<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the quarterly period ended September 30, 1996
or
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from to
------------- -------------
Commission file number:
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2945 Wilderness Place, Boulder, CO 80301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 440-5500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
Number of shares outstanding of the issuer's common stock, as of
October 31, 1996:
6,841,479 shares of Common Stock, $.01 par value per share
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES INDEX
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<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
September 30, 1996 and June 30, 1996 3
Consolidated Statements of Operations -
for the three months ended September 30, 1996
and 1995 4
Consolidated Statements of Cash Flows -
for the three months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submissions of Matters to a vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
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(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 26,169 $ 25,992
Accounts receivable, net of allowance 6,023 7,098
Inventories (Note 2) 14,176 13,868
Prepaid expenses and other current assets 3,614 3,365
Property held for sale 5,037 5,955
-------- --------
Total current assets 55,019 56,278
Property and equipment, at cost, net of
accumulated depreciation and amortization 1,672 1,631
Deposits and other 1,922 2,336
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Total assets $ 58,613 $ 60,245
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,840 $ 4,145
Accrued expenses:
Income taxes 1,146 1,334
Other 1,766 2,904
Current maturities of long-term debt 4,831 5,035
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Total current liabilities 11,583 13,418
Long-term debt 106 115
Other 537 545
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Total liabilities 12,226 14,078
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Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par - shares authorized, 12,000 and 10,000; 68 68
shares outstanding, 6,840 and 6,825
Additional paid-in-capital 43,538 43,463
Foreign currency translation (479) (549)
Retained earnings 3,260 3,185
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Total stockholders' equity 46,387 46,167
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Total liabilities and stockholders' equity $ 58,613 $ 60,245
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</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
Three months ended
September 30,
--------------------
1996 1995
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<S> <C> <C>
Net sales:
Printers $ 2,239 $ 4,516
Consumable supplies and spare parts 11,813 13,220
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Total net sales 14,052 17,736
Cost of sales 7,679 11,709
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Gross profit 6,373 6,027
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Operating Expenses:
Selling, general and administrative 2,544 2,722
Research and development 2,310 1,174
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Total operating expenses 4,854 3,896
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Operating income 1,519 2,131
Other income (expense) (544) (21)
-------- --------
Income before income taxes 975 2,110
Income tax (expense) (768) (663)
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Net income $ 207 $ 1,447
======== ========
Net income applicable to common stockholders $ 207 $ 1,033
======== ========
Pro forma net income per common share $ 0.03 $ 0.28
======== ========
Pro forma weighted average common and common
equivalent shares outstanding 6,996 5,083
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
1996 1995
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<S> <C> <C>
Operating activities:
Net income $ 207 $ 1,447
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 298 455
Loss on disposal of property and equipment 872 7
Changes in operating assets and liabilities:
Trade receivables 1,075 348
Inventories (355) (1,004)
Other current assets (526) (320)
Other assets 317 142
Accounts payable and accrued expenses (1,565) 1,087
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Net cash provided by operating activities 323 2,162
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Investing activities:
Purchase of equipment (250) (207)
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Financing activities:
Proceeds from exercise of stock options 75 0
Principal payments of long-term debt (27) (19)
Payment of dividend (132) 0
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Net cash used in financing activities (84) (19)
-------- --------
Effect of exchange rate changes on cash 188 (1,184)
-------- --------
Net increase in cash and cash
equivalents 177 752
Cash and cash equivalents, at beginning of
period 25,992 6,389
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Cash and cash equivalents, end of period $ 26,169 $ 7,141
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</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to fairly state the Company's consolidated
financial position and operating results for the interim periods. The results
of operations for the three months ended September 30, 1996 are not necessarily
indicative of the results for the full year.
Note 2. Inventories
Inventories consisted of the following:
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<CAPTION>
September 30, June 30,
1996 1996
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(thousands)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $ 6,309 $ 6,183
Raw Materials 7,867 7,685
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$14,176 $13,868
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</TABLE>
Note 3. Deferred Income Taxes
At September 30, 1996 the Company had a deferred tax asset in the amount
of $3,656,000 ($906,000 classified as short term with the balance of $2,750,000
as long term) based on management's assessment that it is more likely than not
that it will have sufficient taxable income in future periods to realize the
corresponding tax benefit resulting from the recognition of the deferred tax
asset. Management plans to reassess the deferred tax asset on a quarterly basis
and make appropriate adjustments as necessary.
Note 4. Pro Forma Net Income Per Common Share
Pro forma net income per share is computed using net income applicable
to common stockholders increased by the excess liquidation preference
attributable to the period and the weighted average number of common (6,840,000
and 4,625,000 as of September 30, 1996 and 1995) and common equivalent shares
outstanding. Common equivalent shares include convertible preferred stock which
was converted into common stock at the completion of the Company's initial
public offering ("IPO") (3,789,000 as of September 30, 1995) and those shares
issuable upon the assumed exercise of dilutive
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stock options as adjusted for the effects of the application of Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") No. 83. (156,000 and
458,000 as of September 30, 1996 and 1995. Pursuant to SAB No. 83, options
granted within one year of the IPO which have an exercise price less than the
IPO price are treated as outstanding for all periods presented. Earnings per
share is computed using the treasury stock method, under which the number of
shares outstanding reflects an assumed use of the proceeds from the assumed
exercise of such options to repurchase shares of the Company's common stock at
the IPO price.
Note 5. Adjusted Pro Forma Earnings Per Share
As of June 30, 1996 the Company has utilized all of its net operating
loss carryforwards. Therefore, management anticipates its future effective tax
rate will be approximately 40%. The following table summarizes the adjusted pro
forma effect to net income per common share assuming the Company had an
effective tax rate of 40% for the quarter ending September 30, 1995. The quarter
ended September 30, 1996 reflects additional income tax expense of $378,000
related to the sale of the Tama property in Japan.
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------------
1996 1995
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(thousands, except per share data)
<S> <C> <C>
Pre-tax income (1) $ 975 $2,110
ELP (2) - 414
Income tax expense 768 844
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Adjusted pro forma net income $ 207 $ 852
======== ======
Adjusted pro forma net income
per common share $ 0.03 $ 0.17
======== ======
Pro forma weighted average
common and common equivalent
shares outstanding 6,996 5,083
======== ======
</TABLE>
(1) Pre-tax income at September 30, 1996 includes a one-time write off of
$872,000 related to the Tama property in Japan.
(2) Excess liquidation preference "ELP" was a one-time cash dividend paid to
holders of Senior Convertible Preferred Stock during the Company's IPO.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
Total net sales. Total net sales decreased 20.8% from $17,736,000 in
the three months ended September 30, 1995 to $14,052,000 in the three months
ended September 30, 1996. Printer sales revenue decreased by 50.4% from
$4,516,000 in the three months ended September 30, 1995 to $2,239,000 in the
three months ended September 30, 1996. The decrease in printer revenue is
attributable to the introduction by Hewlett-Packard of a competing 40 page per
minute printer as well as an industry wide slow down in computer systems sales.
Consumable supplies and spare parts sales decreased by 10.6% from $13,220,000
in the three months ended September 30, 1995 to $11,813,000 in the three months
ended September 30, 1996. This decrease is due to customers return to normal
inventory levels after the large build-up in the last six months of fiscal
1996. The Company anticipates that this trend will continue.
Gross profit. Gross profit increased by 5.7% from $6,027,000 in the
three months ended September 30, 1995 to $6,373,000 in the three months ended
September 30, 1996. The gross margin increased from 34.0% to 45.4% in the same
period. The increase in dollars and as a percentage of sales is primarily due
to the higher sales mix of consumable supplies which generate higher margin,
the favorable dollar to yen exchange rate and continued cost improvements in
the manufacturing process.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 6.5% from $2,722,000 in the three months
ended September 30, 1995 to $2,544,000 in the three months ended September 30,
1996. This decrease consists mainly of lower bonus expense due to the decrease
in pre-tax income.
Research and Development Expense. Research and development expenses
increased by 96.8% from $1,174,000 in the three months ended September 30, 1995
to $2,310,000 in the three months ended September 30, 1996. This increase is
due to expenses associated with the continued development of the KW60 product
line.
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Interest Expense and Other Income (Expense). Interest expense and
other income (expense) increased from $21,000 of expense in the three months
ended September 30, 1995 to $544,000 of expense in the three months ended
September 30, 1996. Other expense at September 30, 1996 includes a book loss
of $872,000 related to the anticipated sale in November 1996 of the Tama
property in Japan.
Net interest expense at September 30, 1995 was $8,000, while at
September 30, 1996 net interest income of $290,000 was realized as a result of
greater cash available for investment.
Income Tax (Expense) Benefit. Income tax expense for the three months
ended September 30, 1995 was $663,000, or an effective tax rate of 31.4%, as a
result of the utilization of net operating loss carryforwards which offset
taxable income in fiscal year 1996. Income tax expense for the three months
ended September 30, 1996 was $768,000 resulting in a year-to-date effective tax
rate of 78.8%. Income tax expense includes the standard provision of a 40% tax
rate and a one-time tax expense of $378,000 related to the sale of the Tama
property in Japan.
LIQUIDITY AND CAPITAL RESOURCES
Changes in cash during the three months ended September 30, 1996
resulted in a net increase of $177,000 as compared to a net increase during the
three months ended September 30, 1995 of $752,000. Net cash provided by
operations for the three months ended September 30, 1996 decreased by
$1,549,000 from the three months ended September 30, 1995. The primary reason
for this decrease was a reduction in net income of $1,240,000.
In November 1996 the Company entered into an agreement to sell the
Tama property in Japan. The proceeds from the sale, net of commission, are
estimated to be Y.552,900,000, or $4,964,533 at a yen-dollar exchange rate of
111.37, and will be used to pay off the Company's long term debt.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 23, 1996 the Company was served a complaint filed by Printronix
Corporation in the Federal District Court for the Central District of
California alleging violations of the Robinson-Patman Act and breach of
contract and seeking an aggregate of $10 million in relief. The suit pertains
to Printronix desire to retain OEM pricing on consumable supplies and spare
parts.
On May 6, 1996, the Company filed an action against Rosetta
Technologies Corporation seeking collection of unpaid invoices. Rosetta
counterclaimed and alleged actions related to breach of contract and antitrust.
The Company intends to vigorously defend against these claims. In
view of the stage of litigation, management and counsel of the Company are
unable to determine the outcome of the legal actions or estimate the amount of
the loss, if any.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submissions of Matters to a vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Form 8-K
None.
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
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: November 11, 1996 KENTEK INFORMATION SYSTEMS, INC.
/s/ PHILIP W. SHIRES
-------------------------------------
Philip W. Shires
President and Chief Executive Officer
(Principal Executive Officer)
/s/ CRAIG G. LAMBORN
-------------------------------------
Craig G. Lamborn
Vice President, Finance and
Administration (Principal Financial
and Accounting Officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 26,169
<SECURITIES> 0
<RECEIVABLES> 6,023
<ALLOWANCES> 0
<INVENTORY> 14,176
<CURRENT-ASSETS> 55,019
<PP&E> 20,771
<DEPRECIATION> 19,099
<TOTAL-ASSETS> 58,613
<CURRENT-LIABILITIES> 11,583
<BONDS> 0
68
0
<COMMON> 0
<OTHER-SE> 46,319
<TOTAL-LIABILITY-AND-EQUITY> 58,613
<SALES> 14,052
<TOTAL-REVENUES> 14,052
<CGS> 6,373
<TOTAL-COSTS> 11,227
<OTHER-EXPENSES> 834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (290)
<INCOME-PRETAX> 975
<INCOME-TAX> 768
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
