<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the quarterly period ended March 31, 1996
or
Transition report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from _____________to_____________
Commission file number:
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2945 Wilderness Place, Boulder, CO 80301
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (303) 440-5500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
Number of shares outstanding of the issuer's common stock, as of May 29, 1996:
6,824,528 shares of Common Stock, $.01 par value per share
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
March 31, 1996 and June 30, 1995 3
Consolidated Statements of Operations -
for the three and nine months ended March 31, 1996
and 1995 4
Consolidated Statements of Cash Flows -
for the nine months ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submissions of Matters to a vote of Security Holders 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
</TABLE>
Page 2
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
-------- --------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,882 $ 6,389
Accounts Receivable, net of allowance 7,835 7,822
Inventories 14,676 12,613
Prepaid Expenses and Other Current Assets 3,480 642
Property held for sale 6,091 7,716
-------- --------
Total current assets 43,964 35,182
Property and equipment, at cost, net of
accumulated depreciation and amortization 1,902 2,715
Deposits and Other 2,464 1,814
-------- --------
Total assets $ 48,330 $ 39,711
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,434 $ 6,399
Accrued expenses:
Income taxes 2,123 594
Other 2,935 2,582
Current maturities of long-term debt 5,116 101
-------- --------
Total current liabilities 15,608 9,676
Long-term debt:
Related party -- 6,424
Other 146 227
Other 578 700
-------- --------
Total liabilities 16,332 17,027
-------- --------
Commitments and contingencies
Stockholders' equity:
Senior preferred stock, $.05 par - shares authorized, 550 550
14,000; shares outstanding, 11,005
Convertible preferred stock, $.01 par - shares authorized, 18 18
16,000; shares outstanding, 1,785
Common stock, $.01 par - shares authorized, 12,000; 8 8
shares outstanding, 836
Additional paid-in-capital 31,484 31,484
Foreign currency translation (684) 541
Retained Earnings (deficit) 622 (9,917)
-------- --------
Total stockholders' equity 31,998 22,684
-------- --------
Total liabilities and stockholders' equity $ 48,330 $ 39,711
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
----------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales:
Printers $ 5,197 $ 3,004 $ 14,693 $ 17,586
Consumable supplies and spare parts 14,844 12,495 41,537 36,335
-------- -------- -------- --------
Total net sales 20,041 15,499 56,230 53,921
Cost of sales 11,287 10,805 34,094 36,548
-------- -------- -------- --------
Gross profit 8,754 4,694 22,136 17,373
-------- -------- -------- --------
Operating Expenses:
Selling, general and administrative 2,524 2,525 7,917 7,641
Research and development 1,309 1,347 3,800 4,195
-------- -------- -------- --------
Total operating expenses 3,833 3,872 11,717 11,836
-------- -------- -------- --------
Operating income 4,921 822 10,419 5,537
Other income (expense) 54 (110) 73 (215)
-------- -------- -------- --------
Income before income taxes 4,975 712 10,492 5,322
Income tax (expense) benefit (2,410) (98) 47 (835)
-------- -------- -------- --------
Net income $ 2,565 $ 614 $ 10,539 $ 4,487
======== ======== ======== ========
Net income per common share $ 0.51 $ 0.13 $ 2.07 $ 0.93
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding 5,079 4,816 5,080 4,849
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
March 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 10,539 $ 4,487
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 1,261 1,233
Provision for losses on trade receivables 156 (240)
Provision for inventory 660 273
Loss on disposal of property and equipment 28 186
Benefit for deferred income taxes (4,282) 0
Changes in operating assets and liabilities:
Trade receivables (169) 6,949
Inventories (3,544) 1,076
Other current assets (124) 506
Other assets 220 (62)
Accounts payable and accrued expenses 2,160 (6,702)
-------- --------
Net cash provided by operating activities 6,905 7,706
-------- --------
Investing activities:
Purchase of equipment (506) (1,382)
-------- --------
Financing activities:
Net payment of loans and notes payable 0 (8,862)
Principal payments of long-term debt (65) (340)
Proceeds from long-term debt 0 202
-------- --------
Net cash used in financing activities (65) (9,000)
-------- --------
Effect of exchange rate changes on cash (841) 1,707
-------- --------
Net increase (decrease) in cash and cash
equivalents 5,493 (969)
Cash and cash equivalents, at beginning of
period 6,389 4,031
-------- --------
Cash and cash equivalents, end of period $ 11,882 $ 3,062
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to fairly state the Company's consolidated
financial position and operating results for the interim periods. The results
of operations for the three months and nine months ended March 31, 1996 are not
necessarily indicative of the results for the full year.
Note 2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---- ----
(thousands)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $ 8,288 $ 5,655
Raw Materials 6,388 6,958
------- -------
$14,676 $12,613
======= =======
</TABLE>
Note 3. Initial Public Offering
The Company completed an "initial public offering" (IPO) of 2,500,000
shares of common stock at $8.00 per share on April 16, 1996. The Company sold
2,200,000 shares and an additional 300,000 were sold by non-management
shareholders. An additional 375,000 shares were sold by non-management
shareholders to cover over-allotments 30 days after the IPO. Common Stock
outstanding after the offering was 6,824,528 shares.
Note 4. Income Taxes
At December 31, 1995 the Company recognized a deferred tax asset in
the amount of $4,282,000 based on management's assessment that it is more
likely than not that it will have sufficient taxable income in future periods
to realize the corresponding tax benefit resulting from the recognition of the
deferred tax asset. Management plans to reassess the deferred tax asset on a
quarterly basis and make appropriate adjustments as necessary.
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Note 5. Pro Forma Earnings Per Share
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<CAPTION>
Three months ended Nine months ended
March 31, March 31,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
(thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $ 2,565 $ 614 $10,539 $ 4,487
Net income applicable to
common stockholders (1) 2,041 244 9,187 3,378
Pro forma net income (loss) 2,461 57 4,943 2,084
Pro forma net income per
share (2) $ .48 $ .01 $ .97 $ .43
Pro forma weighted average
common and common equivalent
shares outstanding (3) 5,079 4,816 5,080 4,849
</TABLE>
- ---------------
(1) Net income applicable to common stockholders reflects the cash payment of
that portion of the Excess Liquidation Preference on Senior Preferred
which accrued during such period. Pro forma net income reflects the
addition to net income applicable to common stock of such portion of the
Excess Liquidation Preference.
(2) Historical per share information is not presented as it differs materially
from pro forma per share data. Pro forma net income per share is computed
assuming the payment of the Excess Liquidation Preference and that the
Company had been unable to utilize the net operating loss and tax credit
carryforwards. The Company estimates it current effective tax rate to be
40.0%.
(3) Calculation of the number of common equivalent shares assumes conversion
into Common Stock of all outstanding convertible preferred stock, and
includes shares of Common Stock issuable upon the assumed exercise of
dilutive stock options.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 TO THREE MONTHS ENDED MARCH
31, 1995
Total net sales. Total net sales increased 29.3% from $15,499,000 in
the three months ended March 31, 1995 to $20,041,000 in the three months ended
March 31, 1996. Printer sales revenue increased by 73.0% from $3,004,000 in
the three months ended March 31, 1995 to $5,197,000 in the three months ended
March 31, 1996. The increase in printer revenue is directly attributable to
the growth of K40D printer sales to OEM customers. Consumable supplies and
spare parts sales increased by 18.8% from $12,495,000 in the three months ended
March 31, 1995 to $14,844,000 in the three months ended March 31, 1996. This
increase is also due to the growth of the K40D unit sales.
Gross profit. Gross profit increased by 86.5% from $4,694,000 in the
three months ended March 31, 1995 to $8,754,000 in the three months ended March
31, 1996. The gross margin increased from 30.3% to 43.7% 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 continued to move
supplies manufacturing from Japan to the United States.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained constant in absolute dollars but decreased
3.7% as a percent of total net sales from $2,525,000 in the three months ended
March 31, 1995 to $2,524,000 in the three months ended March 31, 1996.
Research and Development Expense. Research and development expenses
decreased by 2.8% from $1,347,000 or 8.7% of total net sales in the three
months ended March 31, 1995 to $1,309,000 but were 6.5% of total net sales in
the three months ended March 31, 1996. Expenses related to the K31 and K40D
programs were reduced as these programs neared completion, partially offset by
an increase in spending related to the KW60 product line.
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Interest Expense and Other Income (Expense). Interest expense and
other income (expense) decreased from $110,000 of expense in the three months
ended March 31, 1995 to $54,000 of income in the three months ended March 31,
1996. Net interest expense at March 31, 1995 was $79,000, while at March 31,
1996 net interest income of $43,000 was realized as a result of greater cash
available for investment.
Income Tax (Expense) Benefit. Income tax expense for the three months
ended March 31, 1995 was $98,000, or an effective tax rate of 13.8%, as a
result of the utilization of net operating loss carryforwards which offset
taxable income in fiscal year 1995. Income tax expense for the three months
ended March 31, 1996 was $2,410,000 resulting in a year-to-date effective tax
rate of 40.0% after recognition of a deferred tax asset of $4,282,000 during
the previous quarter ended December 31, 1995.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1996 TO NINE MONTHS ENDED MARCH 31,
1995
Total Net Sales. Total net sales increased by 4.3% from $53,921,000
in the nine months ended March 31, 1995 to $56,230,000 in the nine months ended
March 31, 1996. Printer sales revenue decreased by 16.5% from $17,586,000 in
the nine months ended March 31, 1995 to $14,693,000 in the nine months ended
March 31, 1996. The decreases in sales revenue and unit volumes are primarily
the result of lower sales to IBM. Total unit sales of printers to IBM declined
from 780 units and revenue of $4,992,000 in the nine months ended March 31,
1995 to 142 units and revenue of $1,074,000 in the nine months ended March 31,
1996. This reduction in printer revenue was partially offset by increased K40D
unit sales. OEM printer revenue totaled $12,594,000 in the nine months ended
March 31, 1995, increasing to $13,619,000 in the nine months ended March 31,
1996. Consumable supplies and spare parts sales increased 14.3% from
$36,335,000 in the nine months ended March 31, 1995 to $41,537,000 in the nine
months ended March 31, 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 27.4% from $17,373,000 in the
nine months ended March 31, 1995 to $22,136,000 in the nine months ended March
31, 1996. The gross margin increased from 32.2% to 39.4% 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 continued to move
supplies manufacturing from Japan to the United States.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 3.6% from $7,641,000 in the nine months ended
March 31, 1995 to $7,917,000 in the nine months ended March 31, 1996. This
increase was due primarily to increases in salary, depreciation expense and
expenses related to the closing of the Company's Tokyo office.
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Research and Development Expenses. Research and development expenses
decreased 9.4% from $4,195,000 in the nine months ended March 31, 1995 to
$3,800,000 in the nine months ended March 31, 1996. This decrease was due to a
reduction in expenses associated with the completion of the K31 and K40D
projects and related attrition in the software engineering staff, offset by the
increased expenses associated with the development of the new KW60 product
line.
Interest Expense and Other Income (Expense). Interest expense and
other income (expense) decreased from $215,000 of expense in the nine months
ended March 31, 1995 to $73,000 of income in the nine months ended March 31,
1996. Net interest expense at March 31, 1995 was $459,000, while at March 31,
1996 net interest income of $26,000 was realized as a result of greater cash
available for investment, as well as reduction of debt obligations. Gain on
foreign exchange decreased from $330,000 in the nine months ended March 31,
1995 to zero in the nine months ended March 31, 1996 due to all customers who
previously paid in yen now paying in U.S. dollars during this period.
Income Tax Expense (Benefit). Income tax expense for the nine months
ended March 31, 1995 was $835,000, or an effective tax rate of 15.7%, as a
result of the utilization of available net operating loss carryforwards which
offset taxable income in fiscal year 1995. Income tax benefit for the nine
months ended March 31, 1996 was $47,000 due to recognition of a deferred tax
asset of $4,282,000 in the period offset by application of a year-to-date
effective tax rate of 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
Changes in cash during the nine months ended March 31, 1996 resulted
in a net increase of $5,463,000 as compared to a decrease during the nine
months ended March 31, 1995 of $969,000. The primary factors for this increase
were $8,935,000 more cash being used in financing activities to reduce debt
obligations and $876,000 more cash being used in investing activities to
purchase equipment during the nine months ended March 31, 1995. Net cash
provided by operations for the nine months ended March 31, 1996 decreased by
$801,000 from the nine months ended March 31, 1995. The primary factors for
this decrease were increases in inventory levels and decreases in provision for
loss on accounts receivable which were partially offset by (i) recognition of a
deferred tax asset of $4,282,000, (ii) increase of accounts receivable and
accrued expenses by $4,542,000 and (iii) the effect of exchange rate on cash
being $2,548,000 more between the comparable periods.
As a result of the IPO completed on April 16, 1996, the Company raised
capital of $11,384,000 after deducting underwriting discounts and commission,
estimated offering expenses of approximately $700,000, and payment of Excess
Liquidation Preference of $4,200,000. The Company anticipates that the net
proceeds from the offering will be used to fund the development, tooling and
manufacture of the KW60 printer.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 23, 1996 the Company was served a complaint filed by Printronix
Corporation in the Federal District Court for the Central District of
California alleging violations of the Robinson-Patman Act and breach of
contract and seeking an aggregate of $10 million in relief. The Company
intends to vigorously defend against the claims. The Company believes it has
not violated the Robinson-Patman Act and denies that it has breached any
agreement with Printronix.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submissions of Matters to a vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Form 8-K.
None.
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 29, 1996 KENTEK INFORMATION SYSTEMS, INC.
/s/ PHILIP W. SHIRES
-----------------------------------
Philip W. Shires
President and Chief Executive Officer
(Principal Executive Officer)
/s/ CRAIG G. LAMBORN
-----------------------------------
Craig G. Lamborn
Vice President, Finance and
Administration (Principal Financial
and Accounting Officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 11,882
<SECURITIES> 0
<RECEIVABLES> 7,835
<ALLOWANCES> 0
<INVENTORY> 14,676
<CURRENT-ASSETS> 43,964
<PP&E> 21,944
<DEPRECIATION> 20,042
<TOTAL-ASSETS> 48,330
<CURRENT-LIABILITIES> 15,608
<BONDS> 0
<COMMON> 8
0
568
<OTHER-SE> 31,422
<TOTAL-LIABILITY-AND-EQUITY> 48,330
<SALES> 56,230
<TOTAL-REVENUES> 56,230
<CGS> 34,094
<TOTAL-COSTS> 34,094
<OTHER-EXPENSES> 11,717
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> 10,492
<INCOME-TAX> 47
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,539
<EPS-PRIMARY> 6.25
<EPS-DILUTED> 2.07
</TABLE>
