-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ma9FPOR7TooGioRiRIXdh/815k6O0t4IS39eFdiyyZlcraPEohOxrajYyEkmkCsB 6OgXsXuQysUIA7zWGUTVBA== 0001047469-98-004335.txt : 19980210 0001047469-98-004335.hdr.sgml : 19980210 ACCESSION NUMBER: 0001047469-98-004335 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971226 FILED AS OF DATE: 19980209 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NU KOTE HOLDING INC /DE/ CENTRAL INDEX KEY: 0000812423 STANDARD INDUSTRIAL CLASSIFICATION: PENS, PENCILS & OTHER ARTISTS' MATERIALS [3950] IRS NUMBER: 161296153 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20287 FILM NUMBER: 98526266 BUSINESS ADDRESS: STREET 1: 17950 PRESTON RD STE 690 CITY: DALLAS STATE: TX ZIP: 75252 BUSINESS PHONE: 2142502785 MAIL ADDRESS: STREET 1: 17950 PRESTON ROAD SUITE 690 CITY: DALLAS STATE: TX ZIP: 75252 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended DECEMBER 26, 1997 --------------------------------------------------------------------- Commission file number 0-20287 --------------------------------------------------------------------- NU-KOTE HOLDING, INC. --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 16-1296153 --------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 17950 PRESTON ROAD, SUITE 690, DALLAS, TEXAS 75252 --------------------------------------------------------------------- (Address of principal executive offices (Zip Code) (972) 250-2785 --------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Number of shares of common stock of registrant outstanding at February 5, 1998: Class Outstanding ----- ----------- Class A common stock $.01 par value 21,775,302 1 NU-KOTE HOLDING, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- PART I - FINANCIAL INFORMATION Consolidated Balance Sheets as of December 26, 1997 and March 31, 1997 3 Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit) for the Three Month Periods Ended December 26, 1997 and December 27, 1996 4 Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit) for the Nine Month Periods Ended December 26, 1997 and December 27, 1996 5 Consolidated Statements of Cash Flows for the Nine Month Periods Ended December 26, 1997 and December 27, 1996 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 PART II - OTHER INFORMATION Other Information 23 Signature Page 25
2 NU-KOTE HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
December 26, March 31, 1997 1997 ------------ ---------- ASSETS Current assets: Cash and cash equivalents $ 11,683 $ 12,275 Accounts receivable, net 55,357 71,024 Receivables from related party 3,249 3,694 Inventories, net 87,238 93,770 Prepaid expenses 8,982 10,452 Deferred income taxes 180 1,573 --------- --------- Total current assets 166,689 192,788 Property, plant, and equipment, net 70,120 75,683 Other assets and deferred charges 7,281 4,386 Assets held for sale 2,959 4,482 Intangibles, net 15,480 19,698 --------- --------- Total assets $ 262,529 $ 297,037 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank loans, current maturities of long-term debt and long-term debt subject to acceleration $ 144,558 $ 1,135 Accounts payable 38,331 51,035 Compensation related liabilities 4,734 6,500 Other accrued liabilities 44,181 37,726 --------- --------- Total current liabilities 231,804 96,396 Long-term debt, net of current maturities and portion subject to acceleration 134,677 Other liabilities 8,912 9,995 Deferred income taxes 6,307 6,541 --------- --------- Total liabilities 247,023 247,609 --------- --------- Shareholders' equity: 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; 21,775,302 shares outstanding 223 223 Class B common stock, $.01 par value, 15,000,000 shares authorized; none issued Additional paid-in capital 92,610 91,605 Accumulated deficit (68,130) (36,610) Foreign currency translation adjustments (8,971) (5,564) Treasury stock, at cost, 550,000 shares (226) (226) --------- --------- Total shareholders' equity 15,506 49,428 --------- --------- Total liabilities and shareholders' equity $ 262,529 $ 297,037 --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. 3 NU-KOTE HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT) FOR THE THREE MONTH PERIODS ENDED DECEMBER 26, 1997 AND DECEMBER 27, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
December 26, December 27, 1997 1996 ------------- ------------- Net sales $ 70,755 $ 82,923 Cost of sales 61,140 67,568 ------------- ------------- Gross margin 9,615 15,355 Selling, general and administrative expenses 14,158 15,387 Research and development expenses 1,505 2,517 Provision for loss on sale of division 4,061 Restructuring expense 488 2,031 ------------- ------------- Operating loss (10,597) (4,580) Interest expense 3,513 1,990 Other expense items, net 85 158 ------------- ------------- Loss before income taxes (14,195) (6,728) Provision (benefit) for income taxes 785 (2,699) ------------- ------------- Net loss (14,980) (4,029) Retained earnings (accumulated deficit) - Beginning of period (53,150) 12,505 ------------- ------------- Retained earnings (accumulated deficit) - End of period $ (68,130) $ 8,476 ------------- ------------- ------------- ------------- Net loss per share of common stock (basic and diluted) (0.69) $ (0.19) ------------- ------------- ------------- ------------- Weighted average shares outstanding 21,775,302 21,775,302 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the consolidated financial statements. 4 NU-KOTE HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT) FOR THE NINE MONTH PERIODS ENDED DECEMBER 26, 1997 AND DECEMBER 27, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
December 26, December 27, 1997 1996 ------------- ------------- Net sales $ 223,170 $ 256,621 Cost of sales 185,224 195,331 ------------- ------------- Gross margin 37,946 61,290 Selling, general and administrative expenses 42,932 48,413 Research and development expenses 5,123 7,648 Provision for loss on sale of division 4,061 Restructuring expense 3,305 7,811 ------------- ------------- Operating loss (17,475) (2,582) Interest expense 10,090 6,014 Other (income) expense items, net 278 (935) ------------- ------------- Loss before income taxes and extraordinary item (27,843) (7,661) Provision (benefit) for income taxes 1,127 (3,095) ------------- ------------- Loss before extraordinary item (28,970) (4,566) Extraordinary item arising from early extinguishment of debt (2,550) ------------- ------------- Net loss (31,520) (4,566) Retained earnings (accumulated deficit) - Beginning of period (36,610) 13,042 ------------- ------------- Retained earnings (accumulated deficit) - End of period $ (68,130) $ 8,476 ------------- ------------- ------------- ------------- Net loss per share of common stock (basic and diluted): Loss before extraordinary item $ (1.33) $ (0.21) Extraordinary item (0.12) ------------- ------------- Net loss $ (1.45) $ (0.21) ------------- ------------- ------------- ------------- Weighted average shares outstanding 21,775,302 21,764,239 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the consolidated financial statements. 5 NU-KOTE HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED DECEMBER 26, 1997 AND DECEMBER 27, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited) ------------------------------ December 26, December 27, 1997 1996 ------------- ------------- Cash flows from operating activities: Net loss $ (31,520) $ (4,566) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Extraordinary loss from early extinguishment of debt 2,550 Provision for loss on sale of division 4,061 Exchange gains (204) (1,066) Depreciation and amortization 10,459 9,849 Deferred income taxes 1,159 (82) Tax benefit from exercise of stock options 75 Other (3,547) (5,187) Changes in working capital: Accounts receivable 14,288 24,293 Inventories 4,638 6,594 Prepaid expenses 1,470 (3,528) Accounts payable (10,300) (4,725) Compensation related liabilities (1,766) (7,242) Other accrued liabilities 10,197 (6,429) Cash paid for restructuring (3,742) (8,572) ------------- ------------- Net cash used in operating activities (2,257) (586) ------------- ------------- Cash flows from investing activities: Purchase of property, plant and equipment (4,381) (8,065) Sale of property, plant and equipment 2,699 715 ------------- ------------- Net cash used in investing activities (1,682) (7,350) ------------- ------------- Cash flows from financing activities: Borrowings on long-term debt and other loans 21,463 100,139 Payments on long-term debt and other loans (13,290) (91,632) Payments of financing costs (2,559) Exercise of stock options 338 ------------- ------------- Net cash provided by financing activities 5,614 8,845 ------------- ------------- Effect of exchange rate changes on cash (2,267) (2,782) ------------- ------------- Net decrease in cash (592) (1,873) Cash and cash equivalents at beginning of period 12,275 6,540 ------------- ------------- Cash and cash equivalents at end of period $ 11,683 $ 4,667 ------------- ------------- ------------- ------------- Excluded from the consolidated statements of cash flows was the effect of non-cash financing activities related to the issuance of stock warrants $ 1,005 ------------- -------------
The accompanying notes are an integral part of the consolidated financial statements. 6 NU-KOTE HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (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 rolls, and carbon paper. The Company sells products primarily in the United States and Europe, directly to wholesale and retail markets, and also to original equipment manufacturers and distributors for resale under their brand names or private labels. The Company distributes through major office supply marketing channels, including wholesale distributors, office products dealers, direct mail catalogs, office supply "super stores", warehouse clubs, information processing specialists, value added resellers, and mass market retailers. The consolidated balance sheet as of December 26, 1997 and the related consolidated statements of operations and retained earnings (accumulated deficit) for the three and nine month periods and consolidated statements of cash flows for the nine month periods ended December 26, 1997 and December 27, 1996 are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of such financial statements have been included. Interim results are not necessarily indicative of results for a full year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain all financial disclosures and details included in the Company's annual financial statements and notes. 2. NET LOSS PER SHARE OF COMMON STOCK Effective with its financial statements for the period ended December 26, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which establishes standards for computing and presenting earnings per share. Basic and diluted net loss per share of common stock are the same and, therefore, are not shown separately. 7 3. ACCOUNTS RECEIVABLE Accounts receivable are reflected net of allowances for doubtful accounts of $5,404 and $3,741 at December 26, 1997 and March 31, 1997, respectively. 4. INVENTORIES Inventories consist of the following:
December 26, March 31, 1997 1997 ------------- ------------ Raw materials $ 37,645 $ 36,847 Work-in-process 13,496 12,354 Finished goods 36,097 44,569 ------------- ------------ Total $ 87,238 $ 93,770 ------------- ------------ ------------- ------------
Since physical inventories taken during the year do not necessarily coincide with the end of a quarter, management has estimated the composition of inventories with respect to raw materials, work-in-process and finished goods. It is management's opinion that this estimate represents a reasonable approximation of the inventory levels at December 26, 1997. The amounts at March 31, 1997 are based upon the audited balance sheet at that date. Effective December, 1997, the Company engaged the management consulting firm of Glass and Associates, Inc. ("Glass") to provide interim management services and to assist the Company to the extent possible in finding solutions to its current operating issues. Accordingly, Glass will be evaluating methods of optimizing the utilization of inventory to generate cash for the operation of the business. This may include the sale of inventory outside of the ordinary course of business. The Company has not completed its assessment of its options with respect to its inventory. Accordingly, no additional provision for any write-downs that may result has been recorded as of December 26, 1997. 8 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and consists of the following components:
December 26, March 31, 1997 1997 ------------- ------------ Land $ 4,477 $ 4,477 Buildings and improvements 19,417 19,417 Machinery and equipment 82,280 80,490 ------------- ------------ 106,174 104,384 Less accumulated depreciation (36,054) (28,701) ------------- ------------ Total $ 70,120 $ 75,683 ------------- ------------ ------------- ------------
Depreciation expense amounted to $2,855 and $2,486 for the three month periods and $8,284 and $7,656 for the nine month periods ended December 26, 1997 and December 27, 1996, respectively. 6. INTANGIBLE ASSETS Intangible assets consist of amounts allocated as a result of purchases of existing businesses and are summarized as follows:
Amortization December 26, March 31, Period 1997 1997 ------------- ------------- ------------- Goodwill 20 years $ 6,176 $ 9,880 Covenants-not-to-compete 3-5 years 5,636 5,636 Trademark 40 years 9,269 9,269 Technology license 8 years 1,272 1,272 ------------- ------------- 22,353 26,057 Less accumulated amortization (6,873) (6,359) ------------- ------------- Total $ 15,480 $ 19,698 ------------- ------------- ------------- -------------
Covenant-not-to-compete agreements have been recorded at their net present value using estimated discount rates of 7% and 16%. The trademark has been recorded at its estimated value based upon royalty rates charged for its use, discounted at an estimated rate of return of 35%. The technology license has been recorded at its estimated fair value based on forecasted discounted cash flows using a 16% discount rate. As described in Note 12, the Company sold the components division of Future Graphics, Inc. As a result, the unamortized goodwill associated with the original acquisition of Future Graphics, Inc. amounting to $2,826 was written off. 9 7. LINE OF CREDIT The Company has a line of credit in Colombia in the amount of $1,450. Borrowings against the line of credit amounted to $338 and $603 at December 26, 1997 and March 31, 1997, respectively. The line bears interest at the prevailing Colombian interest rate plus 2 percentage points. Average interest rates at December 26, 1997 and March 31, 1997 were 17.0% and 17.5%, respectively. 8. LONG-TERM DEBT As of and for the quarter ended December 26, 1997, the Company was in violation of certain financial covenants related to the Company's credit agreement dated July 31, 1997. Effective December 31, 1997, the Company and its lenders entered into an amendment and waiver to the aforementioned credit agreement. The amendment and waiver provided, among other things, the following: - Waived for the period from December 31, 1997 through April 2, 1998 violations of certain financial covenants as of and for the quarter ended December 26, 1997 and violations of certain financial covenants for January and February 1998; - Deferred the mandatory principal reduction of $2,500 due on January 2, 1998 to April 1, 1998; - Restricted the Company from making intercompany loans and investments in certain subsidiaries; and - Required the Company to use all proceeds from the sale of assets as a permanent reduction of the revolving credit commitment under the credit agreement. As the amendment and waiver provided for the waiver of financial covenant violations only through April 2, 1998 and there is no certainty the lenders will grant future waivers, the portion of the debt that would be long-term pursuant to the terms of the credit agreement has been classified as a current liability and is reported as long-term debt subject to acceleration. Long-term debt of the Company consists of the following:
December 26, March 31, 1997 1997 ------------- ------------ Revolving lines of credit $ 143,333 $ 133,917 Other items 887 1,292 ------------- ------------ 144,220 135,209 Less current portion (10,000) (532) Less portion subject to acceleration (134,220) ------------- ------------ Long-term debt, net of current portion $ - $ 134,677 ------------- ------------ ------------- ------------
10 9. INCOME TAXES Following are the approximate effective blended tax rates for significant jurisdictions: North America 40 % Switzerland 22 % Germany 64 % United Kingdom 33 % The above resulted in a worldwide effective blended tax rate of 41% and 42% for the three and nine month periods ended December 26, 1997, respectively. For the nine months ended and quarter ended December 26, 1997, no tax benefit has been provided with respect to any jurisdiction as it is currently not considered more likely than not that resulting deferred tax assets will be realized. Additionally, for the three and nine month periods ended December 26, 1997, a provision has been made in the amount of $785 and $1,127, respectively, for income taxes in certain foreign jurisdictions. 10. CONTINGENCIES On January 23, 1998 a class action suit was filed by a shareholder against Nu-kote Holding, Inc., 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, cause number 3-98CV0161-T. The Complaint alleges that the Company and the specified individuals violated the Securities Exchange Act of 1934 by knowingly making false and misleading statements about the Company's business and issued false and misleading financial statements between July 28, 1995 and May 29, 1997. The plaintiff is seeking compensatory damages, including rescission where applicable, pre-judgment interest, post-judgment interest, attorney's fees, expert witness fees and other costs, and extraordinary, equitable, and/or injunctive relief. The Company denies the plaintiff's allegations and intends to vigorously defend the suit. In 1994 and 1995 three original equipment manufacturers filed lawsuits against Nu-kote International, Inc. ("NII") alleging that certain NII ink jet replacement cartridges, refill inks and packaging infringe their trademarks, trade dress and patents and alleging, among other things, unfair competition and misleading representations. The plaintiffs are seeking injunctive relief, monetary damages, court costs and attorney's fees. The complaint in one of the cases has been amended to name Pelikan Produktions A.G. ("PPAG") as a defendant. All of the lawsuits are in the discovery stage, and in management's opinion the potential losses related to these cases are not reasonably estimable. All of the cases are being vigorously contested; and in each case the Company or NII has asserted affirmative defenses and counterclaims and has requested damages and affirmative injunctive relief. In one of these cases NII's motion for summary judgment of the unenforceability of four of the plaintiff's utility patents was granted although a Motion for reconsideration with respect to the ruling is pending before the court that granted the motion. On May 9, 1997 Daniel M. Kerrane, a former officer and director of the Company, filed suit against the Company. He alleges that his Supplemental Employment Agreement with the Company entitled him to terminate his employment and receive a lump sum severance payment because the Company "substantially reduced" his authorities, powers 11 and duties in April, 1997. Mr. Kerrane is seeking damages of $8 million and injunctive relief. The Company is vigorously defending this lawsuit. In addition, the Company is involved in various routine legal matters. In the opinion of management, all matters discussed above are substantially covered by insurance or are without merit. However, one or more of these matters could have a material effect on the Company's financial position or future quarterly or annual results of operations or cash flows when resolved. 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, Macedon and Bardstown 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 the worldwide hardcopy supplies business of Pelikan, Pelikan agreed to indemnify Nu-kote for certain pre-closing environmental liabilities. The Company has found environmental contamination at former Pelikan facilities in Derry, Pennsylvania and Franklin, Tennessee, and has asserted a claim for indemnification. As a result of the indemnifications from Unisys and Pelikan, in the opinion of management, the ultimate cost to resolve these environmental matters will not have a material adverse effect on the Company's financial position, results of future operations or liquidity. This note contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, which represent the Company's expectations or beliefs concerning the possible outcome of the various litigation matters described herein and estimates of the Company's liabilities associated with identified environmental matters. The Company cautions that the actual outcome of the various litigation matters could be affected by a number of factors beyond its control, including, without limitation, judicial interpretations of applicable laws, rules and regulations, the uncertainties and risks inherent in any litigation, particularly a jury trial, the nature and extent of any counter claims, and the scope of insurance coverage, and that the final resolution of such matters could differ materially from the Company's current evaluation of such matters. The Company further cautions that the statements regarding identified environmental matters are qualified by important factors that could cause the Company's actual liabilities to differ materially from those in the forward looking statements, including, without limitation, the following: (i) the actual nature and extent of contamination, if any; (ii) the remedial action selected; (iii) the actual cleanup level required; (iv) changes in regulatory requirements; (v) the ability of other responsible parties, if any, to pay their respective shares; and (vi) any insurance recoveries. 12 11. RESTRUCTURING EXPENSE Restructuring activities commenced during fiscal 1997 (the "1997 Restructuring") related primarily to the consolidation of impact product production into Scotland, Mexico and China; centralization of distribution primarily into Franklin, Tennessee and Duren, Germany; and the closure of one toner facility, and consolidation of toner manufacturing into Connellsville, Pennsylvania and Egg, Switzerland. Activity related to accrued restructuring costs for the 1997 Restructuring during the three and nine month periods ended December 26, 1997 are as follows:
Amount Amount Description of Accrued at Amount Accrued at Restructuring Beginning of Paid in Additional End of Expense Period Period Provision Period ---------------------- ------------ ------------ ---------- ------------- Three Months Ended December 26, 1997: Severance $ 1,153 $ 506 $ 134 $ 781 Lease 430 430 cancellations Facility maintenance and other 233 354 354 233 ------------ ------------ ------------ ----------- $ 1,816 $ 860 $ 488 $ 1,444 ------------ ------------ ------------ ----------- ------------ ------------ ------------ -----------
Amount Amount Description of Accrued at Amount Accrued at Restructuring Beginning of Paid in Additional End of Expense Period Period Provision Period --------------------- ------------ ------------ ---------- ------------- Nine Months Ended December 26, 1997: Severance $ 1,204 $ 1,961 $ 1,538 $ 781 Lease 430 430 cancellations Facility maintenance and other 247 1,781 $ 1,767 233 ------------ ------------ ------------ ----------- $ 1,881 $ 3,742 $ 3,305 $ 1,444 ------------ ------------ ------------ ----------- ------------ ------------ ------------ -----------
The Company anticipates that as a result of declining sales, additional restructuring measures will be necessary to the extent cash is available for funding such expenses. During fiscal 1996, the Company substantially completed the merger of its operations with those of the Pelikan Hardcopy Division, which was acquired in February 1995. That plan included, among other things, the closure of the Company's manufacturing, distribution and administration facility in Bardstown, Kentucky and merger of its operations into the Pelikan Hardcopy Division's facility in Franklin, Tennessee; the termination of contract manufacturing and other contracts; closure of the Company's manufacturing facility in Deeside, Wales and merger of its operations with the Pelikan Hardcopy Division's operations is Scotland; consolidation of certain toner manufacturing 13 operations of ICMI's Connellsville, Pennsylvania facility and the Pelikan Hardcopy Division's Derry, Pennsylvania facility; and consolidation of sales and administrative organizations of the two companies. The Company substantially completed the merger activities in fiscal 1997. Activity related to accrued restructuring costs for the Pelikan merger during the three and nine month periods ended December 27, 1996 are as follows:
Amount Amount Description of Accrued at Amount Accrued at Restructuring Beginning of Paid in Additional End of Expense Period Period Provision Period --------------------- ------------ ------------ ---------- ------------- Three Months Ended December 27, 1996: Severance $ 2,693 $ 938 $ $ 1,755 Lease 385 184 201 cancellations Facility maintenance and other 209 15 194 ------------ ------------ ------------ ---------- $ 3,287 $ 1,137 $ $ 2,150 ------------ ------------ ------------ ---------- ------------ ------------ ------------ ----------
Amount Amount Description of Accrued at Amount Accrued at Restructuring Beginning of Paid in Additional End of Expense Period Period Provision Period ---------------------- ------------ ------------ ---------- ------------- Nine Months Ended December 27, 1996: Severance $ 71 $ 1,009 $ 2,693 $ 1,755 Lease 425 224 201 cancellations Facility maintenance and other 384 190 194 ------------ ------------ ------------ ---------- $ 880 $ 1,423 $ 2,693 $ 2,150 ------------ ------------ ------------ ---------- ------------ ------------ ------------ ----------
12. SALE OF DIVISION 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. This 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. As the conditions giving rise to this loss existed at December 26, 1997, the loss was recognized in the December 26, 1997 financial statements. 14 13. NEW ACCOUNTING STANDARDS During June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and Statement of Financial Accounting standards No. 131, "Disclosure About Segments of an Enterprise and Related Information". Preliminary analysis of these new standards by the Company indicates that the standards will not have a material impact on the Company's financial statements. The standards are effective for financial statements for fiscal years beginning after December 15, 1997. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS QUARTER ENDED DECEMBER 26, 1997 COMPARED TO QUARTER ENDED DECEMBER 27, 1996 Net sales for the quarter ended December 26, 1997 were $70.8 million, a decline of $12.1 million (14.6%) over the quarter ended December 27, 1996. For the quarter ended December 26, 1997, sales by North American entities were $33.6 million, a decline of $9.5 million or 22.0%, as compared to sales in the previous year period. Sales by European entities declined $2.6 million, or 6.5%, as compared to the previous year period and were $37.2 million. Approximately $3.4 million, or 35.8% of the decline in sales by North American entities, was due to the decline in sales of ink jet products. Impact sales declined $2.7 million, or 28.4% of the decline in sales by North American entities, and were $15.3 million. The remaining decline of $3.4 million, or 35.8% of the decline in sales by North American entities was primarily due to a decline in toner and related component sales. Approximately $0.6 million of the decline in sales in Europe was due to exchange rate fluctuations. The balance of the decline in sales in Europe was due largely to the continuing decline in sales of impact products of $1.1 million and a decline in sales of non-impact products of $0.9 million over the previous year period. Worldwide sales of non-impact supplies amounted to $41.6 million and accounted for approximately 58.8% of total sales for the quarter ended December 26, 1997, compared to 58.0% of total sales in the quarter ended December 27, 1996. In North America, sales of non-impact supplies amounted to $18.3 million in the quarter ended December 26, 1997, down $6.8 million or 27.1%, as compared to the previous year period, and represented 54.5% of total North American sales. Sales of non-impact supplies in Europe were $23.1 million in the quarter ended December 26, 1997 and remained flat as compared to the previous year period. Cost of sales were $61.1 million (86.3% of net sales) for the quarter ended December 26, 1997, compared to $67.6 million (81.5% of net sales) in the previous year period. In North America cost of sales included manufacturing volume variances amounting to $0.7 million for the quarter ended December 26, 1997. The remaining worldwide percentage increase in cost of sales is due to the mix of products and customers for the quarter ended December 26, 1997. In addition, gross margin was adversely impacted during the quarter by $2.0 million (2.8% of net sales), associated with increased customer allowances, principally in North America. 16 For the quarter ended December 26, 1997, research and development expenses amounted to $1.5 million, (2.1% of net sales), as compared to $2.5 million (3.0% of net sales ) in the previous year period. Approximately $0.4 million of the decline occurred in North America and the remaining $0.6 million of the decline 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 $14.2 million in the quarter ended December 26, 1997 as compared to $15.4 million in the previous year period. The $1.2 million reduction in these expenses resulted from the Company's implementation of worldwide expense reduction programs. Restructuring expenses amounted to $0.5 million in the current period. These expenses related primarily to: (1) consolidating impact product production into Scotland, Mexico and China; (2) centralizing distribution primarily into Franklin, Tennessee and Duren, Germany; and (3) closing one toner facility and consolidating toner manufacturing into Connellsville, Pennsylvania and Egg, Switzerland. Interest expense for the current fiscal quarter was $3.5 million, compared to $2.0 million for the previous year period. The increase is the result of higher outstanding borrowings and higher interest rates. For the quarter ended December 26, 1997, the Company recognized a tax valuation allowance of approximately $6.0 million against certain deferred tax assets pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the provisions of SFAS 109, 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 a tax benefit of $2.7 million in the previous year period. For the quarter ended December 26, 1997, the Company recognized a net loss of $15.0 million compared to a net loss of $4.0 million in the previous year period. The increase in net loss is directly attributable to: (1) the $12.1 million decrease in sales and the 4.8% increase in cost of goods sold as a percentage of sales; (2) higher interest expense of $1.5 million and income tax benefit reduction of $3.5 million; and (3) a $4.1 million loss on the sale of a division of the Company. The increase in net loss was offset by $1.2 million reduction in selling, general and administrative expenses, a $1.0 million reduction in research and development costs and a $1.5 million decrease in restructuring costs. 17 NINE MONTHS ENDED DECEMBER 26, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 27, 1996 Net sales for the nine months ended December 26, 1997 were $223.2 million, a decline of $33.4 million (13.0%) over the nine months ended December 27, 1996. For the nine months ended December 26, 1997, sales by North American entities were $115.1 million, a decline of $14.4 million or 11.1%, as compared to sales in the previous year period. Sales by European entities declined $19.0 million, or 15.3%, as compared to the previous year period and were $108.1 million. Laser cartridge sales in North America were up $3.2 million, or 28.8%, primarily due to product category growth in the marketplace compared to the previous year period. Sales of ink jet products in North America declined $7.5 million or 34.9% as a result of an across the board decline in sales of ink jet products combined with the fact that current period sales were sales of units with a lower average sell price versus sales in the previous year period. Sales of impact products were down $3.7 million as the ribbon market continues to decline. Toner and component sales in North America were down $6.4 million, or 15.2%, as compared to the previous year period. Approximately $2.1 million of the decline in sales in Europe was due to exchange rate fluctuations. The balance of the decline in sales in Europe was due largely to the continuing decline in sales of impact products of $14.1 million and a decline in sales of non-impact products of $2.8 million over the previous year period. The Company believes that the worldwide sales of impact products will continue to decline as the market shifts to non-impact supplies. Worldwide sales of non-impact supplies accounted for approximately 59.7% of total sales for the nine months ended December 26, 1997, compared to 57.0% of total sales in the nine months ended December 27, 1996. Sales of non-impact products as a percentage of worldwide sales increased largely because sales of impact products declined by $19.3 million (17.6%), which exceeded the overall decline in worldwide non-impact sales of $14.1 million or 9.6%. In North America, sales of non-impact supplies amounted to $64.1 million in the nine months ended December 26, 1997, down $10.7 million or 14.3% as compared to the previous year period, and represented 55.7% of total North American sales. Sales of non-impact supplies in Europe were $69.1 million in the nine months ended December 26, 1997 as compared to $72.5 million in the previous year period. The decline in sales of non-impact products in Europe was principally due to exchange rate fluctuations. Cost of sales were $185.2 million (83.0% of net sales) for the nine months ended December 26, 1997, compared to $195.3 million (76.1% of net sales) in the previous year period. Included in cost of sales for the nine months ended December 26, 1997 were $3.7 million (1.7% of net sales) of expenses resulting from the transition of impact product production from the Company's German facility to the Company's facilities in Scotland, Mexico and China. In addition, gross margin was adversely impacted during the nine month period by $4.8 million (2.2% of net sales), associated with increased customer allowances, principally in North America. 18 For the nine months ended December 26, 1997, research and development expenses amounted to $5.1 million, (2.3% of net sales), as compared to $7.7 million (3.0% of net sales ) in the previous year period. Approximately $2.2 million, or 84.6%, 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 $42.9 million for the nine months ended December 26, 1997 as compared to $48.4 million in the previous year period. The reduction in these expenses resulted primarily from the Company's implementation of worldwide expense reduction programs. Restructuring expenses amounted to $3.3 million in the current period. These expenses related primarily to: (1) consolidating impact product production into Scotland, Mexico and China; (2) centralizing distribution primarily into Franklin, Tennessee and Duren, Germany; and (3) closing one toner facility and consolidating toner manufacturing into Connellsville, Pennsylvania and Egg, Switzerland. Interest expense for the current fiscal period was $10.1 million, compared to $6.0 million for the previous year period. The increase is the result of higher outstanding borrowings and higher interest rates. For the nine months ended December 26, 1997, the Company recognized a tax valuation allowance of approximately $12.5 against certain deferred tax assets pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the provisions of SFAS 109, 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 a tax benefit of $3.1 million in the previous year period. For the nine months ended December 26, 1997, the Company recognized a net loss of $31.5 million compared to a net loss of $4.6 million in the previous year period. The increase in net loss is directly attributable to: (1) a $33.4 million decrease in sales and a 6.9% 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 $4.1 million and income tax benefit reduction of $4.2 million; and (4) a $4.1 million loss on the sale of a division of the Company. The increase in net loss was offset by a $5.5 million reduction in selling, general and administrative costs, $2.6 million reduction in research and development costs and $4.5 million decline in restructuring costs. 19 EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT Because the Company conducts business in many countries, fluctuations in foreign currency exchange rates affect the Company's financial position and results of operations. It is the Company 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 $0.2 million and $1.1 million in exchange gains in the nine months ended December 26, 1997 and December 27, 1996, respectively. LIQUIDITY AND CASH FLOW The Company's cash requirements are related to funding working capital for operations, capital expenditures and payment of interest and principal on indebtedness. For the nine months ended December 26, 1997, $2.3 million in cash was used for operations, primarily to fund reductions of accounts payable and restructuring expenses. Capital expenditures, primarily related to computer systems and manufacturing equipment were $4.4 million. As indicated above, interest expense for the nine months ended December 26, 1997 was $10.1 million. The Company's sources of liquidity and capital include cash provided by operating activities, borrowing under the Company's credit facility and open account trade terms from vendors. For seven of the last nine fiscal quarters, the Company has experienced declining revenues and this has negatively impacted the cash generated from operations. Additionally, during the nine months ended December 26, 1997, $10.3 million in cash was used to reduce accounts payable. As of February 2, 1998, borrowings outstanding under the Company's credit facilities amounted to $143.1 million, up $9.2 million from March 31, 1997. As of February 2, 1998 the Company had approximately $.4 million available for future borrowings under the credit facilities. Cash on hand as of February 2, 1998 amounted to approximately $5.8 million. Management does not believe that the Company has adequate sources of working capital to provide the Company with sufficient cash to meet its near term obligations. In December, 1997, the Company engaged Glass and Associates, Inc., management consultants, to provide interim management services and to assist the Company to the extent possible in finding solutions to its current operating issues. In addition, the Company has engaged BT Alex Brown Incorporated to assist it in evaluating its strategic options which may include the sale of all or part of the Company's business. The Company will also continue to focus on managing net working capital. However, there can be no assurance that any of these strategies will provide the Company with adequate working capital and sufficient cash flow to meet its near term obligations and avoid a default under its credit agreement. The Company's credit facilities contain a number of financial ratio covenants. The Company's credit facilities have been amended to defer a mandatory principal reduction of $2.5 million due on January 2, 1998 to April 1, 1998. In addition, compliance with 20 certain financial covenants was waived through April 2, 1998. Under the terms of the waiver, the company is restricted, among other things, from making further investments, including intercompany loans and advances, to certain subsidiaries. Additionally, the amendment requires the Company to use proceeds from the sale of assets as a permanent reduction of the Revolving Credit Commitments. Scheduled principal reductions over the next year are $5 million on April 1, 1998, $2.5 million on July 1, 1998 and $2.5 million on October 1, 1998. The Company has classified the debt as short term as it continues to negotiate refinancing alternatives with its lending group. It is unlikely that the Company will be able to make the $5.0 million principal payment due on April 1, 1998. The waiver of compliance with the financial ratio covenants of the Company's credit agreement will expire on April 2, 1998. The Company will attempt to obtain additional waivers from its lenders, but there can be no assurance that any waivers can be obtained, at which point the Company will be in default under its credit agreement. NEW ACCOUNTING STANDARDS During June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and Statement of Financial Accounting standards No. 131, "Disclosure About Segments of an Enterprise and Related Information". Preliminary analysis of these new standards by the Company indicates that the standards will not have a material impact on the Company's financial statements. The standards are effective for financial statements for fiscal years beginning after December 15, 1997. YEAR 2000 COMPUTER ISSUES The Company is in various stages of addressing the year 2000 issue and has not fully completed its assessment. However, certain of the Company's information systems are not currently in compliance with the modifications necessary for the year 2000. The Company intends to make the necessary system changes to continue to sustain the information needs of the business, but there can be no assurance that the Company will have adequate resources to fund such system changes. 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 and Exchange Act of 1934, which represent the Company's expectations or beliefs concerning, among other things, future operating results and various components thereof and the adequacy of future operations to provide sufficient liquidity. The Company 21 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, manufacturing efficiencies, new product development, availability of raw materials and critical manufacturing equipment, new plant startups and the regulatory and trade environment. 22 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On January 23, 1998 a class action suit was filed against Nu-kote Holding, Inc., 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, cause number 3-98CV0161-T. The Complaint alleges that the Company and the specified individuals violated the Securities Exchange Act of 1934 by knowingly making false and misleading statements about the Company's business and issued false and misleading financial statements between July 28, 1995 and May 29, 1997. The plaintiff is seeking compensatory damages, including rescission where applicable, pre-judgment interest, post-judgment interest, attorney's fees, expert witness fees and other costs, and extraordinary, equitable, and/or injunctive relief. The Company denies the plaintiff's allegations and intends to vigorously defend the suit. On December 10, 1997 the lawsuit styled INTERNATIONAL COMMUNICATION MATERIALS, INC. V. RICOH COMPANY, LTD and Ricoh Corporation, civil action 95-0767 in the United States District Court for the Western District of Pennsylvania was settled. In connection with the settlement, International Communication Materials, Inc. stopped selling certain Ricoh compatible cartridges. The case has been dismissed. See Item 3 - Legal Proceedings in the registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 and Note 10 of Notes to Consolidated Financial Statements for the three and nine month periods ended December 26, 1997 and December 27, 1996 included elsewhere in this report. ITEM 2 INAPPLICABLE ITEM 3 DEFAULTS UPON SENIOR SECURITIES The Company and its lenders entered into a Second Amended and Restated Credit Agreement and Waiver as of December 31, 1997 (the "Amended Credit Agreement"). The Amended Credit Agreement deferred until April 1, 1998 the principal payment which would otherwise have been due on January 2, 1998. In addition, the Company's lending group waived compliance with certain financial covenants through April 2, 1998. Amended Credit Agreement requires the Company to use all proceeds from the sale of assets as a permanent reduction of its revolving credit commitments and requires principal reductions of $5.0 million on April 1, 1998, $2.5 million on July 1, 1998 and $2.5 million on October 1, 1998. In the absence of this latest amendment and waiver, the Company would have been in default under its credit agreement. ITEMS 4 - 5 INAPPLICABLE 23 PART II - OTHER INFORMATION (CONTINUED): ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit 10.6 - Second Amendment to Second Amended and Restated Credit Agreement and Waiver Exhibit 10.7 Management consulting agreement - Glass and Associates, Inc. Exhibit 11.1 - Statement regarding computation of per share earnings. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K. The registrant filed no reports on Form 8-K during the quarterly period ended December 27, 1997. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date February 9, 1998 /s/ Shaun K. Donnellan ---------------------------- ---------------------------------- Shaun K. Donnellan Chief Executive Officer Date February 9, 1998 /s/ Steven J. DiPasquale ---------------------------- ---------------------------------- Steven J. DiPasquale Chief Financial Officer 25 EX-10.6 2 EXHIBIT 10.6 2ND AMENDED TO SECON AMENDED CREDIT A SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND WAIVER THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND WAIVER ("Amendment") is dated as of the 31st day of December, 1997, and entered into among NU-KOTE HOLDINGS, INC., a Delaware corporation ("Holding"), NU-KOTE INTERNATIONAL, INC., a Delaware corporation ("Company"), the Lenders signatory hereto, BARCLAYS BANK PLC, in its capacity as documentation agent ("Documentation Agent") and NATIONSBANK OF TEXAS, N.A., a national banking association, as administrative agent and collateral agent (in such capacities, "Agent"). WITNESSETH: WHEREAS, Holding, Company, Lenders, Documentation Agent and Agent entered into a Second Amended and Restated Credit Agreement, dated as of July 31, 1997, as amended by First Amendment to Second Amended and Restated Credit Agreement dated as of November 28, 1997 (as amended, the "Credit Agreement"); WHEREAS, Holding and Company have requested that Lenders (i) defer the mandatory $2,500,000 reduction in the commitments of the lenders to lend from January 2, 1998, until April 1, 1998, (ii) waive during the period starting on December 31, 1997, to April 2, 1998, inclusive (the "Waiver Period"), Holding and the Company's failure to comply with certain financial covenants set forth in the Credit Agreement, and (iii) consent to an asset sale and permit certain proceeds of such asset sale to be retained by the Company for working capital purposes; and WHEREAS, Lenders and Agent have agreed to grant the request of Holding and Company and to modify the Credit Agreement upon the terms and conditions set forth below. NOW, THEREFORE, for valuable consideration hereby acknowledged, Holding, Company, Lenders, Documentation Agent and Agent agree as follows: SECTION 1. DEFINITIONS. Unless specifically defined or redefined below, capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. SECTION 2. WAIVERS. Subject to the terms and conditions hereof, Lenders hereby waive, but only during the Waiver Period, the Specified Defaults (hereinafter defined); PROVIDED, HOWEVER, that Lenders' waiver of the Specified Defaults and their rights and remedies as a result of the occurrence thereof shall not constitute and shall not be deemed to constitute a waiver of any other Event of Default, whether arising as a result of further violations of any provision of the Credit Agreement previously violated by Holding or Company, or a waiver of any rights and remedies arising as a result of such other Events of Default. As used herein, "SPECIFIED DEFAULTS" shall mean the failure of Holding and Company to observe (i) the covenants set forth in Section 6.6A, Section 6.6B, Section 6.6C, Section 6.6E, and Section 6.6H of the Credit Agreement for the fiscal quarter ended December 31, 1997, and (ii) the covenants set forth in Section 6.6F and Section 6.6G for the months ended December 31, 1997, January 31, 1998, and February 28, 1998. At the end of the Waiver Period, the waiver of the Specified Defaults will automatically terminate. SECTION 3. AMENDMENTS TO CREDIT AGREEMENT. Subject to the terms and conditions hereof, the provisions of the Credit Agreement enumerated below are amended as follows: (a) Section 2.4A(ii) of the Credit Agreement is amended to read as follows: The Company shall, promptly on the date of receipt of any Net Cash Proceeds from any Asset Sale, prepay an aggregate principal amount of the Revolving Credit Loans or Eurocurrency Loans as elected by Requisite Lenders in an amount equal to the amount of all such Net Cash Proceeds, with each such prepayment constituting a permanent reduction in the Revolving Credit Commitments or the Commitments of the Eurocurrency Lenders under the Eurocurrency Credit Agreements (whichever is prepaid with such proceeds). Each such prepayment of Eurocurrency Loans shall be accompanied by payment of amounts sufficient to compensate the Eurocurrency Lenders for any loss, cost, or expense incurred as a result of payment on a date other than the last day of the Term (as defined in the Eurocurrency Credit Agreements) for such Eurocurrency Loans. (b) Section 2.4A(iii)(a) of the Credit Agreement is amended to read as follows: On April 1, 1998, July 1, 1998, and October 1, 1998, prepay an aggregate principal amount of the Revolving Credit Loans in the amount, if any, necessary to reduce the sum of the aggregate principal amount of all Revolving Credit Loans on such date PLUS the Letter of Credit Usage on such date, to an amount which does not exceed the aggregate Revolving Credit Commitments on such date. On each such date the Company shall also prepay all accrued and unpaid interest on the principal amount so prepaid. (c) Section 2.4E(ii) of the Credit Agreement is amended to read as follows: In addition to the reductions specified in subsection 2.4E(i) above, the Revolving Credit Commitments shall automatically and permanently reduce by the amount of $5,000,000 on April 1, 1998, and the amount of $2,500,000 on each of July 1, 1998, and October 1, 1998. (d) Section 5.1 of the Credit Agreement is hereby amended to add thereto subsection (xiii) to read as follows: On or prior to January 27, 1998, a written analysis of the Company's core business plan prepared by the Company. (e) Section 5.6 of the Credit Agreement is amended to read as follows: -2- Neither Holding, Company nor any Subsidiary shall enter into any agreement prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired. (f) The preamble of Section 5.13 of the Credit Agreement is amended to read as follows: On or before December 15, 1997, and thereafter on or prior to twenty days after Agent's request that the guarantees and/or Liens contemplated by subsection (iii) below be provided (to the extent that same can be provided in compliance with such subsection (iii) below), Holding and Company shall deliver or cause to be delivered to Agent the following: (g) Section 6.3(vi) of the Credit Agreement is amended to read as follows: On and after December 31, 1997, through and including April 1, 1998, Company and its Domestic Subsidiaries may not make further Investments in (including intercompany loans to) or otherwise transfer funds or other assets to Eurocurrency Borrowers for any purpose except for fundings to or for the benefit of MIT if the prior written consent of Required Lenders to such fundings has been obtained; furthermore (A) with respect to the aggregate principal amount of all such Investments in all such Eurocurrency Borrowers, Company or any such Domestic Subsidiary, as appropriate, shall maintain a ledger recording all such Investments in and intercompany loans made pursuant to this subsection 6.3(vi), and such ledger shall be available for inspection at any Lender's request and (B) all intercompany loans made pursuant to this subsection 6.3(vi) shall be evidenced by promissory notes which shall be on terms and conditions satisfactory to Agent, including collateral, and which shall be pledged and delivered to Agent pursuant to the Collateral Documents; (h) Section 6.3(vii) of the Credit Agreement is amended to read as follows: On and after December 31, 1997, through and including April 1, 1998, Company and its Domestic Subsidiaries may not make further Investments in (including intercompany loans to) or otherwise transfer funds or other assets to Latin American Subsidiaries for any purpose; furthermore (A) with respect to the aggregate principal amount of all such Investments outstanding on December 31, 1997, Company or any such Domestic Subsidiary, as appropriate, shall maintain a ledger recording all such Investments in and intercompany loans made pursuant to this subsection 6.3(vii) prior to December 31, 1997, and such ledger shall be available for inspection at any Lender's request and (B) all intercompany loans made pursuant to this subsection 6.3(vii) shall be evidenced by promissory notes which shall be on terms and conditions satisfactory to Agent, including collateral, and which shall be pledged and delivered to Agent pursuant to the Collateral Documents; (i) Section 6.7B(ii)(E) of the Credit Agreement is amended to read as follows: -3- no Asset Sale transactions involving assets located in the United States may be made after December 31, 1997, other than the sale of the Components Division of Future Graphics, Inc., under the terms set forth in that certain Second Amendment to Second Amended and Restated Credit Agreement and Waiver dated as of December 31, 1997, among Company, Agent, and the others named therein; (j) The proviso at the end of Section 6.8 of the Credit Agreement is amended to read as follows: PROVIDED that Company and its Subsidiaries may enter into sale/leaseback arrangements if permitted by subsection 6.6 and subsection 6.7. (k) Section 8.13 of the Credit Agreement is amended to read as follows: (A) Except as otherwise permitted by subsection 6.7B(i), Holding shall cease to own and control 100% of the common stock and 100% of the voting power of Company entitled to vote for an election of the board of directors of Company; or (B) individuals who on February 24, 1995 were members of the board of directors of Holding (together with any new directors whose election to such board of directors or whose nomination for election by the stockholders of Holding was approved by a vote of a majority of the directors then still in office who were either directors on February 24, 1995 or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of such board of directors then in office; or (C) a "person" or "group" (within the meaning of Section 13(d) of the Exchange Act), becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 30% of the total issued and outstanding common stock of Holding; or (D) on or after December 15, 1997, the Company shall fail to retain management resources reasonably satisfactory to Requisite Lenders, for the purpose of facilitating the restructuring of Holding and its Subsidiaries, which management resources shall be subject solely to Holding and Company's direction and authority; SECTION 4. CONSENT TO SALE OF COMPONENTS DIVISION OF FUTURE GRAPHICS, INC. AND RETENTION OF CERTAIN NET CASH PROCEEDS THEREOF. Subject to the terms and conditions hereof, Lenders hereby consent to the sale of the Components Division of Future Graphics, Inc., so long as the gross cash proceeds thereof are not less than $1,000,000, all liabilities due and owing in connection with the business to which such assets relate are assumed by the purchaser thereof, such sale occurs on or before January 31, 1998, and such sale is otherwise upon terms reasonably satisfactory to Agent and heretofore disclosed to Lenders. Lenders furthermore consent to the retention by the Company of such cash proceeds for use by the Company as working capital notwithstanding the provisions of Section 2.4A of the Credit Agreement. SECTION 5. RELEASES. In consideration of Lenders' agreements herein and certain other good and valuable consideration, Holding and Company each hereby expressly acknowledge and agree that neither of them has any setoffs, counterclaims, adjustments, recoupments, defenses, claims or actions of any character, whether contingent, non-contingent, liquidated, unliquidated, -4- fixed, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, known or unknown, against any Lender, Documentation Agent or Agent or any grounds or cause for reduction, modification or subordination of the Obligations or any liens or security interests of any Lender or the Collateral Agent. To the extent Holding or Company may possess any such setoffs, counterclaims, adjustments, recoupments, claims, actions, grounds or causes, each of Holding and Company hereby waives, and hereby releases each Lender, Documentation Agent and Agent from, any and all of such setoffs, counterclaims, adjustments, recoupments, claims, actions, grounds and causes, such waiver and release being with full knowledge and understanding of the circumstances and effects of such waiver and release and after having consulted counsel with respect thereto. SECTION 6. CONDITIONS PRECEDENT. This Amendment shall not be effective until all proceedings of Company taken in connection herewith and the transactions contemplated hereby shall be satisfactory in form and substance to Documentation Agent, Agent and Lenders, and each of the following conditions precedent shall have been satisfied: (a) All fees and expenses, including legal and other professional fees and expenses incurred on or prior to the date of this Amendment by Agent or any Lender, including, without limitation, the fees and expenses of U.S. and foreign counsel and title insurance expenses, shall have been paid to the extent that same have been billed. (b) Agent and each Lender shall have received each of the following, in form and substance satisfactory to Agent, Lenders and Agent's counsel in their sole and absolute discretion: (1) a certificate of Holding and Company certifying (i) as to the accuracy, after giving effect to this Amendment, of the representations and warranties set forth in Section 4 of the Credit Agreement, the other Loan Documents and in this Amendment, and (ii) that there exists no Potential Event of Default or Event of Default, after giving effect to this Amendment, and the execution, delivery and performance of this Amendment will not cause a Potential Event of Default or Event of Default; and (2) such other documents, instruments, and certificates, in form and substance reasonably satisfactory to Lenders, as Lenders shall deem necessary or appropriate in connection with this Amendment and the transactions contemplated hereby, including without limitation copies of resolutions of the boards of directors of each of Holding and Company authorizing the transactions contemplated by this Amendment. (c) All accrued and unpaid interest on the Revolving Credit Loans and the Eurocurrency Loans through and including December 31, 1997, shall have been paid in full. -5- SECTION 7. REPRESENTATIONS AND WARRANTIES; RATIFICATIONS. Holding and Company represent and warrant to Lenders, Documentation Agent and Agent that (a) this Amendment constitutes their legal, valid, and binding obligations, enforceable in accordance with the terms hereof (subject as to enforcement of remedies to any applicable bankruptcy, reorganization, moratorium, or other laws or principles of equity affecting the enforcement of creditors' rights generally), (b) there exists no Potential Event of Default or Event of Default under the Credit Agreement after giving effect to this Amendment, (c) their representations and warranties set forth in the Credit Agreement and other Loan Documents are true and correct on the date hereof after giving effect to this Amendment, (d) they have complied with all agreements and conditions to be complied with by them under the Credit Agreement and the other Loan Documents by the date hereof after giving effect to this Amendment, and (e) the Credit Agreement, as amended hereby, and the other Loan Documents remain in full force and effect. Except as expressly modified by this Amendment, the terms and provisions of the Credit Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Except as provided herein, this Amendment shall not constitute an amendment or waiver of any terms and provisions of the Credit Agreement and other Loan Documents nor a waiver of the rights of the Lenders, Documentation Agent and Agent to insist upon compliance with each term, covenant, condition or provision of the Credit Agreement and other Loan Documents. SECTION 8. EXPENSES OF LENDERS. Holding and Company hereby jointly and severally agree to pay on demand all reasonable costs and expenses incurred by Agent or any Lender, including costs and fees of counsel to Agent or any Lender and other professional fees and expenses, in connection with the preparation, negotiation, review and execution of this Amendment and the other Loan Documents executed pursuant hereto and any and all amendments, modifications and supplements thereto. Holding and Company hereby confirm their obligation to pay promptly the costs and expenses for which they are obligated pursuant to Section 10.3 of the Credit Agreement. SECTION 9. FURTHER ASSURANCES. Holding and Company shall execute and deliver such further agreements, documents, instruments, and certificates in form and substance satisfactory to Agent, as Agent or any Lender may deem necessary or appropriate in connection with this Amendment. SECTION 10. CONSENTS OF EUROCURRENCY BORROWERS AND EUROCURRENCY LENDERS. Each Eurocurrency Borrower and Eurocurrency Lender by its execution below consents and agrees to this Amendment and agrees that the Eurocurrency Credit Agreement or Eurocurrency Credit Agreements to which it is a party are and shall continue to be in full force and effect and are hereby ratified and confirmed in all respects except that, upon the effectiveness of and on and after the date of this Amendment each reference to the Credit Agreement, "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Amendment. Each Eurocurrency Borrower agrees that the collateral described in the Eurocurrency Security Documents to which it is a party shall continue to secure the payment of the indebtedness therein described. -6- SECTION 11. COUNTERPARTS. This Amendment and the other Loan Documents may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. In making proof of any such agreement, it shall not be necessary to produce or account for any counterpart other than one signed by the party against which enforcement is sought. Telecopies of signatures shall be binding and effective as originals. SECTION 12. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, HOLDING AND COMPANY EACH HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. SECTION 13. GOVERNING LAW. (a) THIS AGREEMENT AND ALL LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS MADE UNDER THE LAWS OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF TEXAS, EXCEPT TO THE EXTENT (1) FEDERAL LAWS GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF ALL OR ANY PART OF THIS AGREEMENT AND ALL LOAN DOCUMENTS OR (2) STATE LAW GOVERNS UCC COLLATERAL INTERESTS FOR PROPERTIES OUTSIDE THE STATE OF TEXAS. WITHOUT EXCLUDING ANY OTHER JURISDICTION, HOLDING AND COMPANY EACH AGREES THAT THE COURTS OF TEXAS WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. (b) HOLDING AND COMPANY EACH HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS UPON IT. IN ADDITION, HOLDING AND COMPANY EACH AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO IT AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON RECEIPT BY IT. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF AGENT OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. SECTION 14. ENTIRE AGREEMENT. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. THIS AMENDMENT SHALL CONSTITUTE A LOAN DOCUMENT. -7- IN WITNESS WHEREOF, this Amendment is executed as of the date first set forth above. Holding: NU-KOTE HOLDING, INC. By: /s/ R. A. Larsen ------------------------------------ Name: Richard A. Larsen ----------------------------------- Title: Senior Vice President ----------------------------------- Company: NU-KOTE INTERNATIONAL, INC. By: /s/ R. A. Larsen ------------------------------------ Name: Richard A. Larsen ----------------------------------- Title: Senior Vice President ----------------------------------- Agent: NATIONSBANK OF TEXAS, N.A., By: ------------------------------------ Name: William E. Livingstone, IV Title: Senior Vice President Documentation Agent: BARCLAYS BANK PLC By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- Lenders and Eurocurrency NATIONSBANK OF TEXAS, N.A. Lenders: By: ------------------------------------ Name: William E. Livingstone, IV Title: Senior Vice President IN WITNESS WHEREOF, this Amendment is executed as of the date first set forth above. Holding: NU-KOTE HOLDING, INC. By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- Company: NU-KOTE INTERNATIONAL, INC. By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- Agent: NATIONSBANK OF TEXAS, N.A., By: /s/ William E. Livingstone, IV ------------------------------------ Name: William E. Livingstone, IV Title: Senior Vice President Documentation Agent: BARCLAYS BANK PLC By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- Lenders and Eurocurrency NATIONSBANK OF TEXAS, N.A., Lenders: By: /s/ William E. Livingstone, IV ------------------------------------ Name: William E. Livingstone, IV Title: Senior Vice President IN WITNESS WHEREOF, this Amendment is executed as of the date first set forth above. Holding: NU-KOTE HOLDING, INC. By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- Company: NU-KOTE INTERNATIONAL, INC. By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- Agent: NATIONSBANK OF TEXAS, N.A., By: ------------------------------------ Name: William E. Livingstone, IV Title: Senior Vice President Documentation Agent: BARCLAYS BANK PLC By: /s/ Ronald E. Spitzer ------------------------------------ Name: Ronald E. Spitzer ----------------------------------- Title: Director ----------------------------------- Lenders and Eurocurrency NATIONSBANK OF TEXAS, N.A., Lenders: By: ------------------------------------ Name: William E. Livingstone, IV Title: Senior Vice President The undersigned Barclays Bank PLC executes this Amendment for the purpose of agreeing to all provisions thereof save and except Section 2 thereof. BARCLAYS BANK PLC By: /s/ John A. O'Kane ------------------------------------ Name: John A. O'Kane ----------------------------------- Title: Director ----------------------------------- BARCLAYS BANK PLC By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- ABN AMRO BANK, N.V. By: /s/ Ronald O. Drake ------------------------------------ Name: Ronald O. Drake ----------------------------------- Title: Group Senior Vice President ----------------------------------- By: /s/ William J. Fitzgerald ------------------------------------ Name: William J. Fitzgerald ----------------------------------- Title: Senior Vice President ----------------------------------- COMMERZBANK AKTIENGESELLSCHAFT, ATLANTA AGENCY By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- CREDIT LYONNAIS, NEW YORK BRANCH By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- BARCLAYS BANK PLC By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- ABN AMRO BANK, N.V. By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- COMMERZBANK AKTIENGESELLSCHAFT, ATLANTA AGENCY By: /s/ Harry P. Yergey ------------------------------------ Name: Harry P. Yergey ----------------------------------- Title: SVP and Manager ----------------------------------- By: /s/ W. David Suttles ------------------------------------ Name: W. David Suttles ----------------------------------- Title: Vice President ----------------------------------- CREDIT LYONNAIS, NEW YORK BRANCH By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- BARCLAYS BANK PLC By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- ABN AMRO BANK, N.V. By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- COMMERZBANK AKTIENGESELLSCHAFT, ATLANTA AGENCY By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- CREDIT LYONNAIS, NEW YORK BRANCH By: [ILLEGIBLE] ------------------------------------ Name: [ILLEGIBLE] ----------------------------------- Title: First Vice President ----------------------------------- DEUTSCHE BANK, A.G., NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By: /s/ Silvia L. Spear ------------------------------------ Name: Silvia L. Spear ----------------------------------- Title: Director ----------------------------------- By: /s/ R. A. Visconti ------------------------------------ Name: R. A. Visconti ----------------------------------- Title: Asst. V. P. ----------------------------------- FIRST AMERICAN NATIONAL BANK By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- THE FIRST NATIONAL BANK OF CHICAGO By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- SOCIETE GENERALE By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- DEUTSCHE BANK, A.G., NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- FIRST AMERICAN NATIONAL BANK By: [ILLEGIBLE] ------------------------------------ Name: [ILLEGIBLE] ----------------------------------- Title: S. V. P. ----------------------------------- THE FIRST NATIONAL BANK OF CHICAGO By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- SOCIETE GENERALE By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- DEUTSCHE BANK, A.G., NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- FIRST AMERICAN NATIONAL BANK By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Richard A. Peterson ------------------------------------ Name: Richard A. Peterson ----------------------------------- Title: First Vice President ----------------------------------- SOCIETE GENERALE By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- DEUTSCHE BANK, A.G., NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- FIRST AMERICAN NATIONAL BANK By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- THE FIRST NATIONAL BANK OF CHICAGO By: ------------------------------------ Name: ----------------------------------- Title: ----------------------------------- SOCIETE GENERALE By: /s/ Richard M. Lewis ------------------------------------ Name: Richard M. Lewis ----------------------------------- Title: Vice President ----------------------------------- CONSENTED AND AGREED TO BY EUROCURRENCY BORROWERS: PELIKAN SCOTLAND LIMITED By: [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] -------------------------------- Title: [ILLEGIBLE] ------------------------------- PELIKAN PRODUKTIONS AG By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- PELIKAN HARDCOPY (INTERNATIONAL) AG By: [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] -------------------------------- Title: [ILLEGIBLE] ------------------------------- CONSENTED AND AGREED TO BY EUROCURRENCY BORROWERS: PELIKAN SCOTLAND LIMITED By: [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] -------------------------------- Title: [ILLEGIBLE] ------------------------------- PELIKAN PRODUKTIONS AG By: [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] -------------------------------- Title: [ILLEGIBLE] ------------------------------- PELIKAN HARDCOPY (INTERNATIONAL) AG By: [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] -------------------------------- Title: [ILLEGIBLE] ------------------------------- CONSENT Each of the undersigned, as Guarantors under a "Subsidiary Guaranty" and as grantors under one or more "Subsidiary Security Documents" (as such terms are defined in the Credit Agreement referred to in the foregoing Amendment), each hereby consents and agrees to the foregoing Amendment and agrees that (i) each Subsidiary Guaranty and Subsidiary Security Document is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects except that, upon the effectiveness of and on and after the date of such Amendment each reference to the Credit Agreement, "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by such Amendment, and (ii) the collateral described in the Subsidiary Security Documents shall continue to secure the payment of the indebtedness therein described. FUTURE GRAPHICS, INC. By: /s/ R. A. Larsen ------------------------------------ Name: Richard A. Larsen ----------------------------------- Title: Senior Vice President ----------------------------------- INTERNATIONAL COMMUNICATION MATERIALS, INC. By: /s/ R. A. Larsen ------------------------------------ Name: Richard A. Larsen ----------------------------------- Title: Senior Vice President ----------------------------------- NU-KOTE IMAGING INTERNATIONAL, INC. By: /s/ R. A. Larsen ------------------------------------ Name: Richard A. Larsen ----------------------------------- Title: Senior Vice President ----------------------------------- NU-KOTE IMPERIAL, LTD. By: /s/ R. A. Larsen ------------------------------------ Name: Richard A. Larsen ----------------------------------- Title: Senior Vice President ----------------------------------- EX-10.7 3 EXHIBIT 10.7 GLASS AGREEMENT GLASS & ASSOCIATES, INC. AGREEMENT ENGAGING THE SERVICES OF GLASS & ASSOCIATES, INC. AS INTERIM MANAGER Nu-Kote Holding, Inc. of 17950 Preston Road, Suite 690, Dallas, TX 75252 ("the Company") wishes to engage professional management assistance to provide general management of the Company's operating and business affairs, and to assist the Company to the extent possible in seeking and finding solutions to certain problems within the sphere of management direction and planning. The Company hereby agrees to engage Glass & Associates, Inc. ("Glass"), a Delaware corporation with its principal offices located at 4571 Stephen Circle N.W., Suite 130, Canton, Ohio, 44718, for the purpose of managing the Company during the critical period ahead. Glass will provide Shaun K. Donnellan to serve as Interim Chief Executive Officer of the Company, subject to the following terms and conditions. Glass may provide others from time to time as required during the course of the assignment. 1. Glass shall have full access to all personnel and a relationship with the entire internal organization, much like that of the Chief Executive Officer, although the relationship of Glass to the Company shall at all times be that of an independent contractor. Glass may, in the performance of its duties, negotiate on behalf of Company with various parties, including but not limited to creditors, stockholders and employees of Company, and governmental entities. 2. Glass shall review and approve all financial and operating policies, plans and programs and shall participate in any major decision which might have a significant impact on such policies. 3. Glass shall be subject solely to the control of the Board of Directors of the Company. Except for such control, Glass shall not be subject to the control of any other person or persons. 4. Glass shall be compensated for its services under this agreement at its regular published rates, per the attached schedule, plus expenses. There shall be an initial payment of $200,000.00 as a client deposit which unused portion will be refunded at the end of the assignment. Fees and expenses shall be billed weekly, and all invoices are due and payable upon receipt. 5. Upon completion of its engagement, the Board will consider a performance bonus for Glass, consistent with that which a resident top executive might receive for a job well done. During the course of the assignment, Glass may propose a basis upon which such bonus could be paid. 1 6. In consideration for Glass undertaking to discharge the responsibilities as set forth above: a) The Company shall and does hereby forever release, remise and discharge, agree to indemnify, pay on demand and hold harmless Glass, its agents, attorneys, employees, and representatives, (the "Releases"), from any and all claims, costs, demands, actions, liabilities, judgments, or attorneys fees which may result from any act or failure to act in what Releasees in good faith believe to be the best interests of the company arising out of Releasees' performance or non-performance under this Agreement, or Releasees' present or future association with the affairs of the Company ,its creditors, stockholders, employees, agents, attorneys or representatives. This release, indemnification and agreement to hold harmless extends to all claims of every nature and kind whatsoever, past, present or future, known or unknown, and suspected or unsuspected. b) Company further expressly agrees that it will execute and enter into, sign, seal and deliver any and all additional documents, papers, releases, indemnity agreements, and will do and perform any and all things which Glass may deem desirable to protect it or its agents, attorneys, employees, representatives, and each of them, from any aforesaid claims, costs, demands, actions, liabilities, judgments or attorneys fees, whatsoever, and to do any and all other things necessary or desirable in the opinion of Glass to effectuate the purposes of this release, indemnification and agreement to hold harmless. c) In the event of a breach of this Agreement by the Company, the company agrees to pay all costs, including reasonable attorneys' fees incurred by Glass in its efforts to enforce its rights under this Agreement. 7. This engagement of Glass shall continue at the pleasure of the Board of Directors, and may be terminated at any time by resolution of the Board of Directors, a certified copy of which shall be delivered to Glass. Glass shall have the option to terminate its employment at any time upon notification to the Board of Directors of its desire to terminate. The provisions of Paragraph 6 (Indemnification) shall survive the termination of this Agreement for any reason. 8. In the event that the Glass representative is offered and accepts a permanent assigned position with the Company, Glass will receive from Company payment equal to 30% of his first year's total compensation, an amount not unlike that received by an executive recruiter. 2 9. The parties hereto agree that the interpretation and enforceability of this Agreement shall be determined in accordance with the substantive laws of the State of Ohio, exclusive of choice of law provisions. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. Dated: GLASS & ASSOCIATES, INC. ----------------------------- By: ------------------------------------- (Office) ------------------------------------- COMPANY By: --------------------------------- Its: --------------------------------- 3 RATE SCHEDULE EFFECTIVE JANUARY 1, 1996 Principal ........ $250.00 - $300.00 per hour Case Director ........ $200.00 - $250.00 per hour Senior Consultant ......... $175.00 - $225.00 per hour Consultant ........ $125.00 - $175.00 per hour Clerical/Administrative ........ $45.00 - $60.00 per hour Out-of-Pocket Expenses ........ At Cost EX-11.1 4 EXHIBIT 11.1 COMPUTATION OF EARNINGS EXHIBIT 11.1 NU-KOTE HOLDING, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FOR THE THREE MONTHS ENDED ------------- ------------- DECEMBER 26, DECEMBER 27, 1997 1996 ------------- ------------ BASIC Shares outstanding: Weighted average number of shares outstanding 21,775 21,775 ------------- ------------ ------------- ------------ Net loss $ (14,980) $ (4,029) ------------- ------------ ------------- ------------ Net loss per common share $ (0.69) $ (0.19) ------------- ------------ ------------- ------------ DILUTED Shares outstanding: Weighted average number of shares outstanding 21,775 21,775 Net effect of dilutive stock options and warrants (1) ------------- ------------ 21,775 21,775 ------------- ------------ ------------- ------------ Net loss $ (14,980) $ (4,029) ------------- ------------ ------------- ------------ Net loss per common share $ (0.69) $ (0.19) ------------- ------------ ------------- ------------
26 EXHIBIT 11.1 (CONTINUED) NU-KOTE HOLDING, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FOR THE NINE MONTHS ENDED ------------ ------------ DECEMBER 26, DECEMBER 27, 1997 1996 ------------ ------------ BASIC Shares outstanding: Weighted average number of shares outstanding 21,775 21,764 ------------ ------------ ------------ ------------ Loss before extraordinary item $ (28,970) $ (4,566) Extraordinary loss (2,550) ------------ ------------ Net loss $ (31,520) $ (4,566) ------------ ------------ ------------ ------------ Loss per common share before extraordinary item $ (1.33) $ (0.21) Extraordinary loss per common share (0.12) ------------ ------------ Net loss per common share $ (1.45) $ (0.21) ------------ ------------ ------------ ------------ DILUTED Shares outstanding: Weighted average number of shares outstanding 21,775 21,764 Net effect of dilutive stock options and warrants (1) ------------ ------------ 21,775 21,764 ------------ ------------ ------------ ------------ Loss before extraordinary item $ (28,970) $ (4,566) Extraordinary loss (2,550) ------------ ------------ Net loss $ (31,520) $ (4,566) ------------ ------------ ------------ ------------ Loss per common share before extraordinary item $ (1.33) $ (0.21) Extraordinary loss per common share (0.12) ------------ ------------ Net loss per common share $ (1.45) $ (0.21) ------------ ------------ ------------ ------------
--------------------------- (1) For the three and nine month periods ended December 26, 1997 and December 27, 1996, respectively, stock options and warrants are not considered as those periods resulted in net losses, making the stock options and warrants anti-dilutive. 27 EX-27 5 EXHIBIT 27
5 1,000 9-MOS MAR-31-1998 APR-01-1997 DEC-26-1997 11,683 0 60,761 5,404 87,238 166,689 106,174 36,054 262,529 231,804 0 0 0 223 15,283 262,529 223,170 223,170 185,224 185,224 55,699 0 10,090 (27,843) 1,127 (28,970) 0 (2,550) 0 (31,520) (1.45) (1.45)
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