UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
X Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934.
For the quarterly period ended September 30, 1997
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: 0-26902
NIMBUS CD INTERNATIONAL, INC.
(exact name of registrant as specified in its charter)
Delaware 54-1651183
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
623 Welsh Run Road
Ruckersville, Virginia 22968
(Address of principal executive officers)
Telephone Number (804) 985-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No _______
As of November 12, 1997 there were 21,388,581 shares of the Registrant's
Common Stock outstanding.
NIMBUS CD INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1997 and March 31, 1997.......................3
Condensed Consolidated Statements of Income
Three and six months ended September 30, 1997 and 1996......4
Condensed Consolidated Statements of Cash Flows
Six months ended September 30, 1997 and 1996................5
Notes to Condensed Consolidated Financial Statements........6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................13
Item 4. Submission of Matters to a Vote of Security Holders......14
Item 5. Other Information........................................14
Item 6. Exhibits and Reports on Form 8-K.........................14
Signatures .....................................................15
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
September 30, March 31,
1997 1997
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 8,728 $ 7,790
Accounts and notes receivable, less allowances
for doubtful accounts of $2,772 and $2,014 31,606 26,393
Inventories 1,922 2,217
Prepaid expenses 1,859 1,329
Deferred income taxes 3,412 3,415
------------ ------------
Total current assets 47,527 41,144
------------ ------------
Property, plant, and equipment, net 70,090 63,431
Other assets and intangibles 4,124 3,697
============ ============
$121,741 $108,272
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,597 $ 5,617
Current portion of long-term debt 6,076 5,159
Accrued expenses and other liabilities 14,793 13,533
Income taxes payable 9,177 6,665
------------ ------------
Total current liabilities 38,643 30,974
------------ ------------
Long-term debt 20,985 20,840
Deferred income taxes 3,557 3,561
Minority interest and other liabilities 1,828 475
Commitment and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; authorized
2,000,000 shares, no shares issued or outstanding
Common stock, $0.01 par value, 60,000,000
shares authorized, 39,012,786 shares issued;
21,388,581 and 20,870,579 shares outstanding 390 390
Paid-in capital 65,431 66,775
Retained earnings 36,337 31,969
Cumulative foreign currency translation adjustments 315 378
------------ ------------
102,473 99,512
Treasury stock, at cost, 17,624,205 and (45,745) (47,090)
18,142,207 shares
------------ ------------
Total stockholders' equity 56,728 52,422
============ ============
$121,741 $108,272
============ ============
See accompanying notes to condensed consolidated financial statements.
NIMBUS CD INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- ---------- --------- ----------
Net sales $32,496 $31,361 $60,718 $60,590
Cost of goods sold 22,335 21,960 43,639 43,237
--------- ---------- --------- ----------
Gross profit 10,161 9,401 17,079 17,353
Selling, general and administrative 3,943 3,360 9,225 7,579
expenses
--------- ---------- --------- ----------
Operating income 6,218 6,041 7,854 9,774
Interest expense 691 671 1,389 1,271
Other (income) expense, net (260) (110) (477) (190)
--------- ---------- --------- ----------
Income before income taxes 5,787 5,480 6,942 8,693
Provision for income taxes 2,123 1,933 2,573 3,137
--------- ---------- --------- ----------
Net income $3,664 $3,547 $4,369 $5,556
========= ========== ========= ==========
Earnings per share $0.16 $0.15 $0.19 $0.24
========= ========== ========= ==========
Weighted average shares outstanding 23,056 23,052 23,009 23,037
========= ========== ========= ==========
See accompanying notes to condensed consolidated financial statements.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six months ended
September 30,
-----------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net income $4,369 $5,556
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,590 4,296
Minority interest (212)
Net (gain) on sale of equipment (54)
Other, net 16 (40)
Change in operating assets and liabilities:
Accounts receivable-trade (5,278) (2,706)
Inventories 282 (1,051)
Prepaid expenses (547) (617)
Accounts payable 2,968 1,735
Accrued expenses 1,304 1,243
Income taxes payable 2,594 1,812
---------- ----------
Net cash provided by operating activities 11,032 10,228
---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment (11,799) (12,940)
Proceeds from sale of equipment 113
Other investing activities (339) (12)
Expenditures for computer software (255) (1,230)
---------- ----------
Net cash used in investing activities (12,280) (14,182)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 41
Revolving credit borrowings, net 4,259 1,250
Repayment of debt (2,958)
Capital contribution by minority interest 1,010
---------- ----------
Net cash provided by financing activities 2,311 1,291
---------- ----------
Effect of exchange rate changes on cash (125) 79
Net increase (decrease) in cash 938 (2,584)
---------- ----------
Cash and cash equivalents, beginning of period 7,790 3,593
---------- ----------
Cash and cash equivalents, end of period $8,728 $1,009
========== ==========
See accompanying notes to condensed consolidated financial statements.
NIMBUS CD INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
1. Preparation of Interim Financial Statements:
The condensed consolidated financial statements of Nimbus CD
International, Inc. (referred to as "Nimbus" or the "Company") have been
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission ("SEC"). In the opinion of management, these
statements include all adjustments necessary for a fair presentation of
the financial position, operating results and cash flows of all interim
reporting periods reported herein. All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures prepared in
accordance with generally accepted accounting principles have been either
condensed or omitted pursuant to SEC rules and regulations. However,
management believes that the disclosures made are adequate for a fair
presentation of results of operations and financial position. It is
suggested that these financial statements be read in conjunction with the
Company's audited financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report to Stockholders
incorporated by reference in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31,1997. The results of operations for the
three and six month periods ended September 30, 1997 are not necessarily
indicative of the results for the entire fiscal year ending March 31,
1998.
2. Inventories:
Inventories consist of the following:
September March 31,
30, 1997 1997
---------- -----------
Raw materials $1,341 $1,518
Work-in-process 466 236
Finished goods 115 463
========== ===========
$1,922 $2,217
========== ===========
3. Property, Plant and Equipment:
Property, plant and equipment consisted of the following:
September 30, March 31,
1997 1997
---------- -----------
Land, buildings and improvements $20,811 $20,865
Machinery and equipment 67,586 62,925
Construction in progress 12,437 5,976
---------- -----------
100,834 89,766
Less accummulated depreciation (30,744) (26,335)
---------- -----------
Net property, plant and equipment $70,090 $63,431
========== ===========
NIMBUS CD INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
4. Commitments and Contingencies:
(a) Capital Expenditures: At September 30, 1997 commitments for capital
expenditures amounted to approximately $ 6,449.
(b) Royalties: The Company is party to various licensing agreements in
both the United States and the United Kingdom for technology
associated with its product and the related manufacturing processes,
under which the Company is obligated to pay royalties ranging from
$.015 to $.045 per disc manufactured. In the United States, one
such licensor's patents were found invalid in a third party civil
action in July 1996, and accordingly, the Company suspended payment
of royalties as provided in the license agreement. The licensor has
appealed the verdict and a decision is not anticipated until
mid-1998. In the United Kingdom, the Company has suspended payment
of royalties to a licensor due to a dispute regarding breach of the
license agreement. Pending their ultimate disposition, the Company
continues to accrue royalty expense under these agreements, for
which the balance aggregates to $6.8 million at September 30, 1997.
The Company believes that the outcome of these cases will not result
in a material adverse impact on the results of operations or the
consolidated financial position of the Company.
(c) Litigation and related matters: On March 18,1996, the Company
received notification from the United States Environmental
Protection Agency ("EPA") alleging that the Company was a
Potentially Responsible Party ("PRP") for the cleanup of surface
water contamination at the Cherokee Oil Company Site (the "Site") in
Charlotte, North Carolina which was used by the Company for the
disposal of certain byproducts of its manufacturing processes.
Subsequently, the U.S. Department of Justice notified the Company
that it intended to seek recovery of the approximately $6.4 million
environmental cleanup cost incurred at the site from the Company and
the other PRP's, each of which was considered jointly and severally
liable. In April, 1997, the Company and numerous other PRPs reached
a settlement with the EPA. Under the terms of the settlement, 58
PRPs and the Site owner have reimbursed the EPA $4.0 million for the
cleanup costs. The Company's share of the aggregate settlement, paid
June 25, 1997, was $277, which was fully provided for at March 31,
1997.
5. Accounting Standard Changes
Effective March 31, 1998, the Company will adopt Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards No.
128 "Earnings Per Share" (SFAS 128) which will supercede Accounting
Principles Board Opinion No. 15 "Earnings Per Share". SFAS 128 requires
that "basic earnings per share" be computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. "Diluted earnings per share" will reflect the
potential dilution if stock options or other securities would result in
the issuance or exercise of additional shares of common stock. Early
adoption of the standard is prohibited; however, the Company has computed
the pro forma earnings per share amounts using the new standard as
follows:
Three months ended Six months ended
September 30, September 30,
---------------- ---------------
1997 1996 1997 1996
------- -------- ------- -------
Basic earnings per share $0.17 $0.17 $0.21 $0.27
Diluted earnings per share $0.16 $0.15 $0.19 $0.24
NIMBUS CD INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income"
("SFAS 130") which is effective for fiscal years beginning after December 15,
1997, including interim periods. SFAS 130 establishes standards of reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements, either in the statement of operations or
in a separate statement. Additionally, SFAS 130 requires the display of the
accumulated balance of other comprehensive income as a separate caption in the
equity section of the balance sheet as well as the disclosure of material
components of accumulated other comprehensive income either on the face of the
balance sheet, in a statement of changes in equity or in notes to the financial
statements. The Company does not believe that adoption of SFAS 130 will have a
material effect on the Company's financial statements.
The FASB also issued Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") in June 1997 which is effective
for fiscal years beginning after December 15, 1997, including interim periods
after the year of initial adoption. SFAS 131 established standards for the way
that public companies report information about operating segments in both
interim and annual financial statements, including related disclosures about
products and services, geographic areas, and major customers. The Company has
not determined what, if any, impact SFAS 131 will have on the operating segments
reported or the impact SFAS 131 will have on its financial statements and
related disclosures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Net Sales. Total discs sold increased 23.3% to 45.5 million discs in the three
months ended September 30, 1997 from 36.9 million discs in the same period of
1996. The increase was the result of a 37.1% increase in CD-ROM unit sales to
27.0 million discs in the three months ended September 30, 1997 from 19.7
million discs in the same period of 1996 combined with a 6.4% increase in
CD-Audio unit sales to 18.3 million units in the three months ended September
30, 1997 from 17.2 million units in the same period of 1996. In the United
States, CD-ROM volume increased 19.9% to 18.7 million discs in the second fiscal
quarter of 1998 from 15.6 million discs in the same period of fiscal 1997.
United Kingdom CD-ROM volume increased 97.6% to 8.3 million discs in the second
quarter of fiscal 1998 from 4.2 million discs in the same period of fiscal 1997.
CD-Audio volume decreased in the United States by 2.5% to 7.9 million discs in
the three months ended September 30, 1997 from 8.1 million discs during the same
period of 1996 while the United Kingdom experienced a 15.6% increase in CD-Audio
sales units to 10.4 million discs during the second quarter of fiscal 1998 from
9.0 million units in the same period of fiscal 1997. In addition, 227,000 DVD
discs were sold in the United States during the three month period ending
September 30, 1997.
Net sales increased 3.5% to $32.5 million in the three months ended September
30, 1997 from $31.4 million in the same period of 1996. Compact disc revenues,
excluding DVD, increased 6.4% to $31.7 million in the three months ended
September 30, 1997 from $29.8 million in the second quarter of fiscal 1997. DVD
revenues were $0.8 million in the three months ended September 30, 1997, while
turnkey and other related service revenues of Nimbus Software Services, Inc.
("NSS"), which was closed in the first quarter of fiscal 1998, contributed $1.5
million of revenues for the three month period ended September 30, 1996. The
increase in net sales is due to the increase in disc volumes described above,
offset by a decline in the average disc selling price from $0.81 to $0.70 for
the three month periods ended September 30, 1996 and 1997, respectively, or
13.6%. The price decline, which was experienced both in the United States and
the United Kingdom, reflects an oversupply of production capacity in North
America and Europe as well as a shift in sales mix to CD-ROM from CD-Audio,
which typically has a higher per unit packaging configuration. In addition, the
Company has realized lower disc prices under a vendor supply agreement, under
which cost efficiencies resulting from increased production volumes are
reflected in the disc sales price. The price declines noted above were partially
mitigated by exchange rate changes between the United States and the United
Kingdom during the three month periods ended September 30, 1997 and 1996,
respectively.
The Company believes that disc sales in its third fiscal quarter ending December
31, 1997 will continue to reflect growth in its CD-ROM volume. While the Company
expects continued strong demand for CD-ROM, CD-Audio and continued emerging
demand for DVD products, net revenues in its third fiscal quarter continue to be
dependent on product sales and packaging mix.
Gross Profit. Gross profit increased 8.5% to $10.2 million in the three months
ended September 30, 1997 from $9.4 million in the same period of 1996. Gross
profit as a percent of net sales increased to 31.4% in the three months ended
September 30, 1997 from 29.9% in the same period of 1996. The increase in the
Company's gross profit margin during the second quarter of fiscal 1998 was due
to the higher unit volumes mentioned above, reduced raw material and packaging
material costs and a reduction in the overall level of factory overhead charges
due to the closure of the Company's Sunnyvale facility. The Company's gross
profit margin was unfavorably impacted by an increase in depreciation expense
resulting from capital expansion and acquisition projects in fiscal 1997 and
1998, primarily DVD related. The Company also incurred higher packaging and
factory direct labor due to higher sales levels of non-automated packing
configurations and the absorption of training salaries as the Company expanded
its production capacity. Finally, the Company incurred additional factory
overhead charges related to the acquisition and set-up of additional warehousing
facilities at both the Charlottesville and Provo locations. The Company
anticipates improvement in the gross profit as a percentage of sales in the
third fiscal quarter as depreciation and factory overhead charges are absorbed
by higher production volumes and the Company continues to realize the benefits
of restructuring its North American operations into the two remaining plants.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 14.7% to $3.9 million in the three months
ended September 30, 1997 from $3.4 million in the same period of 1996. As a
percentage of net sales, selling, general and administrative expenses increased
to 12.0% in the three months ended September 30, 1997 from 10.8% in the same
period of the prior year. The increase in the second fiscal quarter includes
$0.3 million of costs incurred in the process of establishing the EuroNimbus
operations in Luxembourg. In addition, the Company experienced higher sales and
marketing costs, primarily personnel and office facilities expenses associated
with efforts to penetrate the OEM and DVD markets in the United States, and bad
debt expense in the United Kingdom.
Operating Income. Operating income increased 3.3% to $6.2 million in the three
months ended September 30, 1997 from $6.0 million in the same period of 1996.
The increase in operating income primarily reflects the higher unit volume
mentioned above, partially offset by the increase in selling, general and
administrative expenses. Operating income as a percentage of net sales remained
constant at 19.1% in the three month periods ended September 30, 1997 and 1996,
respectively.
Interest Expense. Interest expense was $0.7 million for each of the three
month periods ended September 30, 1997 and 1996.
Income Taxes. Income tax expense increased to $2.1 million in the three months
ended September 30, 1997 from $1.9 million in the same period of 1996. The
increase in income tax expense is attributable to the increase in income before
taxes. The effective tax rate was 36.7% for the three months ended September 30,
1997 as compared with 35.3% for the three month period ended September 30, 1996.
Six Months Ended September 30, 1997 and 1996
Net Sales. Total discs sold increased 17.7% to 82.3 million discs in the six
months ended September 30, 1997 from 69.9 million discs in the same period of
1996. The increase resulted from a 18.8% increase in CD-ROM volume to 46.7
million discs from 39.3 million discs for the six month periods ended September
30, 1997 and 1996, respectively, combined with a 14.7% increase in CD-Audio unit
sales to 35.1 million discs in the six month period ended September 30, 1997
from 30.6 million discs for the same period of 1996. The increase in CD-ROM unit
sales was experienced primarily in the United Kingdom, which increased 72.3% to
14.3 million discs in fiscal 1998 from 8.3 million discs in fiscal 1997. In the
United States, CD-ROM unit sales increased 4.5% to 32.4 million discs from 31.0
million discs for the six months ended September 30, 1997 and 1996,
respectively. CD-Audio volumes increased both in the United States and in the
United Kingdom. In the United States, CD-Audio unit sales increased 7.6% to 15.6
million units from 14.5 million units in the six month periods ended September
30, 1997 and 1996, while in the United Kingdom, CD-Audio unit sales increased
21.7% to 19.6 million units for the first six months of fiscal 1998 from 16.1
million units in the same period of the prior fiscal year. DVD discs sold during
the six month period ended September 30, 1997 were 0.4 million units.
Net sales increased to $60.7 million for the six months ended September 30, 1997
from $60.6 million for the same period of 1996. Compact disc revenues, excluding
DVD, increased 3.9% to $59.0 million in the six months ended September 30, 1997
from $56.8 million in fiscal 1997. DVD revenues were $1.5 million in the six
months ended September 30, 1997, while turnkey and other related service
revenues of NSS, which was closed in the first quarter of fiscal 1998,
contributed $3.8 million of revenues for the six month period ended September
30, 1996. Approximately $8.6 million of the increase in CD revenues is due to
the increase in disc volume, offset by a decline in the average disc selling
price from $0.81 to $0.72, or 11.1%, for the six month periods ended September
30, 1996 and 1997, respectively.
Gross Profit. Gross profit decreased 1.7% to $17.1 million for the six month
period ended September 30, 1997 from $17.4 million in the same period of 1996.
Gross margin decreased to 28.2% in the six month period ended September 30, 1997
from 28.7% in the same period of 1996. The decrease in gross profit was
attributable to the decline in the average selling price noted above, a $1.4
million increase in depreciation expense associated with fiscal 1997 and 1998
capital acquisitions, and a $0.5 million increase in freight expense. In
addition, the Company incurred additional factory overhead charges associated
with the transferring of the CD manufacturing equipment and inventory from the
Sunnyvale facility to the Provo plant, and the establishment of additional
warehouse facilities at both the Charlottesville and Provo locations. These
costs were partially offset by reduced raw material costs and a decrease in the
overall level of factory overhead expenses due to the closure of the Company's
Sunnyvale facility.
Gross profit for the six month period ended September 30, 1997 does not reflect
an estimated $0.7 million recoverable under a vendor supply agreement for
under-utilization of dedicated manufacturing capacity at the Company's Provo
facility during this period. Income recognition under the "take or pay"
provisions of the agreement has been deferred since the required annual volume
may ultimately be purchased over the remainder of fiscal 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 21.1% to $9.2 million in the six month period
ended September 30, 1997 from $7.6 million in the same period of 1996. The
increase in the current year includes a $0.6 million increase in the allowance
for doubtful accounts, and $0.6 million of costs incurred in the process of
establishing the EuroNimbus operations in Luxembourg. In addition, the Company
incurred higher corporate, administrative support, and sales and marketing costs
due to the increased level of sales noted above and by the Company's efforts to
penetrate additional product markets. The prior year selling, general and
administrative expenses includes a $0.3 million reserve for environmental
clean-up costs. As a percentage of net sales, selling, general and
administrative expenses increased to 15.2% in the six months ended September 30,
1997 from 12.5% in the same period of 1996.
Operating Income. Operating income decreased 19.4% to $7.9 million in the six
month period ended September 30, 1997 from $9.8 million in the same period of
1996. The decrease in operating income is primarily due to the higher level of
selling, general and administrative expenses mentioned above. Operating income
as a percentage of net sales decreased to 13.0% in the six months ended
September 30, 1997 from 16.2% in the same period of 1996.
Interest Expense. Interest expense increased to $1.4 million in the six months
ended September 30, 1997 from $1.3 million in the same period of 1996. The
increase in interest expense reflects an increase in the Company's effective
interest rate during fiscal 1998.
Income Taxes. Income tax expense decreased to $2.6 million in the six months
ended September 30, 1997 from $3.1 million in the same period of 1996. The
effective tax rate was 37.1% for the six months ended September 30, 1997 as
compared with 36.1% for the same period of 1996.
Liquidity and Capital Resources
Working capital was $8.9 million at September 30, 1997 compared to $10.2 million
at March 31, 1997. Accounts receivable increased $5.2 million for the six month
period ended September 30, 1997, and inventories decreased $0.3 million due to
the cessation of turnkey and related service sales which require the acquisition
of collateral inventories. Accounts payable and accrued expenses increased $4.2
million for the six month period ended September 30, 1997, largely reflecting
the remaining amounts due for equipment purchases and an increase in accrued
royalties, while income taxes payable increased $2.6 million reflecting the
timing of estimated tax payments.
Capital expenditures were $12.1 million for the six months period ended
September 30, 1997. Capital expenditures in fiscal 1998 are related to the
expansion of disc manufacturing capacity, the replacement and expansion of
ancillary production equipment, additional DVD bonding equipment, and the
continued upgrading of the Company's worldwide management information system.
The Company believes that these capital expenditures and working capital
requirements will be financed through a combination of funds provided by
operating activities and availability under its borrowing arrangements.
The Company is party to various licensing agreements in both the United States
and the United Kingdom for technology associated with its product and the
related manufacturing processes, under which the Company is obligated to pay
royalties ranging from $.015 to $.045 per disc manufactured. In the United
States, one such licensor's patents were found invalid in a separate civil
action in July 1996, and accordingly, the Company suspended payment of royalties
as provided in the license agreement. The licensor has appealed the verdict and
a decision is not anticipated until mid 1998. In the United Kingdom, the Company
has suspended payment of royalties to a licensor due to a dispute regarding
breach of the license agreement. Pending their ultimate disposition, the Company
continues to accrue royalty expense under these agreements, whose liability
balance has increased to $6.8 million at September 30, 1997. The Company
believes that the outcome of these cases will not result in a material adverse
impact on the liquidity, results of operations, or the consolidated financial
position of the Company.
Accounting Standard Changes
Effective March 31, 1998, the Company will adopt Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
which will supercede Accounting Principles Board Opinion No. 15 "Earnings Per
Share". This new statement requires that "basic earnings per share" be computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. "Diluted earnings per share"
will reflect the potential dilution if stock options or other securities would
result in the issuance or exercise of additional shares of common stock. Early
adoption of the standard is prohibited; however, the Company has computed the
pro forma earnings per share amounts using the new standard as follows:
Three months ended Six months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
-------- ------- ------- --------
Basic earnings per share $0.17 40.17 $0.21 $0.27
Diluted earnings per $0.16 $0.15 $0.19 $0.24
share
In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income"
(SFAS 130) which is effective for fiscal years beginning after December 15,
1997, including interim periods. SFAS 130 establishes standards of reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements, either in the statement of operations or
in a separate statement. Additionally, SFAS 130 requires the display of the
accumulated balance of other comprehensive income as a separate caption in the
equity section of the balance sheet as well as the disclosure of material
components of accumulated other comprehensive income either on the face of the
balance sheet, in a statement of changes in equity or in notes to the financial
statements. The Company does not believe that adoption of SFAS 130 will have a
material effect on the Company's financial position.
The FASB also issued Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information"("SFAS 131") in June 1997 which is effective
for fiscal years beginning after December 15, 1997, including interim periods
after the year of initial adoption. SFAS 131 established standards for the way
that public companies report information about operating segments in both
interim and annual financial statements, including related disclosures about
products and services, geographic areas, and major customers. The Company has
not determined what, if any, impact SFAS 131 will have on the operating segments
reported or the impact SFAS 131 will have on financial statements and related
disclosures.
Year 2000
As part of the upgrade of its worldwide information systems, the Company is
updating all of its systems to ensure that they will continue to function beyond
the turn of the century. The Company believes that its enterprise wide systems
will be year 2000 compliant by March 31, 1999.
Seasonality and Quarterly Information
The Company's sales are seasonal, with peak sales activity normally occurring in
the third fiscal quarter as retail chains increase inventory before the holiday
season. As a result, operating income is typically higher in the third fiscal
quarter as fixed operating costs are spread over generally higher sales volume.
In addition, in order to provide for capacity demands, long lead time production
equipment is typically ordered for delivery during the first fiscal quarter and,
to a lesser extent, the second fiscal quarter. Equipment installations generally
result in some level of production inefficiency which may have a negative impact
on margins. The effect on margins may be amplified when equipment is installed
in the lower sales volume first and second quarters. Further, pricing and unit
volumes can impact comparative quarterly financial results either positively or
negatively in a manner that may not necessarily be indicative of a full year's
results.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements included or incorporated by reference into the Company's
Securities and Exchange Commission filings and shareholder communications which
are not historical facts are forward -looking statements that involve risks and
uncertainties, including, but not limited to, the effect of changing CD
technology and the possibility that, over time, CD technology could be replaced
by another form of information storage and retrieval technology, the dependence
of the Company's growth prospects on the development of new technologies that
achieve market acceptance and create new demand for CDs and related services and
the highly competitive nature of the CD manufacturing industry which may
adversely affect prices for CDs and other aspects of the Company's business.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 18,1996, the Company received notification from the United States
Environmental Protection Agency ("EPA") alleging that the Company was a
Potentially Responsible Party ("PRP") for the cleanup of surface water
contamination at the Cherokee Oil Company Site (the "Site") in Charlotte, North
Carolina which was used by the Company for the disposal of certain byproducts of
its manufacturing processes. Subsequently, the U.S. Department of Justice
notified the Company that it intended to seek recovery of the approximately $6.4
million environmental cleanup cost incurred at the site from the Company and the
other PRP's, each of which was considered jointly and severally liable. In
April, 1997, the Company and numerous other PRPs reached a settlement with the
EPA. Under the terms of the settlement, 58 PRPs and the Site owner have
reimbursed the EPA $4.0 million for the cleanup costs. The Company's share of
the aggregate settlement, paid June 25, 1997, was $277, which was fully provided
for at March 31, 1997.
From time to time, the Company is involved in litigation that it considers to be
in the normal course of business.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on August 5, 1997, the
following individuals were elected to the Board of Directors:
Votes For Vote Withheld
-------------- --------------
Charles Ayres 19,688,424 76,148
Darryl G. Behrman 19,687,174 77,398
Grant G. Behrman 19,687,374 77,198
Robert H. Davidson 19,686,924 77,648
David E. De Leeuw 19,687,924 76,648
Anthony V. Dub 19,688,924 75,648
Lyndon J. Faulkner 19,688,224 76,348
George E. McCown 19,688,424 76,148
Glenn S. McKenzie 19,687,424 77,148
L. Steven Minkel 19,688,424 76,148
The following proposals were approved at the Company's Annual Meeting:
Affirmative Votes Negative Votes Votes Withheld
------------- ------------- -------------
Ratify the appointment of
Coopers & Lybrand L.L.P. as 19,764,572 16,040 14,950
independent auditors for the
fiscal year ending March 31,
1998
Item 5. Other Information
On September 2, 1997, Chase Manhattan Investments Holdings, L.P. exercised its
remaining 518,453 warrants which converted into 518,002 shares of voting common
stock.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibit 11 - Computation of Net Income Per Share of Common Stock.
B. Reports on Form 8-K
No reports on form 8-K were filed during the quarter ended September 30,
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1997
NIMBUS CD INTERNATIONAL, INC.
(Registrant)
/S/ L. Steven Minkel
L. Steven Minkel
Executive Vice President and
Chief Financial Officer
/S/ Gary E. Krutul
Gary E. Krutul
Corporate Controller
(Principal Accounting Officer)
Exhibit 11
NIMBUS CD INTERNATIONAL, INC.
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
(In thousands, except per share data)
(Unaudited)
Three months Six months
ended ended
September 30, September 30,
------------------ ----------------
1997 1996 1997 1996
-------- -------- ------- -------
Primary and Fully Diluted:
Weighted average common shares 21,043 20,869 20,957 20,854
outstanding
Net additional common shares
issuable upon exercise of dilutive
warrants and stock options,
determined by the treasury stock
method using the average market 2,013 2,183 2,052 2,183
price for options and warrants
outstanding during the periods
-------- -------- ------- -------
Common shares and equivalents 23,056 23,052 23,009 23,037
======== ======== ======= =======
Net income $3,664 $3,546 $4,369 $5,556
======== ======== ======= =======
Earnings per share $0.16 $0.15 $0.19 $0.24
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