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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.
Years With the
Registrant and
Name of Individual Age Position(s) Held its Predecessors
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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
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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.
Years With the
Registrant and
Name of Individual Age Position(s) Held its Predecessors
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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
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:
Location Square Feet Activities Status
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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)
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Location Square Feet Activities Status
- -------- ----------- ---------- ------
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
- ----------
(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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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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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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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
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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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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
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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
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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.
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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.
Year Ended March 31,
-----------------------------------------------------------------------------------
1999(1) 1998(1) 1997(1) 1996(1) 1995(1)
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
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
(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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(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.
Percentage Increase
(Decrease) From Prior
Year Ended March 31, Period
----------------------------------------- ---------------------------
(In Thousands)
1999 1998 1997 1999 v. 1998 1998 v. 1997
--------- --------- --------- ------------ -------------
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)%
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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:
YEAR ENDED MARCH 31,
---------------------------------------
1999 1998 1997
------------ --------- ----------
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)%
===== ===== =====
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.
YEAR ENDED MARCH 31, 1999 V. 1998
--------------------------- ------------------------
1999 1998 DOLLARS PERCENTAGE
------------- ------------ ----------- ----------
(DOLLARS IN MILLIONS)
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%
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
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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
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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
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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
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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.
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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.
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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.
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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.
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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
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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
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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 $100,000 (the "Named Executives") with respect to all services rendered
to the Company during the previous three fiscal years.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------------- ----------------
FISCAL SECURITIES
YEAR OTHER ANNUAL UNDERLYING ALL OTHER
ENDED SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION MARCH 31 ($)(1) ($)(2) ($)(3) (2) ($)(4)
- ----------------------------- ---------- --------- ---------- -------------- --------------- --------------
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 -- -- -- -- --
- -----------------------------
(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.
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(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 $648,270 during fiscal 1999 and
1998, respectively for operational, sales, financial, marketing and
management consulting services provided by Mr. Donnellan and other
associates of Glass & Associates, Inc. Additionally, Mr. Donnellan and
other associates of Glass & Associates, Inc. had been reimbursed actual and
reasonable expenses incurred by them in performing services for the
Company. Glass & Associates, Inc. is a third-party consulting firm,
independent of the Company.
There were no stock appreciation rights granted during fiscal year 1999
to any of the named executives.
The following table sets forth the number of and value realized on
shares acquired on exercise of stock options during the Fiscal Year and the
number of shares covered by exercisable and unexercisable options and stock
appreciation rights held, and the dollar values which would have been realized
on exercise of such options and stock appreciation rights, on March 31, 1999 by
each of the Named Executives.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE MONEY"
OPTIONS/SARS OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)(1)
ACQUIRED VALUE ---------------------------- ---------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------- --------------- --------------- ----------- ---------------- ----------- ---------------
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 -- -- - - -- --
- ----------------------------
(1) Based upon the closing price of the Common Stock ($0.16) on the NASDAQ
National Market System on March 31, 1999.
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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.
ANNUALIZED
AVERAGE 10 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
FINAL PAY OF SERVICE OF SERVICE OF SERVICE OF SERVICE OF SERVICE
------------- ------------ ------------ ------------ ------------ -----------
$ 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
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:
YEARS OF
SERVICE COVERED COMPENSATION
---------------- ----------------------
C. Ronald Baiocchi 22 $150,000
Richard A. Larsen 4 $150,000
Ian Elliott 21 $150,000
Phillip L. Theodore 5 $150,000
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.
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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.
AMOUNT AND NATURE PERCENTAGE
NAME AND ADDRESS OF OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP (1) CLASS
---------------------- ------------------- -----------
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
---------------------
(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.
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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:
AMOUNT AND NATURE PERCENTAGE
NAME AND ADDRESS OF OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP (1) CLASS
- ------------------- -------------------- ------------
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%
- -------------------------------
* 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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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.
- ----------- ----------------------------------------------------------------------------- ------------
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------- ------------
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).
35
36
- ----------- ----------------------------------------------------------------------------- ------------
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------- ------------
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).
36
37
- ----------- ----------------------------------------------------------------------------- ------------
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------- ------------
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.
37
38
- ----------- ----------------------------------------------------------------------------- ------------
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------- ------------
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
- ----------------------------
(b) The Registrant filed no reports on Form 8-K during the quarterly period
ended March 31, 1999.
38
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.
SIGNATURE TITLE DATE
--------- ----- ----
/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
39
40
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Pages
-----------
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
F-1
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
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
43
NU-KOTE HOLDING, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION-NOTE 2)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
1999 1998
----------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
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
========= =========
See accompanying notes to consolidated financial statements.
F-4
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
1999 1998 1997
--------------- --------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
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
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)
---------- -------- ----------- ----- ---------- -------- ------------- ------------
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)
========== ======== ========== ==== ======= ===== ======== =========
TOTAL
SHAREHOLDERS'
EQUITY (DEFICIT)
----------------
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)
========
See accompanying notes to consolidated financial statements.
F-6
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
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
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 -- --
See accompanying notes to consolidated financial statements.
F-7
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
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
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:
1998 1997
-------------- ---------------
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)
============== ===============
F-10
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
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
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
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
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:
1999 1998
------------ ------------
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
========= =========
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
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:
MARCH 31,
AMOTYIZATION ------------------------
PERIOD 1999 1998
--------------- ----------- -----------
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
======== ========
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
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:
1999 1998
------------ ------------
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
========= =========
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
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:
1999 1998
-------------------------- --------------------------
LOCAL LOCAL
CURRENCY DOLLARS CURRENCY DOLLARS
------------- ----------- ------------- -----------
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
=========== ===========
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
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:
1999 1998
--------------------------- --------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
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
======== ========
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
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:
1999 1998 1997
----------- ----------- -----------
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
======= ======= =======
F-20
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:
1999 1998 1997
------------- ------------ ------------
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
======== ======== ========
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
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
MARCH 31, 1999
------------------------------------------------------------------------
DEBTOR-IN-
POSSESSION
ENTITIES OTHER ENTITIES ELIMINATIONS CONSOLIDATED
----------------- ------------------ --------------- ----------------
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
========= ========= ========= =========
F-22
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
YEAR ENDED MARCH 31, 1999
----------------------------------------------------------------
DEBTOR-IN-
POSSESSION
ENTITIES OTHER ENTITIES ELIMINATIONS CONSOLIDATED
---------------- -------------- -------------- ---------------
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)
========= ========= ========= =========
F-23
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
FOR THE YEAR ENDED MARCH 31, 1999
-----------------------------------------------------------------------
DEBTOR-IN-
POSSESSION
ENTITIES OTHER ENTITIES ELIMINATIONS CONSOLIDATED
----------------- ---------------- --------------- ----------------
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
======== ======== ======== ========
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
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
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
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
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
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:
1999 1998 1997
----------- ----------- -----------
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
======= ======= =======
F-29
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:
NU-KOTE PELIKAN GRIEF-WERKE
INTERNATIONAL SCOTLAND GMBH
------------------ ------------------ ------------------
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- -------
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%
F-30
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:
1999 1998 1997
---- ---- ----
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
==== ==== ====
The actuarial and recorded liabilities for this postretirement benefit,
none of which have been funded, are as follows at March 31:
1999 1998 1997
------ ------ ------
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
====== ====== ======
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
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:
1999 1998 1997
--------- --------- ---------
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
========= ========= =========
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
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:
YEAR ENDED MARCH 31,
------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ---------- ------------- ---------- ----------- ----------
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
======== ======== =========
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:
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
---------------------- ------------ --------------- ---------- ----------- -----------------
$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
====================== ============ =============== ========== =========== =================
F-33
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:
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------ ------------ ------------ -------------- ------------
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)
The effects of applying SFAS 123 in this pro forma disclosure are not
necessarily indicative of future results.
F-34
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:
1999 1998 1997
----------- ----------- ----------
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
======= ======= =======
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
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:
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
- ---------------------------- ---------- ---------- --------- ----------- ----------- ----------- -----------
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
========== ========== ========= =========== =========== =========== ===========
F-36
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:
QUARTER ENDED
-----------------------------------------------------------
JUNE 26 SEPTEMBER 25 DECEMBER 25 MARCH 31
------------ -------------- --------------- ------------
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)
QUARTER ENDED
----------------------------------------------------------
JUNE 27 SEPTEMBER 26 DECEMBER 26 MARCH 31
----------- -------------- --------------- ------------
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)
(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
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
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
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
80
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
---------
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
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
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
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
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
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES WRITE-OFFS OTHER (a) PERIOD
- ------------------ ---------- ---------- ------------- ----------- ----------
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
EXCESS AND OBSOLETE INVENTORY RESERVES
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES WRITE-OFFS OTHER (a) PERIOD
- ------------------ ---------- ---------- ------------- ----------- ----------
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
RESTRUCTURING RESERVES
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES WRITE-OFFS OTHER (a) PERIOD
- ------------------ ---------- ---------- ------------- ----------- ----------
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
(a) Other deductions relate primarily to exchange rate adjustments.
S-4