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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 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)
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DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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2945 Wilderness Place, Boulder, CO 80301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 440-5500
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: COMMON STOCK, $.01 PAR
VALUE
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ].
On August 29, 1996, the bid and ask prices of the Common Stock were $6.63
and $6.88, respectively. The aggregate market value of the voting stock of the
Issuer held by non-affiliates based on the average bid and ask prices on August
29, 1996 was $46,203,781.
On August 29, 1996, 6,839,938 shares of the Registrant's
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Item 10, Item 11, Item 12 and Item 13 of
Part III of this Form 10-K are incorporated by reference from the Registrant's
definitive proxy statement to be filed in accordance with Rule 142-101,
Schedule 14A, in connection with the Registrant's November 15, 1996 Annual
Meeting of Stockholders for fiscal year ended June 30, 1996.
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KENTEK INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I.
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . 9
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 10
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 TO F-11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 13
PART III.
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . 14
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION AS WELL AS THE
SECTIONS ENTITLED PRODUCT DEVELOPMENT, CUSTOMERS, MARKETING AND SUPPORT,
MANUFACTURING AND SOURCES OF SUPPLY, BACKLOG, COMPETITION, PROPRIETARY RIGHTS,
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, AND THOSE DISCUSSED IN THE COMPANY'S S-1 REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE'S COMMISSION ("COMMISSION") ON APRIL 16,
1996. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS AND ITS FORM 10-Q FILED WITH THE COMMISSION ON MAY 30, 1996
PART I.
ITEM 1. BUSINESS
Kentek Information Systems, Inc. ("Kentek" or the "Company") is a
leading supplier of mid-range, non-impact laser printers and related consumable
supplies and spare parts. The mid-range market is characterized by heavy-duty,
high-reliability printers that print 30 to 45 pages per minute ("ppm") and
30,000 to 300,000 pages per month. The Company's printers are designed
primarily for high-volume printing requirements, including (i) dedicated system
applications which include printing invoices, forms and direct mail, (ii)
computer network applications for connecting multiple users on a network in
order to share a single heavy-duty printer and (iii) print-on-demand
applications characterized by the use of a printer rather than a copy machine
to generate multiple originals from digitally-stored data on an as-needed
basis. The Company was incorporated under the laws of the state of Delaware in
1981. Its principal offices are located at 2945 Wilderness Place, Boulder, CO
80301. On April 17, 1996, the Company completed its initial public offering
("IPO") of 2,200,000 shares of its common stock at $8 per share. The Company
received $15,623,000 in proceeds net of offering costs of $1,977,000.
The Company is the exclusive manufacturer of consumable supplies for
its printers, with the exception of toner, which is manufactured exclusively
for Kentek to it's specifications. Kentek estimates that its printers have an
average useful life of approximately seven years. Over the useful life of
these printers, the consumable supplies must be replaced several times each
year under normal use conditions and, consequently, sales of consumable
supplies and spare parts typically generate revenues in excess of three times
the original cost of the printer and represent approximately 85% of the total
cost of ownership of the printer.
Originally, the Company sold its printers and consumable supplies and
spare parts almost exclusively to IBM. Since 1991, the Company has sought to
reduce its dependence on IBM by expanding its marketing efforts to other
customers. IBM indicated to the Company in fiscal 1993 that it intended to
reduce significantly its purchases of Kentek printers, and in early fiscal 1995
IBM formally announced its plans to begin purchasing a competitor's line of
mid-range printers. Accordingly, sales of printers to IBM have declined
sharply since the second half of fiscal 1995. However, Kentek currently sells
its products to the broadest base of OEMs, system integrators, and independent
supplies resellers in the mid-range market. Kentek's customers include AT&T,
Genicom, Hewlett-Packard, Lexmark, Mannesmann Tally, Printronix, Oce Printing
Systems (formerly Siemens Nixdorf Printing Systems), and Unisys. The Company
believes its market leadership is primarily attributable to its high printer
reliability, the low total cost of ownership of its printers and consumable
supplies, and the attractive pricing Kentek offers its customers.
In fiscal year 1996, the Company continued to develop a new line of
high performance printers to meet the evolving needs of the mid-range market,
including the KW60, a 60 ppm printer with wide format capability, increased
paper handling capacity, 600 dots per inch resolution, duplex printing and a
full speed highlight color option. The KW60, currently in the engineering
prototype stage, is projected for first customer shipment in the fall of 1997.
INDUSTRY OVERVIEW
The market for non-impact printers can be segmented based upon users'
need for speed (ppm), duty cycle (capacity of pages per month), functionality
(network connectivity, forms and fonts, and paper handling features) and cost
of ownership (average cost per page over the life of a printer). The average
cost per page takes into account the initial purchase price, the cost of
consumable supplies, and maintenance costs. At present, non-impact printers
generally can be divided into the following market segments:
Low-Range. This market segment, defined by printing speeds of less than
30 ppm, is appropriate for personal/desktop applications and small
workgroup applications. Personal/desktop printing for small and home
offices typically requires a relatively inexpensive dot-matrix, ink-jet
or non-impact printer that is connected to a single personal computer.
Small workgroup printing environments generally serve several personal
computers or a small local area network. The Company believes that the
primary selection criteria for low-range printers are print speed and
initial acquisition price. International Data Corporation ("IDC")
estimates that approximately 11,400,000 low-range non-impact printers
were purchased worldwide in 1995. Hewlett-Packard is the leading
manufacturer in the low-range segment.
Mid-Range. This market segment, defined by printing speeds of 30 to 45
ppm, provides enhanced features such as continuous operation and higher
duty cycle. Mid-range printers are utilized in three distinct
applications: dedicated systems, which serve print-intensive specific
applications, such as general accounting, invoicing and generation of
mortgage or insurance forms and documents, and are typically connected
to a minicomputer; network applications, which serve the print needs of
multiple users connected to a network; and print-on-demand
applications, which serve as digital copiers for users who need to
generate multiple custom documents on demand from a
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template stored on disk. IDC estimates that approximately 5,865
mid-range printers were purchased in the U.S. in 1995 and reports that
Kentek is a leading U.S. manufacturer in the mid-range segment, with a
market share of approximately 37% in 1995. The Company believes it
sells its printers to a broader base of customers than any other
mid-range printer manufacturer.
High-Range. This market segment, defined by printing speeds of 50 ppm
or greater, provides higher duty cycle than the other categories.
High-range printer applications include very high volume applications
such as direct mail and monthly public utilities printing bills. IDC
estimates that approximately 2,250 high-range printers were purchased
worldwide in 1995. Xerox and Oce Printing Systems, (formerly Siemens
Nixdorf Printing Systems), are the leading manufacturers in the
high-range segment.
The following characteristics of mid-range printers distinguish them from
low-range printers:
o 30 to 45 ppm print speeds
o High reliability
o High duty cycle
o Low cost per printed page
o Low maintenance
o Complex print jobs
o Continuous operation
o Paper handling features
o Advanced computer and network connectivity
For many business applications, when aggregate usage exceeds 30,000
pages a month, a high-output mid-range printer can provide a more efficient and
cost-effective solution than multiple low-range printers. Additionally, a
single mid-range printer can offer a lower cost of ownership than multiple
low-range printers while providing the convenience of higher speed, high print
quality and enhanced features such as duplex printing, advanced paper handling
and larger memory capacity for storing fonts and customized forms. Mid-range
printers can run continuously and hold sufficient paper and consumables to
require only infrequent operator attention.
The consumable supply products for a mid-range printer are a
significant cost to the end-user over the life of the printer and are roughly
85% of the total cost of operation over the printer's useful life. The
consumable supply products include the photoconductor, toner, developer, fuser
and cleaner. End-users typically purchase consumable supply products from the
supplier which sold them their printer. As one moves from the low-range
printer market to the mid-range and high-range markets, the revenues generated
by sales of consumable supplies over the life of a printer increasingly exceed
the revenues generated by the initial printer sale.
PRINCIPAL PRODUCTS
The Company's objective is to provide a complete printer hardware,
software and consumable supplies package that enables suppliers to easily
install Kentek printers within their systems and to provide completely for
their customers' ongoing supplies needs. Kentek's printers are designed to
provide high print quality, ease of use and reliable operation under the
conditions of continuous use found in data center, network and print-on-demand
printing environments. The Company's printers typically have a usable life of
seven years.
Kentek printers employ technologies that result in lower incidence of
paper jams and better durability than other printers in the industry. For
example, the Company utilizes a simple printer engine design incorporating a
straight paper path that permits the use of a wide variety of printable media
with an incidence of paper jams of approximately 1-in-10,000 printed pages.
This characteristic, in conjunction with high volume paper handling
accessories, permits Kentek printers to operate continuously, unattended at
full speed. Kentek pioneered the use of light emitting diode ("LED")
technology in printhead design. This technology is used to generate the
individual pixels on the photoconductor. The LED array technology uses no
moving parts and provides simple, direct and precise beam alignment from the
diode array to the photoconductor. In contrast, a laser beam printer utilizes
a motor to drive a rotating polygon mirror at speeds of as high as 35,000 rpm
and directs the scanning beam across the width of the photoconductor. As the
beam moves from one side to the other, the spot size modulation and
magnification must be managed. The Company believes that its simple printer
engine design and LED array technology is more durable than laser beam
technology, permitting higher duty cycles at lower costs.
The following descriptions illustrate the principal features of Kentek's
K30/K30D, K31/K31D and K40D printers. All printers in the Company's current
line have a rated duty cycle of 300,000 pages per month and interface with IBM,
HP, DEC and UNIX platforms.
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K30 Printer/K30D Printer. The K30/K30D incorporates the Company's
standard rugged features, including a straight paper path and LED array
printhead. The K30 is capable of full page graphics printing at 300
dots per inch ("dpi"). The K30 includes a standard Motorola 68020
microprocessor and 8 megabytes of RAM. As an option, the controller
contains an Intel i860 microprocessor and up to 16 megabytes of RAM.
The K30 includes two internal floppy disk drives and offers an optional
540 megabyte hard disk drive. The K30 includes standard dual cassette
input trays containing a total of 800 sheets and an output tray and
offers a 1,200 sheet feeder, optional 2,500 sheet feeder and 1,400
sheet output stacker as options. The K30D printer offers the duplex
printing feature, printing on both sides of the paper. The K30 and
K30D, 30 ppm printers, were introduced in July 1992.
K31 Printer/K31D Printer. The K31/K31D duplex offers the same standard
features as the K30/K30D and incorporates the RIGS controller.
Standard features of the K31 and K31D included a 25 MHz IDT 3081 RISC
(MIPS R3000 compatible) microprocessor with an internal floating point
co-processor and 8 megabytes (12 megabytes duplex) to 64 megabytes of
RAM, full graphics printing at 300 dpi, one floppy disk drive and a 540
megabyte internal hard disk, and dual cassette input trays containing a
total of 800 sheets and an output tray. Available as options are a 50
MHz IDT 3081 RISC microprocessor to accelerate complex graphics, a
2,500 sheet input feeder and 1,400 sheet output stacker, and a 600 dpi
printhead under development. The K31 and K31D, 30 ppm printers, were
introduced in September 1995.
K40D Printer. The K40D also incorporates the Company's standard
features of straight paper path, LED array printhead and dual component
toner process. Standard features of the K40D model also include a 25
MHz IDT 3081 RISC (MIPS R3000 compatible) microprocessor with an
internal floating point co-processor and 12 to 64 megabytes of RAM,
full graphics printing at 300 dpi, one floppy disk drive and a 540
megabyte internal hard disk, and dual cassette input trays containing a
total of 800 sheets and an output tray. Available as options are a 50
MHz IDT 3081 RISC microprocessor to accelerate complex graphics, a
2,500 sheet input feeder and 1,400 sheet output stacker, and 600 dpi
printhead under development. The K40D, a 40 ppm duplex printer, was
introduced in November 1994.
The Company offers various accessory options for its printers,
including 1,200 and 2,500 sheet input feeder cassettes, a 1,400 sheet output
stacker, a 75 envelope feeder kit and a 540 megabyte hard drive option, for
expanded storage of forms and fonts.
Kentek also designs and develops sophisticated proprietary printer
controller hardware and software to manage the complex tasks associated with
communicating with multiple host computers over a network and coordinating
complex print jobs at high speed. Kentek's printers generally include a
printer controller (image generation system or IGS controller) and a machine
controller (printer control logic or PCL controller), each with its associated
software. In 1994, Kentek invented a proprietary RISC-based Image Generation
System ("RIGS") architecture that is used on the K31/K31D and K40D printers.
The RIGS architecture uses higher speed microprocessors, expanded RAM and
enhanced ASICs designed to speed complex text and graphics manipulation. Kentek
controllers come standard with HP PCL5e and HPGL printer control language
emulations. Phoenix Page PostscriptTM is available as a printer control
language option
The Company is the exclusive manufacturer of consumable supplies for
its printers, with the exception of toner, which is manufactured exclusively
for Kentek to its specifications.
PRODUCT DEVELOPMENT
The Company believes that the development of new products and the
enhancement of existing products are essential to its future success. The
market for the Company's products is characterized by rapidly changing
technology, evolving industry standards, and frequent new product
introductions. Accordingly, the Company believes that its success depends to a
significant extent on its ability to enhance existing products and to develop
technologically advanced and cost-effective new products that meet a wide range
of changing customer needs and achieve market acceptance. The Company intends
to continue to devote a substantial portion of its resources to research and
development of high speed non-impact printers, printer controllers and software
and consumable supply products. The Company attempts to maintain its
technological competitiveness and position its products attractively by working
with its customers to plan products that meet end-users' needs.
The Company's product development efforts are focused on its KW
printer line, as well as on developing higher speed controller and software
enhancements for its existing printer line and introducing new features such as
highlight color and improved paper handling and additional consumable supply
products. The Company believes that its success depends in part on its ability
to enhance existing products and to develop new products that maintain
technological leadership, meet a wide range of changing customer needs and
achieve market acceptance.
KW Product Line. The KW product line will offer a series of printers
with speeds ranging from 40 to 90 ppm or more with an initial introduction of a
60 ppm printer and will incorporate new features specifically addressing
concerns of the dedicated systems, network computing and print-on-demand market
segments. This will enable the Company to bring high-range performance to the
mid-range market segment. The KW60, a 60 ppm printer which has been under
development since early 1994, is projected to be available for customer
shipments commencing in late 1997.
The KW product line is a new design that incorporates many of the
fundamental characteristics of Kentek's existing products, including a straight
paper path, high-speed and flexible controllers and software, and high
reliability. Further, the standard KW printer will support wide format
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paper, increased paper handling capacity, 600 dpi resolution, duplex printing,
and a full-speed highlight color option. The KW product line also will
introduce the SIGS controller, a scaleable Pentium-based controller
motherboard; a PCI bus that will increase data transfer rates and enable easy
integration of co-processors; and a multiple-connectivity feature that will
ease all types of network connectivity. The Company believes that the adoption
of these industry-standard processors and communication protocols will decrease
the development and engineering cycles associated with implementing future
product enhancements. In addition, the Company is designing consumable
supplies for its KW printer line that will extend the life span of each
component and reduce per page printing costs.
Kentek plans for the KW product development program to result in a
printer and accessory design that will support the development of a line of
printers of up to 90 ppm or more. The KW printers will be manufactured by
Kentek in Boulder, Colorado. The Company believes that locating manufacturing
in the United States rather than in Japan will reduce manufacturing costs. In
parallel with development of the KW60, the Company plans to deploy certain of
the KW features, such as 600 dpi resolution and the SIGS controller, on its
current K31/K31D/K40D printers in order to extend the lifecycles of those
products. The Company believes that it will introduce a KW40 printer in
approximately early 1998.
The Company maintains product development centers in Boulder, Colorado
for controller and software development, and in Nagano, Japan, for printer
engine and new consumable supply product design. As of June 30, 1996 the
Boulder facility employed 44 engineering staff and Nagano employed 22
engineering staff. The Company's R&D expenditures for fiscal years ending June
30, 1996, 1995, 1994 were $6,175,000, $5,357,000 and $5,135,000 respectively.
CUSTOMERS, MARKETING AND SUPPORT
The Company distributes its printers exclusively through sales to OEM
customers and system integrators. In fiscal 1996 net sales to each of Lexmark,
Oce Printing Systems, Hewlett Packard and Mannesmann Tally constituted greater
than 10% of the Company's total net sales. Financial information regarding
sales to principal customers is presented in Note 7 of the notes to
consolidated financial statements which appear elsewhere in Form 10-K. Since
February 3, 1996, the Company and Siemens Nixdorf Printing Systems have been
operating pursuant to an oral extension of their written agreement, pending
negotiation of a replacement agreement or further extension. On April 1, 1996,
Oce van der Grinten N.V., a large Dutch photocopier and printer manufacturer
and distributor, signed a definitive agreement to acquire Siemens Nixdorf
Printing Systems, which has resulted in the combined entity, Oce Printing
Systems. Hewlett Packard announced the discontinuance of its printers which
use the Kentek engine effective October 31, 1996. The loss or decline of sales
to either Lexmark or Oce Printing Systems could have a material adverse affect
on the Company's business, results of operations and financial condition.
Customers typically begin purchasing a printer only after they have
completed a lengthy evaluation process and integrated the printer into their
product lines. This evaluation process includes participation in the early
stages of the printer design process and qualification of production units as
they become available. In addition, before volume purchases of a commercially
available product can occur, customers must develop marketing programs,
including sales and service training. This long sales cycle makes it difficult
in the short term for the Company to recapture lost revenues through sales to
new customers or through sales of new products to existing customers.
Consumable supply products for Kentek's printers are supplied
exclusively by Kentek and distributed principally through its customers. In
addition, certain consumable supplies are distributed through third party
resellers. Customers sell these consumable supply products and spare parts
directly to their customers through resellers of their computer systems, or to
independent supplies resellers for sale to such customers. The Company also
sells its products directly to supplies distributors, where such sales do not
adversely affect the Company's OEM customers.
Kentek's consumable supply products used in IBM-branded products
manufactured by Kentek are sold through Lexmark pursuant to an exclusive
relationship with the Company under which Lexmark is required to purchase its
requirements of consumable supply products for IBM-branded printers only from
Kentek. Under the terms of an agreement between IBM and Lexmark, IBM may begin
selling consumable supply products for IBM-branded printers after March 1999.
In order to do so, IBM would be required to purchase such consumable supplies
from Lexmark for resale by IBM or to incur engineering, tooling and
manufacturing costs to enter the business of supply consumables for its
customers.
The Company needs to maintain only a small sales organization because
the Company does not sell directly to end-users and has considerable sales
leverage from its customer's sales forces. As of June 30, 1996, the Company's
sales and marketing organization consisted of 18 persons, of whom three are
based in three locations in the United States, and four are located at a single
office in Europe. The Company complements its field sales staff with in-house
technical sales personnel and a product support department to provide technical
training and product support to its customers. Financial information about
foreign and domestic sales, operating income and assets is presented in Note 12
of the notes to consolidated financial statements which appear elsewhere in
this Form 10-K.
The Company provides a two-year warranty against defects in the
Company's printer products. The Company warrants its consumable supply
products against manufacturing defects with an industry standard "out-of-box"
warranty. Use of consumable supply products not manufactured or approved by
Kentek voids the user's warranty for both the printer and the consumable supply
products. The Company believes that its commitment to quality has resulted in
low warranty expense. In each of the fiscal years ended June 30, 1996, 1995,
and 1994, the Company incurred warranty expenses of $358,634, $343,796 and
$188,154 respectively.
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MANUFACTURING AND SOURCES OF SUPPLY
The Company operates manufacturing facilities in Boulder, Colorado and
in Nagano, Japan. The Boulder, Colorado facility manufactures the
photoconductor, developer, fuser, and cleaner consumable supply products. The
Company manufactures high capacity sheet feeders and output stackers in its
facility in Nagano, Japan. The Company designs and engineers its printer
engines and supervises their assembly under contract with the Nagano Japan
Radio Corporation. The KW60 and future products in the KW printer line will be
manufactured in Boulder, Colorado. The Company purchases toner manufactured
exclusively to Kentek's specifications by outside suppliers.
The Company procures all of its component parts from outside suppliers
including proprietary components associated with the production of both the
printer products and the consumable supply products. Although the Company
generally purchases from multiple vendors, certain of the Company's parts and
components are obtained entirely or substantially from a single source. The
Company owns all of the unique tooling and mask work used for production of
these parts. The tools for producing component parts of the printer engines
reside with component suppliers in Japan, while tooling designed and produced
for manufacturing the components of the consumable supply products are located
mostly in the United States. The Company employs proprietary ASICs in its
controller products and relies on contract manufacturers to assemble its
printed circuit boards. In fiscal year 1995, the Company completed a two year
plan to relocate all consumable supplies' manufacturing from Japan to Boulder,
CO. The Company has also successfully transitioned its sources for over 70% of
its piece-part components for its consumable supplies from Japan to the United
States. The Company believes that this has reduced its manufacturing costs and
also reduced its exposure to currency fluctuation.
The Company has significant operations in Japan, where certain
components of its printers are sourced, designed and manufactured. Operating
expenses and production costs related to Kentek's Japanese operations are
subject to fluctuations in the dollar-yen exchange rate. The Company mitigates
a portion of its currency fluctuation risk through a contractual risk sharing
provision included in its customer agreements.
The Company owns a 16,000 square foot facility in Tama, Japan which is
vacant and currently held for sale. Although the Company believes that the
stated value of the property is appropriate, there can be no assurance that the
Company will not be required to write down the value of the property in the
future due to a continued weakness in the Japanese real estate market.
BACKLOG
Aggregate backlog as of June 30, 1996 was approximately $9 million,
compared to approximately $12 million as of June 30, 1995. This decrease is
attributable in part to the loss of Hewlett Packard printer sales, as well as
reduced sales to Oce Printing Systems as a result of uncertainty related to
their recent acquisition of Siemens Nixdorf Printing Systems. Backlog consists
of customer orders, the majority of which are scheduled for shipment within
three months following the order date. The Company also receives orders for
immediate shipment which may not be reflected in backlog at any given time.
Purchasers of standard products may generally cancel or reschedule orders
without significant penalty, and, accordingly, the Company's backlog at any
time is not necessarily indicative of future sales. While the Company has
operated historically with a 45 to 60 day backlog of orders, results of
operations for a given quarter are significantly dependent on orders booked and
shipped during that quarter.
The Company has experienced significant fluctuations in quarterly and
annual operating results and anticipates that these fluctuations may continue
in the future. These fluctuations have been and may continue to be caused by a
number of factors, including the timing of customer orders, customers'
inventory management practices, the timing of sales, the effect of fluctuations
in the dollar-yen exchange rate on the Company's operations in Japan,
marketing, research and development expenditures and the introduction of new
products by the Company or its competitors. Consistent with industry practices,
the Company's contractual arrangements with its customers do not require that
customers make minimum quantity purchases of the Company's products or provide
for any bill-back arrangements, and generally permit customers to cancel orders
with minimal penalty.
COMPETITION
The Company competes with many companies in the printer segment of its
business, including Hewlett-Packard, Hitachi, Ricoh and Xerox, each of which
sells non-impact printers and has substantially greater name recognition,
engineering, manufacturing and marketing capabilities, and greater financial
and personnel resources than the Company. For certain applications, the
Company's products compete with similar speed impact printers manufactured by
Genicom, Mannesmann Tally and Printronix. The Company expects increased
competition from established and emerging printer manufacturers and resellers,
including Fujitsu, Kodak and Minolta. As a result of the complexity of the
printer and consumable supplies manufacturing and distribution businesses, many
of the Company's principal customers are also current or potential competitors,
including Genicom, Hewlett-Packard, IBM, Mannesmann Tally, Printronix and Oce
Printing Systems. The principal elements of competition in the Company's
markets include total cost of ownership, product features, product quality and
reliability, performance characteristics and responsiveness to customers.
7
<PAGE> 8
PROPRIETARY RIGHTS
The Company regards much of its hardware and software as proprietary
and relies on a combination of patent, copyright, trademark and trade secret
laws, employee and third-party non-disclosure agreements, and other methods to
protect its products and technology. As of June 30, 1996, the Company had 25
U.S. patents, 12 German patents and 11 United Kingdom patents, all of which
will expire in the period between July 2003 and September 2008. There can be
no assurance, however, that the patents held by the Company will protect the
Company's technology or provide meaningful competitive advantage. In addition,
there can be no assurance that measures taken by the Company to protect its
products and technology will be adequate or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technologies. In addition, the Company has not
applied for patents in Japan. Moreover, the laws of some foreign countries may
not protect the Company's proprietary rights to the same extent as the laws of
the U.S. Other companies could assert patent, copyright or other intellectual
property rights against the Company. If such a claim were made against the
Company, there can be no assurance that the Company would be able to obtain a
license to use such technology if necessary or that such license could be
obtained on terms that would not have a material adverse effect on the
Company's business, results of operations and financial condition. Should the
Company's products be found to infringe a third party's protected technology,
the Company could be required to pay damages to the infringed party or be
enjoined from manufacturing and selling such products. The Company could also
incur substantial costs to redesign its products or to defend any legal action
taken against it.
EMPLOYEES
As of June 30, 1996, the Company had a total of 271 employees
including 212 full time and 59 part-time. There were 107 full-time and 46
part-time employees in manufacturing, 18 full-time employees in sales and
marketing, and 31 full-time and 3 part-time in general and administrative
functions. In addition, 56 full-time and 10 part-time employees were engaged
in research and development. Of the 271 employees, 188 are located in the
U.S., 79 in Japan and four in Europe. The Company's employees are not
represented by any union, and the Company believes that its relationship with
its employees is good.
ITEM 2. PROPERTIES
Kentek leases its main facilities in Boulder, Colorado and Nagano,
Japan. In Boulder, the Company leases three buildings, an approximately 30,000
square foot facility for sales, marketing, research and development, and
general and administrative purposes, an approximately 42,000 square foot
facility for consumables manufacturing and warehousing, and an approximately
11,000 square foot facility for consumable supplies recycling. The current
monthly rent for the administrative facility is $26,765, and the lease
agreement will expire March 31, 1999. The current monthly rent for the
warehouse facility is $17,363, and the lease agreement expires March 31, 1999.
The current monthly rent on the recycling facility is $6,684, and the lease
agreement expires March 31, 1999. In Nagano, the Company leases a total of
approximately 16,500 square feet at three separate sites for manufacturing,
warehousing, and research and development purposes. The current aggregate
monthly rent for the three facilities is approximately $14,300, and the lease
agreements expire on March 31, 1998, February 28, 1997 and March 17, 1998. The
Company also owns a 16,000 square foot facility in Tama, Japan which is
currently held for sale. The Company also leases office space for sales
offices in San Jose, California, Melbourne, Florida and in Gorinchem, The
Netherlands. The Company anticipates that it will require approximately 20,000
additional square feet of manufacturing space by early 1997 for the manufacture
of the KW60 printer, which it believes is available on commercially reasonable
terms and will not be significant to the total cost of operations.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is a defendant in various litigation in the normal
course of business.
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 a aggregate of $10 million in relief. The suit pertains
to Printronix's desire to retain OEM pricing on consumable supplies and spare
parts, even after they discontinued selling the Company's printers.
On May 6, 1996, the Company filed an action seeking collection of
unpaid invoices from Rosetta Technologies Corporation. Rosetta filed
counterclaims related to breach of contract and anti-trust.
The Company intends to vigorously defend against these claims. In
view of the stage of the litigation, management and counsel of the Company are
unable to determine the outcome of the legal action or estimate the amount of
loss, if any.
Based on consultation with various counsel in these matters,
management is of the opinion that the ultimate resolution of such claims will
not materially affect the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the Registrant's fiscal year ended June 30, 1996.
8
<PAGE> 9
PART II.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY & RELATED STOCKHOLDER MATTERS
Market Price and Dividend Information
The Company's Common Stock began trading publicly on the NASDAQ National Market
under the ticker symbol KNTK on April 17, 1996. Prior to that date, there was
no public market for the Common Stock. As of June 30, 1996, 6,824,528 shares
of Common Stock were outstanding and the Company had approximately 123 holders
of record of the Common Stock, which figure does not include those stockholders
whose certificates are held by nominees. The table below sets forth the per
share quarterly high and low closing prices of the Common Stock since the
Company's initial public offering on April 17, 1996 as reported on the NASDAQ
National Market. A cash dividend of $.02 per share was declared on August 8,
1996. It is anticipated that the Company will continue to declare quarterly
dividends.
<TABLE>
<CAPTION>
FISCAL QUARTER HIGH LOW
-------------- ---- ---
<S> <C> <C>
April 17, 1996 $ 8.75 $8.00
Fourth Quarter ended June 30, 1996 $15.50 $8.00
</TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
Kentek Information Systems, Inc. (amounts in thousands, except per
share amounts)
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Revenues $74,381 $70,192 $78,867 $55,875 $61,267
Operating income (loss) 13,277 6,406 10,026 (1,178) (2,211)
Net income (loss) 13,102 5,035 9,647 (665) (3,569)
Net income (loss) applicable
to common stockholders 11,750 3,556 8,326 (665) (3,569)
PER SHARE DATA:
Pro forma net income per
weighted average
common share
(fully diluted) $ 2.42 $ 0.99
Weighted average
common shares
(fully diluted) 5,406 5,099
BALANCE SHEET DATA:
Working capital $42,860 $25,506 $17,870 $ 2,942 ($2,230)
Total assets 60,245 39,711 45,450 33,705 33,296
Long-term debt 115 6,651 5,864 7,839 10,512
Total liabilities 14,078 17,027 29,692 27,473 36,637
Total stockholders' equity (deficit) 46,167 22,684 15,758 6,232 (3,341)
</TABLE>
NOTE: Historical per share information for the years ended June 30, 1994, 1993
and 1992 is not relevant as it would differ materially from the per share data
for the years ended June 30, 1996 and 1995, given the significance of the
senior convertible preferred stock not being considered a common stock
equivalent in computing earnings per share.
9
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Registrant's Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Form 10-K.
OPERATING RESULTS
COMPARISON OF FISCAL YEAR 1996 TO FISCAL YEAR 1995
Total Net Sales. Total net sales increased 6.0% from $70,192,000 in
fiscal 1995 to $74,381,000 in fiscal 1996. Printer sales constituted 31.0% and
24.8%, respectively, of total net sales in fiscal 1995 and fiscal 1996.
Consumable supplies and spare parts sales constituted 69.0% and 75.2%,
respectively, of total net sales in fiscal 1995 and fiscal 1996.
Printers. Printer sales decreased by 15.2% from $21,736,000 in fiscal
1995 to $18,436,000 in fiscal 1996. The decreases in sales revenue and unit
volumes are primarily the result of lower sales to IBM. This was due in large
part to a decision by IBM in fiscal 1995 to purchase competition's 30 ppm
printer. Total unit sales of printers to IBM declined from 825 units and
revenue of $5,318,000 in fiscal 1995 to 162 units and revenue of $1,228,000 in
fiscal 1996. This reduction in printer revenue was partially offset by
increased unit sales of the K40D printer. OEM printer revenue totaled
$16,418,000 in fiscal 1995, increasing 4.8% to $17,208,000 in fiscal 1996.
Consumable Supplies and Spare Parts Sales. Consumable supplies and
spare parts sales increased 15.5% from $48,456,000 in fiscal 1995 to
$55,945,000 in fiscal 1996. The Company's consumable supplies sales for higher
speed printers, which use more consumable supplies, more than offset the
decline in spare parts sales to IBM caused by their reduced printer purchases.
Gross Profit. Gross profit increased by 37.9% from $21,743,000 in
fiscal year 1995 to $29,973,000 in fiscal 1996. The gross margin increased
from 31.0% to 40.3% in the same period. The increase in dollars and as a
percentage of sales is primarily due to the significant increase in sales of
the higher margin K40D printer as well as reduced manufacturing and material
costs as the Company completed the movement of supplies manufacturing from
Japan to the United States. This increase was attributable to a lesser extent
to an increase in higher margin supplies sales and to an increase in consumable
supplies sales as a percentage of total net sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 5.4% from $9,980,000 in fiscal year 1995 to
$10,521,000 in fiscal year 1996. This increase was due primarily to increases
in salary and profit-sharing payout.
Research and Development Expenses. Research and development expenses
increased 15.3% from $5,357,000 in fiscal 1995 to $6,175,000 in fiscal 1996.
This increase was due to the expenses associated with the continued development
of the KW60 product line.
Interest Expense and Other Income (Expense). Interest expense and
other income (expense) decreased from $445,000 of expense in fiscal 1995 to
$188,000 of income in fiscal 1996. Net interest expense at June 30, 1995 was
$497,000, while at June 30, 1996 net interest income of $267,000 was realized
as a result of greater cash available for investment, as well as reduction of
debt obligations. Other income (expense) decreased primarily due to all
customers who previously paid in yen now paying in U.S. dollars during this
period, which results in no foreign exchange gain.
Income Tax Expense. Income tax expense for fiscal 1995 was $926,000,
or an effective tax rate of 15.5%, as a result of the utilization of available
net operating loss carryforwards which offset taxable income. Income tax
expense for fiscal 1996 was $363,000, or an effective rate of 2.7%, due to
recognition of a deferred tax asset of $3,656,000 in the period. A
reconciliation of the income tax rates to the federal statutory rate is
presented in Note 6 of the notes to the Consolidated Financial Statements
appearing elsewhere in this Form 10-K.
As of June 30, 1996, the Company has utilized all of its net operating
loss and tax credit carryforwards. Therefore, management anticipates that its
future net income will be less than its historical net income because of its
future effective tax rate will approximate 40% compared to an effective tax
rate of 2.7% and 15.5% in fiscal 1996 and 1995, respectively. 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 fiscal 1996, 1995 and
1994 and assuming the payment of the Excess Liquidation Preference ("ELP").
ELP was a one-time dividend paid to holders of Senior Convertible
Preferred Stock during the Company's IPO.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------
1996 1995
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Pre-tax income $13,465 $5,961
ELP 1,352 1,479
Income tax expense 5,386 2,384
------- ------
Adjusted pro forma net income applicable to common stockholders $ 6,727 $2,098
======= ======
Adjusted pro forma net income per common share $ 1.24 $ 0.41
======= ======
Pro forma weighed average common and
common equivalent shares outstanding 5,406 5,099
======= ======
</TABLE>
10
<PAGE> 11
COMPARISON OF FISCAL YEAR 1995 TO FISCAL YEAR 1994
Total Net Sales. Total net sales decreased by 11.0% from $78,867,000 in
fiscal 1994 to $70,192,000 in fiscal 1995. Printer sales constituted 36.6% and
31.0%, respectively, of total net sales in fiscal 1994 and fiscal 1995.
Consumable supplies and spare parts sales constituted 63.4% and 69.0%,
respectively, of total net sales in fiscal 1994 and fiscal 1995.
Printers. Printer sales decreased by 24.8% from $28,891,000 in fiscal
1994 to $21,736,000 in fiscal 1995. Total unit sales of printers decreased by
34.0% from 4,316 units in fiscal 1994 to 2,849 units in fiscal 1995. The
decrease in revenue was the result of lower sales to IBM in fiscal 1995 due to
a decision by IBM to purchase a competitor's printer and to IBM's large
inventory of Kentek products at fiscal year-end 1994. Net printer sales to IBM
decreased by 66.3% from $15,764,000 in fiscal 1994 to $5,318,000 in fiscal
1995. Total unit sales of printers to IBM decreased by 68.9% from 2,652 units
for fiscal 1994 to 825 units for fiscal 1995. These decreases were partially
offset by an increase in printer sales to other OEMs.
Consumable Supplies and Spare Parts Sales. Consumable supplies and
spare parts sales decreased by 3.0% from $49,976,000 in fiscal 1994 to
$48,456,000 in fiscal 1995. The decreased sales were due primarily to
significantly lower spare parts sales to IBM. Spare parts sales to IBM
declined by 54.9% from $9,196,000 in fiscal 1994 to $4,145,000 in fiscal 1995.
The higher sales in fiscal 1994 were due to one-time parts stocking orders as
IBM introduced the Company's K30 printer and the purchase by IBM of
high-capacity paper inputs and outputs to sell with its K30 printers. During
this period, sales of consumable supplies and spare parts to customers other
than IBM or Lexmark increased by 9.0%, from $20,293,000 in fiscal 1994 to
$22,121,000 in fiscal 1995.
Gross Profit. Gross profit decreased by 13.3% from $25,081,000, or
31.8% of total net sales, in fiscal 1994, to $21,743,000, or 31.0% of total net
sales, in fiscal 1995. The decrease in absolute dollars was primarily due to
lower printer sales volumes. This decrease was offset in part by the Company's
ability to maintain a stable gross margin because the reduction in sales
between these periods was mainly in lower margin products sold to IBM and
because of a reduction in costs due to the Company's transfer of substantially
all of its supplies manufacturing assembly from Japan to the United States.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained relatively stable from $9,920,000, or 12.6% of
total net sales, in fiscal 1994 to $9,980,000, or 14.2% of total net sales, in
fiscal 1995. Increases in legal and accounting expenses associated with the
Company's efforts to raise capital were offset by lower profit sharing payouts
and a reduction in its bad debt reserve.
Research and Development Expenses. Research and development expenses
increased by 4.3% from $5,135,000, or 6.5% of total net sales, in fiscal 1994
to $5,357,000, or 7.7% of total net sales, in fiscal 1995. The increase was
due primarily to increased mechanical engineering staff and expenditures on
prototype materials for the development of the KW60 printer.
Interest Expense and Other Income (Expense). Interest expense and other
income (expense) increased by $375,000, from $70,000 in fiscal 1994 to $445,000
in fiscal 1995. The increase was due primarily to a one-time charge in 1995 of
$325,000 to settle patent litigation and a decrease in foreign currency
exchange gains of $330,000, from $668,000 in fiscal 1994 to $338,000 in fiscal
1995 due to fewer customers paying Kentek in Japanese yen. These declines were
offset by an increase in miscellaneous income of $196,000, from $157,000 of
expense in fiscal 1994, attributable primarily to losses associated with the
disposal of obsolete fixed assets, to $39,000 of income in fiscal 1995. The
reduction in other income was offset somewhat by a decrease in net interest
expense of $84,000, from $581,000 in fiscal 1994 to $497,000 in fiscal 1995.
Actual interest expense was unchanged, while interest income increased as a
result of greater cash balances.
Income Tax Expense. Income tax expense increased by $617,000 from
$309,000, or an effective tax rate of 3.1% in fiscal 1994 to $926,000, or an
effective rate of 15.5% in fiscal 1995. This increase was because the Company
had less net operating loss carryforwards to offset income in fiscal 1995
($7,249,000) than it had in fiscal 1994 ($16,550,000).
INTERNATIONAL SALES
Direct sales to customers not located in the United States represented
11.8%, 12.0% and 16.7% of the Company's total net sales in fiscal years 1996,
1995 and 1994, respectively. Substantially all of the sales made by the
Company in international markets are priced in dollars to eliminate currency
risk. The Company's international sales are concentrated in Europe, and for
the year ended June 30, 1996, 44.0% and 24.4%, respectively, of such sales were
to customers located in Germany and The Netherlands. The Company believes that
its recent decline in international printer sales is primarily attributable to
a change in practice by certain OEM customers to purchase more products in the
United States for resale abroad.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations historically through internally
generated cash, subordinated debt and equity financing, and bank borrowings.
On April 17, 1996, the Company completed an initial public offering "IPO". The
Company received net proceeds from the sale of its Common Stock of $15,623,000
after deducting underwriting discounts and commission, offering expenses
totaling $1,977,000, and from the net proceeds the Company paid the Excess
Liquidation Preference of $4,152,000 on the Company's Senior Convertible
Preferred Stock ("SCPS").
Changes in cash and cash equivalents during fiscal 1996 resulted in a net
increase of $19,603,000 as compared to an increase during fiscal 1995 of
$2,358,000. The primary factors for this increase were the net proceeds of
$15,623,000, offset by the payment of ELP of $4,152,000 from the Company's IPO
in April 1996, as well as $8,405,000 less cash being used in financing
activities to reduce debt obligations in fiscal 1996 and a reduction in
equipment purchases of $926,000, offset in part by a $1,299,000 decrease in net
cash provided by operations. The primary factors for the decrease in cash
provided by operations were recognition of a deferred tax asset of $3,656,000
as well as an increase in inventory. These factors were partially offset by a
decrease in accounts payable due to the reduced cost of manufacturing in the
U.S. as compared with Japan.
Changes in cash and cash equivalents during fiscal 1995 resulted in a net
increase of $2,358,000 compared to a net increase during fiscal 1994 of
$1,086,000. The primary factors for this increase were $10,590,000 more cash
provided from operations as a result of increases in
11
<PAGE> 12
payments received against accounts receivable and reductions of inventory
levels and a $631,000 effect of exchange rate changes on cash. Offsetting
these factors were $5,955,000 more reductions in debt obligations and
$4,005,000 less in proceeds from sale of stock during fiscal 1995, as compared
to fiscal 1994.
As the Company prepares to manufacture its KW60 printer, it anticipates
that cash used in investing activities will increase by approximately
$8,000,000.
The Company has two sources of bank financing. The first, a $9,000,000
asset-based line of credit with Colorado National Bank, is renewable annually
and is secured by substantially all of Kentek's assets located in the United
States. As of June 30, 1996, the Company had no outstanding balance under this
loan. The available loan amount is the lesser of $9,000,000 or up to 80% of
eligible accounts receivable plus the lesser of 25% of eligible inventory or
$1,500,000. The second is a short term yen-denominated loan, which was due in
July 1996, with Dai-Ichi Kangyo Bank ("DKB") in Tokyo, Japan. The Company is
currently renegotiating this loan with DKB and feels confident that it will be
renewed at reasonable terms and conditions. The loan is secured principally by
a facility owned by the Company in Tama, Japan. As of June 30, 1996, a total
of Y544,144,000, or $4,959,000 at a yen-dollar exchange rate of 109.73, was
outstanding under this loan.
At June 30, 1996 the Company had recorded a $3,656,000 net deferred tax
asset. The Company has determined 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 deferred tax asset. This determination is based
on several recurring periods of profitable operations, continuing efforts to
enhance and develop existing and new customer relationships, the Company's
movement of a substantial portion of its supplies manufacturing to the United
States from Japan and the strengthening of the dollar against the yen.
Management plans to reevaluate the positive and negative evidence to this
effect on a quarterly basis and make appropriate adjustments to the deferred
tax asset. As a result of the nature of these temporary differences, $906,000
of the deferred tax asset at June 30, 1996 is classified as non-current. The
non- current portion is attributable to property and equipment. At June 30,
1995, a valuation allowance equal to the deferred tax asset of $4,746,000 had
been recorded because management had not been able to determine at the time the
financial statements for such periods were prepared that it was more likely
than not that the Company would generate sufficient taxable income in future
periods to realize the benefit of the deferred tax asset. The Company based
its assessment at June 30, 1995 primarily on the recurring operating losses in
recent years prior to the fiscal year ended June 30, 1994, the decline in
revenue associated with losing IBM as its principal customer and the fact that
Kentek's contractual relationship with its customers do not require the
customers to make quantity purchase commitments in advance of shipment orders.
Other factors included the pending introduction by Hewlett-Packard of a
competing printer and the strengthening yen against the dollar at the time the
Company made its assessment.
Financial information about taxes on income is presented in Note 6 of
the notes to consolidated financial statements which appear elsewhere in this
Form 10-K.
The Company believes that funds from operations, together with its bank
lines and the net proceeds of its IPO, will be sufficient to meet the Company's
cash requirements for at least twelve months from the date of this Form 10-K.
The Company paid an annual cash dividend to holders of record of its
Common Stock at August 8, 1996 of $.02 per share for the quarter ended June
30, 1996.
FOREIGN CURRENCY EXCHANGE
The Company has sizable operations in Japan, and as a result, operating
expenses and production costs are dependent on dollar-yen exchange rates. As
the yen strengthens in relation to the dollar, Kentek's manufacturing costs and
operating expenses in Japan increase, thereby adversely affecting results of
operations. Kentek has a currency risk sharing arrangement with its major
customers which mitigates, but does not eliminate, currency risk. The Company
has taken steps to reduce this exposure by relocating approximately one-half of
its manufacturing operations to the U.S. and plans to manufacture its KW
printers and consumable supplies in the United States. In addition, certain of
the Company's contracts with its customers contain pricing schedules that are
designed to share any financial benefit or burden arising from fluctuations in
the yen equally between Kentek and the customer. Currently, these schedules
apply primarily to printers and spare parts, whereas most supplies are sold at
fixed prices.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets" and SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 121 requires that
long-lived assets and certain unidentifiable intangibles be reported at the
lower of the carrying amount or their estimated recoverable amount. The
adoption of SFAS No. 121 by the Company is not expected to have an impact on
the financial statements. SFAS No. 123 encourages the accounting for
stock-based employee compensation programs to be reported within the financial
statements on a fair value based method. If the fair value based method is not
adopted, then SFAS No. 123 requires pro-forma disclosure of net income and
earnings per share as if the fair value based method had been adopted. The
Company has not yet determined how SFAS No. 123 will be adopted nor its impact
on the financial statements. Both SFAS No. 121 and SFAS No. 123 are effective
for fiscal years beginning after December 15, 1995.
12
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995 F-3
Consolidated Statements of Income for the Years Ended June 30, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995 and 1994 F-6
Summary of Accounting Policies F-7
Notes to Consolidated Financial Statements F-9
Report of Independent Certified Public Accountants on Financial Statement Schedule F-14
Schedule II - Valuation and Qualifying Accounts F-15
</TABLE>
F-1
<PAGE> 14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Kentek Information Systems, Inc.
Boulder, Colorado
We have audited the accompanying consolidated balance sheets of Kentek
Information Systems, Inc. and subsidiaries as of June 30, 1996 and 1995 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kentek
Information Systems, Inc. and subsidiaries at June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
August 9, 1996
F-2
<PAGE> 15
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
ASSETS (Note 2)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $25,992 $ 6,389
Accounts receivable, less allowance for possible losses of
$627 and $686 7,098 7,822
Inventories (Note 1) 13,868 12,613
Other 615 642
Property held for sale 5,955 7,716
Deferred income taxes (Note 6) 2,750 ---
------- -------
Total current assets 56,278 35,182
------- -------
Property and equipment (Note 3):
Land and buildings 122 158
Tooling 11,536 18,629
Furniture, fixtures and equipment 6,607 6,983
Leasehold improvements 465 496
------- -------
18,730 26,266
Less accumulated depreciation and amortization 17,099 23,551
------- -------
1,631 2,715
Deposits and other (Notes 3 and 6) 2,336 1,814
------- -------
Total assets $60,245 $39,711
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30,
-------------------
1996 1995
---- ----
Current liabilities:
Accounts payable $ 4,145 $ 6,399
Accrued expenses:
Income taxes 1,334 594
Bonus 860 288
Other 2,044 2,294
Current maturities of long-term debt (Note 3) 5,035 101
------- -------
Total current liabilities 13,418 9,676
Long-term debt (Note 3) 115 6,651
Other 545 700
------- -------
Total liabilities 14,078 17,027
------- -------
Commitments and contingencies (Notes 8 and 11)
Stockholders' equity (Notes 4 and 5):
Senior convertible preferred stock, $.05 par--shares authorized, 0 and 14,000;
shares outstanding, 0 and 11,005 -- 550
Convertible preferred stock, $.01 par--shares authorized,
0 and 16,000; shares outstanding, 0 and 1,785 -- 18
Preferred stock, $.01 par-shares authorized 2,000,000; 0 shares outstanding -- --
Common stock, $.01 par--shares authorized, 12,000 and 10,000; shares
outstanding, 6,825 and 836 68 8
Additional paid-in capital 43,463 31,484
Foreign currency translation adjustment (549) 541
Retained earnings (accumulated deficit) 3,185 (9,917)
------- -------
Total stockholders' equity 46,167 22,684
------- -------
Total liabilities and stockholders' equity $60,245 $39,711
======= =======
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-3
<PAGE> 16
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (Notes 7 and 12):
Printers $18,436 $21,736 $28,891
Consumable supplies and spare parts 55,945 48,456 49,976
------- ------- -------
Total net sales 74,381 70,192 78,867
Cost of sales 44,408 48,449 53,786
------- ------- -------
Gross profit 29,973 21,743 25,081
------- ------- -------
Operating expenses:
Selling, general and administrative 10,521 9,980 9,920
Research and development 6,175 5,357 5,135
------- ------- -------
Total operating expenses 16,696 15,337 15,055
------- ------- -------
Operating income 13,277 6,406 10,026
Other income (expense) (Note 9) 188 (445) (70)
------- ------- -------
Income before income taxes 13,465 5,961 9,956
Income tax expense (Note 6) 363 926 309
------- ------- -------
Net income $13,102 $ 5,035 $ 9,647
======= ======= =======
Net income applicable to common stockholders $11,750 $ 3,556 $ 8,326
======= ======= =======
Pro forma net income per common share $ 2.42 $ 0.99
======= =======
Weighted average common
and common equivalent shares outstanding 5,406 5,099
======= =======
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
<PAGE> 17
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(THOUSANDS)
<TABLE>
<CAPTION>
SENIOR CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------- -------------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AT JULY 1, 1993 11,000 $ 550 1,785 $ 18 836 $ 8
Sale of senior convertible preferred stock 5 -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- --
Net income for the period -- -- -- -- -- --
------- ------ ------ ---- ----- ---
BALANCE, AT JUNE 30, 1994 11,005 550 1,785 18 836 8
Foreign currency translation
adjustment -- -- -- -- -- --
Net income for the period -- -- -- -- -- --
------- ------ ------ ---- ----- ---
BALANCE, AT JUNE 30, 1995 11,005 550 1,785 18 836 8
Conversion of preferred stock
to common (Note 4) (11,005) (550) (1,785) (18) 3,789 38
Sale of common stock, net of offering
costs (Note 4) -- -- 2,200 22
Payment of excess liquidation preference
on preferred stock conversion (Note 4) -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- --
Net income for the
period -- -- -- -- -- --
-------- ------ ------ ---- ----- ---
BALANCE, AT JUNE 30, 1996 -- $ -- -- $ -- 6,825 $68
======== ====== ====== ==== ===== ===
<CAPTION>
FOREIGN RETAINED
ADDITIONAL CURRENCY EARNINGS
PAID-IN TRANSLATION (ACCUMULATED
CAPITAL ADJUSTMENT DEFICIT)
-------- ---------- ------------
<S> <C> <C> <C>
BALANCE, AT JULY 1, 1993 $31,479 $(1,224) $(24,599)
Sale of senior convertible preferred stock 5 -- --
Foreign currency translation
adjustment -- (126) --
Net income for the period -- -- 9,647
------- ------- --------
BALANCE, AT JUNE 30, 1994 31,484 (1,350) (14,952)
Foreign currency translation
adjustment -- 1,891 --
Net income for the period -- -- 5,035
------- ------- --------
BALANCE, AT JUNE 30, 1995 31,484 541 (9,917)
Conversion of preferred stock
to common (Note 4) 530 -- --
Sale of common stock, net of offering
costs (Note 4) 15,601 -- --
Payment of excess liquidation preference
on preferred stock conversion (Note 4) (4,152) -- --
Foreign currency translation
adjustment -- (1,090) --
------- ------- --------
Net income for the
period -- -- 13,102
------- ------- --------
BALANCE, AT JUNE 30, 1996 $43,463 $ (549) $ 3,185
======= ======= ========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE> 18
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $13,102 $5,035 $ 9,647
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,648 1,818 1,465
Loss on disposal of property and equipment 191 130 --
Benefit for deferred income taxes (3,656) -- --
Changes in operating assets and liabilities:
Accounts receivable 724 7,751 (8,179)
Inventories (2,122) 1,589 (6,369)
Other current assets 129 678 (241)
Other assets (181) 140 1,269
Accounts payable and accrued expenses (118) (6,125) 2,834
------- ------ -------
Net cash provided by operating activities 9,717 11,016 426
------- ------ -------
INVESTING ACTIVITIES:
Purchase of equipment (832) (1,758) (1,769)
Proceeds from sale of equipment 12 -- --
Net cash used in investing activities (820) (1,758) (1,769)
------- ------ -------
FINANCING ACTIVITIES:
Net payment of loans and notes payable -- (7,730) (1,979)
Principal payments of long-term debt (85) (760) (556)
Proceeds from sale of stock 17,600 -- 4,005
Payment for offering costs (1,977) -- --
Payment of excess liquidation preference on preferred stock (4,152) -- --
------- ------ -------
Net cash provided by (used in) financing activities 11,386 (8,490) 1,470
------- ------ -------
Effect of exchange rate changes on cash (680) 1,590 959
------- ------ -------
Net increase in cash and cash equivalents 19,603 2,358 1,086
Cash and cash equivalents, at beginning of year 6,389 4,031 2,945
------- ------ -------
Cash and cash equivalents, at end of year $25,992 $6,389 $ 4,031
======= ====== =======
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-6
<PAGE> 19
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Kentek Information Systems, Inc. (the "Company") is a leading supplier of
mid-range, non-impact laser printers and related consumable supplies and spare
parts. The Company was incorporated under the laws of the State of Delaware in
1981.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The Company's principal subsidiary, Nippon
Kentek Kaisha Ltd., a Delaware corporation ("Nippon Kentek"), is engaged in
research and development and manufacturing-related activities in Japan. The
accompanying consolidated financial statements include the accounts of Nippon
Kentek. All significant intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In addition, Management has estimated reserves for inventory obsolescence,
uncollectible accounts receivable and warranty reserves based upon historical
and developing trends, aging of items, and other information it deems pertinent
to estimate collectibility and realizability. It is possible that these
reserves will change within a year, and the effect of the change could be
material to the consolidated financial statements.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash balances in excess of the insurance
provided by federal insurance authorities, cash equivalents and accounts
receivable.
The Company's cash equivalents are placed with a major financial
institution and are primarily invested in investment grade commercial paper
with an average original maturity of three months or less and money market
accounts. Concentrations of credit risk with respect to accounts receivable
are limited due to generally short payment terms and the customers' dispersion
across geographic areas. The Company performs ongoing credit evaluation of its
customers financial condition and generally requires no collateral from its
customers.
INVENTORIES
Inventories are valued at the lower of cost (determined primarily by the
weighted moving average method) or market.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method for tooling and accelerated methods for substantially all
other assets over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Tooling 3
Furniture, fixtures and equipment 3-7
Leasehold improvements Term of Lease
</TABLE>
Property held for sale is stated at the lower of cost or net realizable
value and includes certain facilities and land held for sale which the Company
had concluded are not needed for ongoing operations.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"). Temporary differences are
differences between the tax basis of assets and liabilities and their reported
amounts in the consolidated financial statements that will result in taxable or
deductible amounts in future years.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the
applicable local currency. The translation of the applicable foreign currency
into U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The gains
and losses resulting from such translation are included in stockholders'
equity.
F-7
<PAGE> 20
REVENUE RECOGNITION
Sales of printers and consumable supplies are recorded upon shipment to
customers.
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS
For the years ended June 30, 1996, 1995 and 1994, net income has been
reduced by the Excess Liquidation Preference ("ELP") (Note 4) attributable to
the Senior Convertible Preferred Stock ("SCPS") totaling $1,352,000, $1,479,000
and $1,321,000 respectively, in computing net income applicable to common
stockholders.
PRO FORMA NET INCOME PER COMMON SHARE
Historical per share information for the year ended June 30, 1994 is
not considered relevant as it would differ materially from the per share data
for the years ended June 30, 1996 and 1995 given the significance of the SCPS
not being considered a common stock equivalent in computing primary earnings
per share.
Pro forma net income per share is computed using net income applicable
to common stockholders increased by the ELP attributable to the year and the
weighted average number of common (1,258,000 and 836,000 shares as of June 30,
1996 and 1995) and common equivalent shares outstanding after reflecting a 1
for 4.5 reverse stock split effected immediately prior to the IPO. Common
equivalent shares include convertible preferred stock which was converted into
common stock at the completion of the Company's IPO (3,789,000 shares as of
June 30, 1996 and 1995) Note 4) and those shares issuable upon the assumed
exercise of dilutive stock options as adjusted for the effects of the
application of Securities and Exchange Commission Staff Accounting Bulletin
("SAB") No. 83 (359,000 and 474,000 shares as of June 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.
CASH EQUIVALENTS
The Company considers cash, money market accounts and all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate the value.
REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT
Substantially all of these notes bear interest at a floating rate
of interest based upon the lending institutions prime lending rate.
Accordingly, the fair value approximates their reported carrying amounts at
June 30, 1996, 1995 and 1994.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets" and SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reported at the lower
of the carrying amount or their estimated recoverable amount and the adoption
of this statement by the Company is not expected to have an impact on the
financial statements. SFAS No. 123 encourages the accounting for stock-based
employee compensation programs to be reported within the financial statements
on a fair value based method. If the fair value based method is not adopted,
then the statement requires pro forma disclosure of net income and earnings per
share as if the fair value based method had been adopted. The Company has not
yet determined how SFAS No. 123 will be adopted nor its impact on the financial
statements. Both statements are effective for fiscal years beginning after
December 15, 1995.
RECLASSIFICATIONS
Certain reclassifications have been made to the accompanying 1995 and
1994 financial statements to conform to current year presentation.
F-8
<PAGE> 21
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $ 6,183 $ 5,655
Raw materials 7,685 6,958
------- -------
$13,868 $12,613
======= =======
</TABLE>
2. REVOLVING CREDIT AGREEMENT
The Company has a revolving line-of-credit agreement with a bank,
which expires October 31, 1996. The available loan amount is the lesser of
$9,000,000 or up to 80% of eligible accounts receivable plus an amount up to
the lesser of 25% of eligible inventory or $1,500,000, as defined by the
agreement. The line-of-credit agreement provides for interest at the bank's
prime rate. The agreement is collateralized by all of the Company's business
assets located in the United States. In addition, the Company must meet
certain financial ratio requirements under the terms of the agreement. At June
30, 1996 and 1995, no amounts were drawn on the line-of-credit.
Maximum and average borrowings and weighted average interest rate on
short term borrowings during each of the two years ended June 30, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Maximum borrowings outstanding at month-end $ -- $3,541
Average borrowings outstanding $ -- $ 506
Weighted average interest rate -- 9.25%
</TABLE>
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Bank loan - 3.35% - 4.1%, due July, 1996 $4,959 $6,424
Obligations under capital lease 171 294
Other 20 34
------ ------
5,150 6,752
Less current maturities 5,035 101
------ ------
$ 115 $6,651
====== ======
</TABLE>
Guarantee deposits of $659,000, included in deposits and other, land
and buildings having a net book value of $3,397,000 included in property held
for sale, and the common stock of a subsidiary of Nippon Kentek of $547,000, are
pledged as collateral for long-term debt aggregating $4,959,000 as of June 30,
1996.
As of June 30, 1996, future maturities of long-term debt and net
minimum lease payments under the capital lease obligations are as follows:
<TABLE>
<CAPTION>
CAPITAL LONG-TERM
LEASE DEBT TOTAL
----- ---- -----
(THOUSANDS)
<S> <C> <C> <C>
1997 $ 86 $4,959 $5,045
1998 54 3 57
1999 42 5 47
2001 9 2 11
---- ------ ------
Total payments 191 4,969 5,160
Less amounts representing interest 10 -- 10
---- ------ ------
Principal payments 181 4,969 5,150
Less current maturities 76 4,959 5,035
---- ------ ------
Total long-term obligations $105 $ 10 $ 115
==== ====== ======
</TABLE>
The balance in property and equipment at June 30, 1996 and 1995
includes equipment under capital leases with a total cost of $276,000 and
$420,000 and accumulated depreciation of $214,000 and $335,000.
F-9
<PAGE> 22
4. CAPITAL STOCK
The equity accounts of the Company have been retroactively adjusted to
reflect a 1-for-4.5 reverse stock split of the common stock which was effective
immediately prior to April 17, 1996, the effective date of the Registration
Statement and the authorization of 2,000,000 additional shares of common stock.
All references in the consolidated financial statements with regard to share
and per share amounts have been calculated giving retroactive effect to the 1-
for-4.5 reverse stock split.
On April 17, 1996, the Company completed its IPO of 2,200,000 shares at $8
per share. The Company sold 2,200,000 shares and an additional 300,000 were
sold by non-management stockholders. An additional 375,000 shares were sold by
non-management stockholders to cover over-allotments 30 days after the IPO.
The Company received $15,623,000 in proceeds net of offering costs of
$1,977,000.
Effective immediately prior to the IPO, the outstanding SCPS and
Convertible Preferred Stock ("CPS") were converted into common stock and the
SCPS and CPS authorized shares were canceled. The SCPS was voting and had a
primary liquidation preference of $1 per share, plus the aggregate amount of
the ELP. ELP accrued on the SCPS at an annual rate of 12%. On April 23, 1996,
the ELP of approximately $4,152,000 was paid to SCPS holders, and the shares
were converted into common stock at a conversion rate of 1.3869245 per share.
5. STOCK OPTIONS
On February 8, 1996, the Company amended its 1992 Stock Option Plan (the
"Plan"). The Plan provides for the grant of options to purchase up to a total
of 750,000 shares of common stock of the Company. As of June 30, 1996, the
number of options exercisable were 424,665 and options for 68,998 shares of
common stock were still available under the Plan.
The following is a summary of the Plan stock option activity:
<TABLE>
<CAPTION>
OPTION PRICE
--------------
<S> <C> <C>
Options outstanding at July 1, 1993 162,188 $1.44 to $2.00
Options canceled and expired (162,188) $1.44 to $2.00
Options granted 367,034 $3.24 to $6.49
-------- --------------
Options outstanding at June 30, 1994 367,034 $3.24 to $6.49
Options granted 24,811 $6.49
Options canceled and expired (47,733) $3.24 to $6.49
-------- --------------
Options outstanding at June 30, 1995 344,112 $3.24 to $6.49
Options granted 378,575 $6.49 to $8.38
Options canceled and expired (41,685) $3.24 to $6.49
-------- --------------
Options outstanding at June 30, 1996 681,002 $3.24 to $8.38
======== ==============
</TABLE>
6. TAXES ON INCOME
Taxes on income consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal $ 3,273 $ 845 $ 232
State 746 51 77
Foreign -- 30 --
------- ------- -------
4,019 926 309
------- ------- -------
Deferred expense (benefit):
Federal 1,035 1,632 3,249
State 55 210 304
------- ------- -------
1,090 1,842 3,553
Valuation allowance(1) (4,746) (1,842) (3,553)
------- ------- -------
(3,656) -- --
------- ------- -------
Income tax expense $ 363 $ 926 $ 309
======= ======= =======
</TABLE>
(1) Reduction of valuation allowance for the year ended June 30, 1996 due
to the tax benefit of the deferred tax asset expected to be realized against
taxable income in the future periods and for the years ended June 30, 1995 and
1994 due to utilization of net operating loss carryforward and tax credits.
F-10
<PAGE> 23
The components of the net deferred tax asset are shown below:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Research and development tax credits $ -- $ 821
Inventories 1,740 1,214
Accrued expenses and other 654 758
Property and equipment 1,018 716
Accounts receivable allowance 244 254
Alternative minimum tax credits -- 983
Valuation allowance -- (4,746)
------ -------
Net deferred tax asset $3,656 $ --
====== =======
</TABLE>
A valuation allowance equal to the deferred tax asset was recorded at June
30, 1994 and 1995, as management of the Company was not able to determine that
it is more likely than not that the deferred tax asset would be realized. The
Company based its assessment at June 30, 1994 primarily on the recurring
operating losses in recent years prior to the fiscal year ended June 30, 1994,
the decline in revenue associated with losing IBM as its principal customer and
the fact that Kentek's contractual relationships with its customers generally
do not require the customers to make quantity purchase commitments in advance
of shipment orders. The Company based its assessment at June 30, 1995 on the
continuance of the negative factors mentioned with respect to the prior fiscal
year and on the pending introduction by Hewlett-Packard of a competing printer
and the strengthening yen against the dollar at the time the Company made its
assessment.
The net deferred tax asset $3,656,000 at June 30, 1996 is realizable as the
Company has determined, based on several recurring periods of profitable
operations, continuing efforts to enhance and develop existing and new customer
relationships, its movement of a substantial portion of its supplies
manufacturing to the United States from Japan and the strengthening of the
dollar against the yen, 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 deferred tax asset. Management plans to re-evaluate
the positive and negative evidence to this effect on a quarterly basis and make
appropriate adjustments to the deferred tax asset. Components of the net
deferred tax asset, other than property and equipment, primarily reverse
annually. As a result of the nature of these temporary differences, $906,000
of the net deferred tax asset at June 30, 1996 is classified as non-current.
The non-current portion which is included in deposits and other assets is
attributable to property and equipment.
A reconciliation of the effective tax rates to the federal statutory rate
is shown below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Federal income tax computed at statutory rate $ 4,578 $ 2,027 $ 3,385
Reduction of valuation allowance (4,746) (1,842) (3,553)
Alternative minimum tax -- 773 210
Other temporary differences 531 (32) 267
------- ------- -------
Tax expense $ 363 $ 926 $ 309
======= ======= =======
</TABLE>
7. SALES TO PRINCIPAL CUSTOMERS
Transactions
Sales to customers and their affiliates which exceeded 10% of total net
sales are shown below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customer A 6% 14% 32%
Customer B 32 32 26
Customer C 16 12 7
Customer D 10 8 4
Customer E 10 5 0
</TABLE>
F-11
<PAGE> 24
8. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Operating Leases
The Company leases office and warehouse space under operating leases
expiring at various dates through the year 2001. Rent expense for the years
ended June 30, 1996, 1995 and 1994 was $980,000, $1,106,000 and $1,115,000.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, (THOUSANDS)
-------- -----------
<S> <C>
1997 $ 623
1998 613
1999 458
2000 6
2001 2
------
$1,702
======
</TABLE>
Employment Agreement
On April 1, 1989, the Company entered into an Employment Agreement
with the President and Chief Executive Officer. The Employment Agreement, as
amended, provides for an annual salary of $241,500, an annual bonus equal to
1.5% of the Company's pre-tax profits for each fiscal year and automobile
allowance of $800 per month. The Employment Agreement can be terminated by the
Company by written notice at any time and in such event, the President and
Chief Executive Officer is entitled to a monthly severance payment equal to his
then current monthly salary for a period of six months after such termination.
In addition, the President and Chief Executive Officer is obligated not to
solicit any employees to leave employment of the Company for a period of three
years after termination of his employment. As of June 30, 1996, 1995 and 1994
bonuses of approximately $202,000, $149,000 and $80,000 have been recorded and
are included in other accrued expenses.
Profit-Sharing Plan
The Company has a savings and profit-sharing plan which allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The Company matches 50% of employee
contributions up to 6% of the employee's salary. The Company contributions are
vested 20% per year beginning with the second year of service. During the
years ended June 30, 1996, 1995 and 1994 the Company's contributions to the
plan were $53,000, $103,000 and $87,000.
Related Party Transactions
Consulting services are provided to the Company by the Chairman of the
Board of Directors. Consulting expense for these services for the years ended
June 30, 1996, 1995 and 1994 were approximately $78,000, $87,500 and $79,400.
F-12
<PAGE> 25
9. OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Interest expense $ (253) $ (844) $ (842)
Litigation settlement -- (325) --
Foreign currency exchange gain -- 338 668
Interest income 520 347 261
Miscellaneous (79) 39 (157)
------- ------- ------
Other income (expense) $ 188 $ (445) $ (70)
======= ======= ======
</TABLE>
10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $ 233 $655 $1,069
Income taxes $3,251 $391 $ 145
</TABLE>
Excluded from the consolidated statement of cash flows for the year ended June
30, 1996 was the effect of $568,000 in preferred stock converted into common
stock.
11. CONTINGENCIES
Litigation
On May 23, 1996, the Company was served with 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 a aggregate of $10 million in relief. The suit pertains
to Printronix desire to retain OEM pricing on consumable supplies and spare
parts, even after they discontinued selling the Company's printers.
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 anti-trust.
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
loss, if any. The Company's information at this time does not indicate that
these matters will have a material, adverse effect upon the financial condition,
results of operations or the competitive position of the Company.
12. OPERATION BY GEOGRAPHIC AREA
During the years ended June 30, 1996, 1995 and 1994 the Company had
foreign and domestic sales, operating income and assets are shown below:
<TABLE>
<CAPTION>
U.S. JAPAN EUROPE TOTAL
---- ----- ------ -----
(THOUSANDS)
<S> <C> <C>
1996
Net Sales $65,640 $ -- $ 8,741 $74,381
Operating income 11,717 -- 1,560 13,277
Assets 49,521 10,460 264 60,245
1995
Net sales 61,766 -- 8,426 70,192
Operating income 5,637 -- 769 6,406
Assets 23,686 15,780 245 39,711
1994
Net sales 65,722 -- 13,145 78,867
Operating income 8,355 -- 1,671 10,026
Assets 27,113 18,163 174 45,450
</TABLE>
F-13
<PAGE> 26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
Kentek Information Systems, Inc.
Boulder, Colorado
The audits referred to in our report to Kentek Information Systems, Inc.
dated August 9, 1996 relating to the consolidated financial statements of
Kentek Information Systems, Inc. included the audits of the schedule listed
under Item 8 of Form 10-K for the three years in the period ended June 30,
1996. The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based upon our audits.
In our opinion, such schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Los Angeles, California
August 9, 1996
F-14
<PAGE> 27
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996, 1995 AND 1994
----------------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended June 30, 1996:
Allowance for doubtful accounts $ 686 $ -- $ 59 $ 627
Allowance for inventory valuation in
excess of net realizable value 2,336 1,725 513 3,548
Deferred tax asset valuation allowance 4,746 -- 4,746 --
------ ------ ------ ------
$7,768 $1,725 $5,318 $4,175
====== ====== ====== ======
Year Ended June 30, 1995:
Allowance for doubtful accounts $ 965 $ 180 $ 459 $ 686
Allowance for inventory valuation in
excess of net realizable value 1,654 762 80 2,336
Deferred tax asset valuation allowance 6,588 -- 1,842 4,746
------ ------ ------ ------
$9,207 $ 942 $2,381 $7,768
====== ====== ====== ======
Year Ended June 30, 1994:
Allowance for doubtful accounts $ 887 $ 120 $ 42 $ 965
Allowance for inventory valuation in
excess of net realizable value 1,566 88 -- 1,654
Deferred tax asset valuation allowance -- 6,588 -- 6,588
------ ------ ------ ------
$2,453 $6,796 $ 42 $9,207
====== ====== ====== ======
</TABLE>
F-15
<PAGE> 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 29
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers is set
forth in the Proxy Statement under the heading "Directors and Executive
Officers", which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Executive Compensation", which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial
owners and management is set forth in the Proxy Statement under the heading
"Security Ownership of Certain Beneficial Owners and Management", which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the heading "Certain
Relationships and Related Transactions", which information is incorporated
herein by reference.
<PAGE> 30
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this
Annual Report on Form 10-K.
1. Financial Statements: The financial statements of the
Company are included in Item 8 of this report. See Index to
Financial Statements on page F-1.
2. Financial Statement Schedules: Financial statement
schedules required under the related instructions are
applicable for the period ended June 30, 1996, 1995 and 1994,
and are therefore included in Item 8.
3. Exhibits: The exhibits which are filed with this Report or
which are incorporated herein by reference are set forth in
the Exhibit Index below.
(b) Reports on Form 8-K.
None.
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
<S> <C> <C>
3(i).1+ -- Amended and Restated Certificate of Incorporation of the Registrant.
3(ii).1+ -- Bylaws of the Registrant.
4.1+ -- Reference is made to Exhibits 3(i).1 and 3(ii).1.
4.2+ -- Specimen Stock Certificate.
10.1+ -- Form of Indemnity Agreement entered into between the Registrant and its directors and executive officers.
10.2+ -- Common Stock Registration Rights Agreement, dated as of October 5, 1984, as amended.
10.3+ -- Series A Convertible Preferred Stock Purchase Agreement, dated as of October 5, 1984, as amended.
10.4+ -- Amended and Restated 1992 Stock Option Plan of the Registrant (the "Option Plan").
10.5+ -- Form of Option granted to persons other than non-employee directors under the Option Plan.
10.6+ -- Form of Option granted to non-employee directors under the Option Plan.
10.7+ -- Employment Agreement between the Registrant and Philip W. Shires, dated April 1, 1989.
10.8+ -- Lease Agreement between the Registrant and Security Connecticut Life Insurance Company, dated
September 20, 1990, as amended.
10.9+ -- Lease Agreement between the Registrant and Pine Property Limited Partnership, dated July 15, 1992, as
amended.
10.10+ -- Lease Agreement between the Registrant and BFN Company, dated September 28, 1994.
10.11+ -- Agreement on Bank Transactions and translation between Nippon Kentek Kaisha, Ltd. and The Dai-Ichi
Kangyo Bank, Limited, dated as of July 2, 1984.
10.12+ -- Agreement on Purchase or Negotiation of Bills and translation between Nippon Kentek Kaisha, Limited
and The Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1984.
10.12(a)+ -- Security Agreement between the Registrant and the Dai-Ichi Kangyo Bank, Limited, dated as of July 2,
1992, as amended.
10.12(b)+ -- Guaranty between the Registrant and The Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1992.
10.13+ -- Credit and Security Agreement between the Registrant and Colorado National Bank, dated as of
November 2, 1994.
10.15+ -- Sales/Purchase Contract between Nippon Kentek Kaisha Limited and Kao Corporation, dated October 1,
1991.
10.16+ -- Letter Agreement between the Registrant and Lexmark International, Inc., dated May 10, 1993.
10.17+ -- Addendum Agreement between the Registrant and Lexmark International, Inc., dated November 17, 1994.
10.18+ -- Agreement between the Company and Hewlett-Packard Company, dated March 22, 1994.
10.19+ -- Purchase Agreement between the Company and Siemens Nixdorf Printing Systems, L.P., dated February 3,
1992, as amended.
13.1* -- Report on Form 10-Q for the period ending March 31, 1996.
13.2** -- 1996 Annual Report.
21.1+ -- List of subsidiaries of the Registrant.
27 -- Financial Data Schedule
</TABLE>
+ Previously filed with the Commission as an exhibit to the Registrant's
Registration Statement on Form S-1 (File
No. 333-1606) and incorporated herein by reference.
* Previously filed with the Commission on May 30, 1996.
** To be filed by amendment.
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KENTEK INFORMATION SYSTEMS, INC.
By /s/ PHILIP W. SHIRES
Philip W. Shires
President and Chief Executive Officer
September 23, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C> <C>
/s/ PHILIP W. SHIRES
Philip W. Shires President, Chief Executive Officer
and Director (Principal Executive Officer) September 23, 1996
/s/ CRAIG G. LAMBORN*
Craig G. Lamborn Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer) September 23, 1996
/s/ HOWARD L. MORGAN*
Howard L. Morgan Chairman of the Board September 23, 1996
/s/ MICHAEL N EMMERMAN*
Michael N Emmerman Director September 23, 1996
/s/ I. JIMMY MAYER*
I. Jimmy Mayer Director September 23, 1996
/s/ JUSTIN J. PERREAULT*
Justin J. Perreault Director September 23, 1996
/s/ JAMES H. SIMONS*
James H. Simons Director September 23, 1996
</TABLE>
*By: /s/ PHILIP W. SHIRES
Philip W. Shires
Attorney-in-Fact
<PAGE> 32
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
<S> <C> <C>
3(i).1+ -- Amended and Restated Certificate of Incorporation of the Registrant.
3(ii).1+ -- Bylaws of the Registrant.
4.1+ -- Reference is made to Exhibits 3(i).1 and 3(ii).1.
4.2+ -- Specimen Stock Certificate.
10.1+ -- Form of Indemnity Agreement entered into between the Registrant and its directors and executive officers.
10.2+ -- Common Stock Registration Rights Agreement, dated as of October 5, 1984, as amended.
10.3+ -- Series A Convertible Preferred Stock Purchase Agreement, dated as of October 5, 1984, as amended.
10.4+ -- Amended and Restated 1992 Stock Option Plan of the Registrant (the "Option Plan").
10.5+ -- Form of Option granted to persons other than non-employee directors under the Option Plan.
10.6+ -- Form of Option granted to non-employee directors under the Option Plan.
10.7+ -- Employment Agreement between the Registrant and Philip W. Shires, dated April 1, 1989.
10.8+ -- Lease Agreement between the Registrant and Security Connecticut Life Insurance Company, dated
September 20, 1990, as amended.
10.9+ -- Lease Agreement between the Registrant and Pine Property Limited Partnership, dated July 15, 1992, as
amended.
10.10+ -- Lease Agreement between the Registrant and BFN Company, dated September 28, 1994.
10.11+ -- Agreement on Bank Transactions and translation between Nippon Kentek Kaisha, Ltd. and The Dai-Ichi
Kangyo Bank, Limited, dated as of July 2, 1984.
10.12+ -- Agreement on Purchase or Negotiation of Bills and translation between Nippon Kentek Kaisha, Limited
and The Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1984.
10.12(a)+ -- Security Agreement between the Registrant and the Dai-Ichi Kangyo Bank, Limited, dated as of July 2,
1992, as amended.
10.12(b)+ -- Guaranty between the Registrant and The Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1992.
10.13+ -- Credit and Security Agreement between the Registrant and Colorado National Bank, dated as of
November 2, 1994.
10.15+ -- Sales/Purchase Contract between Nippon Kentek Kaisha Limited and Kao Corporation, dated October 1,
1991.
10.16+ -- Letter Agreement between the Registrant and Lexmark International, Inc., dated May 10, 1993.
10.17+ -- Addendum Agreement between the Registrant and Lexmark International, Inc., dated November 17, 1994.
10.18+ -- Agreement between the Company and Hewlett-Packard Company, dated March 22, 1994.
10.19+ -- Purchase Agreement between the Company and Siemens Nixdorf Printing Systems, L.P., dated February 3,
1992, as amended.
13.1* -- Report on Form 10-Q for the period ending March 31, 1996.
13.2** -- 1996 Annual Report.
21.1+ -- List of subsidiaries of the Registrant.
27 -- Financial Data Schedule
</TABLE>
+ Previously filed with the Commission as an exhibit to the Registrant's
Registration Statement on Form S-1 (File
No. 333-1606) and incorporated herein by reference.
* Previously filed with the Commission on May 30, 1996.
** To be filed by amendment.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1996
<PERIOD-START> JUL-01-1994 JUL-01-1995
<PERIOD-END> JUN-30-1995 JUN-30-1996
<CASH> 6,389 25,992
<SECURITIES> 0 0
<RECEIVABLES> 7,822 7,098
<ALLOWANCES> 0 0
<INVENTORY> 12,613 13,868
<CURRENT-ASSETS> 35,182 56,278
<PP&E> 26,266 18,730
<DEPRECIATION> 23,551 17,099
<TOTAL-ASSETS> 39,711 60,245
<CURRENT-LIABILITIES> 9,676 13,418
<BONDS> 0 0
0 0
568 0
<COMMON> 8 68
<OTHER-SE> 22,108 46,099
<TOTAL-LIABILITY-AND-EQUITY> 39,711 60,245
<SALES> 70,192 74,381
<TOTAL-REVENUES> 70,192 74,381
<CGS> 48,449 44,408
<TOTAL-COSTS> 63,786 61,104
<OTHER-EXPENSES> (399) (441)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 844 253
<INCOME-PRETAX> 5,961 13,465
<INCOME-TAX> 926 363
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,035 13,102
<EPS-PRIMARY> 0.99 2.42
<EPS-DILUTED> 0.99 2.42
</TABLE>
