation and
SECOND AMENDED DISCLOSURE STATEMENT 64
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reporting, improved workflow efficiency and supply chain management, reduced
software application maintenance, Y2K compliance, and the ability to conduct
electronic commerce.
9. FUTURE FINANCIAL PERFORMANCE
The Reorganized Debtors are expected to improve operating and financial
performance substantially. Domestically, sales should increase at approximately
7-10 % per year as new and existing account growth in the faster growing
non-impact market nominally offsets a continued decline in the impact market.
Operating income, however, is expected to show an estimated four-fold increase
on the strength of wider gross margins, particularly in the aftermarket, and
significantly lower selling, general & administrative expenses. Net cash flow
remains positive throughout the forecast periods.
ARTICLE IX. DISCUSSION OF THE JOINT PLAN
THE JOINT PLAN IS ATTACHED HERETO AS EXHIBIT "G." ALL TERMS FOR
IMPLEMENTING THE JOINT PLAN, TREATMENT OF CLASSIFIED AND UNCLASSIFIED CLAIMS AND
INTERESTS, PROVISIONS REGARDING ALL PROPERTY DEALT WITH BY THE JOINT PLAN, AND
ALL OTHER IMPORTANT TERMS AND CONDITIONS ARE CONTAINED IN THE JOINT PLAN. YOU
ARE URGED TO REVIEW THE JOINT PLAN CAREFULLY.
A. SUMMARY OF THE JOINT PLAN
THE JOINT PLAN IS A COMPREHENSIVE PROPOSAL BY THE PLAN PROPONENTS THAT
PROVIDES FOR THE PAYMENT IN FULL OF ALL ALLOWED ADMINISTRATIVE CLAIMS, PRIORITY
CLAIMS AND SECURED CLAIMS, THE PAYMENT TO HOLDERS OF ALLOWED UNSECURED CLAIMS,
OTHER THAN THE CLAIMS OF THE LENDERS, THEIR PRO RATA SHARE OF THE SUM OF
$600,000, OR SUCH HIGHER AMOUNT AS IS GENERATED BY THE BIDDING PROCEDURE, AND
25% OF THE NET CASH RECEIVED ON AVOIDANCE ACTIONS.
To accomplish this, the Joint Plan contemplates:
1. The continued operation of the business of Nu-kote.
2. The transfer of ownership of the business and the Litigation
on the Effective Date of the Joint Plan either to:
(a) Richmont or such other Successful Bidder as is
selected pursuant to the Bidding Procedure; or
(b) if there is no Successful Bidder other than Richmont
and Richmont does not close, to one or more trusts
for the benefit of Creditors in which case the
business will continue to be operated pending its
contemplated sale as a going concern.
SECOND AMENDED DISCLOSURE STATEMENT 65
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B. CLASSIFICATION AND TREATMENT OF CLAIMS
1. TREATMENT OF UNCLASSIFIED CLAIMS
The payment of certain types of Claims asserted against the Debtors is
accomplished without the requirement of classification of those Claims into
Classes. Administrative Claims and Priority Tax Claims are not classified under
section 1123(a)(1) of the Code for purposes of voting or receiving distributions
under the Joint Plan. The procedures for payment of Administrative Claims and
Priority Tax Claims, as well as Fee Claims, fees to the Office of the U.S.
Trustee, and the Norwest Claim are detailed in the Joint Plan and summarized as
follows:
(A) DEADLINE FOR FILING ADMINISTRATIVE CLAIMS. Any person or
Entity who claims to hold an Administrative Claim (other than
an Administrative Claim representing a liability incurred in
the ordinary course of business by any of the Debtors or a Fee
Claim) shall be required to file with the Court an application
for payment of such asserted Administrative Claim and to serve
notice thereof on all parties entitled to such notice. The
failure to file timely the application as required under the
Joint Plan shall result in the Claim being forever barred and
discharged. The Bar Date for filing requests for payment of
all Administrative Claims, Priority Tax Claims and Other
Priority Claims (except Fee Claims) (i) incurred through
September 30, 1999 is December 15, 1999, and (ii) incurred
after September 30, 1999 is the date that is sixty days after
the Effective Date.
(B) PAYMENT OF ALLOWED ADMINISTRATIVE CLAIMS. Each holder of an
Administrative Claim, except as otherwise set forth in the
Joint Plan shall receive from the Reorganized Debtors either:
(i) with respect to Administrative Claims which are Allowed
Claims on the Effective Date, the amount of such holder's
Allowed Claim in one cash payment; (ii) with respect to
Administrative Claims which become Allowed Claims after the
Effective Date, the amount of such holder's Allowed Claim in
one cash payment as soon as practicable after such claim
becomes an Allowed Administrative Claim; or (iii) such other
treatment agreed upon by the Debtors and such holder;
provided, however, that any such Administrative Claim
representing a liability incurred in the ordinary course of
business by any of the Debtors shall be paid by Reorganized
Debtors in accordance with the terms and conditions of the
particular transaction giving rise to such liability and any
agreements relating thereto.
(C) FEE CLAIMS OF PROFESSIONALS OTHER THAN COMMITTEES'
PROFESSIONALS. Each professional person whose retention with
respect to the Debtors' cases has been approved by the
Bankruptcy Court or who holds, or asserts, an Administrative
Claim that is a Fee Claim shall be required to file with the
Bankruptcy Court a final fee application within sixty (60)
days after the Effective Date and to serve notice thereof on
all parties entitled to such
SECOND AMENDED DISCLOSURE STATEMENT 66
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notice pursuant to the Agreed Order Regarding Compensation of
Certain Professionals (the "FEE ORDER"). Not later than five
(5) days prior to the Confirmation Date or sooner if the Court
so orders, any person intending to file a Fee Claim shall file
an estimate of such final Fee Claim on all parties entitled to
such notice pursuant to the Fee Order. No Fee Claims shall be
allowed in excess of estimated amounts.
(D) FEE CLAIMS OF THE COMMITTEES' PROFESSIONALS. Each professional
person employed by the Committees whose retention with respect
to the Debtors' cases has been approved by the Bankruptcy
Court (the "COMMITTEE PROFESSIONALS") shall be required to
file a final fee application in accordance with the Joint
Plan. Any such Fee Claim of a Committee Professional shall be
an Allowed Administrative Claim to the extent that such Fee
Claim is approved by the Bankruptcy Court and so long as the
aggregate allowed Fee Claims of such Committees' Professionals
does not exceed $450,000, and shall be paid in full in one
cash payment on the Effective Date.
(E) PAYMENT OF ADMINISTRATIVE TAX CLAIMS. Each holder of an
Administrative Claim that is an Allowed Claim for Taxes for
which the Debtors are responsible for the period during which
the Debtors' Chapter 11 Case is being administered, and any
other Taxes of the Debtors payable pursuant to Section
507(a)(1) of the Bankruptcy Code, if any, shall be paid the
Allowed Amount of such holder's Claim in cash, in full, by
Reorganized Debtors on the latest of: (i) the Effective Date,
(ii) the date such Claim is allowed by Final Order, or (iii)
the date such payment is due under applicable law.
(F) PAYMENT OF PRIORITY TAX CLAIMS. Any and all Secured or
Priority Claims of any Entity for the payment of any Taxes (a)
accorded a priority pursuant to ss.ss.507(a)(8) of the Code
(but excluding all Claims for post-petition interest and
pre-petition and post-petition penalties all of which interest
and penalties, pre-confirmation and post-confirmation, shall
be (i) deemed disallowed and (ii) fully discharged on the
Confirmation Date), or (b) secured by valid Liens on assets of
any Debtor existing on the Confirmation Date (but excluding
all Claims for post-petition interest and pre-petition and
post-petition penalties, all of which interest and penalties
shall be (i) deemed disallowed and (ii) discharged on
Confirmation Date). Additionally, all Liens securing Tax
Claims shall be deemed and legally treated as released, voided
and discharged on the Confirmation Date. Each Allowed Tax
Claim shall be paid by Reorganized Debtors in accordance with
Section 1129(a)(9)(C) of the Bankruptcy Code.
(G) PAYMENT OF NORWEST CLAIM. The Norwest Claim shall be paid in
full in accordance with the Norwest Agreement and the
Bankruptcy Court's Order approving same. Until the claim of
Norwest is paid hereunder, Norwest shall retain the Norwest
Lien. At the time the Norwest Claim is paid, Norwest shall
deliver a release of the Norwest Lien in a form acceptable to
the Lenders.
SECOND AMENDED DISCLOSURE STATEMENT 67
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(h) PAYMENT OF FEES TO U.S. TRUSTEE. All fees payable under 28
U.S.C. ss. 1930 shall be paid in cash in full. For purposes of
such payments, the Reorganized Debtor shall be treated as a
single entity.
2. TREATMENT OF CLASSIFIED CLAIMS
Section 1122 of the Bankruptcy Code states in part that "a plan may
place a claim or an interest in a particular class only if such claim or
interest is substantially similar to the other claims or interests of such
class." The Joint Plan classifies Claims into three (3) separate Classes and
Interest Holders into one (1) Class, pursuant to ss.ss. 1122 and 1123 of the
Code. The treatment of and consideration to be received by holders of Allowed
Claims pursuant to the Joint Plan shall be in full settlement, release and
discharge of their respective Claims and any associated lien or encumbrance but
shall not affect the liability of any other Entity on such Claim or Interest.
The Reorganized Debtors or the Trustee, as the case may be, may disregard, and
elect not to pay, Allowed Claims whose Pro Rata share of a proposed distribution
is less than $100.00. In such case, the Allowed Amount of such Claims shall be
reduced to zero and such funds shall be retained as part of the Reorganized
Debtors or the Trust. The classification and treatment of Claims and Interests
pursuant to the Joint Plan is detailed below:
(a) CLASS 1 - SECURED CLAIMS OF THE LENDERS. This Class consists
of the Secured Claims of the Lenders. If there is a Successful
Bidder who timely closes the Sale Transaction on or before the
Effective Date, then in full satisfaction of all Claims of all
Lenders, the Lenders shall be paid and receive on or before
the Effective Date $20,550,000 in good and collected funds, or
such higher amount as is generated by the Bidding Procedure.
In addition, the Reorganized Debtors or Successful Bidder, as
the case may be, shall pay to the Lenders a sum equal to
one-third (1/3) of the Net Cash Received by the Reorganized
Debtors, the Debtors, the Estates the Successful Bidder or any
of their successors or assigns ("DEBTOR PARTIES") from the
OEMs, Chubb, Wausau or their excess carriers (or any of their
affiliates, successors or assigns) on account of any claims of
the Debtors or their Estates including, without limitation,
claims against the OEMs and claims of the Debtors, if any,
against directors and officers or any policy of insurance
related to same, provided, however, that the Reorganized
Debtors shall have the sole and absolute discretion to pursue
or not pursue and either to settle or litigate all of such
claims, including, inter alia, the right to permit the
Reorganized Debtors to accept zero-cash or non-cash benefits,
in neither of which zero-cash or non-cash benefits shall the
Lenders have any interest and provided that the Lenders shall
be excluded from participating in any monies paid solely for
defense costs actually incurred by the Debtor Parties.
Otherwise, upon the occurrence of the Trust
Triggering Event, then each holder of an Allowed Secured Class
1 Claim shall receive on the
SECOND AMENDED DISCLOSURE STATEMENT 68
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Effective Date, its Pro Rata share of 97% of (a) the Trust
Interest and (b) the Trust Interest (Litigation), and shall
retain its assignments, security interests, liens and other
interests in the Retained Assets and Litigation, upon which
such assignments, security interests, liens and other
interests shall be deemed to be continuously perfected and
automatically remain attached to secure the Lender's Note and
Allowed Claim to the extent applicable.
In the event the Joint Plan is subject to "cram down"
under Section 1129(b) of the Bankruptcy Code on account of
non-acceptance by Class 3, each holder of an Allowed Secured
Class 1 Claim shall, on the Effective Date: (a) receive a
promissory note in the amount of its Allowed Secured Class 1
Claim bearing interest at the Legal Rate (the "LENDER'S
NOTE"); (b) retain its assignments, security interests, liens
and other interests in the Retained Assets and Litigation,
upon which such assignments, security interests, liens and
other interests shall be deemed to be continuously perfected
and automatically remain attached to secure the Lender's Note
and Allowed Claim to the extent applicable; (c) receive a Pro
Rata share of 100% of the Trust Interest; and (d) receive its
Pro Rata share of 100% of the Trust Interest (Litigation) to
the full extent of the claims, assignments, security
interests, liens and other interests held by each Secured
Class 1 Claim. To the extent the Lender's Note is insufficient
to fully satisfy its Allowed Secured Class 1 Claim, such
holder's Allowed Secured Class 1 Claim shall be treated as an
Unsecured Class 3a Claim.
(B) CLASS 2 - OTHER SECURED CLAIMS. This Class consists of all
other allowed Secured Claims of any Creditor other than those
Secured Claims in Class 1. The following Creditors have filed
Secured Claims, and, to the extent such Secured Claims are
Allowed, each shall be treated as a separate subclass in Class
2:
Class 2A Atlantic Molding, Inc.
Class 2B: Border Lift
Class 2C: CIT Group/Equipment
Class 2D: Doris L. Crank
Class 2E: Dollar Bank Leasing Corp.
Class 2F: Employers Insurance of Wausau
Class 2G: ERS Imaging Supplies, Inc.
Class 2H: GE Capital - Colonial Pacific Leasing
Class 2I: Wayne E. Moore
Class 2J: Newcourt Communication Finance Corp.
Class 2K: Oasis Imaging Products
Class 2L: Oce Printing Systems USA, Inc.
Class 2M: Oskar Haug AG
Class 2N: Phillips Joanna
Class 2O: Precision Packaging Products, Inc.
Class 2P: Tennant Company
SECOND AMENDED DISCLOSURE STATEMENT 69
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Class 2Q: Unisys Corporation
Class 2R: RSL Industrial Contracting
Except to the extent that a Class 2 Claimant may
otherwise agree, each holder of an Allowed Secured Class 2
Claim shall be fully satisfied, at the Reorganized Debtor's
option, by one of the following:
(1) NOTE OPTION: Each holder of a Class 2 Claim shall
retain all Liens securing such Claim until such Claim
is fully paid or until such holder otherwise agrees.
The terms and provisions relating to such Liens shall
be set forth in appropriate documents agreed to
between the parties, or, in the event of
disagreement, as directed by the Court. The
Reorganized Debtor shall execute a note payable to
the Class 2 Creditor and deliver it to the holder of
such Claim, along with an appropriate mortgage and/or
security agreement, no later than the tenth (10th)
Business Day after the later of the Effective Date or
the date that such Claim becomes an Allowed Claim.
The initial principal amount of each Class 2 Claim
shall be equal to the lesser of (i) the amount which
the Court shall determine is equal to the value of
the assets securing such Claim or (ii) the amount of
the Class 2 Claim. To the extent that any Creditor
has a Deficiency Claim in addition to its Class 2
Claim, the Deficiency Claim shall be treated under
this Plan as an Unsecured Claim against the Debtors.
(2) UNIMPAIRMENT OPTION: At the option of the Reorganized
Debtor, any Class 2 Claim may be deemed unimpaired.
If such election is to be made, it must be made on or
before the Effective Date. Any arrearage or other
amounts owed by the Debtors as of the Effective Date
(and any other payments which may at such date be
required to make each such Claim unimpaired) shall be
paid in cash, in full, on or before the forty-fifth
(45th) Business Day after the Effective Date or as
shall otherwise be agreed to in writing by the holder
of such Claim, and all other defaults with respect to
such Claim required to be cured by Section 1124(2) of
the Code shall be cured on or prior to the
forty-fifth (45th) Business Day after the Effective
Date as shall be agreed to in writing by the holder
of such Claim, and from and after the date of such
cure any previously accelerated indebtedness shall be
reinstated and any default rate of interest shall no
longer apply, but shall be deemed waived (not
forgiven). Each Class 2 Creditor whose claim is
unimpaired pursuant to the terms hereof shall retain
such lien as such Creditor held prior to the Petition
Date. After the reinstatement of its Class 2 Claim,
each Class 2 Creditor will receive payments in
accordance with the instruments governing such Claim
or as such Creditor may otherwise in writing agree.
Furthermore, after such unimpairment, each Class 2
Creditor will be entitled to exercise all rights,
privileges, and remedies available to it under the
SECOND AMENDED DISCLOSURE STATEMENT 70
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instruments governing its Class 2 Claim in accordance
with the terms for such instruments, without need for
any application to or order of the Court.
(3) CASH OPTION: The Reorganized Debtor may also elect,
at any time on or before the Effective Date, to pay a
Class 2 Secured Claim in full, in cash, on or
promptly after the Effective Date.
(4) ABANDONMENT OPTION: The Reorganized Debtor may also
elect, at any time on or before the Effective Date,
to fully satisfy a Class 2 Claim by abandoning the
collateral securing such Claim to the holder of such
Claim.
(5) RELEASE OF LIEN: Upon the satisfaction of any note
given to any holder of a Class 2 Secured Claim
pursuant to any of the methods provided for in this
Plan, the holder of such Class 2 Secured Claim shall
execute all instruments and documents necessary to
release its Lien securing such Claim or note.
(C) CLASS 3 - UNSECURED CLAIMS. This Class consists of all Allowed
Unsecured Claims. Class 3a and 3b shall have their votes
counted as a single class. The distinction of 3a and 3b is
solely for distribution purposes per the agreement reached
among the Plan Proponents in the Joint Plan and the
Stipulation. In the event that the Plan Proponents request the
Bankruptcy Court to invoke the "cram down" provisions of
Section 1129(b) of the Bankruptcy Code on account of a
non-acceptance of this Joint Plan by the Unsecured Claims in
Class 3b, Class 3 shall be treated as a single class for Pro
Rata distributions as further provided herein.
(1) CLASS 3a - UNSECURED DEFICIENCY CLAIMS OF THE
LENDERS. Class 3a consists of the Allowed Unsecured
Deficiency Claims of the Lenders calculated as that
amount by which the Allowed Claim of the Lenders
exceeds the Allowed Secured Claim of the Lenders
pursuant to 11 U.S.C. ss. 506. If the Trust
Triggering Event shall not occur on or prior to the
Effective Date, then the Lenders, as holders of all
of the Unsecured Class 3a Claims shall receive, in
full satisfaction of all of their Unsecured Claims,
their respective Pro Rata shares of the payments made
on account of the Lenders' Secured Class 1 Claims, as
provided above. Otherwise, in the event of the
occurrence of the Trust Triggering Event, if the
Joint Plan is accepted without invoking the "cram
down" provisions of Section 1129(b) of the Bankruptcy
Code on account of a non-acceptance of this Joint
Plan by the Unsecured Claims in Classes 3a and 3b
(whose votes will be counted as a single class for
acceptance of this Joint Plan), each Holder of an
Allowed Unsecured Class 3a Claim shall receive its
Pro Rata share
SECOND AMENDED DISCLOSURE STATEMENT 71
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in 97% of the (a) Trust Interest and (b) the Trust
Interest (Litigation), as set forth in the treatment
of Secured Class 1, above.
(2) CLASS 3b - GENERAL UNSECURED CLAIMS. This Class 3b
consists of the Allowed Claims of all General
Unsecured Creditors, excluding all Class 3a Claims.
If the Trust Triggering Event does not occur prior to
the Effective Date, then the holders of all Unsecured
Class 3b Claims shall each receive their Pro Rata
Share of (i) the sum of $600,00 to be paid on or
before the Effective Date by the Successful Bidder,
in good and collected funds to the Reorganized
Debtors, or such other Entity as directed by the
Committees, for the benefit of the Class 3b
Creditors, or (ii) such higher amount as is generated
by the Bidding Procedure. In addition, Unsecured
Class 3b Claims shall receive a Pro Rata share of 25%
of the Net Cash Received by the Reorganized Debtors
from recoveries on Avoidance Actions.
Otherwise, upon the occurrence of the Trust
Triggering Event (a) if the Joint Plan is accepted
without invoking the "cram down" provisions of
Section 1129(b) of the Bankruptcy Code on account of
a non-acceptance of the Joint Plan by the unsecured
claims in Class 3a and 3b, each holder of an Allowed
Unsecured Class 3b Claim shall receive its Pro Rata
share of 3% of (a) the Trust Interest and (b) the
Trust Interest (Litigation) or (b) in the event that
the Plan Proponents request to invoke the "cram down"
provisions of Section 1129(b) of the Bankruptcy Code
provided in Section 12.1 of the Joint Plan is
activated on account of a non-acceptance of the Joint
Plan by the unsecured claims in Class 3a and 3b, the
sharing arrangement between Secured Class 1 (i.e. 97%
of the Trust Interest and Trust Interest
(Litigation)) and Class 3b (i.e. 3% of the Trust
Interest and Trust Interest (Litigation)) shall be
eliminated and of no force and effect. In such event,
Class 3a and 3b shall then be treated as a single
class to receive their Pro Rata share of
distributions from the Litigation Trust, if any,
after the treatment of Secured Class 1 as provided
for by the Joint Plan.
(D) CLASS 4 - COMMON STOCK. This Class consists of: (i) the Record
Holders of Interests of Holding Common Stock and the Record
Holders of Interests of the Debtors common stock (other than
Holding) owned by entities other than the Debtors or
affiliates of the Debtors' as of the Distribution Record Date
and (ii) Holders of Claims arising from rescission of a
purchase or sale of a security of the debtor or of an
affiliate of the debtor, for Claims arising from the purchase
or sale of such a security, or for reimbursement or
contribution allowed under section 502 on account of such a
Claim. The holders of Allowed Class 4 Interests shall have
their respective Interests terminated and canceled and shall
not be entitled to receive any distribution of other benefit
on account of their Interests.
SECOND AMENDED DISCLOSURE STATEMENT 72
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C. IMPLEMENTATION OF THE JOINT PLAN: A SUCCESSFUL BIDDER
The Joint Plan provides for the sale of the stock or assets of the
Debtors (which will include indirectly ownership of all assets and intellectual
property of the Debtors and the Litigation) to the Successful Bidder. The entity
with the Lead Bid under the Joint Plan is Richmont (as defined below). The
Successful Bidder will be selected by means of the Bidding Procedure.
1. THE PROPOSED PURCHASER: RICHMONT
A newly-formed affiliate of Richmont Capital Partners I, L.P., a
Delaware limited partnership, is the proposed purchaser of the stock of
Reorganized Holding. Richmont Capital Partners I, L.P. and its affiliates own
and operate portfolio businesses in industries such as financial services,
apparel, sports products, and food services. Richmont Capital Partners I, L.P.
owns beneficially 2,559,360 shares of the outstanding common stock of Holding,
which is approximately 11.8% of that class. John P. Rochon, a director of
Nu-kote and the chief executive officer of the managing general partner of
Richmont Capital Partners I, L.P. has shared voting and investment power over
these shares. Marketing Specialists, a company in which Richmont Capital
Partners I, L.P. owns a majority interest, has been employed by the Debtors in
connection with the Debtors' recall of certain Epson products.
The proposed purchaser of the stock of Reorganized Holding ("RICHMONT")
will be an affiliate of Richmont Capital Partners I, L.P. The net worth of
Richmont upon formation will be at least sufficient to qualify as financially
able to be the Purchaser under the Joint Plan, and Richmont is willing to be the
Purchaser contemplated in the Plan. The senior management of Richmont is
anticipated to include John P. Rochon and Patrick E. Howard. While Richmont has
expressed an interest and willingness to be the Purchaser contemplated by the
Joint Plan, the ultimate Purchaser will be the entity which is determined by
Nu-kote to have the highest and/or best bid for the purchase of the stock of the
Reorganized Holding. It is contemplated that the current management of Nu-kote
will receive an equity incentive of some form in Richmont if Richmont is the
Purchaser.
2. RICHMONT'S OBLIGATION TO CLOSE
Richmont will have no obligation to close the Sale Transaction and
Richmont shall have no liability, obligation or responsibility to the Debtors,
their Estates, the Lenders, the Creditors, or any other party in interest as to
such Sale Transaction or under the Joint Plan unless the Closing Conditions are
satisfied, other than the right of the Lenders to draw upon the Letter of Credit
as described in and in accordance with the terms and conditions of Art. VIII ss.
8.12 of the Joint Plan. The calculation of whether or not the aggregate
allowance of all Administrative Claims and Priority Claims is less than or equal
to $3,000,000 shall include all Administrative Claims and Allowed Priority
Claims that have been Allowed as of the Effective Date but not paid as of the
date of selection of the Successful Bidder, all Filed Administrative Claims and
Priority Claims that have not been
SECOND AMENDED DISCLOSURE STATEMENT 73
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Allowed as of the Effective Date whether or not objected to unless such
objection has been resolved by Final Order, and reserves for any Administrative
Claims or Priority Claims that have not been filed as of the Effective Date but
which the Debtors believe will be filed by the Bar Date for such claims. Through
and until 4:00 p.m. (EST) on February 11, 2000, Richmont shall be subject to a
higher bid of any other Successful Bidder under the Bidding Procedure and shall
have no right to object to or prevent such a higher bid irrespective of the
amount of Administrative Claims, resolution of the OEM Claims or occurrence of a
Material Adverse Change (as defined below), any one or all of which may be
acceptable to such Successful Bidder.
3. THE LETTER OF CREDIT
In the event Richmont is the Successful Bidder and fails to close the
Sale Transaction on or before the Effective Date, other than on account of any
one or more of the Closing Conditions, the Lenders shall be immediately entitled
to draw upon the full amount of the Letter of Credit and apply the proceeds
thereof to their Claims without notice of any kind as the sole remedy available
for any party in interest for non-performance by Richmont under the Joint Plan.
In the event Richmont is not the Successful Bidder, no demand for funding will
be made against the Letter of Credit and the Letter of Credit shall be promptly
returned to Richmont on the earlier of the selection of the Successful Bidder or
the Confirmation Date, unless such date shall be extended in writing by and
among Richmont, the Debtors and the Lenders.
4. THE BIDDING PROCEDURE
Richmont shall be the initial bidder, and has submitted the Lead Bid as
provided in the Joint Plan.(2) The Bidding Procedure shall be administered by
the investment banking firm of Conway Del Genio, which firm has previously been
employed by the Debtors as their investment bankers in connection with the sale
of the company. The Bidding Procedure shall be as follows:
(a) SOLICITATION. The Debtors shall, and the Lenders may (provided
they direct any solicited parties to Conway Del Genio) seek
higher and better offers than the Lead Bid from any entity
that constitute, or would reasonably be expected to lead to an
Overbid (as defined below).
(b) INFORMATION TO THIRD PARTIES. The Debtors shall (a) furnish,
in addition to the confidential memorandum provided to
prospective bidders who have signed confidentiality
agreements, non-public information (other than trade secrets
or proprietary information) with respect to the Debtors to any
entity seeking to be a successful bidder who first (i) has
executed a letter of interest in a range in excess of that of
the Lead Bid, (ii) has executed a confidentiality agreement in
a form mutually acceptable to the Debtors and the Lenders and
(iii) has delivered to the Debtors and the Lenders its current
financial statements and such other information as Debtors
shall reasonably require,
- ----------------
(2) Richmont, the lead bidder, is fully discussed under Article IX.C.7.
SECOND AMENDED DISCLOSURE STATEMENT 74
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which demonstrate, to the Debtors' reasonable satisfaction,
the financial capability of such entity to consummate the
transactions contemplated by the Overbid and (b) participate
in negotiations or discussions concerning such Overbid. The
Lenders shall receive biweekly reporting from Conway Del Genio
commencing on December 3, 1999 regarding the sale process and
other information reasonably requested by the Lenders.
(c) OVERBIDS. The Debtors shall solicit higher and better offers
("Overbids") in accordance with the following procedure.
(i) OVERBID DEADLINE. All Overbids shall be submitted in
writing to and received by Conway Del Genio no later
than 4:00 p.m. (EST) on, February 8, 2000 (the "Bid
Date"), with copies simultaneously sent to Debtors
through their undersigned counsel
(Hance/Scarborough/Wright), Richmont through its
undersigned counsel (Creel, Sussman & Moore, L.L.P.),
the Lenders through their undersigned counsel (Vinson
& Elkins L.L.P.) and counsel for the U.S. Trustee.
Any party-in-interest in these proceedings may obtain
a copy of the Overbids received in accordance with
the bidding procedures upon written request to
counsel for the Debtors at the addresses set forth
below.
(ii) OVERBID REQUIREMENTS. To be considered, all Overbids
must, in the reasonable judgment of the Debtors,
consist of terms no less favorable to Debtors,
Lenders and the Debtors' other creditors than the
Lead Bid and must satisfy the following minimum
requirements (such Overbid, a "Qualified Overbid"):
- the initial Overbid shall meet all other
payment requirements of the Lead Bid and
provide at least $1,000,000 of additional
cash available for payment of the $600,000
Topping Fee to Richmont and payments to the
Lenders and Unsecured Creditors, with
successive bids (a "Subsequent Overbid")
thereafter exceeding one another by minimum
increments of at least $250,000.
- all Overbids by bidders other than Richmont
shall be accompanied by a cash deposit of
$500,000 or letter of credit acceptable to
the Debtors and Lenders in the amount of
$500,000 (the "Deposit"), which Deposit
shall be held by Conway Del Genio and which
shall be forfeitable to the Lenders in the
event the bidder is selected as the
Successful Bidder and does not timely close
for any reason other than that (i) the
aggregate allowance of all Administrative
Claims and Priority Claims is greater than
$3,000,000, (ii) the OEM Claims are not
resolved in a manner which does not cause
or, with the
SECOND AMENDED DISCLOSURE STATEMENT 75
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passage of time, will not cause, a Material
Adverse Change, (iii) a Material Adverse
Change shall have occurred or (iv) the Joint
Plan shall not have been confirmed by Final
Order of the Bankruptcy Court (the "Closing
Conditions");
- the Overbid shall provide for the purchase
of the assets and /or stock of the Debtors
and shall not be conditional on the outcome
of any unperformed due diligence by the
bidder, (b) the receipt of equity or debt
financing, (c) the approval of any Board of
Directors, shareholder, or other corporate
approval, or (d) any other condition
preceding closing other than the Closing
Conditions;
- the bidder shall provide evidence reasonably
satisfactory to the Debtors and the Lenders
demonstrating that the bidder has the
financial ability to close and consummate
the sale transaction contemplated hereunder
on or prior to the Effective Date; and
- if patent covenants with Hewlett-Packard
Company ("HP") (in the event a settlement
with HP is effected) related to the Debtors'
inkjet business are to be acquired, such
Overbid shall also be by an entity
acceptable to HP.
(iii) RICHMONT DEPOSIT REQUIREMENT. Richmont shall post, as
its Deposit, a $500,000 letter of credit
contemporaneously with the filing of the Joint Plan
as (i) an indication of its good faith and (ii) a
limit on its financial risks in the event of its
non-performance. Richmont's offer and all other
timely submitted Qualified Bids shall remain open and
irrevocable through 4:OO P.M., EST, February 11, 2000
(the "Selection Date") on which date the Debtors
shall select the bid that in their reasonable
judgment represents the highest and best offer for
all of the stock or assets of the company and is in
the best interests of the Debtors, the estates and
their creditors from the bidder making such bid (the
"Successful Bidder") for presentation at the
confirmation hearing in the Bankruptcy Court. Once
accepted, such bid shall be binding on the Successful
Bidder and the Movants, subject to the Closing
Conditions, and approval by the Court. At the
confirmation hearing, the Debtors shall seek the
approval of the Bankruptcy Court of the Successful
Bid. Within three (3) business days after the
Selection Date, the Deposit, together with all
interest accrued thereon, shall be returned to any
bidder whose bid is not the Successful Bid. The
Deposit submitted by the Successful Bidder, together
with all interest thereon, shall be applied against
the payment of the Purchase Price at the closing of
the sale to the Successful Bidder. If the Successful
Bidder fails to consummate the purchase of the assets
and/or stock of the Debtors on or before the
Effective
SECOND AMENDED DISCLOSURE STATEMENT 76
<PAGE> 85
Date for any reason other than on account of a
Closing Condition, then the Debtors shall promptly
direct Conway Del Genio to transfer the Deposit of
such Successful Bidder to the Lenders. In the event
the Debtors determine that the Successful Bidder will
not close on the purchase of the stock or assets of
the Debtors, the Debtors shall, after communication
by Conway Del Genio with all bidders who submitted
the Lead bid and any Overbids that the Debtors are
seeking an alternative bidder, close with the bidder
who in their reasonable judgment represents the
highest and best offer for all of the stock or assets
of the company (which is higher and better than the
Lead Bid), is in the best interests of the Debtors,
the estates and their creditors and is willing to
close, provided such closing is still effected by the
Effective Date (the "Alternative Successful Bidder
Procedure").
(iv) OVERBID PROCESS. If there are no Overbids meeting the
Overbid Requirements by 4:00 p.m. (EST) on the Bid
Date, then Richmont shall be declared the Successful
Bidder on such Bid Date and the bidding process shall
be concluded. However, if there is such an Overbid
then Conway Del Genio and the Debtors shall arrange a
reasonably convenient meeting place and time to which
Richmont, all bidders with qualifying Overbids and a
representative of the Lenders and the U. S. Trustee
shall be invited, and shall commence an auction
process to be concluded on or before the Selection
Date. The Debtors shall conduct the auction such that
all invited bidders will have reasonable opportunity
to achieve the highest and best bid for the benefit
of all parties in interest in the reasonable judgment
of the Debtors.
(d) RIGHT TO REJECT BIDS. The Debtors may, at any time before
entry of an Order of the Court approving a Successful Bid,
reject any purported bid or Overbid that, in the Debtors'
reasonable judgment, is (a) inadequate or insufficient, (b)
not in conformity with the requirements of the Bankruptcy Code
or the Overbid Procedures, or (c) contrary to the best
interests of the Debtors, their estates and their creditors.
The Debtors shall notify the Lenders of any such rejected bid
and provide adequate information to the Lenders regarding the
reasons for such rejection. Any officers or directors of the
Debtors connected with Richmont Capital Partners I, L.P. shall
abstain from participation in the decision as to which bid
should be accepted.
(e) BIDDING PROCEDURE DISPUTES. If any dispute shall arise with
respect to the auction process or any bid received from a
qualified bidder, any rejection thereof, or selection of a
bidder pursuant to the Alternative Successful Bidder
Procedure, the dispute shall be submitted to the Bankruptcy
Court for resolution, after notice and hearing, with the goal
to be resolution of all issues sufficiently in advance of the
Effective Date to permit timely confirmation within the
timeframe suggested in the Joint Plan.
SECOND AMENDED DISCLOSURE STATEMENT 77
<PAGE> 86
5. FAILURE OF THE SUCCESSFUL BIDDER TO CLOSE.
Upon the failure of (i) the Successful Bidder to close on or before the
Effective Date and (ii) the Alternative Successful Bidder Procedure to produce
an alternative highest and best bid reasonably acceptable to the Debtors, all
property of the Debtors' estates shall be transferred by the Debtors to the
trusts or other entities provided for, and in accordance with, the Joint Plan.
6. FAILURE OF THE JOINT PLAN TO BE CONFIRMED.
If the Joint Plan is not confirmed, then the Debtors, the Lenders and
the Committees intend to request that the Court approve a sale of the assets of
the Debtors, after notice and hearing, pursuant to 11 U.S.C. ss.ss. 363 and 365.
7. DISTRIBUTION OF ASSETS.
Additionally, in the event a Joint Plan is not confirmed and provided
the Court approves a sale of the assets and/or stock of the Debtors, the Lenders
still intend that all net proceeds from the sale or other disposition of the
assets shall be distributed 97% to the Lenders and 3% to the other unsecured
creditors.
8. THE REORGANIZED DEBTORS
On the Effective Date, all of the existing stock of Holding will be
cancelled. Reorganized Holding will be authorized to issue such new stock as the
Successful Bidder shall direct provided the Successful Bidder timely closes the
Sale Transaction on the Effective Date. The Successful Bidder may determine, at
any time on or before the Effective Date, (i) that any Interest of any Entity in
any of the Debtors should or should not be canceled and extinguished and (ii)
which and how many shares of Plan Stock should be authorized and issued and to
whom. Such determination by the Successful Bidder shall control in all respects,
without notice or hearing of any kind. The Successful Bidder may determine in
its sole discretion the corporate structure for the Reorganized Debtors,
including, but not limited to, which of the Debtors corporate entities will
continue to exist and which will be dissolved and the ownership of the Debtors'
assets by the Reorganized Debtors.
9. OFFICERS AND DIRECTORS
Provided Richmont is the Successful Bidder, the executive officers of
the Reorganized Debtors will be Patrick E. Howard, Chief Executive Officer; C.
Ronald Baiocchi, President and Chief Operating Officer; and Phillip L. Theodore,
Senior Vice President and Chief Financial Officer. If Richmont is the Successful
Bidder, the initial Directors of the Reorganized Debtors will be Patrick E.
Howard and John P. Rochon. These officers and directors reserve the right to
decline to remain with the Company.
SECOND AMENDED DISCLOSURE STATEMENT 78
<PAGE> 87
10. FUNDING OF THE CAUSES OF ACTION
The Reorganized Debtors will be responsible for evaluating, funding and
pursuing the Litigation based on their reasonable business judgment for the
benefit of the Lenders, the Unsecured Creditors and the Reorganized Debtors.
However, the Reorganized Debtors shall only be liable to fund such amounts as
the Reorganized Debtors, in their sole and absolute discretion, shall deem
appropriate and reasonable. Such advances shall be reimbursed to the Reorganized
Debtors from the first recoveries prior to any distributions of the Net Cash
Received.
11. AUTHORITY FOR SETTLEMENT OF CAUSES OF ACTION AND RELEASES
The Reorganized Debtors shall, in their sole and absolute discretion,
be authorized to compromise and settle any of the Litigation, without Court
approval, at any time, and for any consideration that the Reorganized Debtors
believes to be in their best interest (and not necessarily in the best interest
of the Creditors) including, inter alia, the right to permit the Reorganized
Debtors to accept zero-cash or non-cash benefits. The Reorganized Debtors shall
have the sole and absolute discretion to pursue or not pursue and either to
settle or litigate all of such claims including, inter alia, the right to permit
the Reorganized Debtors to accept zero-cash or non-cash benefits, in neither of
which zero-cash or non-cash benefits shall the Creditors have any interest.
12. PAYMENT OF FEES TO THE U.S. TRUSTEE
The Reorganized Debtors will be responsible for payment of the
quarterly fees which accrue to the U.S. Trustee after either closure of the sale
to the Successful Bidder. Neither the U.S. Trustee nor the Bankruptcy Court are
required to file proofs of claim or estimated claims regarding such fees.
D. IMPLEMENTATION OF THE JOINT PLAN: THE TRUST TRIGGERING EVENT
If the Trust Triggering Event shall occur, then the following means
shall be employed to implement this Joint Plan.
1. EFFECTIVE DATE ENTITIES
On the Effective Date, the Trust and the Litigation Trust shall be
formed pursuant to the Trust Agreement and the Litigation Trust Agreement,
respectively. Also, on the Effective Date, Reorganized Debtors shall be formed
by the filing of the Charter Amendments for Reorganized Debtors. Likewise, any
additional entities determined by the Trustee to be necessary to effectuate this
Joint Plan shall be formed whether by formation, merger, acquisition or
otherwise.
2. TRANSFER OF THE LITIGATION BY THE DEBTORS TO THE LITIGATION
TRUST
SECOND AMENDED DISCLOSURE STATEMENT 79
<PAGE> 88
On the Effective Date, the Litigation owned by the respective Debtors
shall be conveyed to the Litigation Trust free and clear of all liens, claims
and encumbrances except those liens, claims or encumbrances created or preserved
in the treatment of Creditors under Article IV of the Joint Plan. It is further
provided that, to the extent either Chubb or Wausau has a valid, enforceable,
perfected and unavoidable interest or subrogation right in or superior to the
Estates' interest in any particular Litigation (the "CW INTEREST"), such CW
Interest shall be preserved, but shall remain subject to all rights and remedies
of the Debtors, Reorganized Debtors, Trust, Litigation Trust and the Lenders,
all of which are expressly preserved to the fullest extent provided by
applicable law and this Joint Plan. All Litigation is being transferred to the
Litigation Trust to be owned and pursued by the Litigation Trust, at its option,
in the name of the Debtors and for the benefit of the Creditors of these
Estates. All benefits, privileges and other rights of the Debtors and of these
Estates shall be transferred with the Litigation Claims.
(a) PURPOSES FOR THE LITIGATION TRUST. The primary purposes of the
Litigation Trust shall be:
(1) to own, hold, pursue and manage the Litigation for
the benefit of the creditors of the Estates.
(2) to litigate, prosecute, settle or otherwise resolve
the Litigation;
(3) to defend any counterclaims relating to the
Litigation; or
(4) to do anything necessary, related or incidental to
the foregoing.
(b) PROSECUTION OF THE LITIGATION TRUST. The Litigation Trust
shall have the sole responsibility for prosecuting the
Litigation.
(c) MANAGEMENT OF THE LITIGATION TRUST AND LITIGATION ADVISORY
BOARD. The Litigation Trust shall be administered by a
Litigation Trustee supervised by the Litigation Advisory
Board. The Litigation Advisory Board shall consist of five (5)
members, up to four (4) of whom shall be appointed by the
Lenders and one (1) of whom shall be appointed by the
Committees.
(d) BENEFICIARIES OF THE LITIGATION TRUST. The beneficiaries of
the Litigation Trust shall be the holders of Allowed Secured
Class 1 Claims and Allowed Unsecured Class 3 Claims who shall
receive the Trust Interest (Litigation) in accordance with
their treatment under the terms of this Joint Plan.
3. TRANSFER OF TRUST SHARES TO THE TRUST
On the Effective Date, the Trust Shares shall be conveyed to the Trust,
free and clear of all liens, claims and encumbrances, except those liens, claims
or encumbrances created or preserved in the treatment of Creditors under Article
IV of the Joint Plan, or which existed and were enforceable, valid and perfected
prior to the Petition Date.
SECOND AMENDED DISCLOSURE STATEMENT 80
<PAGE> 89
(a) PURPOSES FOR THE TRUST. The primary purposes of the Trust
shall be:
(1) to hold and own the Trust Shares;
(2) to prepare, market and sell the Trust Shares (subject
to applicable securities regulations) and the
Retained Assets of these Estates; or
(3) to do anything necessary, related or incidental to
the foregoing.
(b) MANAGEMENT OF THE TRUST AND TRUST ADVISORY BOARD. The Trust
shall be administered by a Trustee and supervised by the Trust
Advisory Board. The Advisory Board shall consist of five (5)
members appointed by the Lenders.
(c) INCORPORATION OF INK JET SUBSIDIARY AND TRANSFER OF ASSETS. In
light of the ongoing OEM Litigation, the Reorganized Debtors
shall take all steps necessary to incorporate a wholly owned
subsidiary of Reorganized Holding to operate the Debtors' Ink
Jet Business (the "INK JET SUBSIDIARY") including filing
articles of incorporation and bylaws. On the Effective Date,
Reorganized Debtors shall transfer all of their respective
assets related to the Debtors' manufacture and distribution of
ink jet cartridges for ink jet printers (the "INK JET
Business") from the Debtors to the Ink Jet Subsidiary. Such
transfers of the Ink Jet Business shall be free and clear of
all liens, claims and encumbrances except those liens, claims
or encumbrances created or preserved in the treatment of
creditors under Article IV of this Joint Plan.
(d) SALE OF THE TRUST SHARES AND THE RETAINED ASSETS. The Trust
shall have the responsibility for preparing, marketing and
selling the Trust Shares and the Retained Assets.
(e) BENEFICIARIES OF THE TRUST. The beneficiaries of the Trust
shall be the holders of Allowed Secured Class 1 Claims and
Allowed Unsecured Class 3 Claims who shall receive their
respective Trust Interest in accordance with their treatment
under terms of the Joint Plan.
4. EFFECTIVE DATE FINANCING
On the Effective Date, Reorganized Debtors shall obtain the Effective
Date Financing for the purpose of financing the Effective Date transactions
contemplated by this Plan, including, but not limited to, the payment of: (i)
Administrative Claims and Priority Claims which shall not exceed $3,000,000,
including Fee Claims, Other Administrative Claims and Administrative Tax Claims,
(ii) the payment of the Norwest Commitment, and (iii) financing for the payments
required under the Joint Plan and continued operation of Reorganized Debtors and
their affiliates.
SECOND AMENDED DISCLOSURE STATEMENT 81
<PAGE> 90
5. BOARD OF DIRECTORS AND OFFICERS
Upon the Effective Date, the By-laws of Reorganized Debtors shall provide that
Reorganized Debtors shall each have a board of directors, odd in number, and
consisting of between 3 and 7 members. The initial board of directors (the
"INITIAL BOARD") shall be selected by the Trustee at least five (5) days prior
to the Effective Date. From and after the Effective Date, Directors shall be
selected in accordance with Reorganized Debtors' By-laws. The Trustee shall
provide the names of the officers of Reorganized Debtors at least five (5) days
prior to the Effective Date.
6. PAYMENT OF FEES TO THE U.S. TRUSTEE
The Reorganized Debtors will be responsible for payment of the
quarterly fees which accrue to the U.S. Trustee after transfer of all assets to
the Trust. Neither the U.S. Trustee nor the Bankruptcy Court are required to
file proofs of claim or estimated claims regarding such fees.
E. RELEASES
The Joint Plan provides for certain releases (the "Releases") of (a)
all current officers and directors of the Debtors in exchange for Richmont's
purchase of the stock of Holding or cash consideration of $300,000 payable by
Richmont, at Richmont's election and (b) certain other parties in interest
including, Richmont, the Lenders, the Committees, Glass & Associates, the
Debtors' case professionals (subject to fee objections in the Bankruptcy Court)
and non-Debtor Nu-kote Entities (the "Release Parties"). The appropriate parties
will execute forms of release reasonably acceptable to the Release Parties to
effectuate such releases.
The Releases provide for the release of any claims against the Debtors
Current Officers and Directors in consideration for the payment of $300,000.00
at Richmont's option in the event Richmont is not the Successful Bidder.
"Current Officers and Directors" is a defined term under the Joint Plan that
means "for purposes of the releases contemplated in the Joint Plan, all current
officers and directors of the Debtors, as of the date of filing of this Joint
Plan including John Rochon, Patrick Howard, Phillip Theodore, Ian Elliott and C.
Ronald Baiocchi." There is no time restriction for the releases to be executed
for the Current Officers and Directors. The claims to be released include those
in the nature of claims for breach of fiduciary duty which were alleged by the
Lenders and are referenced in more detail herein. The Debtors and their officers
and directors dispute that any such claims exist. The Lenders and the Debtors
have agreed that the Current Officers and Directors will be released upon the
payment of $300,000 if Richmont is not the Successful Bidder and for no
additional payment if there is a closing with Richmont. The releases for the
Current Officers and Directors will not affect the claims made by the plaintiffs
in the Lemmer litigation pending in the United States District Court for the
Northern District of Texas, provided that such claims in the Lemmer litigation
do not constitute property of the Debtors' estate.
SECOND AMENDED DISCLOSURE STATEMENT 82
<PAGE> 91
The Releases include a release for Richmont. The Debtors assert that
they are aware of no claims against Richmont. Richmont asserts that no claims
exist against it.
The Releases include a release of any claims against the Lenders. The
claims to be released would include claims, if any, asserted by the Debtors to
(a) avoid payments to or for the benefit of the Lenders in the year prior to
the bankruptcy filing (asserted by the Debtors to be approximately $20
million), (b) to avoid liens asserted by the Debtors to have been given to the
Lenders in July 1997, (c) equitable subordination or (d) lender liability. The
Lenders dispute that any such claims exist.
The Releases include a release of any claims against Glass &
Associates, Inc. The claims to be released do not include claims to recover a
retainer paid to Glass & Associates in the amount of $125,000. The claims to be
released would include claims that Glass & Associates and their officers
breached their fiduciary duty to the Debtors in connection with their
employment as turnaround professionals for the Debtors. The Debtors do not
believe that any claims by Glass & Associates against the Debtors exist, with
the possible exception of a claim for indemnity. The consideration for the
Debtors' release of Glass & Associates is the Lenders' participation in and
consent to the terms of the Joint Plan, which would not be forthcoming absent
the release for Glass & Associates. The release for Glass & Associates is not
intended to and does not affect or apply to any claims Coudert Brothers may
have independent of Nu-kote against Glass & Associates and Donnellan, if any.
The Releases include a release of any claims against the Committees.
The claims to be released relate to the Committees' involvement in these cases.
The releases do not extend to the members in their capacity as creditors.
The Releases include a release of any claims the Lenders may have
against any professionals employed by the Debtors other than the Coudert
Brothers law firm. Such releases are subject to fee objections in the
Bankruptcy Court.
THE PLAN PROPONENTS BELIEVE THAT THE JOINT PLAN PROVIDES THE ONLY
VEHICLE BY WHICH HOLDERS OF ALLOWED UNSECURED CLAIMS CAN MAXIMIZE THE RECOVERY
ON THEIR ALLOWED CLAIMS. A COPY OF THE JOINT PLAN IS ATTACHED AS EXHIBIT "G."
THE PLAN PROPONENTS URGE YOU TO REVIEW CAREFULLY AND THEN VOTE TO ACCEPT THE
JOINT PLAN.
F. PERMANENT INJUNCTION
Except as otherwise expressly provided in, or permitted under, the
Joint Plan, the Confirmation Order shall provide, among other things, that all
Creditors and persons who have held, hold or may hold Claims or Interests that
existed prior to the Effective Date, are permanently enjoined on and after the
Effective Date against the: (i) commencement or continuation of any judicial,
administrative, or other action or proceeding against the Debtors, Successful
Bidder, Reorganized Debtors, Trust or the Litigation Trust, as the case may be,
on account of Claims against or Interests in the Debtors, or on account of
claims released pursuant to Section 11.4 and 11.5 of the Joint Plan; (ii)
enforcement, attachment,
SECOND AMENDED DISCLOSURE STATEMENT 83
<PAGE> 92
collection or recovery by any manner or means of any judgment, award, decree,
or order against the Debtors, the successful Bidder, Reorganized Debtors, Trust
or the Litigation Trust, or any assets or property of same; or (iii) creation,
perfection or enforcement of any encumbrance of any kind against the Debtors,
Successful Bidder, Reorganized Debtors, Trust or the Litigation Trust, as the
case may be, arising from a Claim. This provision does not enjoin the
prosecution of any claims that arise on or after the Effective Date nor does it
enjoin the determination of the Allowed Amount of any Claims that arose prior
to the Effective Date by a court of competent jurisdiction. Notwithstanding the
above, HP has certain rights and remedies against the Debtors and others under
the Settlement Agreement approved by order of the Court entered December 3,
1999, and this injunction shall in no way limit or impair HP's rights or
remedies under the Settlement Agreement.
G. ACCEPTANCE AND CONFIRMATION OF THE JOINT PLAN
1. REQUIREMENTS FOR CONFIRMATION
At the Confirmation Hearing, the Court will determine whether the
provisions of section 1129 of the Code have been satisfied. Section 1129 of the
Bankruptcy Code, as applicable here, provides as follows:
The Joint Plan must comply with the applicable provisions of the Code,
including section 1123 which specifies the mandatory contents of a plan and
section 1122 which requires that Claims and Interests be placed in Classes with
"substantially similar" Claims and Interests (section 1129(a)(1)).
The proponents of the Joint Plan must comply with the applicable
provisions of the Code (section 1129(a)(2)).
The Joint Plan must have been proposed in good faith and not by any
means forbidden by law (section 1129(a)(3)).
Any payment made or to be made by the Plan Proponents, by the Debtors,
or by a person issuing securities or acquiring property under the Joint Plan,
for services or for costs and expenses in or in connection with the Case, or in
connection with the Joint Plan and incident to the Case, must be disclosed to
the Court and approved or be subject to the approval of the Court as reasonable
(section 1129(a)(4)).
The Plan Proponents must disclose the identity and affiliations of any
individual proposed to serve, after Confirmation of the Joint Plan, as a
director, officer, or voting trustee of the Reorganized Debtor, of an affiliate
of the Debtors participating in a joint plan with the Debtors, or of a
successor to the Debtors under the Joint Plan. The appointment to, or
continuance in, such office of such individual must be consistent with the
interests of the Debtors' creditors, equity holders, and with public policy.
The proponents must also disclose the identity of any insider that will be
employed or retained by the Reorganized Debtor and the nature of any
compensation for such insider (section 1129(a)(5)).
SECOND AMENDED DISCLOSURE STATEMENT 84
<PAGE> 93
The Joint Plan must meet the "best interest of creditors" test which
requires that each holder of a Claim or Interest of a Class of Claims or
Interests that is impaired under the Joint Plan either accept the Joint Plan or
receive or retain under the Joint Plan on account of such Claim or Interest
property of a value as of the Effective Date of the Joint Plan, that is not
less than the amount that such holder would receive or retain if the Debtors
were liquidated on such date under Chapter 7 of the Code. If the holders of a
Class of Secured Claims make an election under section 1111(b) of the Code,
each holder of a Claim in such electing Class must receive or retain under the
Joint Plan on account of its Claim property of a value, as of the Effective
Date of the Joint Plan, that is not less than the value of its interest in the
Debtors' interest in the property that secures its Claim (section 1129(a)(7)).
To calculate what non-accepting holders would receive if the Debtors were
liquidated under Chapter 7, the Court must determine the dollar amount that
would be generated upon disposition of the Debtors' assets and reduce such
amount by the costs of liquidation. Such costs would include the fees of a
Trustee (as well as those of counsel and other professionals) and all expenses
of sale.
Each Class of Claims or Interests must either accept the Joint Plan or
not be impaired under the Joint Plan (section 1129(a)(8)). Alternatively, as
discussed herein, a Joint Plan may be confirmed over the dissent of a Class of
Claims or Interests if the "cramdown" requirements of section 1129(b) of the
Code are met.
Except to the extent that the holder of a particular Claim has agreed
to a different treatment of such Claim, the Joint Plan must provide that
holders of Administrative Claims and Priority Claims (other than tax claims)
will be paid in full in cash on the Effective Date of the Joint Plan, and that
holders of priority tax Claims will receive on account of such Claims deferred
cash payments, over a period not exceeding six (6) years after the date of
assessment of such tax, of a value, as of the Effective Date of the Joint Plan,
equal to the Allowed amount of such Claim (section 1129(a)(9)).
At least one impaired Class must accept the Joint Plan, determined
without including the acceptance of the Joint Plan by any insider holding a
Claim of such Class (section 1129(a)(10)).
The Joint Plan must be "feasible". In other words, it can not be
likely that confirmation of the Joint Plan will be followed by the liquidation,
or the need for further financial reorganization, of the Debtors or any
successor to the Debtors under the Joint Plan, unless such liquidation is
proposed in the Joint Plan (section 1129(a)(11)).
All fees required to be paid under the Code have been paid or the
Joint Plan provides for such payment on its Effective Date (section
1129(a)(12)).
The Joint Plan must provide for the continuation after the Effective
Date of the payment of all Retiree Benefits at the level established prior to
Confirmation, pursuant to the provisions of ss.1114 of the Code (section
1129(a)(13)).
H. THE JOINT PLAN MEETS ALL OF THE REQUIREMENTS FOR CONFIRMATION
SECOND AMENDED DISCLOSURE STATEMENT 85
<PAGE> 94
The Plan Proponents believe that the Joint Plan satisfies all of the
statutory requirements of Chapter 11 of the Code and therefore should be
confirmed. More specifically:
1. The Joint Plan complies with all of the applicable provisions
of the Code;
2. Each of the Plan Proponents have complied with the Code and
have proposed the Joint Plan in good faith;
3. All disclosure requirements concerning (a) payments made or
to be made for services rendered in connection with the
Chapter 11 case or the Joint Plan and (b) the identity and
affiliations of individuals who will serve the Reorganized
Debtor after confirmation have been, or will be met prior to
or at the Confirmation Hearing, including the identities of
those persons necessary under the Joint Plan upon the
occurrence of a Trust Triggering Event; and
4. Administrative Claims, Priority Claims, and fees required to
be paid under the Code are appropriately treated under the
Joint Plan.
ARTICLE X. ALTERNATIVES TO THE JOINT PLAN
The Plan Proponents believe that the Joint Plan affords creditors the
potential for the greatest realization from the Debtors' assets, and,
therefore, is in the best interests of creditors. The Plan Proponents have
considered alternatives to the Joint Plan, such as alternative Chapter 11 plans
and a liquidation in the context of a Chapter 7 case. In the opinion of the
Plan Proponents, such alternatives would not afford the holders of Claims a
return as great as may be achieved under the Joint Plan.
A. ANALYSIS OF LIQUIDATION UNDER CHAPTER 7
An alternative to the confirmation of the Joint Plan would be
conversion of these Cases to liquidation proceedings under Chapter 7 of the
Bankruptcy Code. Under Chapter 7, a trustee would be appointed to administer
the Estates, to resolve pending controversies including Disputed Claims against
the Debtors and Claims of the Estates against other parties, and to make
distribution to Creditors. If the Cases were converted to cases under Chapter
7, significant additional Administrative Expenses would be incurred, any
distributions to holders of Claims would be substantially delayed and, in all
likelihood, reduced as compared to the anticipated results of confirmation of
the Joint Plan. A Chapter 7 trustee would be entitled to compensation in
accordance with the scale set forth in ss. 326 of the Bankruptcy Code. A
Chapter 7 trustee might also seek to retain new professionals, including
attorneys and accountants, in order to resolve any disputed Claims and possibly
to pursue claims of the Estates against other parties.
SECOND AMENDED DISCLOSURE STATEMENT 86
<PAGE> 95
There is a strong probability that such Chapter 7 trustee would not
possess any particular knowledge of the property owned by the Debtors. The
trustee and any such new professionals retained by the trustee would need to
expend time familiarizing themselves with the Cases, which could result in
duplication of effort, increased expense, and delay in payment to Creditors.
Under the Bankruptcy Rules, a new bar date for the filing of proofs of claim
would have to be set, and additional Claims against the Estates that might now
be time-barred (because they were not filed before the applicable bar dates set
in the Cases) could be asserted.
In order to determine whether or not the Joint Plan complies with the
"best interest of creditors" test of section 1129(a)(7) of the Code, it is
necessary to do an analysis of the liquidation of Nu-kote's assets in a Chapter
7. A chart depicting the likely consequences of a liquidation analysis is
attached hereto as Exhibit "F." This chart analyzes the differences between the
book value and the liquidation value of the Debtors' assets. Book values are as
of October 22, 1999. Liquidation values were calculated using varying
percentages or anticipated recovery based on the Company's historical
experience in liquidating assets in connection with the downsizing of the
Company's operations. The Debtors assert that the Company would not likely have
any actual cash on hand in a liquidation after paying off the Norwest debt and
outstanding payables. Receivables would have to be reduced by outstanding
rebates owed to customers and anticipated product returns as customers would
immediately shift their business to Nu-kote's competitors and restock their
shelves with the competitors' products. The Debtors further assert that the
returned inventory would be liquidated for an estimated $0.20 on the dollar but
in actuality the recovery could be far less as there would be little demand for
the returned inventory. After deducting the Norwest debt and current payables
the liquidation value would be approximately $21.4 million before deducting the
costs of the liquidation which could easily be in the $2 million range. This
would result in a net liquidation value of approximately $19.4 million.
The liquidation chart does not include any value for Causes of Action
since any recoveries on Causes of Action are speculative and therefore not
quantifiable. Further, the most valuable of the Causes of Action, the antitrust
claims against Hewlett-Packard, have now been determined by a jury verdict to
be zero. Further, since the Lenders assert liens on all of the Company's Causes
of Action, none of the liquidation value would be available for payment of
Claims of Unsecured Creditors until such asserted liens of the Lenders are
resolved. In addition, Nu-kote firmly believes that any Chapter 7 trustee would
have great difficulty in preserving the value of the OEM Litigation. Upon
appointment of a Chapter 7 trustee, many of the employees of the Company would
likely resign, greatly reducing the value and altering inexorably the
negotiating strategy in the OEM Litigation, with the OEMs believing that a
Chapter 7 trustee's goal is merely to liquidate quickly the assets at any
price. In summary, the appointment of a Chapter 7 trustee would in all
likelihood result in no meaningful recovery for the Creditors.
SECOND AMENDED DISCLOSURE STATEMENT 87
<PAGE> 96
Further, all of the estates' assets, with the possible exception of
the OEM Litigation(3), are subject to Lenders' liens and security interests. The
Lenders' claim is an amount far in excess of the value of these assets.
Additionally, conversion to Chapter 7 would result in the discontinuation of
the Debtors' business operations and destroy the "going concern" value of the
present business assets. Thus, the Joint Plan affords creditors the potential
for the greatest realization from the Debtors' assets, and, therefore, is in
the best interests of creditors.
Due to the numerous uncertainties and time delays associated with
liquidation under Chapter 7 of the Bankruptcy Code, it is not possible to
predict with certainty the outcome of any Chapter 7 liquidation of the Debtors
or the timing of any distributions to Creditors. However, Nu-kote has concluded
that a complete liquidation of the Debtors under Chapter 7 of the Bankruptcy
Code would result in lesser distributions to Creditors than that provided for
in the Joint Plan.
B. ALTERNATIVES UNDER CHAPTER 11
The Plan Proponents or other parties in interest could attempt to
formulate different plans. Such plans might involve reorganization or
continuation of some or all of the Debtors' businesses. The Plan Proponents
believe that the necessary financing for continued operations of the Debtors'
business in Chapter 11 can not be achieved without the support of the Debtors
and the Lenders, and the Joint Plan represents the better alternative.
Additionally, the Plan Proponents do not believe that an alternative plan under
Chapter 11 can meet the necessary requirements under 11 U.S.C. ss. 1129.
THE PLAN PROPONENTS BELIEVE THAT CONFIRMATION AND IMPLEMENTATION OF
THE JOINT PLAN IS PREFERABLE TO ANY OF THE ALTERNATIVES DESCRIBED HEREIN
BECAUSE IT SHOULD PROVIDE GREATER RECOVERIES THAN THOSE AVAILABLE IN
LIQUIDATION TO THE HOLDERS OF UNSECURED CLAIMS WHO WOULD LIKELY RECEIVE LESS IN
AN IMMEDIATE LIQUIDATION. IN ADDITION, OTHER ALTERNATIVES WOULD INVOLVE DELAY,
UNCERTAINTY, AND SUBSTANTIAL ADMINISTRATIVE COSTS.
ARTICLE XI. VOTING PROCEDURES
ACCEPTANCE OR REJECTION OF THE JOINT PLAN WILL BE DETERMINED, PURSUANT
TO THE BANKRUPTCY CODE, BASED UPON THE ALLOWED CLAIMS AND ALLOWED INTERESTS
THAT ACTUALLY VOTE ON THE JOINT PLAN. THEREFORE, IT IS IMPORTANT THAT CLAIMANTS
EXERCISE THEIR RIGHT TO VOTE TO ACCEPT OR REJECT THE JOINT PLAN.
A. CLASSES ENTITLED TO VOTE ON THE JOINT PLAN
_________________
(3) The Lenders assert they hold a valid and perfected security
interest in the OEM Litigation. The Debtors, however, dispute this assertion.
SECOND AMENDED DISCLOSURE STATEMENT 88
<PAGE> 97
All members of Impaired Classes who hold Allowed Claims are entitled
to vote to accept or reject the Joint Plan. Section 1124 of the Bankruptcy Code
generally provides that a class of claims or interests is considered to be
Impaired under a plan unless the plan does not alter the legal, equitable and
contractual rights of the holders of such claims or interest. As discussed in
Discussion of the Joint Plan, for purposes of the Joint Plan solicitation all
of the Classes of Claims are impaired and therefore entitled to vote on the
Joint Plan. Interest Class 5 is deemed to have rejected the Joint Plan and is
therefore not entitled to vote on the Joint Plan.
B. PERSONS ENTITLED TO VOTE ON THE JOINT PLAN
Any holder of an Impaired or deemed Impaired Claim which is an Allowed
Claim against the Debtors on __________________, the Voting Record Date
established by the Bankruptcy Court, is entitled to vote to accept or reject
the Joint Plan, unless such Class has been deemed to reject the Joint Plan.
For purposes of the Joint Plan, an Allowed Claim is a Claim against
the Debtors which (a) has been scheduled by the Debtors pursuant to the Code as
undisputed, noncontingent, and liquidated and as to which no objection has been
filed within the time allowed for the filing of objections, (b) as to which a
timely proof of claim or application for payment has been filed and as to which
no objection has been filed within the time allowed for filing of objections,
(c) has been Allowed by Final Order, or (d) has been Allowed under the Joint
Plan. Therefore, although the holders of Disputed Claims will receive ballots,
these votes will not be counted unless such Claims become Allowed Claims as
provided under the Joint Plan or are temporarily allowed for voting purposes by
the Court.
THE CLAIMS IN CLASSES 1 THROUGH 3 ARE IMPAIRED UNDER THE JOINT PLAN
AND ARE ENTITLED TO VOTE WITH RESPECT TO ACCEPTANCE OR REJECTION OF THE JOINT
PLAN. SINCE HOLDERS OF INTERESTS IN CLASS 4 WILL NOT RECEIVE ANYTHING UNDER THE
JOINT PLAN, THEY ARE DEEMED TO HAVE REJECTED THE JOINT PLAN AND ARE NOT
ENTITLED TO VOTE.
C. VOTE REQUIRED FOR CLASS ACCEPTANCE
During the Confirmation Hearing, the Bankruptcy Court will determine
whether the Classes voting on the Joint Plan have accepted the Joint Plan by
determining whether sufficient acceptances have been received from the holders
of Allowed Claims actually voting in such Classes. A Class of Claims will be
determined to have accepted the Joint Plan if the holders of Allowed Claims in
the Class casting votes in favor of the Joint Plan (i) hold at least two-thirds
of the total amount of the Allowed Claims of the holders in such Class who
actually vote and (ii) constitute more than one-half in number of holders of
the Allowed Claims in such Class who actually vote on the Joint Plan. A Class
of Interests will be determined to have accepted the Joint Plan if the holders
of such Interests casting votes in favor of the Joint Plan hold at least
two-thirds of the amount of the Interests of such Class as to which votes are
cast.
SECOND AMENDED DISCLOSURE STATEMENT 89
<PAGE> 98
As a condition to Confirmation, the Bankruptcy Code requires that each
impaired Class of Claims or Interests accept the Joint Plan, subject to the
exception of ss. 1129(b) described herein. At least one impaired Class of
Claims must accept the Joint Plan.
D. VOTING INSTRUCTIONS
1. BALLOTS AND VOTING
Holders of Allowed Claims entitled to vote on the Joint Plan have been
sent a Ballot, together with instructions for voting, with this Disclosure
Statement. Claimants should read the Ballot carefully and follow the
instructions contained therein. In voting for or against the Joint Plan, please
use only the Ballot(s) that accompanies this Disclosure Statement.
If you have Claims in more than one Class, you will receive multiple
Ballots. IF YOU RECEIVE MORE THAN ONE BALLOT, YOU SHOULD ASSUME THAT EACH
BALLOT IS FOR A SEPARATE CLAIM OR INTEREST AND SHOULD COMPLETE AND RETURN EACH
BALLOT.
IF YOU ARE A MEMBER OF A CLASS ENTITLED TO VOTE ON THE JOINT PLAN AND
DID NOT RECEIVE A BALLOT FOR SUCH CLASS, OR IF YOUR BALLOT IS DAMAGED OR LOST,
OR IF YOU HAVE ANY QUESTIONS CONCERNING VOTING PROCEDURES, YOU SHOULD CONTACT
COUNSEL FOR THE DEBTORS:
FRANK J. WRIGHT
C. ASHLEY ELLIS
HANCE | SCARBOROUGH | WRIGHT
2900 RENAISSANCE TOWER
1201 ELM STREET
DALLAS, TEXAS 75270
BALLOTS OF CLAIMANTS THAT ARE SIGNED AND RETURNED, BUT NOT EXPRESSLY
VOTED EITHER FOR ACCEPTANCE OR REJECTION OF THE JOINT PLAN, SHALL BE COUNTED AS
BALLOTS FOR THE ACCEPTANCE OF THE JOINT PLAN IF PERMITTED BY THE BANKRUPTCY
COURT.
2. RETURNING BALLOTS AND VOTING DEADLINE
You should complete and sign each Ballot that you receive and return
it in the pre-addressed envelope enclosed with each Ballot to the Tabulation
Agent, Lain Faulkner & Co., by the Voting Deadline (as hereinafter defined).
All Ballots will be tabulated by the Tabulation Agent.
THE VOTING DEADLINE IS 4:00 P.M., CENTRAL STANDARD TIME, ON
_________________. IN ORDER TO BE COUNTED, BALLOTS MUST BE ACTUALLY RECEIVED BY
THE TABULATION AGENT ON OR BEFORE 4:00 P.M., CENTRAL STANDARD TIME, ON THE
VOTING DEADLINE AT THE ADDRESS SET FORTH IN
SECOND AMENDED DISCLOSURE STATEMENT 90
<PAGE> 99
THE BALLOT INSTRUCTIONS WHICH ACCOMPANY THE ENCLOSED BALLOT. EXCEPT TO THE
EXTENT ALLOWED BY THE BANKRUPTCY COURT, BALLOTS RECEIVED AFTER THE VOTING
DEADLINE MAY NOT BE ACCEPTED OR USED IN CONNECTION WITH THE PLAN PROPONENTS'
REQUEST FOR CONFIRMATION OF THE JOINT PLAN OR ANY MODIFICATION THEREOF.
3. INCOMPLETE OR IRREGULAR BALLOTS
Ballots which fail to designate the Class to which they apply shall be
counted in the appropriate Class as determined by the Plan Proponents, subject
only to contrary determinations by the Bankruptcy Court.
BALLOTS OF CLAIMANTS THAT ARE SIGNED AND RETURNED, BUT DO NOT INDICATE
A VOTE EITHER FOR ACCEPTANCE OR REJECTION OF THE JOINT PLAN SHALL BE COUNTED AS
BALLOTS FOR THE ACCEPTANCE OF THE JOINT PLAN IF PERMITTED BY THE BANKRUPTCY
COURT.
4. CHANGING VOTES
Bankruptcy Rule 3018(a) permits a Claimant, for cause, to move the
Bankruptcy Court to permit such claimant to change or withdraw its acceptance
or rejection of a plan of reorganization.
E. CONTESTED AND UNLIQUIDATED CLAIMS
Contested Claims are not entitled to vote to accept or reject the
Joint Plan. If you are the holder of a Contested Claim, you may ask the
Bankruptcy Court pursuant to Bankruptcy Rule 3018 to have your Claim
temporarily Allowed for the purpose of voting.
F. POSSIBLE RECLASSIFICATION OF CREDITORS AND INTEREST HOLDERS
The Plan Proponents are required pursuant to ss. 1122 of the
Bankruptcy Code to place Claims and Interests into Classes that contain
substantially similar Claims or Interests. While the Plan Proponents believe
they have classified all Claims and Interests in compliance with ss. 1122, it
is possible that a Claimant or Interest holder may challenge the classification
of its Claim or Interest. If the Plan Proponents are required to reclassify any
Claims or Interests of any Claimants or Interest holders under the Joint Plan,
the Plan Proponents, to the extent permitted by the Bankruptcy Court, intend to
continue to use the acceptances received from such Claimants or Interest
holders pursuant to the solicitation of acceptances using this Disclosure
Statement for the purpose of obtaining the approval of the Class or Classes of
which such Claimants or Interest holders are ultimately deemed to be a member.
Any reclassification of Claimants or Interest holders should affect the Class
in which such Claimants or Interest holders were initially a member, or any
other Class under the Joint Plan, by changing the composition of such Class and
the required vote thereof for approval of the Joint Plan.
SECOND AMENDED DISCLOSURE STATEMENT 91
<PAGE> 100
ARTICLE XII. MISCELLANEOUS PROVISIONS
A. REQUEST FOR RELIEF UNDER SECTION 1129(b)
In the event any Impaired Class of Claims shall fail to accept the
Joint Plan in accordance with ss. 1129(a) of the Bankruptcy Code, the Plan
Proponents shall request the Bankruptcy Court to confirm the Joint Plan in
accordance with the provisions of ss. 1129(b) of the Bankruptcy Code.
The Court may confirm a plan, even if it is not accepted by all
impaired Classes, if the Joint Plan has been accepted by at least one impaired
Class of Claims and the Joint Plan meets the "cramdown" provisions set forth in
ss. 1129(b) of the Code. The "cramdown" provisions require that the Court find
that a plan "does not discriminate unfairly" and is "fair and equitable" with
respect to each non-accepting impaired Class. In the event that all impaired
Classes do not vote to accept the Joint Plan, the Debtors will request that the
Bankruptcy Court nonetheless confirm the Joint Plan pursuant to the provisions
of ss. 1129(b) of the Code.
The Court may find that the Joint Plan is "fair and equitable" with
respect to a Class of non-accepting impaired Interests only if (a) the holder
of an Interest will receive or retain under the Joint Plan property of a value
as of the Joint Plan's Effective Date equal to the greatest of any fixed
liquidation preference or redemption price or the value of such Interest or (b)
the holder of any Interest that is junior to such Interest will not receive or
retain any property under the Joint Plan.
The Court may find that the Joint Plan is "fair and equitable" with
respect to a Class of non-accepting impaired Unsecured Claims only if (a) each
impaired unsecured Creditor receives or retains under the Joint Plan property
of a value as of the Effective Date of such Joint Plan equal to the amount of
its Allowed Claim, or (b) the holder of any Claim or Interest that is junior to
the Claims of the dissenting Class will not receive or retain any property
under the Joint Plan.
The Court may find that the Joint Plan is "fair and equitable" with
respect to a Class of non-accepting Secured Claims, only if, under the Joint
Plan, (a) the holder of each Secured Claim in such Class retains such holder's
lien and receives deferred cash payments totaling at least the Allowed amount
of such Secured Claim and having a value, as of the Effective Date of the Joint
Plan, equal to or in excess of the value of such holder's interest in the
estate's interest in the collateral for the Secured Claim, (b) the collateral
for such Secured Claim is sold, the lien securing such Claims attached to the
proceeds, and such liens on proceeds are afforded the treatment described under
clause (a) or (c) of this sentence, or (c) the holders of such Secured Claims
realize the "indubitable equivalent" of their claims.
If all of the provisions of section 1129 are met, the Court may enter
an order confirming the Joint Plan.
SECOND AMENDED DISCLOSURE STATEMENT 92
<PAGE> 101
B. THE JOINT PLAN IS CONFIRMABLE UNDER SS. 1129(b) OF THE BANKRUPTCY CODE
The Joint Plan also meets the "best interest of creditors" test and is
"feasible". In addition, if any Class of Claims rejects the Joint Plan, the
Joint Plan can nevertheless be confirmed because it meets the "cramdown"
standard with respect to such Class.
1. THE JOINT PLAN MEETS THE "BEST INTEREST OF CREDITORS" TEST
The "best interest of creditors" test requires that the Court find
that the Joint Plan provides to each non-accepting holder of a Claim or
Interest treated under the Joint Plan a recovery which has a present value at
least equal to the present value of the distribution that such person would
receive from the debtor if the debtor were liquidated under Chapter 7 of the
Code. An analysis of the likely recoveries and affect on Creditors in the event
of liquidation under Chapter 7 of the Code is contained herein at Article X.
2. THE JOINT PLAN IS FEASIBLE
The Code requires that, as a condition to Confirmation of a plan, the
Court find that Confirmation is not likely to be followed by a liquidation or a
need for further financial reorganization except as proposed in that plan.
Richmont is financially able and willing to be the Purchaser contemplated under
the Joint Plan. Any other proposed purchaser will similarly have to demonstrate
such financial ability and a commitment to Nu-kote's reorganization efforts.
The Reorganized Debtors will benefit from the significant improvements in
business operations, the streamlined and refocused product lines already
achieved post-petition, and will undertake to meet the demands of the changing
industry. The combination of these elements and the reorganization contemplated
in the Joint Plan amply meets the feasibility requirements of the Bankruptcy
Code. For an extended discussion of the future operations of the Reorganized
Debtors, see Article VIII.B.
3. THE JOINT PLAN MEETS THE CRAMDOWN STANDARD WITH RESPECT TO
ANY IMPAIRED CLASS OF CLAIMS REJECTING THE JOINT PLAN
In the event any impaired Class of Claims rejects the Joint Plan, the
Joint Plan can nevertheless be confirmed. The Joint Plan satisfies the
provisions for cramdown under ss.1129(b)(2) of the Code. Secured Creditors are
either retaining their liens and receiving the value of their interest in the
Debtors' property in deferred cash payments totaling the allowed amount of
their Claims, or receiving the indubitable equivalent of their Claims. Interest
Holders are not receiving or retaining any property under the Joint Plan on
account of their Interests. In the event an impaired Class rejects the Joint
Plan, the Joint Plan shall be deemed a motion for cramdown of such Class under
ss.1129(b)(2) of the Code.
C. MODIFICATION
The Joint Plan shall not be modified except upon the agreement of all
Plan Proponents, which consent shall not be unreasonably withheld.
SECOND AMENDED DISCLOSURE STATEMENT 93
<PAGE> 102
D. FURTHER ASSURANCES AND AUTHORIZATIONS
Reorganized Debtors or their affiliates or the Trust or Litigation
Trust, if and to the extent necessary, shall seek such orders, judgments,
injunctions, and rulings that may be required to carry out further the
intentions and purposes, and to give full effect to the provisions, of the
Joint Plan.
E. AGREEMENTS BETWEEN THE PLAN PROPONENTS
This Joint Plan contemplates and provides for certain accommodations
and compromises between the Plan Proponents. If this Joint Plan is not
Confirmed, the Joint Plan shall not bind the Plan Proponents to the
accommodations and compromises contained in this Joint Plan.
ARTICLE XIII. SECURITIES LAW CONSIDERATIONS
Under Section 1145(a) of the Bankruptcy Code, the distribution
pursuant to the Joint Plan of the Reorganized Holding Common Stock and the
issuance of notes pursuant to the Joint Plan, in the event of the occurrence of
a Trust Triggering Event, are exempt from registration under the Securities Act
of 1933, as amended (the "SECURITIES ACT"), and applicable state securities
laws. Under Section 1145 of the Bankruptcy Code, the exercise of warrants will
also be exempt from the registration requirements of the Securities Act.
HOLDERS OF ALLOWED CLAIMS RECEIVING CERTAIN SECURITIES ISSUED UNDER THE JOINT
PLAN MAY BE DEEMED TO BE "AFFILIATES" AND, AS A RESULT, RESALES OF SUCH
SECURITIES WILL BE SUBJECT TO CERTAIN RESTRICTIONS.
Section 1145(b) of the Bankruptcy Code defines a person or entity that
may be an "underwriter," and thus restricted in the resale of securities
received, as any person or entity that (i) purchases a Claim, including an
Administrative Claim, or Interest with a view towards distribution of any
security received or to be received under a plan of reorganization in exchange
for such a Claim, Interest, or Administrative Claim, (ii) offers to sell
securities offered or sold under a plan of reorganization for the holders of
such securities, (iii) offers to buy securities offered for sale under a plan
of reorganization from the holders of such securities, if such offer to buy is
with a view towards distribution of such securities under an agreement made
either in connection with such plan, with the consummation of such plan, or
with the offer or sale of securities under such plan, or (iv) is an "issuer" of
the securities offered or sold under a plan of reorganization as that term is
defined in Section 2(11) of the Securities Act, with respect to such
securities. Under Section 2(11) of the Securities Act, an "issuer" includes any
person directly or indirectly controlling or controlled by an issuer, or any
person under direct or indirect common control with an issuer.
An "underwriter," as defined in Section 1145(b) of the Bankruptcy
Code, with respect to the securities issued under the Joint Plan received
pursuant to the Joint Plan would be required, in connection with any resale of
such securities, either to (i) have its
SECOND AMENDED DISCLOSURE STATEMENT 94
<PAGE> 103
securities to be sold registered under the Securities Act or (ii) rely on an
applicable exemption, if any, from registration. The Securities and Exchange
Commission has promulgated Rule 144 under the Securities Act to permit resales
by affiliates of the issuer under certain specified conditions, and if such
conditions are satisfied, such affiliates are not deemed to be statutory
underwriters. Among such conditions is the requirement that certain current
information regarding the issuer be publicly available. As discussed below, it
is contemplated that, upon confirmation of the Joint Plan, and, in the event of
the occurrence of a Trust Triggering Event, Reorganized Holding will register
the Reorganized Holding Common Stock pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). As a result
of such registration, Reorganized Holding will be required to file the
information contemplated by Rule 144 with the Securities and Exchange
Commission, and therefore make it publicly available. It is an integral part of
the Joint Plan that Rule 144 be available to any party deemed to be an
affiliate of Reorganized Holding for purposes of permitting resales of
Reorganized Holding Common Stock in accordance with the provisions of Rule 144.
RECIPIENTS OF JOINT PLAN SECURITIES UNDER THE JOINT PLAN ARE ADVISED
TO CONSULT THEIR COUNSEL AS TO THEIR ABILITY TO RESELL, WITHOUT REGISTRATION,
THE SECURITIES THEY RECEIVE UNDER THE JOINT PLAN.
A. REGISTRATION OF PLAN SECURITIES/REPORTING REQUIREMENTS
RECIPIENTS OF SECURITIES UNDER THE JOINT PLAN ARE ADVISED TO CONSULT
THEIR COUNSEL AS TO THEIR REPORTING OBLIGATIONS, IF ANY, ARISING UPON THE
REGISTRATION BY REORGANIZED HOLDING.
ARTICLE XIV. CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE JOINT PLAN
The following discussion summarizes certain possible federal income
tax consequences of the Joint Plan to the Debtors, and to the holders of Claims
and Interests. It is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, and administrative and judicial
interpretations thereof which are now in effect, but which could change, even
retroactively, at any time. This discussion does not address all aspects of
federal, state and local tax laws that could impact the various classes of
Claimants, the holders of Interests or the Debtors.
The tax discussion below assumes (i) items treated by the Debtors as
their indebtedness would, if challenged, be characterized as debt for federal
income tax purposes; and (ii) all of the interest which has accrued on
obligations classified as debt by the Debtors was properly accrued and if
deducted, was properly deducted. In addition, the tax consequences of the Joint
Plan will be subject to final determination of tax attributes, such as net
operating loss ("NOL") carryovers and the basis in stock of the Debtors'
subsidiaries, which in turn could be affected by future adjustments made
pursuant to
SECOND AMENDED DISCLOSURE STATEMENT 95
<PAGE> 104
Internal Revenue Service ("IRS") audits of prior or future tax returns of the
Debtor and its subsidiaries. Other assumptions are stated elsewhere in this
discussion.
NO RULING HAS BEEN SOUGHT OR OBTAINED FROM THE IRS WITH RESPECT TO ANY
OF THE TAX ASPECTS OF THE JOINT PLAN AND NO OPINION OF COUNSEL HAS BEEN
OBTAINED BY THE DEBTORS WITH RESPECT THERETO. NO REPRESENTATIONS OR ASSURANCES
ARE BEING MADE WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES AS DESCRIBED
HEREIN. CERTAIN TYPES OF CLAIMANTS AND INTEREST HOLDERS MAY BE SUBJECT TO
SPECIAL RULES NOT ADDRESSED IN THIS SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES.
FURTHER, STATE, LOCAL, OR FOREIGN TAX CONSIDERATIONS MAY APPLY TO A HOLDER OF A
CLAIM OR INTEREST WHICH ARE NOT ADDRESSED HEREIN. BECAUSE THE TAX CONSEQUENCES
OF THE JOINT PLAN ARE COMPLEX AND MAY VARY BASED ON INDIVIDUAL CIRCUMSTANCES,
EACH HOLDER OF A CLAIM OR INTEREST AFFECTED BY THE JOINT PLAN MUST CONSULT, AND
RELY UPON, HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES
OF THE JOINT PLAN WITH RESPECT TO THAT HOLDER'S CLAIM OR INTEREST. THIS
INFORMATION MAY NOT BE USED OR QUOTED IN WHOLE OR IN PART IN CONNECTION WITH
THE OFFERING FOR SALE OF SECURITIES.
A. FEDERAL INCOME TAX CONSEQUENCES IF THERE IS A SUCCESSFUL BIDDER.
This section describes certain possible material federal income tax
consequences to the Debtors and holders of Claims and Interests under the Joint
Plan if a Successful Bidder is selected. As discussed in detail above, if a
Successful Bidder is selected, Claimants of the Debtors will receive cash,
notes, or a right to recovery in certain of the Litigation, or some combination
thereof, in satisfaction of their Claims.
1. TAX CONSEQUENCES TO THE DEBTORS.
(a) GAIN OR LOSS ON NON-CASH PAYMENTS. The Debtors will generally
recognize gain or loss on the transfer of any non-cash
property in satisfaction of Claims equal to the difference
between the fair market value of the property transferred and
the adjusted tax basis to the Debtors in such property.
However, the Debtors will not recognize gain or loss on the
issuance of their own stock or debt, except to the extent of
any discharge of indebtedness income, discussed below.
Provided that the transfer of the right to receive a
portion of the recovery in certain of the Litigation is
treated as the issuance of a contingent debt instrument by
the Debtors, the Debtors will not recognize gain or loss on
such transfer except to the extent of any discharge of
indebtedness income.
SECOND AMENDED DISCLOSURE STATEMENT 96
<PAGE> 105
(b) DISCHARGE OF INDEBTEDNESS. As a general rule, the discharge
of all or a portion of a debt by its holder results in the
debtor's recognition of taxable income. Section 108 of the
Code sets forth certain exceptions to this general rule.
Section 108(e)(2) of the Code provides that a taxpayer does
not recognize income from the discharge of indebtedness to
the extent that satisfaction of the liability would have
given rise to a deduction. Section 108(a)(1)(A) of the Code
provides an exception to the required recognition of income
from the discharge of indebtedness when the discharge occurs
in a case under the Bankruptcy Code if the taxpayer is under
the jurisdiction of the court and the debt discharge is
granted by the court or is pursuant to a plan approved by the
court. If Section 108(a)(1)(A) of the Code applies to exclude
from gross income the discharged indebtedness, the "tax
attributes" of the taxpayer are reduced, unless the taxpayer
affirmatively elects to first reduce the tax bases of its
depreciable assets. Section 108(b) of the Code reduces tax
attributes in the following order: NOLs, general business
credit carryovers, minimum tax credits, capital loss
carryovers, basis of depreciable property and foreign tax
credit carryovers.
If the exceptions provided for in Section 108 of the
Code were inapplicable, the Debtors would recognize discharge
of indebtedness income with respect to any Allowed Claims
that are satisfied to the extent that the aggregate amount of
such satisfied Allowed Claims exceeds the amounts transferred
in satisfaction thereof, i.e., the sum of (i) the amount of
cash, (ii) the fair market value of the rights to recover in
certain of the Litigation and (iii) the issue price of the
notes received by holders of such Allowed Claims. The
exceptions provided for in Section 108 of the Code should
apply to exclude such discharge of indebtedness income from
the gross income of the Debtors, and instead require the
Debtors to reduce their tax attributes, as described above,
by such amount. However, if the amount of the discharge of
indebtedness exceeds the tax attributes of the Debtors, such
excess is nevertheless excluded from gross income and no
additional tax liability arises.
(c) LIMITATIONS ON NET OPERATING LOSSES. Section 382 of the Code
limits the ability of a corporation to utilize NOLs in
instances where the corporation's ownership has changed
significantly. As a general rule, if a shareholder or a group
of shareholders increases its ownership interest by more than
50 percentage points, during any three year period, in a
corporation which has an NOL, the amount of NOL carryovers
available for use by the corporation following such ownership
change is restricted.
In general, if an ownership change occurs, the
amount of income that can be offset by the NOL carryovers in
any one year is limited to the value of the corporation
immediately before the change multiplied by the long-term
tax-exempt interest rate established monthly by the federal
government (the "Annual Limitation"). Subject to the
limitations period on NOL carryovers,
SECOND AMENDED DISCLOSURE STATEMENT 97
<PAGE> 106
any available but unused NOL carryover in a year is added to
the amount available for use in the next year. Any NOL
incurred after the date of an ownership change (other than an
NOL resulting from the realization of "net unrealized
built-in loss," as noted below) is not subject to the
limitations of Section 382 of the Code.
Under the Joint Plan, all outstanding Interests
together with any options, rights or warrants to purchase
Interests will be canceled and the Successful Bidder will
acquire all of the common stock of Reorganized Holding.
Accordingly, an ownership change for purposes of Section 382
of the Code would occur. Therefore, the Debtors' right to
utilize its NOL (as determined after taking into account any
reduction of tax attributes required by the application of
Section 108) will be limited to the Annual Limitation. For
purposes of Section 382, the Debtors' NOL includes its "net
unrealized built-in loss." Generally speaking, the "net
unrealized built-in loss" is the excess of the Debtors'
adjusted bases in its assets over their fair market value on
the date of the ownership change.
However, under Section 382(h) of the Code, the
Annual Limitation does not apply to certain built-in gains of
the Debtors. It is the Debtors' opinion that the gain that is
realized from a positive recovery in the Litigation will be
able to be sheltered, to some degree, by the Debtors' NOL,
without the application of the limitations set forth in
Section 382 of the Code, due to the special rules for
built-in gains set forth in Section 382(h) of the Code.
However, the above issues are subject to examination by the
IRS and could be challenged in such an examination.
2. TAX CONSEQUENCES TO CREDITORS
(A) OVERVIEW. The federal income tax consequences of the
implementation of the Joint Plan to a holder of a Claim will
depend, among other things, on the origin of the holder's
Claim, when the holder's Claim becomes an Allowed Claim, when
the holder receives payment in respect of his Claim, whether
the holder reports income using the accrual or cash method of
accounting, whether the holder has taken a bad debt deduction
or worthless security deduction with respect to his Claim,
and whether the holder's Claim constitutes a "security" for
federal income tax purposes.
(B) REALIZATION AND RECOGNITION OF GAIN OR LOSS IN GENERAL. Under
the Joint Plan if there is a Successful Bidder, a holder of
an Allowed Claim will receive cash, a note issued by
Reorganized Debtor, and/or a right to recovery in certain
Litigation. A holder of an Allowed Claim will generally
recognize gain or loss as the case may be upon receipt of
such cash in an amount equal to the difference between (i)
the amount realized by the holder in respect of its Claim and
(ii) the holder's adjusted tax basis in its Claim. The amount
realized by a holder in respect of his claim will generally
equal the amount
SECOND AMENDED DISCLOSURE STATEMENT 98
<PAGE> 107
of any cash, plus the issue price of any note, and plus the
fair market value of any other property received by the
holder. The character of any gain recognized, whether capital
or ordinary, must be determined by examining the nature of
the Allowed Claim in the hands of its holder. However, even
if the Allowed Claim was a capital asset in the hands of an
exchanging holder, and such gain would be long-term capital
gain if the holder's holding period for the Allowed Claim
surrendered exceeded one year at the time of the exchange,
the gain may be recharacterized as ordinary income to the
extent the gain is attributable to accrued but unpaid
interest or accrued market discount. Any loss recognized by a
holder of an Allowed Claim will be either an ordinary loss or
a capital loss, depending on the nature of the Allowed Claim.
The loss would be a capital loss if the Claim constitutes a
"security" for federal income tax purposes. For this purpose,
a "security" includes a debt instrument with interest coupons
or in registered form. Otherwise, the loss is generally
ordinary.
The extent to which gain or loss may be recognized
by a Claimant upon implementation of the Joint Plan may be
significantly affected by any bad debt deduction that may
have been taken by the Claimant in a prior year with respect
to the debt on which the Claim is based. If the Claimant took
a bad debt deduction in a prior year which is recovered in
whole or part through a payment made to the Claimant pursuant
to the Joint Plan, the Claimant will generally be required to
include in income the amount recovered in the year the
Claimant receives the payment. An exception to this rule
permits exclusion of a recovery of a prior bad debt deduction
to the extent that the earlier bad debt deduction did not
produce a tax benefit to the Claimant.
3. TAX CONSEQUENCES TO HOLDERS OF INTERESTS
A holder of an Interest who does not receive consideration for his or
her Interest in the Joint Plan will generally be entitled to a deduction for
his or her loss under Section 165 of the Code. Section 165(g) of the Code
provides generally for capital loss treatment where any security, including
shares of stock in a corporation, becomes worthless during the taxable year.
The loss is generally equal to the holder's tax basis in his or her Interest.
Holders of Interests should contact their own tax advisors to determine if, and
to what extent, they might have tax basis in shares held.
B. FEDERAL INCOME TAX CONSIDERATIONS IF THERE IS A TRUST TRIGGERING EVENT
This section describes certain possible material federal income tax
consequences to the Debtors and holders of Claims and Interests under the Joint
Plan if there is a Trust Triggering Event. As discussed in detail above, upon a
Trust Triggering Event the Debtors will transfer the Trust shares to the Trust
and the Litigation to the Litigation Trust. Claimants will receive cash, notes,
interests in the Trust and Litigation Trust, or other property, or some
combination thereof, in satisfaction of their Claims.
SECOND AMENDED DISCLOSURE STATEMENT 99
<PAGE> 108
1. FEDERAL INCOME TAX CONSEQUENCES TO THE DEBTORS
(a) GAIN OR LOSS ON NON-CASH PAYMENTS. The Debtors will generally
recognize gain or loss on the transfer of any non-cash
property in satisfaction of Claims equal to the difference
between the fair market value of the property transferred and
the adjusted tax basis to the Debtors in such property.
However, the Debtors will not recognize gain or loss on the
issuance of their own stock or debt, except to the extent of
any discharge of indebtedness income, discussed below.
The transfer of the Litigation to the Litigation
Trust will be a taxable transaction whereby the Debtors will
recognize gain or loss equal to the fair market value of the
Litigation less the Debtors' tax basis, if any, in the
Litigation. The Debtors may utilize their NOLs to offset any
gain recognized upon the transfer of the Litigation. The
determination of the fair market value of the Litigation is
factual in nature and the IRS may challenge the value of the
Litigation as determined by the Debtors.
The transfer of the Trust Shares to the Trust will
generally not result in the recognition by the Debtors of any
gain or loss, except to the extent of any discharge of
indebtedness, as discussed below.
(b) DISCHARGE OF INDEBTEDNESS. As a general rule, the discharge
of all or a portion of a debt by its holder results in the
debtor's recognition of taxable income. Section 108 of the
Code sets forth certain exceptions to this general rule.
Section 108(e)(2) of the Code provides that a taxpayer does
not recognize income from the discharge of indebtedness to
the extent that satisfaction of the liability would have
given rise to a deduction. Section 108(a)(1)(A) of the Code
provides an exception to the recognition of income from the
discharge of indebtedness when the discharge occurs in a case
under the Bankruptcy Code, if the taxpayer is under the
jurisdiction of the court and the debt discharge is granted
by the court or is pursuant to a plan approved by the court.
If Section 108(a)(1)(A) of the Code applies to exclude from
gross income the discharged indebtedness, the "tax
attributes" of the taxpayer are reduced, unless the taxpayer
affirmatively elects to first reduce the tax bases of its
depreciable assets. Section 108(b) of the Code reduces tax
attributes in the following order: NOLs, general business
credit carryovers, minimum tax credits, capital loss
carryovers, basis of depreciable property and foreign tax
credit carryovers.
If the exceptions provided for in Section 108 of the
Code were inapplicable, the Debtors would recognize discharge
of indebtedness income with respect to any Allowed Claims
that are satisfied by the issuance of Trust Interests, Trust
Interests (Litigation), cash, notes or other property to the
extent that the aggregate amount of such satisfied Allowed
Claims exceeds
SECOND AMENDED DISCLOSURE STATEMENT 100
<PAGE> 109
the sum of (i) the amount of cash, (ii) the fair market value
of the Trust Interests, Trust Interests (Litigation) and
other property and (iii) the issue price of the notes
received by holders of such Allowed Claims. The exceptions
provided for in Section 108 of the Code should apply to
exclude such discharge of indebtedness from the gross income
of the Debtors, and instead require the Debtors to reduce
their tax attributes, as described above, by such amount.
However, if the amount of the discharge of indebtedness
exceeds the tax attributes of the Debtors, such excess is
nevertheless excluded from gross income and no additional tax
liability arises.
(c) LIMITATIONS ON NET OPERATING LOSSES. Section 382 of the Code
limits the ability of a corporation to utilize NOLs in
instances where the corporation's ownership has changed
significantly. As a general rule, if a shareholder or a group
of shareholders increases its ownership interest by more than
50 percentage points, during any three year period, in a
corporation which has an NOL, the amount of NOL carryovers
available for use by the corporation following such ownership
change is restricted.
In general, if an ownership change occurs, the
amount of income that can be offset by the NOL carryovers in
any one year is limited to the value of the corporation
immediately before the change multiplied by the long-term
tax-exempt interest rate established monthly by the federal
government (the "Annual Limitation"). Subject to the
limitations period on NOL carryovers, any available but
unused NOL carryover in a year is added to the amount
available for use in the next year. Any NOL incurred after
the date of an ownership change (other than an NOL resulting
from the realization of "net unrealized built-in loss," as
noted below) is not subject to the limitations of Section 382
of the Code.
Under the Joint Plan, all outstanding Interests
together with any options, rights or warrants to purchase
Interests will be canceled and Reorganized Holding will issue
the Trust Shares to the Trust. Accordingly, an ownership
change for purposes of Section 382 would occur. Therefore,
the Debtors' right to utilize its NOL (as determined after
taking into account any reduction of tax attributes required
by the application of Section 108) will be limited to the
Annual Limitation. For purposes of Section 382, the Debtors'
NOL includes its "net unrealized built-in loss." Generally
speaking, the "net unrealized built-in loss" is the excess of
the Debtors' adjusted bases in its assets over their fair
market value on the date of the ownership change.
An alternative approach to the Annual Limitation is
available for certain corporations in bankruptcy. Under this
alternative (the "Attribute Reduction"), the amount of the
debtor corporation's NOL carryover which can be utilized in
any one year is not limited if such corporation is under the
jurisdiction of a court in a Title 11 case, and the
continuing shareholders and
SECOND AMENDED DISCLOSURE STATEMENT 101
<PAGE> 110
qualified creditors of the corporation own immediately after
the court approved reorganization, stock of the corporation
representing at least 50% in value and voting power. Only
those creditors who have held the debt of the debtor
corporation for at least 18 months or whose debt arose in the
ordinary course of the debtor's business are considered
qualified creditors. The Debtors have not determined whether
this requirement will be satisfied as of the Effective Date
under the Joint Plan. The Attribute Reduction approach is
automatically applied unless the debtor affirmatively elects
for it not to apply. If the Attribute Reduction applies and a
second ownership change occurs during the two-year period
immediately following such ownership change, then the Annual
Limitation applies to taxable years ending after such
ownership change but before the second ownership change and
the debtor corporation's NOL limitation is reduced to zero
for any taxable year ending after the second ownership
change.
If the Attribute Reduction alternative is utilized,
however, the debtor corporation's NOL carryovers must be
reduced by an amount equal to the sum of:
(1) the interest paid or accrued by the debtor
corporation on indebtedness which was
converted to stock in the year in which the
court approved reorganization occurs; and
(2) the interest paid or accrued by the debtor
corporation on indebtedness which was
converted to stock during the three years
preceding the taxable year in which the
court approved reorganization occurs.
If a debtor in bankruptcy elects not to have the
Attribute Reduction apply then, for purposes of calculating
the Annual Limitation, the value of the debtor corporation is
determined after the occurrence of the ownership change
rather than before, as required under the general rules
described above. Treasury Regulations provide that the value
of the debtor corporation for this purpose would be the
lesser of the value of the stock of the corporation
immediately after the ownership change or the value of the
corporation's assets (determined without regard to
liabilities) immediately before the ownership change. The
Debtors will not determine whether to make such election, if
available, until after the Effective Date.
2. TAX CONSEQUENCES TO CREDITORS
(a) OVERVIEW. The federal income tax consequences of the
implementation of the Joint Plan to a holder of a Claim will
depend on, among other things, the origin of the holder's
Claim, when the holder's Claim becomes an Allowed Claim, when
the holder receives payment in respect of his Claim, whether
the holder reports income using the accrual or cash method of
accounting,
SECOND AMENDED DISCLOSURE STATEMENT 102
<PAGE> 111
whether the holder has taken a bad debt deduction or
worthless security deduction with respect to his Claim, and
whether the holder's Claim constitutes a "security" for
federal income tax purposes.
(b) REALIZATION AND RECOGNITION OF GAIN OR LOSS IN GENERAL.
Generally, a holder of an Allowed Claim will recognize
income, gain or loss on the exchange under the Joint Plan of
his Allowed Claim for cash and other property in an amount
equal to the difference between (i) the sum of the amount of
any cash, the issue price of any notes, and the fair market
value on the date of the exchange of any other property
received by the holder (other than any consideration
attributable to accrued but unpaid interest on the Allowed
Claim), and (ii) the adjusted tax basis of the Allowed Claim
exchanged therefor. The character of any gain recognized,
whether capital or ordinary, must be determined by examining
the nature of the Allowed Claim in the hands of its holder.
However, if the Allowed Claim was a capital asset in the
hands of an exchanging holder, and such gain would be
long-term capital gain if the holder's holding period for the
Allowed Claim surrendered exceeded one year at the time of
the exchange, the gain may be recharacterized as ordinary
income to the extent the gain is attributable to accrued but
unpaid interest or accrued market discount. Any loss
recognized by a holder of an Allowed Claim will be either an
ordinary loss or a capital loss, depending on the nature of
the Allowed Claim. The loss would be a capital loss if the
Claim constitutes a "security" for federal income tax
purposes. For this purpose, a "security" includes a debt
instrument with interest coupons or in registered form.
Otherwise, the loss is generally ordinary.
(c) CERTAIN TAX CONSEQUENCES OF THE JOINT PLAN TO CREDITORS. The
Trust and the Litigation Trust will be treated as grantor
trusts for federal income tax purposes. Therefore, upon the
creation of the Trust and the Litigation Trust, each
beneficiary thereof will be treated as having received and as
owning an undivided interest in the assets of each respective
trust (i.e., the Trust Shares and the Litigation) in exchange
for surrendering all or a portion of such beneficiary's
Allowed Claim. The bases of each such beneficiary's interest
in the Trust Shares and the Litigation will be equal to their
fair market value as of the Effective Date. The determination
of the fair market value of an Allowed Claim holder's
beneficial interest in the assets of the Trust and the
Litigation Trust is factual in nature and the IRS may
challenge any such determination.
The holder of a Claim will generally recognize gain
or loss, if any, equal to the difference between the amount
realized (i.e., cash, issue price of any notes and fair
market value of the Trust Shares, Litigation and other
property received by the holder) in the exchange and the
holder's adjusted tax basis in the Claim. The character of
such gain or loss will depend on the nature of the Claim in
the hands of the holder. A holder of an Allowed Claim
SECOND AMENDED DISCLOSURE STATEMENT 103
<PAGE> 112
that recognizes an ordinary loss upon the exchange of an
Allowed Claim for an interest in the Trust Shares must
generally recapture as ordinary income any gain realized on
the subsequent disposition of such Trust Shares to the extent
of such loss. The basis of any notes received by a holder of
an Allowed Claim will equal their issue price, and the basis
of any other property received will equal its fair market
value.
Other tax consequences of the Joint Plan to the
holder of a Claim will depend on whether the holder reports
income on the accrual or cash basis method, and whether the
holder receives distributions under the Joint Plan in more
than one taxable year.
The extent to which gain or loss may be recognized
by a Claimant upon implementation of the Joint Plan may be
significantly affected by any bad debt deduction that may
have been taken by the Claimant in a prior year with respect
to the debt on which the Claim is based. If the Claimant took
a bad debt deduction in a prior year which is recovered in
whole or part through a payment made to the Claimant pursuant
to the Joint Plan, the Claimant will generally be required to
include in income the amount recovered in the year the
Claimant receives the payment. An exception to this rule
permits exclusion of a recovery of a prior bad debt deduction
to the extent that the earlier bad debt deduction did not
produce a tax benefit to the Claimant.
C. CERTAIN TAX CONSEQUENCES OF THE JOINT PLAN TO HOLDERS OF INTERESTS
A holder of an Interest who does not receive consideration for his or
her Interest in the Joint Plan will generally be entitled to a deduction for
his or her loss under Section 165 of the Code. Section 165(g) of the Code
provides generally for capital loss treatment where any security, including
shares of stock in a corporation, becomes worthless during the taxable year.
The loss is generally equal to the holder's tax basis in his or her Interest.
Holders of Interests should contact their own tax advisors to determine if, and
to what extent, they might have tax basis in shares held.
THE FOREGOING IS INTENDED TO BE A SUMMARY ONLY AND NOT A SUBSTITUTE
FOR CAREFUL TAX PLANNING OR CONSULTATION WITH A TAX ADVISOR. THE FEDERAL,
STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE JOINT PLAN ARE COMPLEX AND,
IN SOME CASES, UNCERTAIN. SUCH CONSEQUENCES MAY ALSO VARY BASED UPON THE
INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF A CLAIM OR INTEREST. ACCORDINGLY,
EACH HOLDER OF A CLAIM OR INTEREST IS STRONGLY URGED TO CONSULT WITH HIS OR HER
OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES OF THE JOINT PLAN.
ARTICLE XV. EFFECTIVE DATE TRANSACTIONS
SECOND AMENDED DISCLOSURE STATEMENT 104
<PAGE> 113
The Plan Proponents shall File, on or before five (5) Business Days
prior to the Confirmation Hearing, the proposed agenda and order in which the
transactions contemplated in the Joint Plan shall be closed, unless otherwise
agreed to by the Plan Proponents. This agenda may be modified to take into
account the Bidding Procedure or other matters requiring modification of such
agenda.
ARTICLE XVI. RESPONSES TO OBJECTIONS TO
PRIOR DISCLOSURE STATEMENTS
On November 1, 1999, the Lenders and Creditors (the "CREDITOR
PROPONENTS") filed a disclosure statement in connection with their Third
Amended Plan of Reorganization (the "CREDITORS' DISCLOSURE STATEMENT") and on
November 2, 1999, the Debtors filed a disclosure statement in connection with
the First Amended Nu-kote/Baiocchi Plan of Reorganization (the "DEBTORS'
DISCLOSURE STATEMENT"). On December 1, 1999, the Plan Proponents filed the
original joint disclosure statement which preceded this Disclosure Statement.
Various parties in interest filed objections to one or more of these prior
disclosure statements and/or the disclosure statements that preceded them, or
the original joint disclosure statement. Certain of those objections have been
resolved by agreement between the Plan Proponents and the objecting party.
Thus, this Article XVII will reflect, in some cases, additional information
that such objecting parties asked to have included in this Disclosure Statement
and the sections in which such language may be found. In other cases in which
the objections cannot be addressed to the satisfaction of the objecting
parties, this Article XVII will disclose the existence and nature of such
objections. The objections will be addressed seriatim.
A. RESPONSE TO OBJECTIONS BY CANON
1. CREDITORS' RESPONSE
In Canon's objection to the Creditors' Disclosure Statement, Canon
correctly notes that "a disclosure statement should...contain all material
information relating to the risks posed to creditors and equity interest
holders under the proposed plan of reorganization." In re Cardinal Congregate
I, 121 B.R. 760 (Bankr. S.D. Ohio 1990). However, Canon fails to include the
fact that courts have held that a disclosure statement should include the
factors and pertinent information presently known to the plan proponents. In re
Ligon, 50 B.R. 127 (Bankr. M.D. Tenn. 1985); Cardinal Congregate One, 121 B.R.
760 (S.D. Ohio 1990); In re Microwave Prods. of America, Inc., 100 B.R. 376
(Bankr. W.D. Tenn. 1989). Moreover, conclusory allegations and opinions are
insufficient for purposed of adequate information pursuant to section 1125(a).
In re Ligon, 50 B.R. at 130.
Many of Canon's objections are about issues which have not been
determined at this time. Accordingly, it is impossible for the Plan Proponents
to include more detailed information about issues which are unknown to the Plan
Proponents. For example, Canon requests additional information concerning the
manner in which the litigation trust would resolve the Canon litigation and
disclosure of exactly what rights and obligations are being transferred to the
litigation trust. Whether Canon's claims will be liquidated in the claims
SECOND AMENDED DISCLOSURE STATEMENT 105
<PAGE> 114
objection process in the Bankruptcy Court, estimated by the Bankruptcy Court
for confirmation purposes, whether relief from the stay will be sought, or some
combination of the above will be employed through a bifurcated procedure is not
known nor required to be known at this time. With regards to the litigation to
be transferred to the Litigation Trust, the disclosure statement has been
amended at page 61 to list the litigation which will be transferred to the
Litigation Trust.
With regards to Canon's request for fuller disclosure concerning
operation of the Litigation Trust, the Plan Proponents intend to send a copy of
the Litigation Trust to Canon prior to the Plan Confirmation hearing.
In addition, Canon requested disclosure of whether and to what extent
Nu-kote's insurers are responsible for the satisfaction of the OEM's claim. The
Plan Proponents assert that such a disclosure is not necessary for approval of
the Disclosure Statement as the standard is adequate information such that a
reasonable investor may make an informed decision about the plan.
Canon also requested confirmation that Plan Proponents were not
attempting to eliminate Canon's rights and defenses (including rights of setoff
and recoupment), disclosure of whether the post-confirmation business
activities of the reorganized entity will include infringing activities, and
confirmation that the post-confirmation injunctive power will not be utilized
to hamper Canon's ability to protect its intellectual property in the event the
reorganized Debtor engages in post-confirmation infringing activities. The
Disclosure Statement has been amended to state that all litigation transferred
to the Litigation Trust is subject to Canon's rights of setoff and recoupment
under the Bankruptcy Code and applicable law.
Concerning any post-confirmation infringement, the Plan Proponents
have been assured by the Debtors that no post-bankruptcy infringing has
occurred. In addition, the Plan Proponents have no intention of the Reorganized
Debtors infringing on any of Canon's patents, trademarks, etc. Finally, the
Plan Proponents inform Canon that section 524(a) of the Bankruptcy Code has no
post-confirmation effect. Accordingly, the section 524(a) injunction would not
preclude Canon from protecting its intellectual property post-confirmation.
2. DEBTORS' RESPONSE
Canon objected to the Debtors' Disclosure Statement saying that it
failed to describe adequately the differences between the three cases which
comprise the OEM Litigation, and that creditors need more information to
understand more fully the "unique nature" of these claims. As stated below in
response to a similar objection by Epson, the Debtors refute the notion that a
prolonged discussion of the history of each of the OEM Litigation cases is
necessary to provide adequate information about the OEM Litigation. The claims
asserted against International in the OEM Litigation by Canon, HP and Epson are
indeed similar in design, and the Debtors dispute the idea that a
cross-comparison of the claims asserted by each of the OEMs would be useful to
a creditor in deciding whether
SECOND AMENDED DISCLOSURE STATEMENT 106
<PAGE> 115
to vote to accept the Joint Plan, or is even relevant. The descriptions of the
OEM Litigation cases in the Disclosure Statement include a synopsis of the
several different claims and counterclaims asserted and the progress made in
each case. The Debtors maintain that these descriptions are more than adequate
to describe the nature, extent and importance of the OEM Litigation. Further,
the Plan Proponents have now requested any language Canon would like inserted
into the Disclosure Statement in an effort to resolve this objection.
Canon's next concern centers around the alleged lack of information
concerning the procedures the Debtors will employ to liquidate the claims Canon
has filed. Canon has not moved to lift the automatic stay to allow the Canon
Litigation to proceed. Canon has, however, filed proofs of claim in this
bankruptcy case, asserting administrative claim priority to at least some
portion of its claims as filed. Canon apparently desires a definitive answer as
to the mechanics of the liquidation of its particular claims. This definitive
answer is not, however, known or necessary at this pre-confirmation stage of
the proceedings. Settlement of the Canon Litigation in its entirety is a
possibility that will be explored. Alternatively, whether Canon's claims will
be liquidated in the claims objection process as set forth in the Joint Plan in
the Bankruptcy Court, estimated by the Bankruptcy Court for confirmation
purposes, whether Canon or the Debtors will deem it prudent to move for relief
from the automatic stay to proceed with the Canon Litigation to liquidate the
claims, or some combination of the above will be employed through a bifurcated
procedure is not known nor required to be known at this time. This Disclosure
Statement, as well as the procedural and substantive provisions in the
Bankruptcy Code itself, adequately delineate these several alternatives.
Adequate information as to the alternate procedures by which Canon's asserted
claim could be liquidated is provided.
Finally, the Debtors are mindful of the provisions of ss. 553 of the
Bankruptcy Code regarding setoff, and will comply with same to the extent
applicable in resolution of the claims asserted by Canon. To clear up any
remaining issue with Canon, section 13.19 of the Joint Plan has been modified
to provide specifically as follows: "Notwithstanding the foregoing, Canon,
Epson and Pelikan Holding shall retain the right to assert any setoff or
recoupment rights they may have to the extent available under the Bankruptcy
Code or applicable law." Neither the Joint Plan nor any of the transfers
contemplated in the Joint Plan are intended to destroy, alter or in any way
impair any of Canon's asserted setoff or recoupment rights, if any.
Canon further requested assurances that the discharge and injunctive
provisions of the Plan are not intended to protect the Reorganized Debtors from
allegations of post-confirmation infringement. The Plan Proponents acknowledge
that none of the Joint Plan provisions nor the transfers contemplated by the
Joint Plan prohibit, restrict or in any way impair Canon's asserted rights to
enforce its asserted intellectual property rights with respect to any of the
post-confirmation business activities of the Reorganized Debtors or any
successor to the Debtors. The Plan Proponents or their successors will not use
the post-confirmation injunction, discharge provisions or any other Joint Plan
provision to so restrict Canon and will not assert that the Joint Plan provides
any type of de facto license with respect to Canon's intellectual property
rights.
SECOND AMENDED DISCLOSURE STATEMENT 107
<PAGE> 116
Canon requested additional disclosure regarding the treatment of
Allowed Administrative Claims under the Joint Plan. Specifically, Canon
requested clarification as to the treatment of Allowed Administrative Claims in
the event of a Chapter 7 liquidation or if a Trust Triggering Event occurs
under the Plan. Initially, the Plan Proponents point to the discussion titled
"Analysis of Liquidation under Chapter 7" herein where it is discussed that in
the event of a conversion, a Chapter 7 trustee would be appointed to administer
the Estates, to resolve pending controversies including Disputed Claims against
the Debtors and Claims of the Estates against other parties, and to make
distribution to Creditors in accordance with ss. 726 which includes provisions
for payment of Allowed Administrative Claims. With regard to the treatment of
Allowed Administrative Claims should a Trust Triggering Event Occur, the Plan
Proponents respond that even if circumstances arise such that a Trust
Triggering Event occurs, the Joint Plan is nonetheless a confirmed Chapter 11
plan and Allowed Administrative Claims must nonetheless be paid in full.
In addition to the description of asserted administrative claims known
at the time the original joint disclosure statement was filed, the Disclosure
Statement has been amended to include a list of requests for administrative
claims calculated through September 30, 1999 filed in response to the Court's
Order on same. The Disclosure Statement has also been amended to clarify that
the fees of professionals employed by the Court on a regular basis through
either the fee application procedure or by means of the monthly notice
procedure that have been paid as of the deadline for the submission of bids
will not be assessed against the stated $3,000,000 "cap" on Allowed
Administrative Claims. However, it must be noted that this $3,000,000 "cap" is
not a true nor absolute cap. The final total amount of Administrative Claims
ultimately Allowed by this Court is not something subject to an arbitrary "cap"
enforceable by the Plan Proponents. Instead, this $3,000,000 "cap" provision
functions solely as a benchmark for the proposed Purchaser Richmont; if the
Allowed Administrative Claims exceed $3,000,000 Richmont is under no obligation
to close. This $3,000,000 "cap" is subject to waiver or increase by Richmont or
the Successful Bidder. Based upon the filings thus far in this case and the
number of professionals employed by the Debtors, the Plan Proponents assert
that a reasonable estimate of the Fee Claims that will be accrued yet unpaid at
the Confirmation Date will be approximately $1,000,000.
Finally, Canon objects to the Chapter 7 liquidation analysis provided
by the Plan Proponents. The Plan Proponents disagree with this objection and
submit that the liquidation analysis is sufficient to allow a hypothetical
reasonable investor to make an informed judgment about the Joint Plan.
B. RESPONSE TO OBJECTIONS BY EPSON
1. CREDITORS' RESPONSE
SECOND AMENDED DISCLOSURE STATEMENT 108
<PAGE> 117
Among other things, Epson argues that the Creditors' Disclosure
Statement failed to adequately deal with administrative claims and what Epson
believes to be the likely administrative insolvency of the Debtors' estates.
The Creditor Proponents disagree with this contention at this time. Epson also
objects to the failure of the Creditors' Disclosure Statement to describe the
administrative claim (which Epson estimates at $7 million) that Epson is
asserting in this case. The Creditor Proponents believe that at this point it
is not practical to list and quantify each potential administrative claim.
Epson further alleges that the Creditors' Disclosure Statement failed to
address where, how, and when Epson's claims would be adjudicated. Whether
Epson's claims will be liquidated in the claims objection process in the
Bankruptcy Court, estimated by the Bankruptcy Court for confirmation purposes,
whether relief from the stay will be sought, or some combination of the above
employed through a bifurcated procedure is not required to be known at this
time. Further, this is a confirmation issue relating to the adequacy of the
terms of the Creditors' Plan itself, and such an issue should be resolved at
the Confirmation Hearing.
Moreover, Epson objects that the description of the OEM Litigation in
the Creditors' Disclosure Statement was not full, objective, and current. The
detail required to be provided in a disclosure statement is only such detail as
is necessary for a hypothetical creditor to make an informed decision whether
to vote to accept a proposed plan of reorganization. The level of detail
suggested as required by Epson not only far exceeds the accepted standard for
adequate information, but also would serve to confuse the hypothetical
creditor. The descriptions of the OEM Litigation cases in the Disclosure
Statement include a synopsis of the several different claims and counterclaims
asserted and the progress made in each case. The Plan Proponents maintain that
these descriptions are more than adequate to describe the nature, extent and
importance of the OEM Litigation. Moreover, the Creditor Proponents assert that
much of the issues raised by Epson will be resolved by way of litigation and it
is inappropriate to prejudge issues which may require additional litigation in
the content of a disclosure statement. However, as an additional response to
Epson's objection, the Plan Proponents have included Epson's language below.
Epson also objects that the Creditor Proponents have not provided a
copy of the Litigation Trust Agreement to Epson and that the Creditors'
Disclosure Statement failed to discuss what would happen if any or all of the
OEM Litigation is resolved unfavorably from the Debtors' perspective. Epson
believes that the risk and consequences of such a result need to be disclosed.
The Plan Proponents intend to forward Epson a copy of the Litigation Trust
prior to Plan Confirmation. Moreover, the risks of an unfavorable result in the
remaining OEM Litigation are disclosed and the consequence is obviously that
the amount available to creditors would be reduced.
Epson further objects that the Creditors' Disclosure Statement failed
to address the reorganized Debtors' future operations. Epson believes that such
information is necessary to enable claimants to determine the feasibility of
the Creditors' Plan. In particular, Epson believes that further disclosure is
necessary with respect to the formation of an ink jet subsidiary under the
Creditors' Plan. Epson believes that the purpose of the creation of such a
subsidiary needs to be disclosed, and that the assets that will be
SECOND AMENDED DISCLOSURE STATEMENT 109
<PAGE> 118
directed into that subsidiary need to be identified. Moreover, Epson believes
that to the extent the reorganized Debtors' business will be carried on by
legally separate entities, any financial projections need to be broken down by
entity, and that the Creditor Proponents need to disclose what the Lenders
intend to do as the new shareholders of the reorganized Debtors. The Creditor
Proponents are unable to respond to this request with specific numbers because
they are not known at this time. See In re Ligon, 50 B.R. 127 (M.D. Tenn 1985;
Cardinal Congregate One, 121 B.R. 760 (S.D. Ohio 1990); In re Microwave Prods.
of America, 100 B.R. 376 (W.D. Tenn. 1989) (stating that the Disclosure
Statement should contain information presently known to Plan Proponents.) The
Creditor Proponents point Epson to the discussion of the Debtors' business,
supra. Moreover, Epson believes even though PPAG was sold, the Creditor
Proponents must disclose the reorganized Debtors' post-sale supply source. The
Plan Proponents respond by noting that, at this time, the post-sale supply
source is not known.
Epson also believes that further disclosure regarding potential claims
against the Debtors' management and professionals, including its attorneys, is
necessary. The potential Officer and Director's Claim is discussed at Article
V.J.62. Such a discussion is adequate to enable a reasonable investor to make
an informed decision about the Plan.
Epson further objects to the Plan Proponents' disclaimers with regard
to the financial information listed in the Disclosure Statement. Such
disclaimers do not effect the ability of the parties to make an informed
judgment about the Plan.
Also, Epson alleges that the Creditors' Disclosure Statement failed to
adequately discuss the "effective date financing" for administrative expenses
under the Creditors' Plan. According to Epson, the Lender, the term of such
financing, the proposed collateral, and the maximum amount of such financing,
etc., must be disclosed. The Plan Proponents respond by noting that no
agreements regarding effective date financing have been entered into by Plan
Proponents and any lenders. The inclusion of possible lenders would be improper
as they would include opinions and not facts. See Ligon, 50 B.R. at 130. Epson
further objects to the requirement that as a condition to Confirmation, all
Administrative and Priority Claims shall not exceed $3,000,000.00. The Plan
Proponents respond by noting that the $3,000,000.00 cap can be increased by
Plan Proponents. Moreover, a Motion for Administrative Bar Date has been filed.
This will assist in the estimation of amounts of administrative claims. The
remaining objections are confirmation issues and should be addressed at
Confirmation. Specifically, Epson raises issues relating to the classification
of claims under the Creditors' Plan and the absolute priority rule.
2. DEBTORS' RESPONSE
Epson objected to the Debtors' Disclosure Statement by asserting the
"likely administrative insolvency" of these estates. The Debtors dispute
Epson's contention and believe that same is not well-founded. Epson also
claimed that with regard to treatment of Allowed Administrative Claims, the
Debtors' Disclosure Statement and prior proposed plan were inconsistent. The
Debtors do not believe that there is any inconsistency between the provisions
of the Joint Plan and the provisions of this Disclosure Statement
SECOND AMENDED DISCLOSURE STATEMENT 110
<PAGE> 119
related thereto. The Joint Plan's Allowed Administrative Claim limitation is
mirrored in the Disclosure Statement.
Epson also asserted that portions of the Debtors' Disclosure Statement
were objectionable due to lack of disclosure of potential administrative
claims. The Debtors believe that they are not required to, nor would it be
possible to at this juncture, quantify and list each potential administrative
claim that may be asserted against the estate. The Court has now established
December 15, 1999 as the date by which all requests for payment of an
administrative claim, calculated through September 30, 1999 must be filed, thus
some degree of certainty as to the amount of asserted administrative claims
will be had. Further, the Debtors maintain that the specific $3 million
limitation on Allowed Administrative Claims and Priority Claims, unless waived
or altered by the Successful Bidder is designed to and does provide assurance
of the nature of the obligations to which the Successful Bidder under the Joint
Plan will be bound, and that same is adequate disclosure of the obligations of
the Successful Bidder. Finally, Epson alleges that the payments due under the
Retention Agreements and the "lawyers', accountants', brokers', and other
professionals' fees alone will exceed $1 million" and that the Joint Plan is
therefore administratively insolvent. The Debtors would point out that the
limitation on Allowed Administrative Claims, which includes such Fee Claims,
has now been increased to $3 million. The Joint Plan is neither
administratively insolvent nor unconfirmable on its face.
Epson also objected to the Debtors' Disclosure Statement by saying
that the Debtors failed to describe adequately the Epson Litigation and the
other cases which comprise the OEM Litigation. The Debtors refute the notion
that a prolonged discussion of the history of each of the OEM Litigation cases
is necessary to provide adequate information about the OEM Litigation. The
detail required to be provided in a disclosure statement is only such detail as
is necessary for a hypothetical creditor to make an informed decision whether
to vote to accept a proposed plan of reorganization. The level of detail
suggested as required by Epson not only far exceeds the accepted standard for
adequate information, but also, the Debtors maintain, would serve not to
elucidate, but instead to confuse the hypothetical creditor. The descriptions
of the OEM Litigation cases in the Disclosure Statement include a synopsis of
the several different claims and counterclaims asserted and the progress made
in each case. A disclosure statement is not the appropriate venue to tout one's
past litigation successes or set forth litigation strategy. The Debtors
maintain that these descriptions are more than adequate to describe the nature,
extent and importance of the OEM Litigation.
As a means of addressing Epson's objection, however, the Plan
Proponents have set forth below Epson's description of the Epson Litigation in
response to Epson's objection.
Epson next objected to the Debtors' Disclosure Statement claiming that
it failed to address the Reorganized Debtor's future operations. For an
extended discussion of this topic, the Debtors' would refer to Article H(b) of
the Disclosure Statement. These several pages discuss the future of the
marketplace, the Reorganized Debtors' place in that
SECOND AMENDED DISCLOSURE STATEMENT 111
<PAGE> 120
marketplace, sales and marketing strategies and projections of future financial
performance.
In response to Epson's objection to classification of creditors, the
Debtors assert that the classification scheme established under the Joint Plan
is appropriate pursuant to ss. 1122 of the Bankruptcy Code. In any event, these
objections raised by Epson are more properly raised as confirmation objections.
Epson does not object to the level of detail in the information provided on
classification, only to the classification itself.
Epson's statements that "management will be the initial `Purchaser'
... at the auction for the stock of the Reorganized Debtors and will be the
sole arbiter of the winning bid" are in contradiction to the express provisions
of the Joint Plan. The Joint Plan specifically states that Conway, Del Genio,
Gries & Co., L.L.P. has been employed as the contemplated investment banker and
the process of soliciting the Successful Bidder is ongoing. For a detailed
discussion of the bidding procedure, see Article I(c)(1). Additionally, the
Plan Proponents have filed a "Motion for Approval of Bidding Procedures" which
further sets forth and explains the bidding procedure. Finally, the fact that
the Lenders previously served a Notice of Claim asserting alleged causes of
action against the officers and directors of Nu-kote is disclosed herein.
Further, the Disclosure Statement has been amended to state that all
litigation transferred to the Litigation Trust is subject to Epson's rights of
setoff and recoupment under the Bankruptcy Code and applicable law.
As stated above, Epson continues to object to the Plan Proponents'
description of the Epson Litigation. Thus, in response, the Plan Proponents set
forth (but do not adopt) the following language requested by Epson in brackets:
[EPSON'S REQUESTED LANGUAGE:]
[SEIKO EPSON CORP. SEIKO EPSON CORP. AND EPSON AMERICA, INC.,
PLAINTIFFS AND COUNTER-DEFENDANTS VS. NU-KOTE INTERNATIONAL, INC. AND
PELIKAN PRODUKTIONS, A.G., DEFENDANTS AND COUNTER-CLAIMANTS, Case No.
CV95-2734TJH ("EPSON I") and SEIKO-EPSON CORP. AND EPSON AMERICA,
INC., PLAINTIFFS AND COUNTER-DEFENDANTS VS. NU-KOTE INTERNATIONAL,
INC., AND PELIKAN PRODUKTIONS, A.G., DEFENDANTS AND COUNTER-CLAIMANTS,
pending in the U.S. District for Central District of California (the
"DISTRICT COURT") under Case No. CV97-9587TJH ("EPSON II")
(consolidated); SEIKO EPSON CORP. AND EPSON AMERICA, INC.,
PLAINTIFFS/APPELLANTS VS. NU-KOTE INTERNATIONAL, INC. AND PELIKAN
PRODUKTIONS, A.G., DEFENDANTS/APPELLEES, Appeal from Orders of U.S.
District Court for Central District of California to the U.S. Court of
Appeals for the Federal Circuit (the "FEDERAL CIRCUIT") under Docket
Nos. 97-1313-1548-1566-1588 and 98-1015 ("APPEAL"):]
[EPSON I, EPSON II AND APPEAL PRE-PETITION]
SECOND AMENDED DISCLOSURE STATEMENT 112
<PAGE> 121
[On April 25, 1995, Epson commenced Epson I alleging patent
infringement, trademark infringement, false advertising and unfair
competition against International. Epson subsequently added certain
patents and PPAG to Epson I. International and PPAG filed answers and
counterclaims asserting the invalidity, unenforceability and
non-infringement of Epson's patent rights. International and PPAG also
assert in their counterclaims that Epson violated the Sherman
(antitrust) and Lanham Acts, many of which claims are similar and/or
related to counterclaims rejected in the HP litigation. International
seeks damages and an injunction for false advertising, trade libel,
disparagement of goods, defamation and unfair competition. On or about
November 30, 1995, the District Court found that Epson had
demonstrated a likelihood of success on its patent infringement claims
against International and PPAG and issued a preliminary injunction
enjoining International and PPAG from, among other things, infringing
Epson's patents (the "PI"). International and PPAG appealed the
issuance of the PI, but the Federal Circuit affirmed. On October 15,
1997, Epson filed Epson II, in which Epson asserted that International
and PPAG infringed additional Epson patents. Epson I and Epson II have
now been consolidated by stipulation.]
[In a series of rulings in 1997, the District Court held six (6) out
of seven (7) of Epson's patents-in-suit in Epson I to be either
invalid or unenforceable. (As described below, the Federal Circuit
reversed this ruling in September 1999.) The District Court also held
International and PPAG in contempt for violating the Pl. The District
Court's contempt ruling is memorialized in two written orders. One
order directed International and PPAG to pay Epson's lost profits of
$1,050,849 and attorneys' fees of $31,413 (the "FIRST CONTEMPT
ORDER"). The other order does not quantify a monetary award (the
"SECOND CONTEMPT ORDER"). The District Court also issued an amended
preliminary injunction (the "API"), which enjoins International and
PPAG from, among other things, infringing certain patents that were
not part of the Pl and that the District Court did not hold invalid or
unenforceable. On or about September 28, 1998, Epson filed a motion to
hold International and PPAG in contempt for violation of the API (the
"API CONTEMPT MOTION"), which Motion has not been decided.]
[Epson appealed the District Court's invalidity and unenforceability
rulings. Nu-kote and PPAG appealed the District Court's Contempt
Orders. The Appeal was fully briefed and oral argument was conducted
before the Federal Circuit on November 2, 1998, four days prior to the
Petition Date. The District Court stayed various matters, e.g., the
API Contempt Motion, pending resolution of the Appeal.]
[With respect to the Second Contempt Order, which International and
PPAG appealed to the Federal Circuit, and the pending API Contempt
Motion, Epson has requested that the officers and directors of
International be held liable for the contempt. As to the Second
Contempt Order, the District Court reserved the question of contempt
by the officers and directors until after the Appeal was decided.
Because the findings of contempt in the Contempt Order have now been
affirmed on appeal (as discussed below), the District Court must
review the issue
SECOND AMENDED DISCLOSURE STATEMENT 113
<PAGE> 122
of the officer and director liability for the Second Contempt Order.
If the pending API Contempt Motion is granted, the officers and
directors could face additional personal liability, which, if
satisfied, would partially discharge Epson's Administrative Claim
against International.]
[B. LITIGATION REGARDING THE AUTOMATIC STAY]
[After the Debtors filed their petition of bankruptcy, Epson,
International and PPAG filed various pleadings in the District Court
and the Federal Circuit regarding the scope of the automatic stay and
its applicability to, among other things PPAG, the Appeal and the
Contempt Orders.]
[On December 1, 1998, Epson filed an Emergency Motion for Relief from
the Automatic Stay (the "Motion for Relief") with the Bankruptcy Court
to allow Epson to proceed with Epson I, Epson II and the Appeal. This
Motion for Relief led to yet more filings in the District Court and
the Federal Circuit.]
[On December 23, 1998, the Bankruptcy Court found that International
had a reasonable likelihood of success on all issues presented in the
Motion for Relief and set a final hearing on same.]
[On February 4 and 5, 1999, the Bankruptcy Court held a Final Hearing
on Epson's Motion for Relief. The Final Hearing was not completed as
of February 5, 1999. On February 10, 1999, the Bankruptcy Court issued
an Order continuing the Final Hearing on Epson's Motion for Relief
until a date twenty (20) days after the completion of the presentation
of evidence in the HP Litigation (the "SCHEDULING ORDER"). Again, the
parties then filed various pleadings with the District Court and the
Federal Circuit.]
[International then filed a motion for contempt before the Bankruptcy
Court, in which International sought to have Epson and its counsel
held in contempt by the Bankruptcy Court for allegedly violating the
automatic stay and the Bankruptcy Court's Scheduling Order. The
Bankruptcy Court did not hold Epson in contempt, but instead issued an
Order on the Motion for Contempt (the "FIRST TO FILE ORDER"),
enjoining Epson from prosecuting stay issues in any court other than
the Bankruptcy Court. On April 1, 1999, the District Court entered an
Order Deferring Decision on Application of Bankruptcy Stay to the
United States Bankruptcy Court for the Middle District of Tennessee,
and Deferring Any Further Proceedings in this Matter Pending Decision
on that Issue. Epson subsequently unsuccessfully sought a modification
and a stay of the First to File Order. Epson then appealed the First
to File Order. That appeal is pending.]
[On August 27, 1999, pursuant to an agreed order, the Bankruptcy Court
ordered that the Appeal could proceed as to both PPAG and
International.]
SECOND AMENDED DISCLOSURE STATEMENT 114
<PAGE> 123
[On September 8, 1999, the Federal Circuit issued its opinion in the
Appeal. Among other things, in that opinion, the Federal Circuit held
that the automatic stay in these bankruptcy cases did not apply to
PPAG or the contempt proceedings in Epson I.]
[The only issue that remains undecided in connection with the Motion
for Relief is Epson's request for relief from the stay to proceed in
the Epson I and Epson II as against Nu-kote on issues other than
contempt. Even though the last witness in the HP trial testified in
July 1999, neither party has so far invoked its right under the
Scheduling Order to ask that the balance of the Final Hearing take
place.]
[C. THE FEDERAL CIRCUIT DECISION ON THE APPEAL.]
[As noted above, on September 8, 1999, the Federal Circuit issued a
decision on the Appeal and entered judgment in full against PPAG and
in part against International. Seiko Epson Corp. v. Nu-kote
International, Inc., 190 F.3d 1360 (Fed. Cir. 1999). (On October 29,
1999 the Federal Circuit ruled that the September 8, 1999 decision
applies fully to International). International and PPAG filed a
request for Rehearing and Reconsideration en banc with the Federal
Circuit on limited issues, which the Federal Circuit denied on October
18, 1999. The Federal Circuit's decision is, therefore, final and
entered against both PPAG and International.]
[In its September 8, 1999 decision, the Federal Circuit reversed the
summary judgment decisions that the District Court had entered in
favor of International and PPAG concerning the Epson patents which
cover the structure and design of the Epson ink jet cartridges. The
Federal Circuit held that International and PPAG had not presented any
evidence to support a determination that the Epson utility patents
were procured through inequitable conduct and thus were unenforceable
and rejected the "per se" unenforceability theory advanced by
International. The Federal Circuit also held that International and
PPAG had provided no evidence to prove that the Epson design patent
should have been invalidated and that International's and PPAG's other
arguments were "not meritorious."]
[The Federal Circuit also affirmed the District Court's finding of
contempt, e.g., that International and PPAG had sold products in
violation of the District Court's PI and that the District Court's
award of contempt damages based on Epson's "lost profits" on a per
cartridge basis. The Federal Circuit ruled that the District Court's
measure of those damages was partially defective and remanded for a
new calculation of damages for such contempt. Epson has filed a motion
to assess the recalculated contempt damages in the amount of
approximately $560,000, while the Debtors have submitted that such
damages should be reduced to approximately $200,000 to $300,000.]
[On November 29, 1999, the District Court conducted a hearing to
spread the mandate of the Federal Circuit's decision on the Appeal. As
a result of the decisions of the Federal Circuit, various matters,
including fixing contempt damages
SECOND AMENDED DISCLOSURE STATEMENT 115
<PAGE> 124
and assessing whether there is continuing contemptuous conduct by
International and PPAG, must be determined in Epson I. International
also has been ordered to recall all products found to infringe the
API. Further, Epson has the current right to proceed against PPAG and
to seek reinstatement and expansion of the original PI against PPAG.
Although International has sold its interest in PPAG, PPAG still
supplies International with ink jet cartridge products that Epson
asserts infringes patents and violates the API. International may be
obligated to fund PPAG's defense costs either expressly or impliedly
pursuant to the Uniform Commercial Code ss. 2-312, which claim may be
an Administrative Claim (although PPAG has not filed such a claim).
The District Court has taken those matters under submission.]
[Epson has filed a substantial Administrative Claim for
International's alleged post-petition infringement and contempt. Epson
has asserted the right to prosecute these claims in independent
litigation in the District Court (or any other appropriate forum)
under 28 U.S.C. ss.ss. 1334(b) and 1409(e), the "First to File" rule,
the Federal Circuit decision, and other principles of law and to seek
mandatory withdrawal of the reference to move resolution of that
Administrative Claim from the Bankruptcy Court to the District Court.
The Debtors dispute that they have engaged in post-petition
infringement or contemptuous conduct, that Epson has an allowable
Administrative Claim or that Epson has any right to address those
issues in a forum other than the Bankruptcy Court.]
[Based on the Federal Circuit's decisions, International's success of
defending itself in Epson I and Epson II is not guaranteed. Further,
in light of the Federal Court's decision and International's failure
in the HP trial, International cannot guarantee a successful recovery
on the antitrust claims against Epson.]
C. DEBTORS' RESPONSE TO OBJECTIONS BY HEWLETT-PACKARD
1. PLAN PROPONENTS' RESPONSE
Hewlett-Packard's objections to the Debtors' Disclosure Statement
generally consisted of objections regarding the adequacy and accuracy of the
description by the Debtors of the litigation between HP and Nu-kote. Given that
the jury in the HP Litigation has rendered its verdict, the objection by HP is
moot. The Disclosure Statement does, however, contain a revised description of
the HP Litigation and its outcome. Any further description or discussion of the
HP Litigation is unnecessary as a settlement approved by the Bankruptcy Court
has been reached with HP.
D. RESPONSE TO OBJECTIONS BY WAUSAU
1. CREDITORS' RESPONSE
Employers Insurance of Wausau ("WAUSAU") objects first to the
Creditors' Disclosure Statement's failure to adequately describe what, if any,
treatment is proposed with respect to rights of subrogation asserted by Wausau
to be held by Wausau and
SECOND AMENDED DISCLOSURE STATEMENT 116
<PAGE> 125
Chubb. Wausau contends that its rights of subrogation arise as a matter of law
by reason of payments made by Wausau under the policy prior to the filing of
the bankruptcy proceeding as well as pursuant to the Wausau Agreement. Wausau,
moreover, believes that further disclosure is necessary regarding Wausau's
rights of subrogation under the American International Specialty Lines ("AISL")
policy for which Wausau had funded sufficient monies prior to the filing of the
bankruptcy to exhaust the full amount of the policy.
The Creditor Proponents' response is that nothing in the Creditors'
Plan does or is intended to effect Wausau's subrogation rights, if any. Such
clarification is stated in the Third Amended Creditors' Plan. Wausau contends
that the Creditors' Plan cannot be confirmed without the consent of Wausau.
Wausau believes that this perceived shortcoming of the Creditors' Plan needs to
be disclosed to those voting on the Creditors' Plan. Such allegation is
disclosed by the insertion of Wausau's objection herein.
Wausau's objection also argues that the Creditors' Plan is not
confirmable. The Creditor Proponents will not specifically address this
argument and note that this is a confirmation issue and, thus, is better
addressed at Confirmation.
Wausau further objects that the Creditors' Disclosure Statement failed
to adequately describe the probable recoveries to the various classes of
creditors, and that the liquidation analysis is inadequate. Creditor Proponents
disagree. The Disclosure Statement discloses as much information about
recoveries in the OEM Litigation as can be reasonably disclosed. Moreover,
Wausau objected that the Creditors' Disclosure Statement should be amended to
discuss whether the Creditor Proponents intend to reject the Wausau agreement
and to discuss the size and classification of any damage claim arising from
such a rejection, if rejection is anticipated. The Plan Proponents do not
believe such agreements are executory and therefore no assumption or rejection
is necessary.
Wausau further objected to the Creditors' Disclosure Statement because
Wausau did not receive a copy of the Litigation Trust Agreement, and because
the Disclosure Statement did not provide names or information concerning the
identity or experience of (1) the Litigation Trustee, (2) the Litigation
Advisory Committee, or (3) the directors, officers, or other management of
Reorganized Holding, and did not adequately disclose how the litigation trustee
or his successor would be selected. The Creditor Proponents intend to provide a
copy of the Litigation Trust to Wausau prior to the Plan Confirmation hearing.
Wausau further objects to the Creditors' Disclosure Statement's
discussion regarding judgment reduction and offsets and to the Creditors'
Disclosure Statement's discussion of the permanent injunction. The Creditor
Proponents address this issue in their Amended Plan.
Wausau also objected that the Creditors' Disclosure Statement did not
disclose Wausau's contention that the Debtors' rights under the Chubb Agreement
and the Chubb
SECOND AMENDED DISCLOSURE STATEMENT 117
<PAGE> 126
Order cannot be transferred to the Litigation Trust without the Litigation
Trust also assuming the obligations to Wausau under the Chubb Agreement and the
Chubb Order. Such language has been included in the Amended Disclosure
Statement.
Wausau also objects that the Creditors' Disclosure Statement failed to
adequately disclose the amount of taxes that would be triggered by the transfer
of assets to the Litigation Trust and further failed to disclose whether the
Bankruptcy Court would be asked to resolve this issue, whether that issue would
be resolved at confirmation, and whether these taxes would be incurred in a
Chapter 7 liquidation if there were no Litigation Trust. The Creditor
Proponents respond by noting that the Disclosure Statement at Article XIV
discusses various tax considerations. Such disclosure is sufficient for a
reasonable investor to make an informed judgment. See 11 U.S.C. ss. 1125.
Wausau also asserted that the Creditors' Disclosure Statement was
deficient in the following respects:
(a) the Creditors' Disclosure Statement did not describe how the
future defense of the Canon and Epson litigation would be
funded;
(b) the Creditors' Disclosure Statement did not describe the
existence or status of the litigation between the Lenders and
the Debtors regarding the Lenders' claimed security interest
and proceeds of the OEM Litigation;
(c) the Creditors' Disclosure Statement does not disclose
Wausau's contention that any interest of the Lenders in the
AISL policy is subordinated to the subrogation rights of
Wausau;
(d) the Creditors' Disclosure Statement did not disclose
standards for settlement and mechanisms to avoid potential
conflict of interest with respect to the exercise of control
by the Lenders over the Litigation Trust or the Litigation
Advisory Board, which would have authority to compromise the
Debtors' preference, fraudulent conveyance, or equitable
subordination claims against the Lenders or other parties;
and
(e) the Creditors' Disclosure Statement did not disclose the
reason for the releases of the Creditor Proponents, or the
consideration being paid for the release of such claims.
The Creditor Proponents respond to these objections by noting that
most, if not all, of such objections have been addressed in either the
Creditors' Third Amended Plan or the Amended Disclosure Statement. The Plan
Proponents assert that no further response is needed with relation to the
objections.
2. DEBTORS' RESPONSE
SECOND AMENDED DISCLOSURE STATEMENT 118
<PAGE> 127
Wausau's objections to the initial Debtors' disclosure statement
generally related to its subrogation rights. Wausau has expressed concern that
a plan somehow affects its subrogation rights against recovery of attorneys
fees in the OEM Litigation and against American International Specialty Lines
on its insurance policy. In response, Nu-kote states that nothing in the Joint
Plan does or is intended to affect Wausau's subrogation rights, if any. Nu-kote
would note that the Chubb Agreement, which was approved by the Court,
specifically provides for Wausau and Chubb to retain their rights to any
recoveries of attorneys fees in connection with the HP Litigation. The payment
of attorneys' fees and costs would include any valid subrogation claims.
Subrogation rights, in the context of an insurer, permit the insurer
to "stand in the shoes" of its insured. See Reliance National Indemnity Co., v.
General Star Indemnity Co., 72 Cal.App.4th 1063, 1078 85 Cal. Rptr.2d 627, 635
(1999). The insurer is basically in the same position as "an assignee of the
insured's claim, and succeeds only to the rights of the insured." Id. This
concept of subrogation is memorialized in the Wausau Commercial Liability
Policy. In its Objection, Wausau cites case law for the proposition that
"equitable subrogation rights are superior in priority to perfected bank liens,
even in the absence of UCC filing." The Debtors submit that Wausau's
subornation rights, to the extent valid and existing, do not give rise to a
Secured Claim by Wausau within the meaning of the Bankruptcy Code.
Subrogation does not include or encompass the phrase "equitable
contribution." In fact, equitable contribution exists independently of the
rights of the insured. Id. "Equitable contribution permits reimbursement to the
insurer that paid on the loss for the excess it paid over its proportionate
share of the obligation, on the theory that the debt it paid was equally and
concurrently owed by the other insurers and should be shared by them pro rata
in proportion to their respective coverage of the risk." Id. Wausau and Chubb
are obligated to indemnify or defend the same loss or claim, and as such, may
well have independent rights against each other for equitable contribution.
State Farm Fire and Casualty v. Cooperative of American Physicians, Inc., 163
Cal.App.3d 199, 205, 209 Cal.Rptr. 251, 252 (1984). The Joint Plan and this
Disclosure Statement can do nothing to impact those rights.
Wausau further objects that Nu-kote failed adequately to disclose the
probable recoveries to Creditors. Nu-kote disagrees. The Disclosure Statement
discloses as much information about recoveries on the OEM Litigation as can
reasonably be disclosed considering the confidential nature of such
information.
Wausau further objects that the Disclosure Statement does not disclose
whether or not Nu-kote intends to assume or reject the pre-petition agreements
with Wausau. The Debtors do not believe these agreements are executory and
therefore no assumption/rejection is necessary.
Wausau further objected to the failure of the Debtors to disclose the
purchase price to be paid potentially by Richmont if Richmont is the Successful
SECOND AMENDED DISCLOSURE STATEMENT 119
<PAGE> 128
Bidder for the stock of the Reorganized Holding. The price to be paid by
Richmont if Richmont is the Successful Bidder is disclosed in the Joint Plan as
$21,150,000, plus up to $3,000,000, or such other amount as Richmont may agree,
for payment of Allowed Administrative Claims, plus the cost associated with
satisfaction of the Other Secured Claims in Class 2 of the Joint Plan, if any.
If Richmont is not the Successful Bidder, the winning bid will be determined by
the Bidding Procedure detailed in the Joint Plan and in this Disclosure
Statement. Based on Nu-kote's analysis of the value of the assets being
purchased in connection with the stock, the liquidation analysis prepared by
the Lenders and Nu-kote's analysis of the administrative and priority claims,
Nu-kote believes that the purchase price will be in the range of $24-35
million.
Wausau further objected that the Debtors' Disclosure Statement
inaccurately indicated that Wausau's claims are against Holding instead of
International. Such clerical error has been corrected.
Wausau objects first to the Disclosure Statement's failure to
adequately describe what, if any, treatment is proposed with respect to rights
of subrogation asserted by Wausau to be held by Wausau and Chubb. Wausau
contends that its rights of subrogation are superior to those of the Debtors
and other creditors and arise as a matter of law by reason of payments made by
Wausau under the policy prior to the filing of the bankruptcy proceeding as
well as pursuant to the Wausau Agreement. Wausau, moreover, believes that
further disclosure is necessary regarding Wausau's rights of subrogation under
the American International Specialty Lines ("AISL") policy for which Wausau had
funded sufficient monies prior to the filing of the bankruptcy to exhaust the
full amount of the policy.
The Plan Proponents' response is that nothing in the Plan does or is
intended to affect Wausau's subrogation rights, if any, unless and to the
extent such rights may be affected under the Bankruptcy Code or applicable law.
Wausau contends that the Plan cannot be confirmed without the consent of
Wausau. Wausau believes that its perceived shortcoming of the Plan needs to be
disclosed to those voting the Plan. Such allegation by Wausau is disclosed by
the insertion of Wausau's objection therein.
Moreover, Wausau asserts that the Disclosure Statement fails to
acknowledge the Lenders' lack of repetition perfection of any claim against the
AISL policy or the subordination of any claimed Lenders' interest in such
policy to the subrogation rights of Wausau.
Wausau's objection also argues that the Plan is not confirmable
because of the $3,000,000 Administrative Expenses cap and other reasons. Wausau
thus alleges that the OEM's have veto power over the Plan. In addition, Wausau
objects to alleged "illegal provisions" of the Joint Plan which transfers the
assets of the estate to the Lenders without being authorized under sections 363
and 365 of the Bankruptcy Code. The Joint Plan has been amended to delete these
provisions.
Wausau further objects that the Disclosure Statement failed to
adequately describe the probable recoveries to the various classes of
creditors, and that the liquidation analysis
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is inadequate. The Plan Proponents disagree. The Disclosure Statement discloses
as much information about recoveries as can be reasonably disclosed.
Wausau further objects to the Disclosure Statement because Wausau did
not receive a copy of the Litigation Trust Agreement, and because the
Disclosure Statement did not provide names or information concerning the
identity or experience of (1) the Litigation Trustee, (2) the Litigation
Advisory Committee, or (3) the directors, officers, or other management of
Reorganized Holding, and did not adequately disclose how the litigation trustee
or his successor would be selected. A copy of the Litigation Trust Agreement is
being made available by the Plan Proponents contemporaneously with the filing
of the Disclosure Statement.
Wausau further objects to the Disclosure Statement's discussion
regarding judgment reduction and offsets. The Plan Proponents respond by
stating that the Disclosure Statement is clear in this regard. Wausau also
objects to the discussion of the permanent injunction. The Plan Proponents
disagree with Wausau's contention and assert that the permanent injunctions are
adequately described.
Wausau also objects that the Disclosure Statement failed to adequately
disclosure the amount of taxes that would be triggered by the transfer of
assets to the Litigation Trust and further failed to disclose whether the
Bankruptcy Court would be asked to resolve this issue, whether that issue would
be resolved at confirmation, and whether these taxes would be incurred in a
Chapter 7 liquidation if there were no Litigation Trust. The Plan Proponents
respond by noting that the Disclosure Statement at Article XIV discusses
various tax considerations. Such disclosure is sufficient for a reasonable
investor to make an informed judgment.
Wausau asserts the Disclosure Statement does not disclose the reason
for the various releases, or the consideration being paid for the release of
such claims. The Plan Proponents respond by noting that the consideration for
the releases are contained in the Plan and disclosed adequately.
Wausau asserts that the Disclosure Statement is deficient in the
following respects:
(a) the Disclosure Statement does not describe how the future
defense of the Canon and Epson litigation will be funded;
(b) the Disclosure Statement does not disclose Wausau's
contention that any interest of the Lenders in the AISL
policy is subordinated to the subrogation rights of Wausau;
(c) the definition of "CW Interest" contains an element that
applies only to security interest, not to subrogation rights,
i.e., a requirement that the subrogation right not only be
valid, enforceable, and unavoidable but also be "perfected."
The term "perfected" is classically a Uniform Commercial Code
("UCC") concept which has no application to the law of
subrogation.
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Although various sections of the Avoidance Powers of the
Bankruptcy Code which should have no application to Wausau's
claim, make reference to "perfection" (i.e., including
various avoidance provisions relating fraudulent conveyance
which would have no application to Wausau's subrogation
rights), the Plan must be referring to UCC concepts because
it already provides that the subrogation right be "valid,
enforceable, and unavoidable" in order to be preserved from
the free and clear sale to the Litigation Trust. Since all
rights other than the Lenders' secured rights under Article
IV and "CW Interests" purport to be cut off by the sale free
and clear of liens, this trick definition tries to cut off
Wausau's rights.
(d) The Litigation Trustee and Litigation Advisory Board, not
Wausau, may commence and control the AISL litigation under
paragraph 8.03 of the Joint Plan. This result is inconsistent
with Wausau's rights to control such litigation and to
require Debtor to cooperate with Wausau in such litigation in
accordance with the provisions of the Policy.
(e) Wausau is not a beneficiary of the Litigation Trust under
Sections 8.05(g), or 8.06(g). The "preservation" of Wausau's
rights is an illusion.
(f) Wausau is prejudiced by a purported transfer of the AISL
Policy and prosecution by a party which may not have standing
and which will be actively interfering with Wausau's
independent standing as a subrogation owner of the AISL
claim.
(g) Wausau appears to be enjoined under paragraph 12.6 from suing
the Litigation trust from interfering with its subrogation
rights, to be bound by the Joint Plan under paragraph 12.03
notwithstanding Wausau's lack of consent and to have its
subrogation rights involuntarily released under paragraph
12.05 of the Joint Plan.
(h) The Lenders are purportedly insulated from liability for
their wrongful future conduct in the Litigation Trust.
(i) In the event of a Trust Triggering Event, there is not source
of monies to pay the administrative claims.
(j) Sections 7.01, 7.10, 7.11, 8.02, 8.03, 8.05(a)(1), 8.06(g),
8.12, 11.1, 11.3, 12.02, 12.03(i), 12.05, 12.6 and 13.12
adversely impact the rights of Wausau.
The Plan Proponents respond to these objections by noting that most,
if not all, of such objections have been addressed in either the Plan or the
Disclosure Statement. The Plan Proponents assert that no further response is
needed with relation to the objections.
E. RESPONSE TO THE OBJECTION AND COMMENTS BY THE SEC
SECOND AMENDED DISCLOSURE STATEMENT 122
<PAGE> 131
1. CREDITORS' RESPONSE
The SEC raised several points. In response, the Creditor Proponents
state first that no warrants are being issued pursuant to the Creditors' Plan.
Additionally, the Disclosure Statement now states that "the availability of
Rule 144 to parties deemed affiliates of Reorganized Holding is dependent on
compliance with the conditions set forth in Rule 144 by each person seeking to
avail himself or herself of the protection set forth in Rule 144." Moreover,
the Disclosure Statement, after deletion of a sentence, now unambiguously
discloses that Interest Holders will receive no distributions under the
Creditors' Plan, and the introductory portion of the Disclosure Statement now
states that holders of equity interests are deemed to have rejected each of the
Competing Plans (by virtue of the cancellation of their interests under each
plan) and are therefore not permitted to vote on either of the Competing Plans.
Article IX, Section I.8(g) reflects a clarification that Allowed Unsecured
Class 4 and 5 Claims are the beneficiaries of the Litigation Trust.
The SEC also expresses a concern regarding the applicability of
securities laws to the interests in the Litigation Trust. Because the interests
in the Litigation Trust are not represented by certificates, the Creditor
Proponents believe that there is no need for registration under the Securities
Exchange Act of 1934.
The SEC also identified a number of additional items that it believed
to be necessary to enable the Creditors' Disclosure Statement to provide the
requisite adequate information:
(a) summary information for each class of claimants, including
the number of claimants in the class, the amount of claims of
each class, and the distributions to be received by each
class;
(b) the valuation evidence that the Creditor Proponents intend to
offer at the confirmation hearing to show the zero value of
shareholder interests for purposes of cramdown;
(c) an indication of whether the Creditor Proponents have
prepared a valuation of the Debtors' on a going-concern
basis; and
(d) further disclosure of significant risk factors attendant to
the Creditors' Plan, including any risk factors associated
with the OEM Litigation.
2. DEBTORS' RESPONSE
While not filing a formal objection to the Debtors' Disclosure
Statement, the SEC has expressed concern over the adequacy of disclosures of
current or prior relationships and transactions between Richmont or its control
persons and the Debtors. Nu-kote believes that adequate disclosure has been
given as to Richmont's stock ownership and its officers' positions as directors
of Holding. Richmont has not engaged in any other
SECOND AMENDED DISCLOSURE STATEMENT 123
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transactions with the Debtors other than that Richmont has provided Patrick E.
Howard to the Debtors as their CEO at no cost to the Debtors.
The SEC further questioned the adequacy of the information in the
Debtors' initial disclosure statement regarding the terms of the proposed sale
and the method by which the sale will be determined to be fair and reasonable.
If Richmont is the Purchaser, the terms of the sale are all cash at closing.
The means of determining that the purchase price is fair and reasonable is
four-fold: (1) the Debtors have employed an investment banker (Conway, Del
Genio, Gries) to market actively the Company to determine if there are any
higher and better offers; (2) the Debtors' period of exclusivity has expired
thereby allowing any parties-in-interest to file competing plans with higher
and better offers; (3) the Debtors' liquidation analysis which is a part of the
Disclosure Statement; and (4) the Bidding Procedure established under the Joint
Plan.
The SEC further questioned the adequacy of the information in the
Debtors' Disclosure Statement regarding the release of claims against certain
officers and directors. As disclosed herein, the Lenders previously conducted
their own investigation of such claims and prepared a Notice of Claim which is
described in this Disclosure Statement. The Notice of Claim has been sent to
the Debtors' D&O insurance carriers. The releases for certain of the officers
and directors are also detailed in this Disclosure Statement. Further, the
Examiner has also been appointed to investigate any claims the Debtors might
have against their officers and directors, and the Examiner's report will
provide additional information.
3. THE PLAN PROPONENTS ADDITIONAL RESPONSE TO THE SEC
The SEC also expressed concern over the scope of the language
contained at P. 12.6 of the Joint Plan. As set forth herein, this language has
been amended, and the Plan Proponents believe that this amended language
resolves any concern the SEC had with regard to P. 12.6 and ss. 524(e) of the
Bankruptcy Code.
SECOND AMENDED DISCLOSURE STATEMENT 124
<PAGE> 133
F. RESPONSE TO COMMENTS BY PBGC
1. CREDITORS' RESPONSE
The Plan Proponents note that they do not intend to terminate the
pension plan upon Confirmation. The appropriate language regarding this
treatment is incorporated in this Disclosure Statement. Further, the Disclosure
Statement now discloses that International is the "contributing sponsor" of the
Nu-kote International, Inc. Retirement Income Plan (the "PENSION PLAN") and
that, if the Pension Plan terminates, the unfunded benefit liabilities of the
Pension Plan under 29 USC ss.1301(a)(18) and 29 USC ss.1362(b) asserted by the
PBGC are estimated to be $6.3 million. The Disclosure Statement also discloses
that a pension plan covered by Title 4 of ERISA may be terminated in accordance
with the provisions of 29 USC ss.ss. 1341 and 1342, and that (1) the PBGC
administers the mandatory pension plan termination insurance program
established under Title 4 of ERISA; (2) upon termination of an underfunded
pension plan covered by Title 4, the PBGC typically becomes trustee of the plan
and, within certain statutory limits, guarantees the payment of pension
benefits to participants and beneficiaries; and (3) on April 14, 1999, PBGC
filed three claims in the substantively consolidated bankruptcy cases. See
Article VI.A.6.
Moreover, the Disclosure Statement discloses that, under ERISA,
International and each member of its "controlled group," as that term is
defined in 29 USC ss. 1301(a)(14), are jointly and severally liable to the PBGC
for: (1) the "total amount of unfunded benefit liabilities" of the Pension
Plan; (2) the payment of premiums due with respect to the Pension Plan; and (3)
any minimum funding contributions necessary to satisfy the funding standards of
ERISA and the Internal Revenue Code. The PBGC also believes that the Disclosure
Statement should disclose that the sale of the European subsidiaries would
remove those subsidiaries from International's present controlled group and
could deprive the PBGC of the opportunity to recover from them any unfunded
obligations of the Pension Plan if the Pension Plan terminates
post-confirmation, which could place the responsibility for meeting any
unfunded obligations of the Pension Plan solely on the reorganized Debtors. The
PBGC also objects that the Creditors' Disclosure Statement failed to disclose
the impact that termination of the Pension Plan would have on the anticipated
amount of administrative expenses, priority claims, and general unsecured
claims in this case.
2. DEBTORS' RESPONSE
Via a letter to Debtors' counsel, the PBGC requested the insertion of
certain language in the Disclosure Statement. The language requested by the
PBGC has been incorporated above at Article VI(a)(6).
G. RESPONSES TO OBJECTIONS BY LEMMER
1. CREDITORS' RESPONSE
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Lori Lemmer, individually and on behalf of a class of securities
claimants, objected to both the Debtors' and Creditors' Disclosure Statements.
In response to the objections to the Creditors' Disclosure Statement, the
Creditor Proponents state that the objection regarding the HP Litigation is now
moot. The Disclosure Statement now identifies the beneficiaries of the
litigation trust as "holders of Allowed Unsecured Class 4 Claims." Moreover,
the Disclosure Statement has been revised to eliminate the language suggesting
that interest holders would receive distributions under the Joint Plan.
Finally, the Disclosure Statement has been revised by the insertion of the
following language after the word "all" in the first line of that section: "of
the Debtors".
2. DEBTORS' RESPONSE
The Lemmer plaintiffs filed an objection to the Debtors' Disclosure
Statement basically alleging two grounds for objection. Initially, the Lemmer
plaintiffs object to the failure to name the price for which the stock of
Holding will be sold. In response, the Debtors assert that while it is not
possible to know the purchase price at this time, the amount of the Lead Bid by
Richmont has been disclosed in the Joint Plan. The Joint Plan establish
detailed Procedures by which an investment banker has been employed to solicit
interest in the purchase of the stock of Holding, and further establishes the
Bidding Procedure by which the stock will be sold. It is this Bidding Procedure
that will ultimately determine both the Successful Bidder and the purchase
price. However, based on Nu-kote's analysis of the value of the assets being
purchased in connection with the stock, the liquidation analysis prepared by
the Lenders and Nu-kote's analysis of the administrative and priority claims,
Nu-kote believes that the purchase price will be in the range of $24-35
million.
Next, the Lemmer plaintiffs object to the distribution order and the
relative priority of their class and the class into which the Lenders'
unsecured claim would be placed if the Debtors commence and succeed on an
equitable subordination action against the Lenders. As set forth above, ss.
510(c) of the Bankruptcy Code provides for subordination "for purposes of
distribution all or part of an allowed claim to all or part of another allowed
claim or all or part of an allowed interest to all or part of another allowed
interest." The Lemmer plaintiffs, as shareholders of Holding, are the holders
of interests. The Lenders, even if their unsecured claims were subordinated
pursuant to ss. 510(c) would still be holders of unsecured claims. Thus, the
unsecured claim of the Lenders could potentially have only been subordinated to
other Allowed Unsecured Claims, not the interests of the Lemmer plaintiffs.
Finally, as set forth above, upon confirmation of the Joint Plan, mutual
releases shall be granted by and between the Debtors and the Lenders.
The Lemmer plaintiffs state that the Disclosure Statement filed by the
Plan Proponents fails to explain the necessity for and the cost of the
Litigation Trust and fails to explain which litigation claims will be
investigated and pursued by the Reorganized Debtors and which will be
investigated and pursued by the Litigation Trust. Initially, the Plan
Proponents point out that the creation of a Litigation Trust is only proposed
in the alternative scenario (as opposed to a sale to a Successful Bidder) under
the Joint Plan. Articles VII and VIII of the Joint Plan set forth in detail the
two possible alternative
SECOND AMENDED DISCLOSURE STATEMENT 126
<PAGE> 135
scenarios for implementation of the Joint Plan. Under the first scenario,
contemplated in Article VII of the Joint Plan, the stock or assets of the
Debtors (which will include indirectly ownership of all assets and intellectual
property of the Debtors and the Litigation) will be sold to the Successful
Bidder. Under the Successful Bidder scenario, the Reorganized Debtors will be
responsible for evaluating, funding and pursuing the Litigation based on their
reasonable business judgment for the benefit of the Lenders, the Unsecured
Creditors and the Reorganized Debtors (see P. P. 7.01, 7.03 and 7.10 of the
Joint Plan). Under the Successful Bidder scenario, the Litigation Trust is not
created.
Alternatively, a second scenario for implementation is set forth in
Article VIII of the Joint Plan. Under this scenario, if a Trust Triggering
Event occurs, the Trust and the Litigation Trust shall be formed. "Trust
Triggering Event" is defined at 1.110 of the Joint Plan as (i) the failure of
the Successful Bidder to close the Sale Transaction contemplated by the Joint
Plan on the Effective Date, or (ii) the lack or absence of a Successful Bidder
fully prepared to close the Sale Transaction on the Confirmation Date. The
Litigation Trust shall be administered by a Litigation Trustee supervised by
the Litigation Advisory Board (see P. 8.05(c) of the Joint Plan). If the
Litigation is transferred to the Litigation Trust, the Litigation Trust will
have the sole responsibility for prosecuting the Litigation (see P. 8.05(f) of
the Joint Plan).
Read together, these two Articles of the Joint Plan make it clear that
the Litigation Trust will only be implemented in the event there is no
Successful Bidder under the Plan. Under either scenario, Successful Bidder or
Trust Triggering Event, the "Litigation" to be pursued by the Reorganized
Debtors or transferred to the Litigation Trust is defined in P. 1.65 of the
Joint Plan as (i) OEM Litigation; (ii) all Causes of Action; and (iii) all
Avoidance Actions; and (iv) any and all policies of insurance or litigation
funding or indemnity agreements related to any litigation, and all rights and
remedies of these estates under all policies of insurance or litigation funding
or indemnity agreements related to such litigation. The Lemmer plaintiffs also
request a disclosure of the value of the Litigation intended to be investigated
and pursued by the Reorganized Debtors or the Litigation Trust, as the case may
be. At this juncture, the Plan Proponents do not have a value or description of
the Litigation which may ultimately be transferred to the Litigation Trust or
pursued by the Reorganized Debtors, as the case may be, other than as already
contained in the Disclosure Statement. The Plan Proponents have not performed a
valuation of the Avoidance Actions.
In addition, the Lemmer plaintiffs seek an explanation of whether the
releases of the Current Officers and Directors are intended to impact Lemmer's
securities fraud claims presently pending in the Northern District of Texas. To
the extent such claims are not property of the estate which could have been
brought by the Debtors, it is not intended that the releases will affect the
Lemmer claims.
The Lemmer plaintiffs further request an explanation of why a
settlement with the Current Officers and Directors was negotiated before the
examiner concluded his investigation. The Plan Proponents respond by noting
that these Bankruptcy Cases have continued for well over a year and the Joint
Plan negotiations preceded not only the
SECOND AMENDED DISCLOSURE STATEMENT 127
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appointment of an Examiner, but the filing of the Examiner motion. The longer
the case continues, the more administrative fees will accrue. The Plan
Proponents believe that the best outcome for all creditors and the estates is
to move these cases forward. Thus, the Plan proponents believe that t is in the
best interests of these estates to enter into the proposed settlement at this
time.
H. CREDITORS' RESPONSE TO OBJECTIONS OF WELLS FARGO BUSINESS CREDIT,
INC., FORMERLY NORWEST BUSINESS CREDIT, INC.
In connection with its objection, Wells Fargo Business Credit, Inc.,
formerly Norwest Business Credit, Inc. ("WELLS FARGO") provided the Plan
Proponents with several passages of additional language to be inserted into the
Creditors' Plan and the Creditors' Disclosure Statement, along with several
specified changes to those documents. To the extent it incorporates the
referenced objectionable provisions of the Creditors' Disclosure Statement, the
Disclosure Statement incorporates the additions and changes specified by Wells
Fargo except as stated below.
Wells Fargo also requested language concerning the postpetition
financing claim of Norwest in Article 7, ss. C2(d). The requested language was
added, except for the last sentence now reads, "At the time the Norwest claim
is paid in full, Norwest shall deliver a release of the Norwest lien."
Wells Fargo further objects to the Creditors' Disclosure Statement
because of the failure to provide an initial summary section outlining the
various classes of creditors and their respective treatments. The Plan
Proponents assert that no such initial summary section is needed because the
table of contents includes a section titled Treatment of Classified Claims and
Interests Under the Creditors' Plan, and shows that this section begins on page
57 of the Disclosure Statement.
In addition, Wells Fargo objects because the Disclosure Statement does
not state what entity shall provide the effective date financing under the
Plan. At this time, the Plan Proponents do not have a definitive entity who
will provide the effective date financing. Finally, Wells Fargo requests
certain language be included in Article 7, ss. I.4 be included regarding
Norwest's indemnification rights under the Norwest Agreement. The Plan
Proponents are not required to include such language because ss. 1141(d)(1) of
the Bankruptcy Code states that, except as otherwise provided in the subsection
in the plan or the order confirming the plan, the confirmation of the plan
discharges the debtor from any debt that arose before the date of such
confirmation. The Plan Proponents likewise refute Wells Fargo's assertion that
Article 7, ss. 1.4 needs to be modified to permit the pursuit of administrative
claims.
I. CREDITORS' RESPONSE TO OBJECTIONS OF SPECTRA, INC.
Spectra, Inc. ("SPECTRA"), objected to the description of certain
litigation involving Spectra and International, but these objections are
addressed in the Disclosure Statement. The Disclosure Statement, throughout,
reflects that International, rather than Holding, is
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the Debtor involved in this litigation. Moreover, at several places, the
Disclosure Statement reflects the fact that in connection with the
court-approved sale of Modular, Inc. Technology Stockholm, AB ("MIT"),
International's rights in respect of its tortious interference counterclaim
against Spectra have been assigned to the purchaser, and such counterclaims are
therefore excluded from the Litigation Trust under the Creditors' Plan. These
facts are reflected in this Disclosure Statement. In addition, many of the
issues raised by Spectra will be resolved by way of litigation and it is
inappropriate to prejudge issues which may require additional litigation in the
content of a disclosure statement.
J. RESPONSES TO PELIKAN HOLDING A.G.'S OBJECTIONS
1. CREDITORS' RESPONSE
Pelikan Holding A.G. ("PELIKAN") objects first to the Creditors'
Disclosure Statement's failure to attach a copy of the Litigation Trust
Agreement. Creditor Proponents intend to provide Pelikan a copy of the
Litigation Trust prior to the Plan Confirmation hearing.
Pelikan further objects to the failure of the Creditors' Disclosure
Statement to identify the individual who would serve as trustee of the
Litigation Trust and his or her experience, and fails to identify the
individuals who would serve on the Litigation Advisory Committee which would
oversee the trustee as well as their experience. The Creditor Proponents are
unable to respond to this objection with specific names and further information
at this time because such persons are not currently known. This Court, along
with others, has stated that a disclosure statement should contain all
pertinent information presently known to plan proponents. In re Ligon, 50 B.R.
127 (Bankr. M.D. Tenn. 1985) (citing In re Stanley Hotel, Inc., 13 B.R. 926
(Bankr. D.Colo. 1981)). See also In re Cardinal Congregate One, 121 B.R. 760
(S.D. Ohio 1990); In re Microwave Prods. of America, Inc., 100 B.R. 376 (Bankr.
W.D. Tenn. 1989); In re Scioto Valley Mortgage Co., 88 B.R. 168 (Bankr. S.D.
Ohio 1989).
Pelikan also objects that the Creditors' Disclosure Statement fails to
provide a description of the claims that are to be transferred to the
Litigation Trust and contains only a cursory identification of the types of
claims which might exist. With regard to the litigation claims that are to be
transferred to the Litigation Trust, the Disclosure Statement contains all
information presently known to the Plan Proponents. Accordingly, such
description is sufficient to enable a reasonable and typical investor to make
an informed judgment about the Plan. See id.
With regard to Pelikan's objection that the Disclosure Statement fails
to identify the asserted and unasserted claims against the Plan Proponents that
are being released under the Plan, the Plan Proponents note that the lenders
interfered with management at the Debtors during the year prior to the filing
of these cases. The Lenders strongly refute such an allegation; however, such
disclosure is included in the Joint Disclosure Statement.
Pelikan further objects that the Disclosure Statement fails to address
Creditors' rights of set-off and recoupment with regard to claims being
transferred to the Litigation
SECOND AMENDED DISCLOSURE STATEMENT 129
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Trust. The Plan Proponents have amended their Disclosure Statement to address
this issue. See Article 7, P. G(2)(d).
Pelikan also objects to the Disclosure Statement because: (1) the
failure to disclose which contracts will be assumed under the proposed Plan
what past defaults of the Debtors will be cured and the source of funds for
curing the defaults, (2) the Plan does not provide for the assumption of the
agreements with Pelikan creating the environmental indemnity as well as that
three of the claims of Pelikan against the Debtors would have to be satisfied
to assume the agreement and that some of the other past defaults of the Debtors
are not curable, (3) the effect on the value of business tort and similar
potential damage claims to be transferred to the Litigation Trust of the
separation of such claims from the operating business, (4) any estimate of the
size of the unsecured Class 4A claims, (5) the source of funds for payment of
administrative claims or expenses. The Plan Proponents respond by noting that
at this time it is unknown which executory contracts will be assumed under the
Plan. Accordingly, the Plan Proponents cannot make more detailed disclosures
with regard to executory contracts and unexpired leases. See id. The Plan
Proponents further assert that there will be no effect on the value of the
business when the tort claims are transferred to the Litigation Trust. In
addition, it is not necessary for the Plan Proponents to estimate the size of
the unsecured Class 4A claims as any such estimation is not known at this time.
Further, the Plan Proponents do not have a definitive lender for exit financing
at this time.
Pelikan also objects that the Disclosure Statement does not disclose
the effect of Texas law on the ability of the Debtors to assign tort claims to
the Litigation Trust. The Plan Proponents respond by noting that to the extent
that any tort claim cannot be transferred to the Litigation Trust, it will be
retained by the Reorganized Debtors.
Finally, Pelikan objects that the Disclosure Statement does not
disclose the effect of the lack of an agreement by the Lenders to vote the
unsecured Class 4A claims in favor of a plan, which would allow Lenders to
alter the effect of the Plan through voting their Class 4A claims against the
Plan. The Plan Proponents respond by noting that the Creditors' Plan already
addresses this issue in Article 4, ss. 4.1(b).
2. DEBTORS' RESPONSE
Pelikan Holding objected to the Debtors' Disclosure Statement
asserting an (1) alleged failure to disclose which contracts will be assumed
under the proposed Joint Plan what alleged past defaults of the Debtors will be
cured and the source of funds for curing the defaults, (2) alleged failure of
the Joint Plan to provide for the assumption of the agreements with Pelikan
Holding creating the environmental indemnity as well as that three of the
claims of Pelikan Holding against the Debtors would, according to Pelikan
Holding, have to be satisfied to assume the agreement and that some of the
other past defaults of the Debtors are not curable, (3) alleged lack of
disclosure of defenses to the environmental indemnity obligations of Pelikan
Holding, and (4) alleged lack of discussion of the claims against management
which are to be released under the Joint Plan.
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In response, the Debtors point to the discussion at Article E(j)(3)
including the discussion at footnote 2. This discussion sets forth the Debtors
position that the Debtors' do not believe that assumption of the referenced
agreements is necessary as they are not executory in nature because Pelikan
Holding has fully performed its obligations thereunder. However, should the
Debtors deem further action necessary, all appropriate steps to assume same
will be taken. The Joint Plan does not specifically list all contracts the Plan
Proponents believe to be executory. To the extent further action with regard to
the pre-petition agreements with Pelikan Holding is deemed necessary, same will
be taken in accordance with the provisions for assumption of executory
contracts in Article IX of the Joint Plan. Further, the process seeking a
potential resolution of all claims and defenses asserted by Pelikan Holding, in
the context of resolution of the motion for relief from stay filed by Pelikan
Holding, is ongoing. Finally, as disclosed herein, the Lenders previously
conducted their own investigation of such claims and prepared a Notice of Claim
which, along with the allegations made therein, is described in this Disclosure
Statement. The Notice of Claim has been sent to the Debtors' D&O insurance
carriers. The releases for certain of the officers and directors are also
detailed in this Disclosure Statement. Further, the Examiner has also been
appointed to investigate any claims the Debtors might have against their
officers and directors, and the Examiner's report will provide additional
information.
K. DEBTORS' RESPONSE TO OBJECTIONS BY PAGLIARA
Mr. Pagliara, a shareholder of Holding, objected to the Debtors'
Disclosure Statement on three bases: the failure to provide recent financial
information, an inadequate discussion of the HP Litigation, and a delay in
distribution of information to the shareholders of Holding due to the fact that
they hold their stock in street name. In response, the Debtors believe that the
financial information provided in the Disclosure Statement is the most recent
and most accurate information available for the purposes for which it is
provided. For example, numerous references are made to assets as they existed
on the Petition Date. To the extent that Mr. Pagliara desires additional
financial information, access to the Debtors' Six Month Budget and Monthly
Operating Reports is available to the public from the filings with the
Bankruptcy Court, 701 Broadway, Nashville, Tennessee 37203 or, upon request,
from Debtors' counsel, Hance | Scarborough | Wright, 2900 Renaissance Tower,
1201 Elm Street, Dallas, Texas 75270-2101. Secondly, Mr. Pagliara's objections
regarding the HP Litigation description are largely moot. Finally, the stock of
Holding is contemplated to be canceled under the Debtors' Plan. The
shareholders of Holding are numerous and, as Mr. Pagliara's objection
indicates, contacting each and every one might prove extremely difficult as
much of the stock is held in street name. In such a situation, notice to
shareholders is often limited or subjected to procedures fashioned and deemed
sufficient by the Bankruptcy Court. Often, under these circumstances, notice of
the existence of documents as opposed to copies of the documents themselves and
the effect on the subject stock are provided to the shareholders and/or the
clearing houses through which they can be contacted. Delivery of a copy of the
Disclosure Statement to every shareholder of Holding would be cost prohibitive,
is not necessary given that all shareholders of Holding are deemed to have
SECOND AMENDED DISCLOSURE STATEMENT 131
<PAGE> 140
rejected the Joint Plan and the solicitation of shareholder votes is thus
unnecessary, and notice to Mr. Pagliara of the existence and filing of the
Joint Plan is therefore sufficient.
L. DEBTORS' RESPONSE TO OBJECTIONS BY STATE OF TENNESSEE
The Tennessee Department of Employment Security and the Tennessee
Department of Environment and Conservation filed an objection to the Debtors'
Disclosure Statement on the stated basis that the Debtors failed to provide
adequate information regarding the voluntary environmental cleanup program to
which the Debtors are a party via a Consent Order and Agreement. To provide
additional information about the environmental situation at the Franklin,
Tennessee facility and the cleanup program, the Debtors added an extended
discussion at Article V(j)(3) above, incorporating in large part the suggested
language of the above-referenced Tennessee Departments.
M. PLAN PROPONENTS RESPONSE TO OBJECTIONS BY COUDERT BROTHERS
Coudert Brothers asserted two objections to the Disclosure Statement.
First, Coudert Brothers alleges that the Disclosure Statement concerns a plan
that is not confirmable as a matter of law by virtue of including release and
injunction provisions in favor of Glass & Associates, Inc., Shaun Donnellan and
other employees of Glass & Associates, Inc. (defined above as the "Glass
Group"). Second, Coudert Brothers alleges that the Disclosure Statement fails
to disclose the fact that the Joint Plan provides for a permanent injunction
upon confirmation as to such persons. In response to the latter objection, the
amended injunctive language that now appears at P. 12.6 of the Joint Plan is
now repeated in full herein in the section entitled Summary of the Joint Plan.
With regard to Coudert Brothers' objection that the Joint Plan is not
confirmable because of the releases of the Glass Group, the Plan Proponents
assert that these releases are appropriate in that consideration has been given
for those releases by the Lenders in the form of the global resolution of
disputes reflected in the Joint Plan. The release for the Glass Group was a
condition of the Lenders' agreement on the terms of the Joint Plan. Further,
the release for the Glass Group contained in the Joint Plan is not intended to
and shall not affect or apply to any claims Coudert Brothers may have against
the Glass Group, if any.
N. PLAN PROPONENTS RESPONSE TO OBJECTIONS BY THE U.S. TRUSTEE
The U.S. Trustee lists numerous objections to the Disclosure
Statement. The Plan Proponents responses to many of the Trustee's objections
have been incorporated throughout the text of the Disclosure Statement.
The Trustee objects because the Plan Proponents have not disclosed the
proposed compensation to be paid to insiders who will continue in management
after confirmation. Initially, the Plan Proponents would note that such
objection is a plan confirmation issue and thus is not appropriate at this
juncture. The Plan Proponents nonetheless endeavor to respond to this objection
by stating that such information is not known or capable of
SECOND AMENDED DISCLOSURE STATEMENT 132
<PAGE> 141
being known at this time. The identity of the Successful Bidder is not known.
Therefore, it is not known which insiders of the Debtors, if any, will continue
in management after confirmation, thus triggering the referenced disclosure
obligation. The Plan Proponents will state, however, if Richmont is the
Successful Bidder, it is not anticipated at this time that Pat Howard or John
Rochon will initially receive any compensation as directors of the Reorganized
Debtors. It is further anticipated that if Richmont is the Successful Bidder
the Current Officers and Directors will continue their employment with the
Reorganized Debtors at or near their current salaries subject to normal annual
increases.
The Trustee additionally objects to the failure of the Disclosure
Statement to list the nature of the claims or causes of action which the Glass
Group is releasing. The reason no such listing is made is because the Debtors
do not believe that any such claims exist, with the possible exception of a
claim for indemnity. The consideration for the Debtors' release of the Glass
Group is the Lenders' participation in and consent to the terms of the Joint
Plan, which would not be forthcoming absent the release for the Glass Group.
Finally, the Trustee states that the Disclosure Statement fails to
disclose the amounts of payments made to prepetition creditors within the first
30 days after commencement of the case and requests disclosure of whether any
action will be taken to recover those payments. The Plan Proponents respond by
noting that there is no intent under the Joint Plan to seek such recoveries to
the extent such payments were made pursuant to Bankruptcy Court authority.
Further, the Plan Proponents also note that to the extent such payments were
made, they were made utilizing the cash collateral of the Lenders and the
Lenders did not then and do not now object to such use.
ARTICLE XVII. RECOMMENDATION OF PLAN PROPONENTS
The Plan Proponents believe that the Joint Plan is in the best
interests of the Debtors' Creditors. Accordingly, the Plan Proponents
unanimously recommend that you vote for acceptance of the Joint Plan and hereby
solicit your acceptance of the Joint Plan.
DATED: MARCH __, 2000.
THE DEBTORS:
HANCE | SCARBOROUGH | WRIGHT
By:
----------------------------------
Frank J. Wright
C. Ashley Ellis
2900 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270-2101
SECOND AMENDED DISCLOSURE STATEMENT 133
<PAGE> 142
(214) 742-2900 - Telephone
(214) 748-6815 - Facsimile
and
HARWELL HOWARD HYNE GABBERT
& MANNER, P.C.
BY:
---------------------------------------
Craig V. Gabbert, Jr.
Barbara D. Holmes
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238
(615) 256-0500 - Telephone
(615) 251-1059 - Facsimile
ATTORNEYS FOR NU-KOTE HOLDING, INC.; NU-KOTE
IMPERIAL, LTD.; NU-KOTE INTERNATIONAL, INC.;
NU-KOTE IMAGING INTERNATIONAL, INC.; INTERNATIONAL
COMMUNICATION MATERIALS, INC.; FUTURE GRAPHICS,
INC.; AND NU-KOTE LATIN AMERICA, INC.
THE LENDERS:
VINSON & ELKINS L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, TX 75201
Tel: (214) 220-7700
By:
---------------------------------------
Daniel C. Stewart SBT #19206500
William L. Wallander SBT #20780750
and
BASS, BERRY & SIMS PLC
2700 First American Center
Nashville, Tennessee 37238
Tel. (615) 742-6267
SECOND AMENDED DISCLOSURE STATEMENT 134
<PAGE> 143
By:
------------------------------------------
Paul Jennings
AUTHORIZED ATTORNEYS IN FACT FOR THE LENDERS
THE COMMITTEES
GREENEBAUM DOLL & MCDONALD PLC
3300 National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
Tel: (502) 587-3656
By:
------------------------------------------
John W. Ames
ATTORNEYS FOR UNSECURED CREDITORS
COMMITTEE FOR NU-KOTE INTERNATIONAL, INC.
POYNER & SPRUILL, LLP
100 N. Tryon Street, Suite 4000
Charlotte, NC 28202-4010
Tel: (704) 342-5250
By:
------------------------------------------
Judy Thompson
ATTORNEYS FOR UNSECURED CREDITORS
COMMITTEE FOR INTERNATIONAL
COMMUNICATION MATERIALS, INC.
KURLBAUM STOLL SEAMAN & MUSTOE, P.C.
1100 Main Street, Suite 2001
Kansas City, MO 64105
Tel: (816) 221-5444
By:
------------------------------------------
Thomas G. Stoll
and
SECOND AMENDED DISCLOSURE STATEMENT 135
<PAGE> 144
BOWEN RILEY WARNOCK & JACOBSON, PLC
John C. Rochford
1906 West End Avenue
Nashville, TN 37219
By:
-----------------------------
John C. Rochford
ATTORNEYS FOR UNSECURED CREDITORS
COMMITTEE FOR FUTURE GRAPHICS, INC.
SECOND AMENDED DISCLOSURE STATEMENT
136
