KENTEK INFORMATION SYSTEMS INC \DE\, 424B3, 1996-05-14

KENTEK INFORMATION SYSTEMS INC \DE\
424B3, 1996-05-14
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE> 1

PROSPECTUS SUPPLEMENT, DATED MAY 9, 1996

On May 6, 1996 Kentek received a draft of a complaint from Printronix
Corporation alleging violations of the Robinson-Patman Act and breach of
contract and seeking an aggregate of $10 million in relief. If and when the
complaint is filed, 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.

This prospectus supplement hereby supplements the information contained within
the Prospectus dated April 17, 1996.
<PAGE> 2
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-1606

2,500,000 SHARES

LOGO

====================

COMMON STOCK

--------------------

Of the 2,500,000 shares of common stock, par value $0.01 per share (the
"Common Stock") offered hereby, 2,200,000 shares are being sold by Kentek
Information Systems, Inc. ("Kentek" or the "Company") and 300,000 shares are
being sold by certain non-management stockholders of the Company (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. See "Principal and Selling Stockholders."

Prior to this offering, there has been no public market for the Common
Stock of the Company. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
"KNTK", subject to official notice of issuance.

------------------------

PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER "RISK FACTORS" BEGINNING ON PAGE
6.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $8.00 $.54 $7.46 $7.46
- ------------------------------------------------------------------------------------------------
Total............................. $20,000,000(3) $1,350,000(3) $16,412,000 $2,238,000(3)
- ------------------------------------------------------------------------------------------------
================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, and to reimburse the
representatives of the Underwriters for certain expenses. See
"Underwriting."

(2) Before deducting expenses payable by the Company estimated to be $700,000.

(3) The Selling Stockholders have granted to the several Underwriters a 30-day
over-allotment option to purchase, in the aggregate, up to 375,000
additional shares of Common Stock on the same terms and conditions as set
forth above. If all such additional shares are purchased by the
Underwriters, the total Price to Public will be $23,000,000, the total
Underwriting Discounts and Commissions will be $1,552,500 and the total
Proceeds to Selling Stockholders will be $5,035,500. See "Underwriting."

------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, to withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by the Underwriters and to certain further
conditions. It is expected that delivery of certificates for the shares will be
made at the offices of Janney Montgomery Scott Inc. at 1801 Market Street,
Philadelphia, Pennsylvania 19103 on or about April 22, 1996.

------------------------

JANNEY MONTGOMERY SCOTT INC. HANIFEN, IMHOFF INC.

The date of this Prospectus is April 17, 1996
<PAGE> 3

[pictures]

The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and quarterly reports containing unaudited
consolidated financial information for the first three quarters of each fiscal
year.
---------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET SYSTEM
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4

[pictures]
<PAGE> 5

[pictures]
<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and is subject to,
the more detailed information and Consolidated Financial Statements, including
notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere in this Prospectus. Except as
noted otherwise, all information in this Prospectus (i) assumes that the
Underwriters' over-allotment option has not been exercised, (ii) reflects the
automatic conversion of all outstanding shares of Senior Convertible Preferred
Stock and Series A Convertible Preferred Stock into Common Stock upon the
closing of this offering, and (iii) reflects a 1-for-4.5 reverse stock split of
the Common Stock.

THE COMPANY

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 is the exclusive supplier of consumable supplies, which consist
of the photoconducter, toner, developer, fuser and cleaner, and spare parts for
its printers. 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. Since 1985, Kentek has sold over 80,000 printers and, as a result, the
sale of consumable supplies and spare parts is a substantial portion of its
business. Sales of consumable supplies and spare parts accounted for 63%, 69%
and 74%, respectively, of the Company's total net sales in fiscal 1994, 1995 and
in the six months ended December 31, 1995.

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 OEMs. 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 printers to the
broadest base of OEMs and system integrators in the mid-range market. At
December 31, 1995, printer sales to any one OEM did not account for more than 8%
of total net sales. Kentek's customers include AT&T, Genicom, Hewlett-Packard,
Lexmark, Mannesman Tally, Printronix, 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 OEM and
systems integrator customers.

Kentek's printers incorporate several features designed to enhance
reliability, durability and ease of use, including a straight paper path to
minimize paper jams to fewer than 1-in-10,000 printed pages, and a modular
supplies design to enable quick and easy replacement of consumable supplies,
which also results in lower maintenance costs. Kentek's advanced printer design
and paper handling capacity allow for continuous high-volume operation with
minimal operator attendance. The Company currently sells 30 and 40 ppm printers,
all of which are compatible with HP, IBM, DEC, and UNIX host platforms.

The Company is developing 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 mid-1997.

3
<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,200,000 shares
Common Stock offered by the Selling
Stockholders............................... 300,000 shares
Common Stock to be outstanding after
the offering............................... 6,824,528 shares(1)
Nasdaq National Market symbol................ KNTK
Dividend policy.............................. The Company currently intends to pay an
annual cash dividend of approximately $.08
per share, payable quarterly, commencing in
the first full quarter following the closing
of this offering.
Use of proceeds.............................. To fund the development of a new line of
high-performance printers, to pay
approximately $4.1 million of a liquidation
preference upon conversion of senior
convertible preferred stock and for general
corporate purposes. See "Use of Proceeds."
</TABLE>

- ---------------

(1) Does not include 387,011 shares of Common Stock issuable upon exercise of
stock options outstanding at December 31, 1995 and options to purchase
256,151 shares of Common Stock granted after December 31, 1995. See
"Management -- Stock Option Plan."

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
--------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1994 1995
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales:
Printers...................................... $33,096 $19,262 $18,821 $28,891 $21,736 $14,582 $ 9,496
Consumable supplies and spare parts........... 33,767 42,005 37,054 49,976 48,456 23,840 26,693
------- ------- ------- ------- ------- ------- -------
Total net sales............................. 66,863 61,267 55,875 78,867 70,192 38,422 36,189
Cost of sales................................... 46,621 47,038 43,248 53,786 48,449 25,743 22,807
------- ------- ------- ------- ------- ------- -------
Gross profit.................................. 20,242 14,229 12,627 25,081 21,743 12,679 13,382
Operating expenses:
Selling, general and administrative........... 10,359 8,667 9,199 9,920 9,980 5,116 5,393
Research and development...................... 6,486 7,773 4,606 5,135 5,357 2,848 2,491
------- ------- ------- ------- ------- ------- -------
Total operating expenses.................... 16,845 16,440 13,805 15,055 15,337 7,964 7,884
Operating income (loss)......................... 3,397 (2,211) (1,178) 10,026 6,406 4,715 5,498
Other income (expense)(1)....................... (6,515) (1,358) 523 (70) (445) (105) 19
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes............... (3,118) (3,569) (655) 9,956 5,961 4,610 5,517
Income tax (expense) benefit.................... -- -- -- (309) (926) (737) 2,457
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................... $(3,118) $(3,569) $ (655) $ 9,647 $ 5,035 $ 3,873 $ 7,974
======= ======= ======= ======= ======= ======= =======
Net income (loss) applicable to common
stockholders(2)............................... $(3,118) $(3,569) $ (655) $ 8,326 $ 3,556 $ 3,134 $ 7,146
======= ======= ======= ======= ======= ======= =======
Pro forma net income(2)......................... $ 5,035 $ 7,974
======= =======
Pro forma net income per share(3)............... $ .99 $ 1.57
======= =======
Pro forma weighted average common and common
equivalent shares outstanding(4).............. 5,099 5,079
======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(5) AS ADJUSTED(6)
------- ----------- --------------
<S> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 6,950 $ 6,950 $19,034
Working capital............................................................ 25,914 22,286 37,998
Total assets............................................................... 44,639 44,639 56,723
Short-term debt............................................................ 5,349 5,349 5,349
Long-term debt............................................................. 157 157 157
Total stockholders' equity................................................. 29,791 26,163 41,875
</TABLE>

4
<PAGE> 8

SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------
1991 % 1992 % 1993 % 1994 % 1995 %
------- --- ------- --- ------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT UNIT SALES, AVERAGE PRICES AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL SALES DATA:
Printer sales to
non-IBM OEMs.......................... $ 9,842 30% $ 6,732 35% $ 9,617 51% $13,127 45% $16,418 76%
Printer sales to IBM.................... 23,254 70 12,530 65 9,204 49 15,764 55 5,318 24
------- --- ------- --- ------- --- ------- --- ------- ---
Total net printer sales............... $33,096 100% $19,262 100% $18,821 100% $28,891 100% $21,736 100%
======= === ======= === ======= === ======= === ======= ===
Consumable supplies and
spare parts sales to
non-IBM OEMs.......................... $12,324 36% $ 7,775 19% $12,953 35% $20,293 41% $22,121 46%
Consumable supplies and spare parts
sales to IBM(7)....................... 21,443 64 34,230 81 24,101 65 29,683 59 26,335 54
------- --- ------- --- ------- --- ------- --- ------- ---
Total net consumable supplies and
spare parts sales................... $33,767 100% $42,005 100% $37,054 100% $49,976 100% $48,456 100%
======= === ======= === ======= === ======= === ======= ===
Non-IBM OEM printer units sold.......... 1,935 1,179 1,423 1,664 2,024
IBM printer units sold.................. 5,092 2,584 1,995 2,652 825
------- ------- ------- ------- -------
Total printer units sold.............. 7,027 3,763 3,418 4,316 2,849
======= ======= ======= ======= =======
Cumulative printer units sold........... 66,744 70,507 73,925 78,241 81,090
Average revenue per printer sold to:
Non-IBM OEMs.......................... $ 5,086 $ 5,710 $ 6,758 $ 7,889 $ 8,112
IBM................................... 4,567 4,849 4,614 5,944 6,446

<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------------------
1994 % 1995 %
------- --- ------- ---

<S> <<C> <C> <C> <C>
SUPPLEMENTAL SALES DATA:
Printer sales to
non-IBM OEMs.......................... $ 9,590 66% $ 8,735 92%
Printer sales to IBM.................... 4,992 34 761 8
------- --- ------- ---
Total net printer sales............... $14,582 100% $ 9,496 100%
======= === ======= ===
Consumable supplies and
spare parts sales to
non-IBM OEMs.......................... $10,701 45% $13,958 52%
Consumable supplies and spare parts
sales to IBM(7)....................... 13,139 55 12,735 48
------- --- ------- ---
Total net consumable supplies and
spare parts sales................... $23,840 100% $26,693 100%
======= === ======= ===
Non-IBM OEM printer units sold.......... 1,254 802
IBM printer units sold.................. 780 102
------- -------
Total printer units sold.............. 2,034 904
======= =======
Cumulative printer units sold........... 81,994
Average revenue per printer sold to:
Non-IBM OEMs.......................... $ 7,648 $10,892
IBM................................... 6,400 7,461
</TABLE>

- ---------------

(1) Includes foreign exchange gain (or loss) of $(4,558), $1,062, $393, $668,
$338, $287, and $0 in fiscal years 1991, 1992, 1993, 1994, 1995, and the
first six months ended December 31, 1994 and 1995, respectively.

(2) Net income (loss) applicable to common stockholders reflects the assumed
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.

(3) Historical per share information is not presented as it differs materially
from pro forma per share data. Had pro forma net income per share been
computed assuming the payment of the Excess Liquidation Preference, pro
forma net income per share would have been $.70 per share for the fiscal
year ended June 30, 1995 and $1.41 per share for the six months ended
December 31, 1995. Assuming that the Company had been unable to use net
operating loss and tax credit carryforwards or recognize the benefit of
deferred tax assets but had made cash payments of the accrued Excess
Liquidation Preference, pro forma net income per share would have been $.41
for the fiscal year ended June 30, 1995 and $.49 for the six months ended
December 31, 1995. All net operating loss carryforwards had been utilized by
the end of fiscal 1995; the Company estimates its current effective tax rate
to be 40.0%.

(4) 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.

(5) Reflects accrual of the cumulative Excess Liquidation Preference of $3.6
million at December 31, 1995, and conversion into Common Stock of all
outstanding shares of convertible preferred stock.

(6) Adjusted to give effect to the sale of the 2,200,000 shares of Common Stock
offered by the Company hereby at the initial public offering price of $8.00
per share (after deduction of underwriting discounts and commissions and of
estimated offering expenses of approximately $700,000 payable by the
Company) and the application of the estimated net proceeds therefrom
described in "Use of Proceeds."

(7) Consumable supplies for IBM-branded printers purchased from Kentek are
distributed exclusively through Lexmark.

------------------------

Except for the historical information contained herein, the discussion in this
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the sections entitled "Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business", as well as those discussed elsewhere in
this Prospectus and any documents incorporated herein by reference.

5
<PAGE> 9

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information appearing in this Prospectus,
in connection with an investment in the Common Stock offered hereby.

Potentially Significant Fluctuations in Quarterly and Annual Operating
Results. 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. As a result of these factors, since inception
the Company has been profitable in only five fiscal years: 1986, 1987, 1990,
1994 and 1995. There can be no assurance that the Company will be profitable on
either a quarter-to-quarter or an annual basis. As a result, quarterly
period-to-period comparisons of the Company's financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. 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. 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 without penalty. These factors contributed to
volatility in the Company's operating results and losses both on a quarterly and
annual basis. In addition, it is possible that in some future periods the
Company's results of operations may be below the expectations of public market
analysts and investors. In any such event, the market price of the Common Stock
could be materially and adversely affected. In addition, a significant portion
of the Company's operating expenses are relatively fixed, and planned
expenditures are based primarily on sales forecasts. The Company's operating
income and working capital may be adversely affected by the Company's inability
to reduce expenses if total net sales do not meet the Company's forecasts in any
given quarter. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Quarterly Operating Results."

Significant Competition. The Company competes with many companies in the
printer segment of its business, including Hewlett-Packard, Hitachi (sold by IBM
and Dataproducts), Ricoh (sold by QMS and DEC) 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, Mannesman
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 manufacturing and
distribution businesses, many of the Company's principal customers are also
current or potential competitors, including Genicom, Hewlett-Packard, IBM,
Mannesman Tally, Printronix and Siemens Nixdorf 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. Increased competitive pressure
may lead to intensified price competition, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The announcement of the pending introduction of a potentially competing printer
may have a material and adverse effect on the Company's business, results of
operations and financial condition for a given period by causing customers to
reduce orders for the Company's printers and by encouraging customers to seek
price concessions on existing models. For example, when rumors began to
circulate in the industry in June 1995 that Hewlett-Packard was about to
introduce a new 30 ppm printer, several of the Company's OEM customers reduced
orders for Kentek printers and/or sought price concessions from Kentek. There
can be no assurance that the Company will be able to compete successfully in the
future, or that competition will not have a material adverse effect on the
Company's business, results of operations and financial condition.

The Company derives a majority of its revenue from the ongoing sales of
consumable supplies and spare parts to support its installed base. For the
fiscal years ended 1994 and 1995 and the six months ended

6
<PAGE> 10

December 31, 1995, the Company derived 63%, 69% and 74%, respectively, of total
net sales from sales of consumable supplies and parts. Future consumable supply
product sales are dependent upon the Company's ability to maintain or expand its
installed base of printers and on the Company remaining the exclusive supplier
of consumable supplies for its printers. In order to maintain or expand its
installed base, the Company must achieve high levels of printer sales to offset
the loss of consumable supplies sales when older printers are taken out of
service. The decline in printer sales to IBM, which has occurred since fiscal
1994, will adversely affect the Company's installed base, and thus negatively
impact future sales of consumable supplies and spare parts to IBM's customers
through Lexmark. There can be no assurance that the Company will remain the
exclusive supplier of consumable supply products for its printers or that demand
for the Company's printers and consumable supply products will be sufficient to
ensure a broad and sustainable source of revenue. Should the Company's customers
or other companies successfully produce or remanufacture the Company's
consumable supplies, the Company's business, results of operations and financial
condition could be materially and adversely affected. See "Business -- Industry
Overview; -- Consumable Supply Products; and -- Competition."

Dependence on Key Customers. Sales of consumable supply products to the
Company's largest customer, Lexmark, constituted 26%, 32% and 32% of the
Company's total net sales in fiscal years 1994 and 1995 and in the six months
ended December 31, 1995, respectively. Lexmark currently sells consumable
supplies only for IBM-branded printers. Until fiscal 1995, IBM was the Company's
largest printer customer, accordingly there exists a large installed base of
IBM-branded printers manufactured by Kentek. The Company believes that sales of
consumable supplies and spare parts to Lexmark will continue to constitute a
significant portion of its total net sales over the next several years. However,
IBM indicated to Kentek in fiscal 1993 its intent to reduce significantly its
purchases of Kentek's printers, and in early fiscal 1995 formally announced its
plans to purchase a competitor's line of mid-range printers. Accordingly, since
the second half of fiscal 1995, sales of printers to IBM have declined sharply.
IBM announced to its customers in January 1996 that it will discontinue listing
Kentek printers as part of its product line effective June 28, 1996. As a
result, the Company anticipates a decline in its installed base of IBM-branded
printers and, accordingly, sales of consumable supplies and spare parts to
Lexmark can be expected to decline as such installed printers are taken out of
service. While the Company has an exclusive relationship with Lexmark under
which Lexmark must purchase its requirements of consumable supplies for the
Company's printers from Kentek, under the terms of Lexmark's agreements with
IBM, IBM may commence manufacturing consumable supplies for Kentek's printers in
March 1999. Should Lexmark reduce or cease its purchase and distribution of
consumable supply products for Kentek's installed base of IBM-branded printers,
or should IBM commence manufacturing or selling consumable supplies for these
printers, the Company's business and operating results would be materially and
adversely affected.

Sales of printers and consumable supplies and spare parts to Siemens
Nixdorf Printing Systems constituted 16% of the Company's total net sales for
the six months ended December 31, 1995; sales of printers constituted 30% of the
Company's total net printer sales, or $2.8 million; and sales of consumable
supplies and spare parts constituted 12% of the Company's total net consumable
supplies and spare parts sales, or $3.1 million, for this period. The Company's
top eight customers accounted for 90% of its total net sales in the six months
ended December 31, 1995. As of June 30, 1995, the Company's three largest
customers were IBM, Lexmark and Siemens Nixdorf Printing Systems, sales to which
constituted 14%, 32% and 12%, respectively, of the Company's total net sales.
For the six months ended December 31, 1995, the Company's three largest
customers were Hewlett-Packard, Lexmark and Siemens Nixdorf Printing Systems,
sales to which constituted 11%, 32% and 16%, respectively, of the Company's
total net sales. If Siemens Nixdorf Printing Systems or any other significant
customer of the Company were to reduce or eliminate purchases of the Company's
printers or consumable supplies, the Company's business, operating results and
financial condition could be materially and adversely affected. 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. Oce van der Grinten N.V. currently manufactures and distributes
mid-range printers which compete with the Company's printers in the United
States and Europe. It is possible

7
<PAGE> 11

that in the future the combined entity, Oce Printing Systems, will purchase
fewer printers and consumable supplies and spare parts from the Company than
Siemens Nixdorf Printing Systems has purchased historically, which could have a
material adverse effect on the Company's results of operations and financial
condition. The Company believes that if Oce Printing Systems were to decide to
replace Kentek printers previously sold to Siemens Nixdorf Printing Systems with
its own printers, purchases of Kentek printers by Oce Printing Systems would
eventually decline to zero. Although the Company does not currently have
sufficient information regarding the long-term plans of Oce Printing Systems,
and thus cannot predict the likely impact of such acquisition on its future
operating results and financial condition, the Company does not currently
believe that its printer sales to Oce Printing Systems will be materially
reduced over the next nine to twelve months by virtue of such acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business -- Customers, Marketing and Support."

Dependence on New Products; Rapid Technological Change. 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. Lack of market acceptance for the Company's
existing or new products, the Company's failure to introduce new products in a
timely or cost-effective manner, or its failure to increase functionality of
existing products or to remain price competitive, would materially and adversely
affect the Company's business, operating results and financial condition. There
can be no assurance that the Company's product development efforts will be
successful or will be completed in a timely fashion. In addition, there can be
no assurance that the Company's products, even if successfully developed, will
achieve market acceptance. See "Business -- Technology and Products; and
- -- Product Development."

Long Design and Sales Cycle on New and Existing Products. OEM 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 OEM 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, OEM customers must develop marketing programs, including sales and
service training. Should Kentek lose one or more major customers or if one of
the Company's existing products should lose market acceptance, Kentek's
business, results of operations and financial condition could be adversely
affected. This Company's long sales cycle makes it difficult in the short term
for the Company to recapture lost revenues through sales to new OEM customers or
through sales of new products to existing customers. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."

International Operations; Currency Fluctuations. The Company has
significant operations in Japan, where certain components of its printers are
sourced, designed and manufactured. In addition, direct sales to international
customers represented 17%, 12% and 13% of the Company's total net sales in
fiscal 1994 and 1995 and in the six months ended December 31, 1995. The Company
believes that international sales will continue to represent a significant
portion of its total revenue, and that it will be subject to the normal risks of
conducting business internationally, including unexpected changes in regulatory
requirements, export license requirements, tariffs and other barriers,
difficulties in staffing and managing foreign sales operations and potentially
adverse tax consequences. The Company's business may be adversely affected by
lower sales levels in Europe, which typically occur during the summer months.
Other risks inherent in the Company's international business include greater
difficulties in accounts receivable collection, the potential of protective
trade activities or laws and the burdens of complying with a wide variety of
foreign laws. See "Business -- Manufacturing and Sources of Supply" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- International Sales."

Operating expenses and production costs related to Kentek's Japanese
operations are subject to fluctuations in the dollar-yen exchange rate. Although
the Company does not have a hedging program at this time, the Company mitigates
a portion of its currency fluctuation risk through a contractual risk sharing
provision included in its OEM customer agreements. In addition, the Company may
reinstitute a formal hedging program in the future. There can be no assurance
that the Company will be able to successfully

8
<PAGE> 12

mitigate or hedge against fluctuating currency rates in the future. 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. Purchase
prices for future orders are adjusted monthly in a manner that results in the
sharing of exchange rate changes between Kentek and its customers. However, such
adjustments do not affect outstanding orders. Consequently, when the yen
strengthens significantly over a short period of time, as it did in February and
March 1995, Kentek's costs of manufacturing products for outstanding orders
increase but it is not entitled to any price adjustments on such orders.
Therefore, a substantial strengthening of the yen could have a material adverse
effect on the Company's financial condition and results of operations.
Conversely, when the dollar strengthens against the yen, the Company's
manufacturing costs and operating expense in Japan are affected favorably.
However, the exchange rate sharing agreement results in reductions in customers'
purchase prices on future orders, partially offsetting such benefit.

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. Such a
write-down could materially and adversely affect the Company's operating results
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Dependence on Suppliers. Although the Company generally purchases parts and
components from multiple vendors, certain of the Company's parts and components
are obtained entirely or substantially from a single source. The Company
contracts with Kao Corporation ("Kao") to formulate the toner for its current
line of printers. Should Kao discontinue formulation of this toner, the Company
would be required to seek another source, and its failure to find such a source
could materially and adversely affect the Company's business, operating results
and financial condition. Sanyo Electric Trading Co., Ltd. ("Sanyo") is the
Company's sole supplier of light emitting diode ("LED") printheads. Although the
Company currently maintains approximately a six month inventory of printheads,
if Sanyo were to cease manufacturing such printheads and the Company were unable
to purchase them from an alternate supplier, the Company's business, operating
results and financial condition could be materially and adversely affected. In
addition, the Company employs proprietary application specific integrated
circuits ("ASICs") in the controllers of its current line of printers. These
ASICs are sourced exclusively from Integrated Device Technologies, Inc. The
Company maintains approximately a six month inventory of these ASICs.
Disruptions in supply or material increases in costs of components are a
continuing risk and could have a material adverse affect on the Company's
business, operating results and financial condition.

The Company has entered into a contract manufacturing alliance with Nagano
Japan Radio Corporation ("NJRC") to produce the Company's printer engine. The
Company believes its relationship with NJRC has been successful, but should NJRC
experience capacity limitations or other difficulties in meeting the Company's
requirements, it could have a material adverse effect on its business, results
of operations and financial condition. Further, the Company relies on other
contract manufacturing sources to procure components and assemble the printed
circuit boards used in the printer controllers. Should any of these contract
manufacturing sources experience difficulty in acquiring electronic components,
or should they experience difficulty in their operations, the Company's
business, results of operations and financial condition could be materially and
adversely affected. A significant portion of the Company's revenue depends on
the sale of consumable supplies for use in its installed base of printers, and
for use in new printers being built and shipped monthly. The Company is
dependent on unique parts produced from Company-owned tooling for the components
used to manufacture these consumable supply products. Some of these components
are sourced in Japan and some of the Company-owned tooling is located in Japan.
Should a unique tool used to produce a component be destroyed or should there be
trade difficulties with Japan, or should any one of these component vendors
experience difficulty in supplying component parts or in its continuing
operations, the Company may experience a component shortage which could have a
material adverse affect on its business, results of operations and financial
condition. The Company has no written supply agreements with Sanyo, Integrated
Device Technologies or NJRC. See "Business -- Manufacturing and Sources of
Supply."

9
<PAGE> 13

Limitations on Protection of Intellectual Property and Proprietary Rights.
The Company regards much of its hardware and software as proprietary and relies
on a combination of patent, copyright, trademark, trade secret, employee and
third-party non-disclosure agreements and other methods to protect its products
and technology. As of December 31, 1995, the Company had been issued 25 United
States and 23 foreign 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 any
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
because Japanese patent applications are published upon filing and often require
several years to successfully prosecute. Moreover, the laws of some foreign
countries may not protect the Company's proprietary rights to the same extent as
the laws of the United States. Other companies could assert patent, copyright or
other intellectual property rights against the Company. If any such claims 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 restricted from manufacturing and selling such products. The Company could
also incur substantial costs in redesigning its products or in defending any
legal action taken against it. See "Business -- Proprietary Rights."

Dependence on Key Employees. The Company's continued success will depend
upon its ability to retain a number of key employees, as well as its ability to
attract and retain new key management and technical personnel. There can be no
assurance that the Company will be able to retain its existing key management,
engineering and sales personnel or attract and retain qualified employees in the
future. See "Business -- Employees" and "Management."

Control by Existing Stockholders. Following this offering, the executive
officers, directors, and holders of five percent or more of the outstanding
shares of Common Stock of the Company will beneficially own approximately 47.5%
of the outstanding Common Stock. Accordingly, these stockholders will have the
ability to exert considerable influence over the election of the Company's
directors and most other corporate actions, including matters requiring
stockholder approval. This concentration of ownership may also have the effect
of delaying or preventing a change in control of the Company. See "Principal and
Selling Stockholders", "Management" and "Description of Capital Stock."

No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Company's Common Stock. The
initial public offering price of the Common Stock has been determined through
negotiations among the Company, the Selling Stockholders and the representatives
of the Underwriters (the "Representatives"). There can be no assurance that an
active trading market for the Common Stock will develop or be sustained after
the offering. Future announcements concerning the Company or its competitors,
including results of technological innovations, new products, government
regulations, proprietary rights or product litigation, or changes in earnings or
earnings estimates by public market analysts may cause the market price of the
Common Stock to fluctuate substantially. In addition, stock prices for many
technology companies fluctuate widely for reasons that may be unrelated to
operating results. These fluctuations, as well as general economic, political
and market conditions, including market conditions in the computer hardware and
software industries, recessions or military conflicts, may adversely affect the
market price of the Common Stock. See "Underwriting."

Shares Eligible for Future Sale; Registration Rights. Upon completion of
this offering, the Company will have 6,824,528 shares of Common Stock
outstanding, of which the 2,200,000 shares offered hereby by the Company and the
300,000 shares offered hereby by the Selling Stockholders (675,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or registration under the Securities Act of 1933,
as amended (the "Securities Act") unless purchased by "affiliates" of the
Company as that term is defined under the Securities Act and the regulations
promulgated thereunder. The remaining 4,324,528 shares of Common Stock are
"restricted securities" as that term is defined by Rule 144 promulgated under
the Securities Act. Of such shares, approximately 236,196 shares will

10
<PAGE> 14

be eligible for sale in the public market as of the date of this Prospectus in
reliance on Rule 144(k) under the Securities Act. In addition, beginning 90 days
from the date of this Prospectus approximately 176,790 shares will be eligible
for sale in the public market pursuant to the provisions of Rule 144 and Rule
701 under the Securities Act, and the holders of then vested options to purchase
29,277 shares will be entitled to exercise such options and sell such shares
subject to the provisions of Rule 144 and Rule 701. The Company, the Selling
Stockholders, the directors, executive officers and certain other stockholders
of the Company, holding in the aggregate approximately 4,104,174 shares (and
vested options to purchase an additional 163,645 shares) of Common Stock, have
agreed that they will not, directly or indirectly, offer, sell, offer to sell,
contract to sell, grant any option to purchase or otherwise dispose of or
transfer any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable therefor, for a period of 180 days from the date of
this Prospectus without the prior written consent of Janney Montgomery Scott
Inc., on behalf of the Underwriters.
Upon the expiration of this 180 day lock-up period approximately 4,104,174
additional shares of Common Stock (and approximately 327,593 additional shares
issuable upon exercise of then vested options) will become available for sale in
the public market subject to compliance with Rule 144, Rule 144(k) or Rule 701.
Holders of 4,323,818 shares of Common Stock have the right, under certain
conditions, to participate in future Company registrations and to cause the
Company to register certain shares of Common Stock owned by them. Sales of
substantial amounts of Common Stock in the public market may have an adverse
impact on its market price and could impair the Company's future ability to
raise capital through an offering of its equity securities. See "Shares Eligible
for Future Sale" and "Description of Capital Stock -- Registration Rights."

Possible Issuance of Preferred Stock; Effect of Anti-Takeover Provisions.
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. Such issuance, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could make
it more difficult for a third party to acquire or discourage a third party from
acquiring a majority of the outstanding voting stock of the Company. In
addition, the Company is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law, which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. The application of Section 203 and certain provisions of
the Company's Certificate of Incorporation may have the effect of delaying or
preventing changes in control or management of the Company, which could
adversely affect the market price of the Company's Common Stock by discouraging
or preventing takeover attempts that might result in the payment of a premium
price to the Company's stockholders. See "Description of Capital
Stock -- Delaware Anti-Takeover Law and Certain Charter Provisions."

11
<PAGE> 15

THE COMPANY

The Company was incorporated in Delaware in August 1981. "Kentek" and all
of the Company's product designations referred to herein are trademarks of the
Company. This Prospectus also includes trade names, trademarks, and registered
trademarks of companies other than Kentek. The Company's principal executive
offices are located at 2945 Wilderness Place, Boulder, Colorado 80301, and its
telephone number is (303) 440-5500.

USE OF PROCEEDS

The estimated net proceeds from the sale by the Company of the Common Stock
offered hereby will be approximately $15.7 million, at the public offering price
of $8.00 per share and after deducting underwriting discounts and commissions
and estimated offering expenses of approximately $700,000.

The Company anticipates that approximately $8.0 million of the net proceeds
received by the Company in this offering, along with cash on hand and the
Company's lines of credit, will be used to fund the development, tooling and
manufacturing of a new line of high-performance printers, including the 60 ppm
KW60. Upon the closing of this offering, the Company will pay the holders of the
Company's Senior Convertible Preferred Stock ("Senior Preferred") the Excess
Liquidation Preference (the "Excess Liquidation Preference") resulting from the
conversion of such Senior Preferred into Common Stock. The Excess Liquidation
Preference has accrued on the Senior Preferred since its date of issuance, June
30, 1993, at the rate of 12.0% per annum. Upon the conversion of the Senior
Preferred on the closing of this offering, the Company must pay the Excess
Liquidation Preference either in cash or in stock, and the Company has elected
to pay in cash. At December 31, 1995, the Excess Liquidation Preference was
approximately $3.6 million, and will be approximately $4.1 million as of the
closing of this offering. See Note 5 of Notes to the Consolidated Financial
Statements. In addition, the Company may use a portion of the proceeds of this
offering to expand its consumable supply products business and manufacturing
operations through internal growth or acquisitions, although the Company has no
present commitments or agreements and is presently not conducting discussions
with respect to any such acquisitions. The Company anticipates that the balance
of the net proceeds of this offering will be used for general corporate and
working capital purposes. Pending such uses, the Company will invest the net
proceeds in short-term, interest-bearing, investment grade securities.

The Company will not receive any proceeds from the sale of the 300,000
shares (675,000 shares if the Underwriters' over-allotment option is exercised
in full) of Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."

DIVIDEND POLICY

The Company currently intends to pay an annual cash dividend to its
stockholders of approximately $.08 per share of Common Stock, payable quarterly,
commencing in the first full quarter following the closing of this offering,
subject to declaration by the Board of Directors. No dividend will be payable
unless declared by the Board of Directors and unless funds are legally available
for payment of a dividend. Future determinations by the Company's Board of
Directors as to dividend policy will depend on a number of factors, including
future earnings, capital requirements, financial condition and business
prospects of the Company, restrictions in loan agreements and such other factors
as the Board of Directors in its discretion may deem relevant.

12
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1995: (i) on an actual basis reflecting the effectiveness of the
1-for-4.5 reverse stock split of the Common Stock; (ii) on a pro forma basis
reflecting the automatic conversion of all of the Senior Preferred and Series A
Convertible Preferred Stock into Common Stock upon the closing of this offering
and the accrual of the cumulative Excess Liquidation Preference on the Senior
Preferred; and (iii) on a pro forma as adjusted basis to give effect to the sale
of the 2,200,000 shares of Common Stock offered by the Company hereby at the
initial public offering price of $8.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses and the
application of the estimated net proceeds of the offering contemplated hereby.
See "Use of Proceeds."

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Short-term debt, including current portion of long-term
debt..................................................... $ 5,349 $ 5,349 $ 5,349
======= ======= =======
Long-term debt, excluding current portion.................. $ 157 $ 157 $ 157
Stockholders' equity:
Senior preferred stock, $.05 par value, 14,000,000 shares
authorized, 11,005,000 shares issued and outstanding,
actual, and no shares issued and outstanding, pro
forma and pro forma as adjusted....................... 550 -- --
Series A convertible preferred stock, $.01 par value,
13,000,000 shares authorized, 1,785,054 shares issued
and outstanding, actual, and no shares issued and
outstanding, pro forma and pro forma as adjusted...... 18 -- --
Convertible preferred stock, $.01 par value, 3,000,000
shares authorized, no shares issued and outstanding... -- -- --
Preferred stock, $.01 par value, 2,000,000 shares
authorized, no shares issued and outstanding.......... -- -- --
Common stock, $.01 par value, 12,000,000 shares
authorized, 836,119 shares issued and outstanding,
actual, 4,624,528 shares issued and outstanding, pro
forma and 6,824,528 shares issued and outstanding, pro
forma as adjusted(1).................................. 8 46 68
Additional paid in capital............................... 31,484 32,014 47,704
Foreign currency translation adjustment.................. (326) (326) (326)
Accumulated deficit...................................... (1,943) (5,571) (5,571)
------- -------- ---------
Total stockholders' equity....................... 29,791 26,163 41,875
------- -------- ---------
Total capitalization........................... $29,948 $26,320 $42,032
======= ======= =======
</TABLE>

- ---------------

(1) Does not include 387,011 shares of Common Stock issuable upon exercise of
stock options outstanding as of December 31, 1995 and options to purchase
256,151 shares of Common Stock issued after December 31, 1995. See
"Management -- Stock Option Plan."

13
<PAGE> 17

DILUTION

As of December 31, 1995, the pro forma net tangible book value of the
Company, after giving effect to the conversion of all outstanding preferred
stock and to the payment of the Excess Liquidation Preference to the holders of
Senior Preferred was approximately $26,163,000, or $5.66 per share of Common
Stock. Net tangible book value per share represents the amount of the Company's
total tangible assets less its total liabilities, divided by the total number of
shares of Common Stock outstanding. After giving effect to the sale of the
2,200,000 shares of Common Stock offered by the Company hereby (at the initial
public offering price of $8.00 per share) and receipt of the net proceeds
therefrom (after deducting underwriting commissions and discounts and estimated
offering expenses), the adjusted pro forma net tangible book value of the
Company at December 31, 1995 would have been approximately $41,875,000, or $6.14
per share, representing an immediate increase in net tangible book value of $.48
per share to existing stockholders and an immediate dilution of $1.86 per share
to new investors purchasing shares in the offering. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price........................................ $8.00
Pro forma net tangible book value before offering.................... $5.66
Increase attributable to purchase by new investors................... .48
-----
Pro forma net tangible book value after offering..................... 6.14
-----
Dilution to new investors............................................ $1.86
=====
</TABLE>

The following table sets forth at December 31, 1995, with respect to the
existing stockholders and the new investors, a comparison of the number of
shares of Common Stock purchased from the Company, the total consideration paid
to the Company and the average consideration paid per share. The calculations
are based on the initial public offering price of $8.00 per share, before
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company, and do not reflect the sale of Common Stock by the
Selling Stockholders.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 4,624,528 67.8% $32,060,000 64.6% $6.93
New investors.................... 2,200,000 32.2 17,600,000 35.4 8.00
--------- ----- ----------- -----
Total.................. 6,824,528 100.0% $49,660,000 100.0%
========= ===== =========== =====
</TABLE>

The foregoing tables do not give effect to any exercise of options
outstanding at December 31, 1995 to purchase an aggregate of 387,011 shares of
Common Stock at a weighted average exercise price of $4.60 per share, or to any
exercise of options granted since December 31, 1995 to purchase an additional
256,151 shares of Common Stock at a weighted average exercise price of $6.49 per
share. To the extent stock options are exercised, there will be further dilution
to new investors. If all options outstanding at December 31, 1995 were exercised
in full, the pro forma net book value at December 31, 1995 per share as adjusted
for the offering contemplated hereby would have been $6.05 the dilution per
share to new investors would have been $1.95, the percentage of shares purchased
by existing stockholders and new investors would be 69.5% and 30.5%,
respectively, the percentage of the total consideration paid by existing
stockholders and new investors would be 65.8% and 34.2%, respectively, and the
average consideration paid by existing stockholders and new investors would be
$6.75 and $8.00, respectively. See "Management -- Stock Option Plan."

14
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The selected data presented below for each of the fiscal years in the
five-year period ended June 30, 1995 are derived from the consolidated financial
statements of the Company, which financial statements have been audited by BDO
Seidman, LLP, independent certified public accountants. The selected data
presented below for the six month periods ended December 31, 1994 and 1995 are
derived from the Unaudited Consolidated Financial Statements included elsewhere
in this Prospectus. This information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The selected consolidated financial data for the
six months ended December 31, 1994 and 1995 have not been audited, but in the
opinion of management, reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial data for and at the end
of such periods. Results for the interim period ended December 31, 1995 are not
necessarily indicative of the results that may be expected for the entire fiscal
year or other interim periods.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
--------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1994 1995
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales:
Printers........................................... $33,096 $19,262 $18,821 $28,891 $21,736 $14,582 $ 9,496
Consumable supplies and spare parts................ 33,767 42,005 37,054 49,976 48,456 23,840 26,693
------- ------- ------- ------- ------- ------- -------
Total net sales.................................. 66,863 61,267 55,875 78,867 70,192 38,422 36,189
Cost of sales........................................ 46,621 47,038 43,248 53,786 48,449 25,743 22,807
------- ------- ------- ------- ------- ------- -------
Gross profit....................................... 20,242 14,229 12,627 25,081 21,743 12,679 13,382
Operating expenses:
Selling, general and administrative................ 10,359 8,667 9,199 9,920 9,980 5,116 5,393
Research and development........................... 6,486 7,773 4,606 5,135 5,357 2,848 2,491
------- ------- ------- ------- ------- ------- -------
Total operating expenses......................... 16,845 16,440 13,805 15,055 15,337 7,964 7,884
Operating income (loss).............................. 3,397 (2,211) (1,178) 10,026 6,406 4,715 5,498
Other income (expense)(1)............................ (6,515) (1,358) 523 (70) (445) (105) 19
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.................... (3,118) (3,569) (655) 9,956 5,961 4,610 5,517
Income tax (expense) benefit......................... -- -- -- (309) (926) (737) 2,457
------- ------- ------- ------- ------- ------- -------
Net income (loss).................................... $(3,118) $(3,569) $ (655) $ 9,647 $ 5,035 $ 3,873 $ 7,974
======= ======= ======= ======= ======= ======= =======
Net income (loss) applicable to common
stockholders(2).................................... $(3,118) $(3,569) $ (655) $ 8,326 $ 3,556 $ 3,134 $ 7,146
======= ======= ======= ======= ======= ======= =======
Pro forma net income(2).............................. $ 5,035 $ 7,974
======= =======
Pro forma net income per share(3).................... $ .99 $ 1.57
======= =======
Pro forma weighted average common and common
equivalent shares outstanding(4)................... 5,099 5,079
======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1995
JUNE 30, --------------------------------------
----------------------------------------------- PRO PRO FORMA
1991 1992 1993 1994 1995 ACTUAL FORMA (5) AS ADJUSTED (6)
------- ------- ------- ------- ------- ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 7,992 $ 5,778 $ 2,945 $ 4,031 $ 6,389 $ 6,950 $ 6,950 $19,034
Working capital........................ (2,557) (2,230) 2,942 17,870 25,506 25,914 22,286 37,998
Total assets........................... 35,781 33,296 33,705 45,450 39,711 44,639 44,639 56,723
Short-term debt........................ 17,066 13,494 8,501 8,479 101 5,349 5,349 5,349
Long-term debt......................... 8,513 10,512 7,839 5,864 6,651 157 157 157
Total stockholders' equity (deficit)... 800 (3,341) 6,232 15,758 22,684 29,791 26,163 41,875
</TABLE>

15
<PAGE> 19
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------
1991 % 1992 % 1993 % 1994 % 1995 %
------- --- ------- --- ------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT UNIT SALES, AVERAGE PRICES AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL SALES DATA:
Printer sales to
non-IBM OEMs.......................... $ 9,842 30% $ 6,732 35% $ 9,617 51% $13,127 45% $16,418 76%
Printer sales to IBM.................... 23,254 70 12,530 65 9,204 49 15,764 55 5,318 24
------- --- ------- --- ------- --- ------- --- ------- ---
Total net printer sales............... $33,096 100% $19,262 100% $18,821 100% $28,891 100% $21,736 100%
======= === ======= === ======= === ======= === ======= ===
Consumable supplies and spare
parts sales to non-IBM OEMs........... $12,324 36% $ 7,775 19% $12,953 35% $20,293 41% $22,121 46%
Consumable supplies and spare
parts sales to IBM(7)................. 21,443 64 34,230 81 24,101 65 29,683 59 26,335 54
------- --- ------- --- ------- --- ------- --- ------- ---
Total net consumable supplies
and spare parts sales............... $33,767 100% $42,005 100% $37,054 100% $49,976 100% $48,456 100%
======= === ======= === ======= === ======= === ======= ===
Non-IBM OEM printer units sold.......... 1,935 1,179 1,423 1,664 2,024
IBM printer units sold.................. 5,092 2,584 1,995 2,652 825
------- ------- ------- ------- -------
Total printer units sold.............. 7,027 3,763 3,418 4,316 2,849
======= ======= ======= ======= =======
Cumulative printer units sold........... 66,744 70,507 73,925 78,241 81,090
Average revenue per printer sold to:
Non-IBM OEMs.......................... $ 5,086 $ 5,710 $ 6,758 $ 7,889 $ 8,112
IBM................................... 4,567 4,849 4,614 5,944 6,446

<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------------------
1994 % 1995 %
------- --- ------- ---

<S> <<C> <C> <C> <C>
SUPPLEMENTAL SALES DATA:
Printer sales to
non-IBM OEMs.......................... $ 9,590 66% $ 8,735 92%
Printer sales to IBM.................... 4,992 34 761 8
------- --- ------- ---
Total net printer sales............... $14,582 100% $ 9,496 100%
======= === ======= ===
Consumable supplies and spare
parts sales to non-IBM OEMs........... $10,701 45% $13,958 52%
Consumable supplies and spare
parts sales to IBM(7)................. 13,139 55 12,735 48
------- --- ------- ---
Total net consumable supplies
and spare parts sales............... $23,840 100% $26,693 100%
======= === ======= ===
Non-IBM OEM printer units sold.......... 1,254 802
IBM printer units sold.................. 780 102
------- -------
Total printer units sold.............. 2,034 904
======= =======
Cumulative printer units sold........... 81,994
Average revenue per printer sold to:
Non-IBM OEMs.......................... $ 7,648 $10,892
IBM................................... 6,400 7,461
</TABLE>

- ---------------

(5) Reflects accrual of the cumulative Excess Liquidation Preference of $3.6
million at December 31, 1995, and conversion into Common Stock of all
outstanding shares of convertible preferred stock.

(7) Consumable supplies for IBM-branded printers purchased from Kentek are
distributed exclusively through Lexmark.

16
<PAGE> 20

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus.

OVERVIEW

The Company's revenues are derived from the sale of mid-range printers and
related consumable supplies and spare parts. In recent years, sales of
consumable supplies and spare parts have represented a majority of the Company's
total net sales. The Company estimates that its printers have an average useful
life of approximately seven years, and consumable supplies and spare parts must
be replaced several times each year. Over the useful life of a printer,
consumable supplies and spare parts can be expected to generate revenues of more
than three times the original purchase price of the printer. In the fiscal years
ended June 30, 1994, 1995 and in the six months ended December 31, 1995, sales
of consumable supplies and spare parts accounted for approximately 63.4%, 69.0%
and 73.8%, respectively, of the Company's total net sales for such periods. The
Company plans to introduce faster, higher-duty cycle printers which will have a
higher consumption rate for consumable supplies and spare parts.

Printer sales exhibit significant quarter-to-quarter variability. These
fluctuations have been and may continue to be caused by a number of factors,
including (i) the timing of customer orders, as Kentek's contractual
arrangements with its customers do not require the customers to make quantity
purchase commitments in advance of shipment orders and generally permit the
cancellation of orders without penalty, (ii) changes in customer inventory
practices, (iii) the timing of introduction of new versions of the Company's
products and of competitive products and (iv) the timing of marketing and
research and development expenditures. As a result of these factors, since
inception the Company has been profitable in only five fiscal years: 1986, 1987,
1990, 1994 and 1995. The Company believes that variability in orders for
shipment will decrease in the future because OEM customers are making and will
continue to make fewer large initial purchases of printers and supplies for
inventory stocking upon the introduction of new models and increasingly will
make purchase decisions on an as-needed basis to reduce costs associated with
inventory management. In addition, the Company plans to increase its sales
efforts to OEMs and systems integrators who provide vertical marketing printing
solutions for end-users. Such customers tend to resell Kentek's products to
end-users on a short lead-time basis, thus reducing fluctuations in orders
traditionally associated with inventory stocking practices. See
"Business -- Customers, Marketing and Support."

Consumable supplies and spare parts sales typically are less susceptible to
such fluctuations, although OEM customers' inventory management practices could
significantly affect shipments. The Company has historically experienced a 9 to
12 month lag between the time it introduces a new printer to OEMs for trial use
and the time it receives a meaningful volume of orders for printer and
consumable supplies shipments. The Company believes this trend will continue
when it introduces its new KW60 printer in approximately mid-1997. See
"-- Quarterly Operating Results."

From 1985 to 1991, the Company sold its printers and consumable supplies
and spare parts almost exclusively to IBM. Beginning in 1991, the Company began
to pursue a strategy of reducing its dependence on sales to IBM by expanding its
base of OEM customers. Between fiscal 1991 and fiscal 1994, net printer sales to
IBM decreased from 70.2% to 54.6% as a percentage of total net printer sales.
IBM indicated to Kentek in fiscal 1993 that it intended to reduce significantly
its purchases of Kentek printers and decided in fiscal 1995 to purchase a
competitor's printer. Sales to IBM as a percentage of total printer sales have
decreased from 54.6% in fiscal 1994 to 24.5% and 8.0%, respectively, in fiscal
1995 and in the six months ended December 31, 1995. Total printer unit sales to
IBM have also decreased during these periods, with 2,652 units sold in fiscal
1994, 825 units in fiscal 1995 and 102 units in the six months ended December
31, 1995. The Company believes this trend will continue in the future. However,
the Company also believes that due to its large installed base of printers sold
to IBM, IBM's customers will continue to purchase through Lexmark (the exclusive
distributor of consumable supplies for IBM-branded printers) a substantial
volume of consumable supplies and spare parts from Kentek over the useful life
of these printers.

17
<PAGE> 21

The Company competes with many companies in the printer segment of its
business, many of whom have significantly greater name recognition and financial
and personnel resources than the Company. The announcement of the pending
introduction of a competing printer may have a material adverse effect on the
Company's business, results of operations and financial condition, by causing
customers to reduce purchase orders for Kentek printers and by encouraging
customers to seek price concessions on existing models. For example, when rumors
began to circulate in the industry in June 1995 that Hewlett-Packard was about
to introduce a new 30 ppm printer, several of the Company's OEM customers
reduced orders for Kentek printers and/or sought price concessions from Kentek.
See "Risk Factors -- Significant Competition."

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. 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. Sales of printers and consumable supplies and
spare parts to Siemens Nixdorf Printing Systems constituted 16% of the Company's
total net sales for the six months ended December 31, 1995, representing 30% of
Company's total net printer sales ($2.8 million), and 12% of the Company's total
net consumable supplies and spare parts sales ($3.1 million), for this period.
Oce van der Grinten N.V. currently manufactures and distributes mid-range
printers which compete with the Company's printers in the United States and
Europe. It is possible that in the future the combined entity, Oce Printing
Systems, will purchase fewer printers and consumable supplies and spare parts
from the Company than Siemens Nixdorf Printing Systems has purchased
historically, which could have a material adverse effect on the Company's
results of operations and financial condition. The Company believes that if Oce
Printing Systems were to decide to replace Kentek printers previously sold to
Siemens Nixdorf Printing Systems with its own printers, purchases of Kentek
printers by Oce Printing Systems would eventually decline to zero. Although the
Company does not currently have sufficient information regarding the long-term
plans of Oce Printing Systems, and thus cannot predict the likely impact of such
acquisition on its future operating results and financial condition, the Company
does not currently believe that its printer sales to Oce Printing Systems will
be materially reduced over the next nine to twelve months by virtue of such
acquisition. See "Risk Factors -- Dependence on Key Customers."

The Company has significant operations in Japan, and, as a result,
operating expenses and the value at which assets and liabilities are carried on
the balance sheet are dependent on dollar-yen exchange rates. In fiscal 1993 the
Company made a strategic decision to reduce this exposure by relocating the
manufacturing and assembly of its consumable supply products to the United
States. As of December 31, 1995, over 70% of the components for manufacturing
Kentek's consumable supplies were sourced in the United States. The Company
plans to manufacture its new KW60 printer and consumable supplies product line
in the United States. 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.
Purchase prices for future orders are adjusted monthly in a manner that results
in the sharing of exchange rate changes between Kentek and its customers.
However, such adjustments do not affect outstanding orders. Consequently, when
the yen strengthens significantly over a short period of time, as it did in
February and March 1995, Kentek's costs of manufacturing products for
outstanding orders increase but it is not entitled to any price adjustments on
such orders. Therefore, a substantial strengthening of the yen could have a
material adverse effect on the Company's financial condition and results of
operations. Conversely, when the dollar strengthens against the yen, the
Company's manufacturing costs and operating expenses in Japan are affected
favorably. However, the exchange rate sharing agreement results in reductions in
customers' purchase prices on future orders, partially offsetting such benefit.
Currently, these sharing arrangements apply primarily to printers and parts
manufactured in Japan.

The Company owns a 16,000 square foot facility in Tama, Japan which is
vacant and currently held for sale. The property was first advertised for sale
in July 1995. The Company has had several inquiries regarding purchase of the
property. All interested parties to date are pursuing bank financing information
as well as investigating governmental approved usage of the property. Based on
an assessment of the sales effort responses, estimated cost associated with the
sale of the property, and the current Japanese real estate market

18
<PAGE> 22

conditions, the recorded value of the property represents the Company's current
estimate of net realizable value. However, subject to future market conditions,
adjustments to the net realizable value of this property could materially and
adversely effect the Company's operating results and financial condition.

Kentek incurred net losses in fiscal 1991, 1992 and 1993. Factors which
contributed to the fiscal 1991 and 1992 losses included price decreases on sales
to IBM and Lexmark under previously negotiated contracts, competitors'
introductions of low cost 16 to 20 ppm printers and a significant decline in the
dollar-yen exchange rate which raised the costs of products manufactured in
Japan. Beginning mid-fiscal 1992, the Company made several operational and
strategic changes, including:

Renegotiation of Key Contracts. The Company's contract with Lexmark, which
had provided for declining consumable supplies pricing, was renegotiated
to provide Kentek with the exclusive right to sell supplies to Lexmark for
the life of the installed base of IBM-branded Kentek printers at an 18%
average price increase for all orders placed after April 1993, in exchange
for providing Lexmark the exclusive distribution rights for such
consumable supplies. In addition, IBM contracted to buy the K30 in 1993
under a new OEM contract at higher prices and more favorable margins for
the Company.

Expansion of OEM Customer Base. The Company expanded its base of OEM
customers, adding six OEM customers between fiscal 1991 and the six months
ended December 31, 1995. Between fiscal 1991 and the six months ended
December 31, 1995, sales of printers and consumable supplies and spare
parts to non-IBM OEMs increased from 33.2% of total net sales to 62.7% of
Kentek's total net sales.

New Product Introduction. In July 1992, the Company introduced the K30, a
30 ppm printer with higher print quality and higher profit margins than
predecessor models. Kentek further responded to the mid-range market's
need for increased speed and print quality with the introduction of the
K40D, a 40 ppm printer, in November 1994 and the K31, an enhanced 30 ppm
printer, in September 1995.

Reduction in Manufacturing Costs. In order to reduce manufacturing costs,
minimize the impact of dollar-yen exchange rate fluctuations on its costs
and improve responsiveness to customers, the Company began sourcing an
increasing portion of its consumable supply components in the United
States in fiscal 1994. In addition, the Company began to transition the
manufacturing assembly of substantially all of its consumable supply
products from Japan to the United States. The Company plans to manufacture
the printer and consumable supply products for its KW60 printer in the
United States.

As a result of these changes, the Company's financial performance improved
and the Company reported a smaller loss of $655,000 in the fiscal year ended
June 30, 1993 and net income of $9,647,000 and $5,035,000 in the fiscal years
ended June 30, 1994 and 1995, respectively. In the six months ended December 31,
1995, the Company had net income of $7,974,000.

INTERNATIONAL SALES

Direct sales to customers not located in the United States represented
16.7%, 12.0% and 12.9% of the Company's total net sales in fiscal years 1994 and
1995 and for the six months ended December 31, 1995, 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 six months ended December 31, 1995, 47% and
21%, 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.

19
<PAGE> 23

RESULTS OF OPERATIONS

The following table sets forth certain operating data expressed as a
percentage of total net sales for the periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED JUNE ENDED
30, DECEMBER 31,
------------------------ --------------
1993 1994 1995 1994 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales:
Printer sales to non-IBM OEMs............... 17.2% 16.6% 23.4% 25.0% 24.1%
Printer sales to IBM........................ 16.5 20.0 7.6 13.0 2.1
Consumable supplies and spare parts......... 66.3 63.4 69.0 62.0 73.8
----- ----- ----- ----- -----
Total net sales..................... 100.0 100.0 100.0 100.0 100.0
Cost of sales................................. 77.4 68.2 69.0 67.0 63.0
----- ----- ----- ----- -----
Gross profit........................ 22.6 31.8 31.0 33.0 37.0
Operating expenses:
Selling, general and administrative......... 16.5 12.6 14.2 13.3 14.9
Research and development.................... 8.2 6.5 7.7 7.4 6.9
----- ----- ----- ----- -----
Total operating expenses............ 24.7 19.1 21.9 20.7 21.8
Operating income (loss)....................... (2.1) 12.7 9.1 12.3 15.2
Other income (expense)........................ 0.9 (0.1) (0.6) (0.3) --
----- ----- ----- ----- -----
Income (loss) before income taxes............. (1.2) 12.6 8.5 12.0 15.2
Income tax (expense) benefit.................. -- (0.4) (1.3) (1.9) 6.8
----- ----- ----- ----- -----
Net income (loss)............................. (1.2)% 12.2% 7.2% 10.1% 22.0%
===== ===== ===== ===== =====
</TABLE>

OPERATING RESULTS

COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1995 TO SIX MONTHS ENDED DECEMBER
31, 1994

Total Net Sales. Total net sales decreased 5.8% from $38,422,000 in the six
months ended December 31, 1994 to $36,189,000 in the six months ended December
31, 1995. Printer sales constituted 38.0% and 26.2%, respectively, of total net
sales in the six months ended December 31, 1994 and the six months ended
December 31, 1995. Consumable supplies and spare parts sales constituted 62.0%
and 73.8%, respectively, of total net sales in the six months ended December 31,
1994 and the six months ended December 31, 1995.

Printers. Printer sales revenue decreased 34.9% from $14,582,000 in the six
months ended December 31, 1994 to $9,496,000 in the six months ended December
31, 1995. Total unit sales of printers decreased by 55.6% from 2,034 units in
the six months ended December 31, 1994 to 904 units in the six months ended
December 31, 1995. The decreases in sales revenue and unit volumes were
primarily the result of lower sales to IBM. This was due in large part to a
decision by IBM in fiscal 1995 to purchase a competitor's 30 ppm printer, and to
a lesser extent to IBM's large purchases of the Company's printers during the
six months ended December 31, 1994. IBM's decision to purchase a competitor's
printer did not impact the Company's operating results until fiscal 1995,
because such competitor's printer did not become available for shipment until
that time. Total unit sales of printers to IBM decreased by 86.9%, from 780
units for the six months ended December 31, 1994 to 102 units for the six months
ended December 31, 1995.

The decrease in total unit sales of printers between these periods was also
due in part to lower sales to other OEMs, which the Company believes was caused
primarily by uncertainty surrounding the anticipated introduction of the
Hewlett-Packard 5Si, a 24 ppm printer. Total unit sales of printers to non-IBM
OEM customers decreased by 36.0% from 1,254 units in the six months ended
December 31, 1994 to 802 units in the six months ended December 31, 1995. This
decrease was also attributable in part to the absence in the six months ended
December 31, 1995 of certain one-time printer sales pursuant to government
contracts which were realized in the first six months of fiscal 1995 and, to a
lesser extent, to unusually strong printer sales to

20
<PAGE> 24

OEMs in the first six months of fiscal 1995. The decrease in total printer sales
revenue between these periods was proportionately less significant (34.9%) than
the decrease in unit sales (55.6%) due to the Company's introduction of its 40
ppm printer, the K40D in November 1994. The K40D carries a substantially higher
purchase price than predecessor models and, as a result, sales revenue from K40D
printers increased as a percentage of total printer sales revenue from 1% in the
six months ended December 31, 1994 to 53% in the six months ended December 31,
1995.

Consumable Supplies and Spare Parts Sales. Consumable supplies and spare
parts sales increased by 12.0% from $23,840,000 in the six months ended December
31, 1994 to $26,693,000 in the six months ended December 31, 1995. 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 a
decline in printer sales.

Gross Profit. Gross profit increased by 5.5% from $12,679,000 in the six
months ended December 31, 1994 to $13,382,000 in the six months ended December
31, 1995. The gross margin increased from 33.0% to 37.0% in the same period. The
increase in both absolute dollars and as a percentage of revenues is primarily
due to reduced manufacturing and material costs as the Company moved more
supplies manufacturing from Japan to the United States, and to the introduction
of the higher margin K40D printer. 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 by 5.4% from $5,116,000, or 13.3% of total net
sales, in the six months ended December 31, 1994 to $5,393,000, or 14.9% of
total net sales, in the six months ended December 31, 1995. This increase was
due primarily to salary increases, an increase in depreciation expense and
expenses related to closing of the Company's Tokyo, Japan administrative office
in November 1995.

Research and Development Expenses. Research and development expenses
decreased by 12.5% from $2,848,000 or 7.4% of total net sales in the six months
ended December 31, 1994 to $2,491,000, or 6.9% of total net sales in the six
months ended December 31, 1995. The decrease was due to a reduction in expenses
associated with the completion of the K31 and K40D projects and attrition in
software engineering staff, offset in part by an increase in research and
development expenses associated with the Company's efforts to develop its new KW
product line.

Interest Expense and Other Income (Expense). Interest expense and other
income (expense) decreased by $124,000 from $105,000 of expense in the six
months ended December 31, 1994 to $19,000 of income in the six months ended
December 31, 1995. The decrease was due primarily to a decline in net interest
expense of $365,000, from $382,000 in the six months ended December 31, 1994 to
$17,000 in the six months ended December 31, 1995. The decrease in interest
expense was due to lower outstanding debt and increases in interest income
resulting from greater invested cash balances. This decrease in expense was
offset by a decline in other income of $241,000, from $277,000 in the six months
ended December 31, 1994 to $36,000 in the six months ended December 31, 1995.
The decrease was primarily due to the decision by certain customers who had paid
the Company in yen in 1994 (at a time when the yen strengthened against the
dollar) to pay in dollars in 1995.

Income Tax (Expense) Benefit. Income tax expense for the six months ended
December 31, 1994 was $737,000, or an effective tax rate of 16.0%, as a result
of the utilization of available net operating loss carryforwards of $7,249,000
to offset taxable income in fiscal 1995. All net operating loss carryforwards
had been utilized by the end of fiscal year 1995. Income tax benefit for the six
months ended December 31, 1995 was $2,457,000 due to the effect of a $4,282,000
deferred tax asset recognized during this period. Components of the deferred tax
asset are items which primarily reverse annually, except for property equipment
and, the alternative minimum tax credit which is available to offset future tax
liability into perpetuity.

At December 31, 1995, management determined, based on several recurring
periods of profitable operations, continuing successful 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 was more likely than not
that sufficient taxable income in future periods would be generated to recognize
the $4,282,000 deferred tax asset. Management plans to re-

21
<PAGE> 25

evaluate the positive and negative evidence to this effect on a quarterly basis
and make appropriate adjustments to the deferred tax asset.

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 sell 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.

Unit sales of printers to non-IBM OEMs increased by 21.6% from 1,664 units
in fiscal 1994 to 2,024 units in fiscal 1995 because the Company added several
new OEM customers as part of its strategy to expand its OEM customer base and
increased sales volumes to existing customers.

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 the 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 is 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.

22
<PAGE> 26

Income Tax (Expense) Benefit. 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).

COMPARISON OF FISCAL YEAR 1994 TO FISCAL YEAR 1993

Total Net Sales. Total net sales increased 41.1% from $55,875,000 in fiscal
1993 to $78,867,000 in fiscal 1994. Printer sales constituted 33.7% and 36.6% of
total net sales in fiscal 1993 and fiscal 1994. Consumable supplies and spare
parts sales constituted 66.3% and 63.4%, respectively of total net sales in
fiscal 1993 and fiscal 1994.

Printers. Printer sales increased by 53.5% from $18,821,000 in fiscal 1993
to $28,891,000 in fiscal 1994. Total unit sales of printers increased by 26.3%
from 3,418 units in fiscal 1993 to 4,316 units in fiscal 1994. The increase in
revenue was primarily the result of IBM transitioning from the Company's 24 ppm
printer to the K30 printer, which carried a higher purchase price than its
predecessor, and to a significant increase in volume sales. IBM transitioned to
the K30 printer during this period notwithstanding its prior indications to
Kentek in fiscal 1993 that it would significantly reduce its purchases of Kentek
printers. The Company believes that IBM purchased the K30 in significant
quantities in fiscal 1994 because the competitor's 30 ppm printer had not yet
become available for shipment. Printer unit sales to IBM increased by 33.0% from
1,995 in fiscal 1993 to 2,652 in fiscal 1994. Printer sales to non-IBM OEMs
increased by 17.0% from 1,423 in fiscal 1993 to 1,664 in fiscal 1994, primarily
attributable to purchases by new OEM customers.

Consumable Supplies and Spare Parts Sales. Consumable supplies and spare
parts sales increased by 34.9% from $37,054,000 in fiscal 1993 to $49,976,000 in
fiscal 1994. The increased sales resulted from consumable supplies sales to the
Company's growing installed base of higher speed printers among OEM customers,
the renegotiation of a long-term supply agreement with Lexmark to provide for an
average 18% price increase on consumable supplies purchased from the Company for
orders placed after April 1993, and purchases of supplies for inventory by new
OEM customers. Additionally, in connection with its decision to purchase the K30
printer, IBM purchased an initial inventory of spare parts as well as
high-capacity paper inputs and stackers to sell with the printers, which led to
a 53% increase in sales of spare parts to IBM from $6.0 million in 1993 to $9.2
million in 1994.

Gross Profit. Gross profit increased by 98.6% from $12,627,000, or 22.6% of
total net sales, in fiscal 1993 to $25,081,000, or 31.8% of total net sales, in
fiscal 1994. The increase in both absolute dollars and as a percent of total net
sales was primarily due to the renegotiation of a long-term supply agreement
with Lexmark, increased sales volumes and to higher gross margins on Kentek's
new printer, the K30. In addition, during fiscal 1994 the Company continued to
transition a portion of its consumable supplies manufacturing to the United
States from Japan, and, as a result, reduced manufacturing costs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 7.8% from $9,199,000, or 16.5% of total net
sales, in fiscal 1993 to $9,920,000, or 12.6% of total net sales, in fiscal
1994. This increase was due primarily to additional funding of the employee
bonus plan, an event triggered by the Company's return to profitability, as well
as an increase in advertising and trade show expenses.

Research and Development Expenses. Research and development expenses
increased by 11.5% from $4,606,000, or 8.2% of total net sales, in fiscal 1993
to $5,135,000 or 6.5% of total net sales, in fiscal 1994. This increase was due
to an increase in engineering staff and to the development costs of 40 and 60
ppm printer prototypes, which were expensed as incurred.

Interest Expense and Other Income (Expense). Interest expense and other
income (expense) increased by $593,000 from income of $523,000 in fiscal 1993 to
expense of $70,000 in fiscal 1994. The increase in expense was due primarily to
a decline in other income of $1,707,000 from $2,218,000 in fiscal 1993 to
$511,000 in fiscal 1994. During fiscal 1993, the Company received non-recurring
income of $1,573,000 related to the recovery from IBM of prepaid tooling costs.
This decline in other income was partially offset by a

23
<PAGE> 27

decrease of $1,114,000 in interest expense from $1,695,000 for fiscal 1993 to
$581,000 for fiscal 1994. The decrease in net interest expense was due primarily
to the recapitalization of the Company on June 30, 1993, pursuant to which
$7,000,000 of subordinated debentures were exchanged for Senior Preferred. There
was no interest expense associated with the subordinated debentures during
fiscal 1994. Further, in fiscal 1994 the Company maintained lower outstanding
balances on its draft export line of credit with Dai-Ichi Kangyo Bank.

Income Tax (Expense) Benefit. During fiscal 1993, the Company sustained a
loss from operations and paid no income tax. During fiscal 1994, the Company
utilized its net operating loss carryforwards, but was in an alternate minimum
tax position and accordingly incurred income tax of $309,000. As of July 1,
1993, the Company implemented the provisions of Statement of Financial
Accounting Standard ("SFAS") 109, "Accounting for Income Taxes." There was no
income statement impact as a result of this implementation. See "Summary of
Accounting Policies" in the Consolidated Financial Statements.

QUARTERLY OPERATING RESULTS

The following table presents selected unaudited quarterly financial data
for each of the eight quarters ending December 31, 1995. In the opinion of
management, this quarterly information has been prepared on the same basis as
the Company's audited financial information and includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the information for the periods presented. The results of
operations for any quarter are not necessarily indicative of the results to be
expected for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1994 1994 1994 1994 1995 1995 1995 1995
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales........................ $25,672 $25,088 $19,646 $18,776 $15,499 $16,271 $17,736 $18,453
Gross profit..................... 9,006 7,354 6,101 6,578 4,694 4,370 6,027 7,355
Total operating expenses......... 4,332 4,080 3,744 4,220 3,872 3,501 3,896 3,988
------- ------- ------- ------- ------- ------- ------- -------
Operating income................. 4,674 3,274 2,357 2,358 822 869 2,131 3,367
Other income (expense)........... 259 (433 ) 47 (152 ) (110 ) (230 ) (21) 40
------- ------- ------- ------- ------- ------- ------- -------
Income before taxes.............. $ 4,933 $ 2,841 $ 2,404 $ 2,206 $ 712 $ 639 $ 2,110 $ 3,407
======= ======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF REVENUE:
Total net sales.................. 100.0 % 100.0 % 100.0% 100.0 % 100.0 % 100.0 % 100.0% 100.0 %
Cost of sales.................... 64.9 70.7 68.9 64.9 69.7 73.1 66.0 60.1
------- ------- ------- ------- ------- ------- ------- -------
Gross profit..................... 35.1 29.3 31.1 35.1 30.3 26.9 34.0 39.9
Total operating expenses......... 16.9 16.3 19.1 22.5 25.0 21.5 22.0 21.6
------- ------- ------- ------- ------- ------- ------- -------
Operating income................. 18.2 13.0 12.0 12.6 5.3 5.4 12.0 18.3
Other income (expense)........... 1.0 (1.7 ) 0.2 (0.8 ) (0.7 ) (1.4 ) (0.1) 0.2
------- ------- ------- ------- ------- ------- ------- -------
Income before taxes.............. 19.2 % 11.3 % 12.2% 11.8 % 4.6 % 4.0 % 11.9% 18.5 %
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

The Company has experienced significant quarterly fluctuations in operating
results and anticipates that such fluctuations may continue in the future. These
fluctuations have been and may continue to be caused by a number of factors,
including (i) the timing of customer orders, as Kentek's contractual
relationships with its customers do not require the customers to make quantity
purchase commitments in advance of shipment orders and generally permit the
cancellation of orders without penalty, (ii) changes in customer inventory
practices, (iii) the timing of introduction of new versions of the Company's
products and competitive products and (iv) the timing of marketing and research
and development expenditures.

Future operating results may fluctuate as a result of these and other
factors, including the Company's ability to continue to develop innovative
products, and the introduction of new products by competitors. There can be no
assurance that the Company will be profitable on a quarterly or annual basis.

24
<PAGE> 28

A significant portion of the Company's operating expenses are fixed. If
revenue does not meet the Company's expectations in any given quarter, the
adverse impact on the Company's liquidity position and net income may be
magnified by the Company's inability to reduce expenditures quickly enough to
compensate for the revenue shortfall.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations historically through internally
generated cash, subordinated debt and equity financings and bank borrowings.
Effective June 30, 1993, the Company completed a recapitalization in which it
converted $7,000,000 in outstanding subordinated debentures into Senior
Preferred and subsequently issued additional shares of Senior Preferred for
$4,005,000 in cash. The Senior Preferred will convert to Common Stock at the
closing of this offering.

Changes in cash during the six months ended December 31, 1995 resulted in a
net increase of $561,000 as compared to a net decrease during the six months
ended December 31, 1994 of $1,893,000. The primary factors for this increase
were $7,940,000 more cash being used in financing activities to reduce debt
obligations and $738,000 more cash being used in investing activities to
purchase equipment during the six months ended December 31, 1994 as compared to
the six months ended December 31, 1995. Offsetting these factors were $2,242,000
more cash provided from operations which primarily resulted from increases in
payments received against accounts receivable and the effect of exchange rate
changes on cash being $3,982,000 more between the comparable periods.

Changes in cash during the fiscal year ended June 30, 1995 resulted in a
net increase of $2,358,000 compared to a net increase during the fiscal year
ended June 30, 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
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 the fiscal year ended June 30, 1995 as
compared to the fiscal year ended June 30, 1994.

Changes in cash during the fiscal year ended June 30, 1994 resulted in a
net increase of $1,086,000 compared to a net decrease of $2,833,000 during the
fiscal year ended June 30, 1993. The primary reason for this increase were
$4,005,000 more of proceeds received from the sale of stock during the fiscal
year ended June 30, 1994 as compared to the fiscal year ended June 30, 1993.
Although net income increased by $10,302,000 for the fiscal year ended June 30,
1994 as compared to the fiscal year ended June 30, 1993, net cash provided by
operations ultimately decreased by $491,000, primarily resulting from increases
in accounts receivable and inventory levels to support the increased sales
volume.

As the Company prepares to manufacture the KW60 printer, it anticipates
cash used in investing activities will increase.

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 December 31, 1995, 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, due in July 1996,
with Dai-Ichi Kangyo Bank in Tokyo, Japan. The loan is secured principally by a
facility owned by the Company in Tama, Japan. As of December 31, 1995, a total
of Y544,144,000, or $5,261,000 at a yen-dollar exchange rate of 103.43, was
outstanding under this loan.

At June 30, 1994 and 1995 a valuation allowance equal to the deferred tax
asset of $6,588,000 and $4,746,000, respectively, 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,
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
relationship with its customers do not require the customers to make quantity
purchase commitments in advance of shipment orders. The Company based its
assessment at

25
<PAGE> 29

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 Company believes that funds from operations, together with its bank
lines and the net proceeds of this offering, will be sufficient to meet the
Company's cash requirements for at least twelve months following completion of
this offering.

The Company intends to pay an annual cash dividend to holders of its Common
Stock of approximately $.08 per share, payable quarterly, commencing in the
first full quarter following the closing of this offering.

FOREIGN CURRENCY EXCHANGE

Foreign currency exchange rate fluctuations have had a material impact on
the Company's results of operations. During fiscal 1991, foreign currency losses
totaled $4.6 million, caused in significant part by an active hedging program
during a time when the yen strengthened appreciably against the dollar.
Currently, the Company does not have an active hedging program. There can be no
assurance that a hedging program, if reinstituted, would insulate the Company
from dollar-yen exchange rate risk.

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. Purchase
prices for future orders are adjusted monthly in a manner that results in the
sharing of exchange rate changes between Kentek and its customers. However, such
adjustments do not affect outstanding orders. Consequently, when the yen
strengthens significantly over a short period of time, as it did in February and
March 1995, Kentek's costs of manufacturing products for outstanding orders
increase but it is not entitled to any price adjustments on such orders.
Therefore, a substantial strengthening of the yen could have a material adverse
effect on the Company's financial condition and results of operations.
Conversely, when the dollar strengthens against the yen, the Company's
manufacturing costs and operating expense in Japan are affected favorably.
However, the exchange rate sharing agreement results in reductions in customers'
purchase prices on future orders, partially offsetting such benefit. The Company
has taken steps to reduce this exposure by relocating approximately one-third of
its manufacturing operations to the U.S. and plans to manufacture its KW
printers and consumable supplies in the United States. In addition, 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 parts, whereas most supplies are sold at fixed
prices. See "Risk Factors -- International Operations; Currency Fluctuations."

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.

26
<PAGE> 30

BUSINESS

INTRODUCTION

Kentek is a leading supplier of mid-range electrophotographic (laser)
non-impact printers that are able to print 30 to 45 ppm at monthly printing
volumes ranging from 30,000 to 300,000 pages. Printers in this mid-range segment
are distinguished from lower speed printers by high durability and duty cycle,
the capability to operate continuously unattended and reduced total cost of
operation. Kentek believes it has maintained its market share of the mid-range
market segment due to the reliability, durability and ease of use of its
printers, low cost of ownership, as well as the significant profit margin it
provides its OEM customers. The Company believes it sells its printers to a
broader base of OEMs than any other mid-range printer manufacturer worldwide.
Its OEM customers include AT&T, Genicom, Hewlett-Packard, IBM, Lexmark,
Mannesman Tally, Siemens Nixdorf and Unisys. Consumable supplies account for
over 85% of the overall cost of ownership of a typical mid-range printer over
its useful life. The Company is the exclusive designer and manufacturer of
consumable supply products, with the exception of toner, used in its printers.
Sales of consumable supplies and spare parts accounted for 69% and 74%,
respectively, of the Company's total net sales for fiscal 1995 and for the six
months ended December 31, 1995.

Kentek's printers originally were utilized in mainframe and mini-computer
data centers. As the complexity and volume of print jobs on local area networks
has grown, Kentek's printers increasingly have been deployed on such networks.
To meet the evolving needs of its OEM customers, system integrators and end
users, Kentek's product development efforts have been focused on designing
high-performance, high-reliability printers. The Company is currently developing
its KW60 printer, a 60 ppm printer with wide format paper handling capability,
an enhanced resolution printhead and full speed highlight color option.

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 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 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 the 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 OEM customers than any other mid-range printer manufacturer. See
"-- Customers, Marketing and Support."

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

27
<PAGE> 31

high-range printers were purchased worldwide in 1995. Xerox and Siemens
Nixdorf are the leading manufacturers in the high-range segment.

Kentek believes that the market for mid-range printers is evolving in three
areas: dedicated systems, network computing and print-on-demand. Historically,
dedicated system printers have served the high-volume needs of general system
output or dedicated application specific printing, including general accounting,
invoicing, and generation of mortgage or insurance forms and documents. In many
of these applications, the printer must be able to meet intense peak demands
such as month-end reports or invoices. In addition, many end-users require
advanced paper handling capabilities, such as the ability to collate and staple
the output product. Dedicated system printers continue to be used with large
computer systems and print-intensive computer applications, but increasingly
these computer systems are also employed as the servers on distributed computer
networks.

Network computing's relatively brief history has been marked by continual
evolution toward greater hardware and software complexity. Originally, networks
served as a means for freestanding personal computers to share information, and
each computer generally had its own printer. As networks were able to increase
in speed and size, servers allowed users to share printers. Most recently,
network developers have standardized network communication protocols to allow
different types of computers to share a single network printer. The Company
believes that the continued growth in network printing will require continuing
improvements in the ability of printers to communicate over a network with
multiple incompatible host computers, faster output speeds, and enhanced paper
output handling capabilities, such as sorters and staplers.

The Company believes print-on-demand is an emerging sector in the mid-range
market segment. Print-on-demand is characterized by a shift of high volume copy
jobs from copiers or offset printing to mid-range printers, which can provide
users with multiple originals at lower cost, more quickly and with better print
quality. According to industry sources, printing over a network is rapidly
becoming a replacement for copying, and users are increasingly moving to a
business model where documents are distributed electronically and then
customized and printed as needed.

The Company believes that mid-range printers in general, and the Company's
printers specifically, are well suited to meet the needs of these applications.
The following characteristics of mid-range printers distinguish them from
low-range printers:

<TABLE>
<S> <C>
- 30 to 45 ppm print speeds - Complex print jobs
- High reliability - Continuous operation
- High duty cycle - Paper handling features
- Low cost per printed page - Advanced computer and network
- Low maintenance connectivity
</TABLE>

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. Moreover, Kentek believes that as printing volume
and complexity and aggregate network traffic increases, computer users and
information systems managers will increasingly demand high-speed,
high-reliability mid-range printers with special features to reduce the total
cost of ownership and optimize performance on the network.

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 OEM which sold
them their printer. As one moves from the low-range

28
<PAGE> 32

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.

The Company is the exclusive manufacturer of consumable supplies for its
printers, with the exception of toner. The Company also supplies toner, which is
manufactured under contract according to the Company's specifications. Although
there have been attempts by others to develop competitive supplies or to
remanufacture supplies using spent Kentek consumable supplies, to date no other
manufacturer of consumable supplies has been able to achieve significant sales
volume of competitive consumable supplies for Kentek printers. The Company
believes that the combination of the overall size of the mid-range market, the
technical complexity of the consumable supplies, the Company's position with
respect to proprietary information, the Company's sales channel distribution
strategy and low cost per page of the consumable supplies may tend to discourage
competitors from entering this market. Although the Company has patent
protection for certain features of its consumable supplies, it relies primarily
on trade secret protection to protect its consumable supplies and related
manufacturing processes. There can be no assurance that others will not produce
or remanufacture consumable supplies for the Company's printers in the future.

KENTEK'S STRATEGY

Kentek's strategy is to enhance its position as the leading U.S. supplier
of mid-range non-impact printers and related consumable supplies. The principal
elements of the Company's strategy are as follows:

Maintain Cost Leadership. The Company will continue to focus on reducing
the cost of ownership for its OEM customers and their end-users. The
Company also seeks to price its products to allow their OEM customers to
earn attractive profit margins, creating incentives for OEMs to develop
printer applications and sell Kentek printers. The Company will continue to
enhance its low total cost of ownership position to end-users through
attractive pricing of its consumable supplies.

Introduce Higher Speed and Performance. Kentek is developing new printers,
controllers, software and accessories in anticipation of the increasing
requirements of the dedicated system, network and print-on-demand markets.
The Company is currently developing its KW60, a 60 ppm printer, and will
introduce new features including wide-format printing capability, increased
paper handling, single highlight color option and a 600 dots per inch
resolution. The Company believes that it has led the trend of introducing
higher duty cycles and lower total cost of ownership to the mid-range
printer market segment, and it believes that the KW60, anticipated to be
ready for market in mid-1997, will bring high-range printing performance to
the mid-range segment.

Dominate the Consumables Business. The Company intends to continue to
dominate the aftermarket for consumable supplies for its printers. Because
higher speed printers require more consumable supplies and spare parts than
lower speed printers, the Company expects consumable supply and spare parts
sales to increase if the Company is successful in achieving substantial
sales of its higher speed printers. The Company believes that the overall
size of the market, the technical complexity of engineering the consumable
supplies and the Company's position with respect to its proprietary
information may discourage competition.

Expand and Leverage OEM Relationships. The Company believes its base of OEM
customers is broader than any other mid-range printer manufacturer
worldwide. The Company is seeking to expand and leverage these long-term
relationships, working with OEMs and their customers to customize printers
and software to meet end-user needs, to determine desired enhancements, and
to determine the features and specifications desired for next generation
products. In addition, when the Company introduces high-range performance
to the mid-range market through its KW printer line, the Company
anticipates the opportunity will arise to develop relationships with those
OEMs and systems integrators currently serving the high-range market.

29
<PAGE> 33

TECHNOLOGY AND PRODUCTS

The Company's objective is to provide a complete printer hardware, software
and consumable supplies package that enables OEMs and systems integrators 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.

Customers may use Kentek printers in a wide range of environments and
implement new applications and features developed by the Company or others. The
Company's operating system software for the printer resides on a floppy disk or
optional hard disk drive inside the printer and can be easily updated by
distributing software enhancements and new features via floppy disk or hard
disk. On the KW printer line, the Company anticipates distributing software via
CD-ROM. Kentek's host communications options include Serial RS 232C, RS 422,
Centronics Parallel, Dataproducts Parallel, SCSI and Ethernet. 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 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. Kentek has 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.

The IGS controller interfaces with the host computer or network, from which
it receives a data stream, which it converts to a bit map. If the printer is
idle, this bit map is transmitted directly to the LED array printhead. If the
printer is busy, the bit map is redirected to a print queue in the printer's
RAM. In actual use, printer speed is largely determined by the printer's ability
to manipulate large jobs that contain complicated variations of print and
graphics. In order to handle large graphic intensive jobs at high speeds, the
Kentek IGS controller maintains two to six complete pages of bit maps in RAM, a
bit map for every page in process, enabling the printer to maximize throughput
and recover completely in the event of a paper jam. The Kentek IGS controller
comes standard with HP PCL5e, HPGL and DEC LNO3+ printer control language
emulations. Phoenix Page PostscriptTM is available as a printer control language
option. Kentek's IGS controller is designed with microprocessors and RAM that
equal or exceed the performance of many modern computer work stations so that
complicated print jobs do not impede throughput.

30
<PAGE> 34

PRINTERS

The table below, along with the text following, illustrates 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.

KENTEK PRINTERS

<TABLE>
<CAPTION>
PRINT
SPEED LIST PRICE
KENTEK PRINTER MODEL OEM PRINTER MODEL (PPM) RANGE(1)
- ------------------------------- --------------------------------------- ----- ------------------
<S> <C> <C> <C>
K30 IBM 3930, Siemens Nixdorf 2030, HP 5000 30 $14,999 - $16,485
Single Sided Printing C30, AT&T 6491, and Unisys DU 4000,
Mannesman Tally 9030
K30D IBM 3930, Siemens Nixdorf 2030D, HP 30 $19,999 - $22,500
Single or Double Sided Printing 5000 C30D, AT&T 6491, and Unisys DU
4000, Mannesman Tally 9030D
K31 Mannesman Tally 9031, Genicom 7930S 30 $15,999 - $19,000
Single Sided Printing

K31D Mannesman Tally 9031D, Genicom 7930D 30 $22,999 - $25,999
Single or Double Sided Printing

K40D Siemens Nixdorf 2040, HP 5000 C40D, 40 $28,500 - $33,500
Single or Double Sided Printing Mannesman Tally 9040D, Genicom 7940
</TABLE>

- ---------------

(1) Prices quoted by manufacturers for sales to end-users. Such prices are
subject to change. Actual end-user prices may vary substantially from list
prices, depending in part on configuration options.

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.

31
<PAGE> 35

CONSUMABLE SUPPLY PRODUCTS

The Company manufactures and sells consumable supplies for prior and
current generation of printers, and it will also manufacture supplies for the
KW60 and other future printers. In November 1994, the Company introduced its XL
line of extra-long life consumable supply products, nearly doubling the useful
life of each component while reducing the cost per page. The Company's printers
are designed to employ either standard or extra-long life consumable supply
products, consisting of the photoconductor, toner, developer, fuser and cleaner.
In the fiscal years ended June 30, 1994 and 1995 and the six months ended
December 31, 1995, sales of consumable supply products constituted 46.7%, 54.8%
and 59.4% of the Company's total revenue for such periods, respectively, not
including sales of spare parts. The Company continues to manufacture consumable
supply products for printers for a number of years after the manufacture of the
printer is discontinued. The Company discontinued manufacturing its K2 and
K3/K4, 12 and 24 ppm printers, by May 1993. However, sales of consumable
supplies for such printers still accounted for approximately 39% of total sales
of consumable supplies sales (and approximately 23% of total net sales) in the
six months ended December 31, 1995.

Kentek is the sole authorized manufacturer of consumable supplies for its
printers, except toner. The Company is the exclusive authorized supplier of
toner, which is manufactured under contract in accordance with the Company's
specifications. The high speed and print quality of Kentek printers require
highly specific tolerances between the various printer parts and the consumable
printer supplies. Consumable supplies must also be designed to enable easy
replacement. The Company believes that the combination of the overall size of
the market, the technical complexity of engineering the consumable supplies, the
Company's proprietary position, its sales channel distribution strategy and the
low cost per page of the consumable supplies, may tend to discourage competitors
from entering this market. There can be no assurance that others will not
reproduce or remanufacture consumable printer supplies for the Company's
printers in the future.

The table below describes the Company's consumable supply products
(suggested user price and rated useful life vary by printer model):

KENTEK CONSUMABLE SUPPLY PRODUCTS

<TABLE>
<CAPTION>
PRINTER FAMILIES
------------------------------------------------------------------------------------------
K2 K3/K4 K30/K31/K40D
---------------------------- ---------------------------- ----------------------------
RATED USEFUL SUGGESTED RATED USEFUL SUGGESTED RATED USEFUL SUGGESTED
PRODUCT LIFE (PAGES) LIST PRICE(1) LIFE (PAGES) LIST PRICE(1) LIFE (PAGES) LIST PRICE(1)
- ------------------------- ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Toner.................... 33,000 $ 113 33,000 $ 90 34,000 $ 90
Photoconductor........... 80,000 475 80,000 310 200,000 390
Developer................ 300,000 1,040 300,000 940 600,000 940
Fuser.................... 150,000 730 150,000 675 200,000 675
Cleaner.................. 200,000 359 200,000 328 400,000 328
</TABLE>

- ---------------

(1) Prices suggested by Kentek to OEMs for sales to end-users. Such prices are
subject to change. Actual end-user prices may vary substantially from
suggested list prices.

PRODUCT DEVELOPMENT

The Company believes that the development of new products and the
enhancement of existing products are essential to its future success. 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 OEM customers to plan products that meet end-users' needs. The
design and manufacture of mid-range non-impact business printers requires
expertise in a variety of engineering disciplines, and as of December 31, 1995
the Company had assembled an engineering team of 51 persons. During fiscal years
1993, 1994, 1995 and the six months ended December 31, 1995, the Company's
research and development spending was $4,606,000, $5,135,000, $5,357,000 and
$2,491,000, respectively. The Company anticipates that approximately $8 million
of the proceeds of this offering will be used for tooling of its KW60 printer.
See "Use of Proceeds."

32
<PAGE> 36

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 December 31, 1995 the Boulder
facility employed 29 engineering staff and Nagano employed 22 engineering staff.

The Company's product development efforts are focused on the 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 OEM customer shipments
commencing in mid-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 paper,
increased paper handling capacity, 600 dpi resolution, duplex printing, and a
full-speed highlight color option. The KW product line also will introduce a
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/K40D
printers in order to extend the lifecycles of those products. The Company
believes that it will introduce a KW40 printer in approximately mid-1997. See
"-- Manufacturing and Sources of Supply."

Magnetic Ink Character Recognition; Expansion of Consumable Supplies
Business. The Company's magnetic ink character recognition line of consumable
supply products is currently in beta testing in customer sites. These consumable
supplies are designed for use by banks and financial institutions in printing
characters which can be magnetically scanned by bank equipment. The Company
believes opportunities may exist to expand its consumable supplies business
through strategic acquisitions of related consumable supplies businesses and the
expansion of its existing consumable supply products manufacturing capacity.

CUSTOMERS, MARKETING AND SUPPORT

The Company distributes its printers exclusively through sales to OEM
customers and system integrators. The seven largest printer customers of the
Company for fiscal 1995 included AT&T, Genicom, Hewlett-Packard, IBM, Mannesman
Tally, Siemens Nixdorf Printing Systems and Unisys, which together accounted for
81% of printer sale revenues in the fiscal year ended June 30, 1995, and 93% of
printer sale revenues in the six months ended December 31, 1995. In fiscal 1995
net sales to each of Lexmark and Siemens Nixdorf Printing Systems constituted
greater than 10% of the Company's total net sales. 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

33
<PAGE> 37

definitive agreement to acquire Siemens Nixdorf Printing Systems. The Company's
results of operation and financial condition could be materially and adversely
affected by such acquisition. See "Risk Factors -- Dependence on Key Customers"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The loss or decline of sales to either Lexmark or Siemens Nixdorf
Printing Systems could have a material adverse affect on the Company's business,
results of operations and financial condition.

In 1991 the Company initiated a strategy to steadily diversify its base of
OEM customers in order to reduce its dependence on IBM. Printer sales to IBM
accounted for 16.5% of the Company's total net sales in the fiscal year ended
June 30, 1993, but has declined to 2.1% of the Company's total net sales in the
six months ended December 31, 1995. The Company believes that sales of printers
to IBM will continue to decline because IBM has entered into an agreement with a
competitor of the Company to purchase a competing mid-range printer. IBM has
announced to its customers that it will discontinue listing Kentek printers as
part of its product line effective April 1, 1996.

Consumable supply products for Kentek's printers are supplied exclusively
by Kentek and distributed principally through its OEM customers and their
affiliates. In addition, certain consumable supplies are distributed through
third party resellers. Kentek manufactures consumable supply products which are
placed in a package displaying the logos of its major OEM customers or in a
plain package for rebranding. OEM 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 eight largest consumable supply products customers of the Company
include AT&T, Hewlett-Packard, IBM, Lexmark, Mannesman Tally, Printronix,
Siemens Nixdorf Printing Systems and Unisys, which together accounted for 85% of
consumable supply products and spare parts sales in the fiscal year ended June
30, 1995, and 89% of consumable supplies sales in the six months ended December
31, 1995. Consistent with industry practice, certain of the Company's OEM
customers provide the Company with projections of their expected requirements
for printers and supplies. However, the Company's agreements with these
customers do not require minimum purchases by the OEMs.

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 manufacture the supplies for direct sales to its
customers. See "-- Competition."

Kentek's OEM marketing effort is focused on maintaining strong ties to
existing OEMs and establishing strong relationships with additional major OEMs
worldwide. The OEM relationship is important to Kentek because OEMs develop long
term relationships with their customers, as well as with their suppliers. By
incorporating a Kentek printer into an overall system solution for these
customers, OEMs create an installed base for Kentek and, therefore, promote
consumable supply sales. The Company's marketing effort for its consumable
supplies business is focused on providing attractive profit margins to its OEM
customers, increasing the number of OEM customers, and maintaining effective
sales channel policies.

In addition to its focus on OEMs, Kentek markets its printers directly to
systems integrators who provide vertical marketing printing solutions for
end-users and often configure the Company's products for use in network
applications and provide expertise in network connectivity, electronic forms,
fonts and application software for end-user customers needs. The Company
supports its systems integrators by participating in joint sales calls, product
training and customer application issues. These customers often sell the
Company's products to end-users on a short lead-time basis and in unpredictable
quantities. The Company supports this sales practice with a dedicated finished
goods inventory stocked in Boulder, Colorado for quick option configuration and
shipment at a premium price. The Company plans to continue to expand its efforts
to coordinate with systems integrators both through OEMs and directly in order
to develop stronger relationships with them and to provide enhanced service to
the end-user. Kentek also plans to continue its development of specific software
features designed to assist these OEM and systems integrator customers in
achieving success

34
<PAGE> 38

in vertical markets such as banking, health care and manufacturing. The Company
works closely with its OEM and systems integrator customers in order to plan
future business strategies, coordinate product introductions and determine
future product feature requirements. See "Risk Factors -- Potential Significant
Fluctuations in Quarterly and Annual Operating Results."

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 OEM's sales forces. As of December 31, 1995 the Company's sales and
marketing organization consisted of 20 persons, of whom five 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 OEM customers.

The quality and reliability of the Company's products and the ongoing
support of these products are important elements of the Company's business. OEMs
provide direct support for their computer systems and peripherals, including the
Company's printer products. Systems integrators typically provide service within
the local area of their individual sales offices. The Company offers a variety
of customer services, including system and software maintenance, consulting
services, hardware and software training, and applications support. Net sales
and cost of revenues related to customer service is not material to the
Company's results of operations or financial condition.

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, 1994 and 1995, and in the
six months ended December 31, 1995, the Company incurred warranty expenses of
$188,154, $343,796 and $190,024, respectively.

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 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. 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. The Company has
successfully transitioned its source 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.

BACKLOG

Aggregate backlog as of December 31, 1995 was approximately $15 million,
which approximates the backlog as of December 31, 1994. 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

35
<PAGE> 39

generally cancel or reschedule orders without significant penalty, and,
accordingly, the Company's backlog at any time is not necessarily indicative of
future sales.

COMPETITION

Kentek's printers compete in the mid-range market segment principally with
printers manufactured by Hitachi, Ricoh and Xerox. In addition, in applications
where a lower duty cycle is not a significant disadvantage, Kentek's printers
compete with the Hewlett-Packard LaserJet 5Si. Due to the complexity of printer
distribution channels, many of the Company's competitors are also customers. See
"-- Industry Overview" and "Risk Factors -- Significant Competition."

Many of the Company's competitors have substantially greater name
recognition, engineering, manufacturing and marketing capabilities, and greater
financial and personnel resources than the Company. In addition, the Company
expects increased competition from other established and emerging printer
manufacturers and resellers. 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. The Company believes that it competes favorably with respect to these
factors. Increased competitive pressure may lead to intensified price-based
competition which could have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be able to compete successfully in the future,
or that competition will not have a material adverse effect on the Company's
business, results of operations and financial condition.

36
<PAGE> 40

The following table sets forth a representative sample of the competing
printer options available to users in the low-, mid- and high-range market
segments:

NON-IMPACT PRINTER MARKET SEGMENTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINTING
MARKET SPEED DUTY CYCLE LIST
SEGMENT LEADING PRODUCTS (PPM) (PGS/MONTH) PRICE(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Low-Range HP DeskJet 320 3 1,000 $ 379
HP DeskJet 660C 4 1,000 599
HP DeskJet 1600C 8 1,000 1,899
HP LaserJet 4P 4 8,000 1,229
HP LaserJet 4 Plus 12 20,000 1,839
IBM 3916 16 75,000 4,895
Lexmark Optra LXi 16 75,000 3,699
HP LaserJet 4Si 17 75,000 3,749
HP LaserJet 4Si MX 17 75,000 5,499
HP LaserJet 5Si 24 100,000 3,499
HP LaserJet 5Si MX 24 100,000 4,899
- ---------------------------------------------------------------------------------------------------------
Mid-Range Kentek K30/K30D 30 300,000 $ 14,999/
Sold as: IBM 3930 19,999
Siemens Nixdorf 2030
HP 5000 C30/C30D
AT&T 6491
Mannesman Tally 9030
Unisys DU 4000
Kentek K31/K31D 30 300,000 15,999/
Sold as: Genicom 7930 22,999
Mannesman Tally 9031
Siemens Nixdorf 2030
Kentek K40D 40 300,000 28,500
Sold as: Siemens Nixdorf 2040
HP C40D
Mannesman Tally 9040
Genicom 7940
Hitachi
Sold as: IBM 3130-01S 30 200,000 13,496
IBM 3130-03S 30 200,000 17,995
Dataproducts Typhoon 30 30 200,000 15,495
Dataproducts Typhoon 40D 40 300,000 30,995
Xerox
Sold as: Xerox 4230 30 230,000 14,995
Xerox 4235 35 150,000 36,195
Ricoh
Sold as: QMS 3225 32 300,000 16,499
QMS 3825 38 200,000 21,999
DEC Print Server 32 300,000 20,991
Oce van der Grinten
Sold as: Oce 9230 30 300,000 32,600
Oce 9245 45 500,000 48,368
Oce 9260 60 750,000 77,990
QMS 4525 45 650,000 71,990
- ---------------------------------------------------------------------------------------------------------
High-Range Siemens 2050-200 50 1,000,000 $114,500
Xerox 4050 50 850,000 65,000
IBM 3825 58 1,000,000 159,350
IBM 3160 60 750,000 65,479
Dataproducts Typhoon 60D 60 1,000,000 65,995
Siemens 2075-200 75 1,200,000 167,500
Kodak 1392 92 1,500,000 167,500
IBM 3827 92 2,000,000 240,200
Siemens 2090 100 1,500,000 170,000
Xerox 4135 135 4,000,000 377,670

---------------

(1) List prices quoted by manufacturers for sales to end-users. Such prices are subject to
change. Actual end-user prices may vary substantially from list prices, depending in part on
configuration options.
- ---------------------------------------------------------------------------------------------------------
</TABLE>

37
<PAGE> 41

While the Company derives a portion of its total net sales from the initial
sale of printers, the Company derives the majority of its revenue from the
ongoing sales of consumable supply products and spare parts to support its
installed base of its printers. For fiscal year 1995 and the six months ended
December 31, 1995, 69% and 74%, respectively, of the Company's total net sales
were derived from sales of its consumable supplies and spare parts. The Company
believes that the combination of the overall size of the market, the technical
complexity of the consumable supplies, the Company's patent protection, sales
channel distribution strategy and low cost per page of the consumable supplies
provide significant disincentives for competitors to enter this market. Future
consumable supply product sales are dependent upon the Company's success in
expanding its installed base of printers and on the Company remaining the sole
manufacturer of supplies for its printers. There can be no assurance that the
Company will remain the sole manufacturer of consumable supply products for its
printers or that demand for the Company's printers and consumable supply
products will be sufficient to ensure a broad and sustainable source of revenue.

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. The Company currently has 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 December 31, 1995 the Company had a total of 252 employees including
197 full time and 55 part-time. There were 103 full-time and 46 part-time
employees in manufacturing, 21 full-time employees in sales and marketing, and
29 full-time and two part-time in general and administrative functions. In
addition, 44 full-time and seven part-time employees were engaged in research
and development. Of the 252 employees, 165 are located in the U.S., 83 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.

FACILITIES

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 $25,232, and the lease agreement will expire
March 31, 1999. The current monthly rent for the warehouse facility is $19,018,
and the lease agreement expires March 31, 1999. The current monthly rent on the
recycling facility is $6,413, 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

38
<PAGE> 42

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 believes that at this
time all facilities are adequate for its purposes.

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.

LEGAL PROCEEDINGS

The Company is not presently involved in any legal proceedings.

39
<PAGE> 43

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------
<S> <C> <C>
Howard L. Morgan, Ph.D.(1)....... 50 Chairman of the Board of Directors
Philip W. Shires................. 54 President, Chief Executive Officer and
Director
Craig G. Lamborn................. 42 Vice President, Finance and Administration
Dennis W. McFeely................ 52 Vice President, Sales
Richard L. Kann.................. 40 Vice President, Operations
Michael N Emmerman(1)............ 50 Director
Toshiki Kaura.................... 48 Director
I. Jimmy Mayer(2)................ 59 Director
Justin J. Perreault(2)........... 33 Director
James H. Simons, Ph.D.(2)........ 57 Director
</TABLE>

- ---------------

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

HOWARD L. MORGAN, PH.D., has served as Chairman of the Board since 1993 and
as a director since 1982. He has served since June 1989 as the President of The
Arca Group, Inc., a consulting and investment management company. Dr. Morgan has
also been a general partner of Renaissance Partners, a venture capital
partnership, since 1982. He serves as a director of Franklin Electronic
Publishers, Inc., Quarterdeck Corporation, HDS Network Systems, Inc., Integrated
Circuit Systems, Inc., Unitronix Corporation, Scan-Graphics Inc., Cylink
Corporation, Segue Software Corporation and Metatools, Inc. Dr. Morgan received
a B.S. in Physics from City College of New York in 1965 and a Ph.D. in
Operations Research from Cornell University in 1968.

PHILIP W. SHIRES has served as President since April 1989 and as Chief
Executive Officer since October 1991. Prior to joining Kentek, he served as
President of the Data Products Division of Lear Siegler Corporation, President
of the ITT Qume Division of International Telephone and Telegraph Corporation
and President of Optotech, Inc., an optical disk drive manufacturer. He received
a B.S. in Economics from Claremont Mens College in 1963.

CRAIG G. LAMBORN has served as Vice President, Finance and Administration
since September 1992. Mr. Lamborn served as Controller from December 1990 to
September 1992. From September 1987 to December 1990, Mr. Lamborn held several
financial positions at McDATA Corporation, a manufacturer of communication
devices for IBM compatible products. Mr. Lamborn received a B.B.A. in Accounting
from Boise State University in 1977.

DENNIS W. MCFEELY has served as Vice President, Sales since November 1994.
From September 1992 to October 1994, Mr. McFeely was Vice President and General
Manager of Axiom Real Estate Management, Inc., an IBM and Grubb & Ellis real
estate management joint venture. Mr. McFeely served in various capacities at IBM
prior to 1992, including Manager of the Printer Systems Marketing Center. He
received an M.B.A. in Marketing and Finance from Oklahoma City University in
1975 and a B.A. in Math and Finance from Oklahoma State University in 1969.

RICHARD L. KANN has served as Vice President, Operations since April 1995.
Mr. Kann served as Director of Operations from October 1990 to April 1995. Prior
to joining Kentek, he served in various management positions at Beckman
Instruments, Lear Siegler Data Products Division and Optotech, Inc., a
manufacturer of optical disk drive products. He received a B.S. in Biological
Sciences from the University of Southern California in 1977.

MICHAEL N EMMERMAN served as a director since he co-founded the Company in
1981. He has been associated with Neuberger & Berman, a money management firm,
since 1974 and a General Partner of Neuberger & Berman since 1989. He received a
B.B.A. from Pace College in 1966 and an M.B.A. from the A.T. Roth Graduate
School of Business at C.W. Post College in 1967.

40
<PAGE> 44

TOSHIKI KAURA has served as a director since August 1995. He has been
General Manager and Director of Kankaku Investment Co., a Japanese investment
banking firm, since 1995. From 1970 to August 1995, he served in various
management positions at both Kankaku Investment Co. and Kankaku Securities Co.,
Ltd. Mr. Kaura received a B.A. in Commerce from Hiroshima Shudo University in
1970.

I. JIMMY MAYER has served as a director since January 1990. He has been
President of Inversiones Sanford S.A., a diversified holding company, since
1985. Prior to that, beginning in 1963, he co-founded and managed several
successful industrial enterprises in Latin America. He received a B.S. in
Physics from the Massachusetts Institute of Technology in 1958.

JUSTIN J. PERREAULT has served as a director since February 1994. Since
November 1995 he has served as Executive Vice President and Chief Operating
Officer of Object Design, Inc., a privately held software company. From 1992 to
November 1995, he was a Vice President at the Harvard Private Capital Group,
Inc., an investment affiliate of Aeneas Venture Corp. and the Harvard Management
Company. Prior to joining the Harvard Private Capital Group, Mr. Perreault was a
consultant with McKinsey & Co., Inc. from 1990 to 1992. He received a B.S. in
mechanical engineering from Rensselaer Polytechnic Institute in 1985 and an
M.B.A. from the Harvard Business School in 1990.

JAMES H. SIMONS, PH.D. has served as a director since 1982. Since 1982, he
has served as the President and Chairman of Renaissance Technologies Corp. Dr.
Simons also serves as a director of Franklin Electronic Publishers, Inc., Cylink
Corporation, Segue Software Corporation and Numar Corp. He received a B.S. in
Mathematics in 1958 from the Massachusetts Institute of Technology and a Ph.D.
in Mathematics from the University of California at Berkeley in 1961.

BOARD COMMITTEES

The Audit Committee consists of Mr. Emmerman and Dr. Morgan. The Audit
Committee makes recommendations to the Board regarding the selection of
independent auditors, reviews the results and scope of the audit and other
services provided by the Company's independent certified public accountants and
reviews the Company's balance sheet, statement of operations and statement of
cash flows for each interim period.

The Compensation Committee consists of Messrs. Mayer and Perreault and Dr.
Simons. The Compensation Committee administers the Company's compensation
program and 1992 Stock Option Plan and makes recommendations to the Board
concerning salaries and incentive compensation for employees and consultants of
the Company.

DIRECTORS' COMPENSATION

Each of the Company's non-employee directors receives $750.00 compensation
for each regular or special meeting of the Board of Directors at which he is in
attendance and is entitled additionally to be reimbursed for his reasonable
out-of-pocket expenses relating to such attendance. Also see
"Management -- Stock Option Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 1995, the Company's compensation committee consisted of Drs.
Morgan and Simons. In June 1993, Dr. Morgan purchased shares of Senior Preferred
convertible into 15,809 shares of Common Stock, and a trust for the benefit of
Dr. Simons purchased shares of Senior Preferred convertible into 616,409 shares
of Common Stock, with a combination of the cancellation of certain warrants and
debt and the payment of cash. The Senior Preferred will convert into Common
Stock upon the closing of this offering. See "Certain Transactions" and
"Description of Capital Stock."

During fiscal years 1993, 1994 and 1995 and the six months ending December
31, 1995, the Company paid The Arca Group, Inc. $94,600, $79,400, $87,500 and
$32,650, respectively, for consulting services provided by Dr. Morgan, Chairman
of the Board of Directors. Dr. Morgan is the President of The Arca Group, Inc.

41
<PAGE> 45

EXECUTIVE COMPENSATION

The following table sets forth certain compensation of the Company's
President and Chief Executive Officer and the five other most highly compensated
executive officers who earned more than $100,000 in the fiscal year ended June
30, 1995 (collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------- SECURITIES
NAME AND FISCAL BONUS UNDERLYING ALL OTHER
PRINCIPAL POSITION(1) YEAR SALARY EARNED OPTIONS COMPENSATION(9)
------------------------------- ------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Philip W. Shires............... 1995 $237,046 $149,340 --(6) $ 5,302
President and Chief Executive
Officer
Takanori J. Hishikawa(2)....... 1995 137,506 49,400 -- 4,850
Vice President, Operations
Craig G. Lamborn............... 1995 128,527 47,500 --(7) 3,699
Vice President, Finance and
Administration
Robert M. Parks(3)............. 1995 126,415 35,000 -- 4,351
Vice President, Marketing
Steven C. Johnson(4)........... 1995 98,995 34,600 -- 3,534
Vice President, Engineering
Richard L. Kann................ 1995(5) 89,500 12,000 4,263(8) 2,145
Vice President, Operations
</TABLE>

- ---------------

(1) Dennis W. McFeely would appear in this table but for the fact that he joined
the Company in November 1994 and therefore did not earn over $100,000 in
fiscal year 1995. Mr. McFeely's annualized compensation is $119,600, and he
earned commissions in the amount of $13,169 in the fiscal year ended June
30, 1995. Mr. McFeely was granted options to purchase 1,541 shares of Common
Stock with an exercise price of $6.49 per share on November 2, 1995 and
options to purchase 10,753 shares of Common Stock with an exercise price of
$6.49 per share on February 8, 1996.

(2) As of April 1995, Mr. Hishikawa was no longer employed by the Company. He
has been receiving severance payments from the Company since that time. The
Company's obligations with respect to severance payments will be complete in
April 1996.

(3) As of June 1995, Mr. Parks was no longer employed by the Company.

(4) As of May 1995, Mr. Johnson was no longer employed by the Company.

(5) Mr. Kann replaced Mr. Hishikawa as Vice President, Operations in April 1995.

(6) Mr. Shires was granted options to purchase 30,820 shares of Common Stock
with an exercise price of $6.49 per share on November 2, 1995 and options to
purchase 65,076 shares of Common Stock with an exercise price of $6.49 per
share on February 8, 1996.

(7) Mr. Lamborn was granted options to purchase 10,787 shares of Common Stock
with an exercise price of $6.49 per share on November 2, 1995 and options to
purchase 23,802 shares of Common Stock with an exercise price of $6.49 per
share on February 8, 1996.

(8) Mr. Kann was granted options to purchase 3,082 shares of Common Stock with
an exercise price of $6.49 per share on November 2, 1995 and options to
purchase 17,671 shares of Common Stock with an exercise price of $6.49 per
share on February 8, 1996.

(9) Represents matching contributions made on behalf of the individuals to the
Company's 401(k) plan.

STOCK OPTION PLAN

The Company's 1992 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors in October 1992 and was amended in June 1993, November 1995
and February 1996. The purpose of the Option Plan is to attract and retain
qualified personnel, to provide additional incentives to employees, officers,
directors, consultants and advisors of the Company and to promote the success of
the Company's business. Under the terms of the Option Plan, following the
conversion of the Senior Preferred upon the closing of this offering, all
outstanding options will be converted into options to purchase common stock.
Assuming

42
<PAGE> 46

conversion of the Senior Preferred into Common Stock and the effectiveness of
the 1-for-4.5 reverse stock split, a total of 750,000 shares of Common Stock
have been reserved for issuance under the Option Plan. At December 31, 1995, the
Company had outstanding options to purchase 387,011 shares of Common Stock at a
weighted average per share exercise price of $4.60. At February 8, 1996, no
options to purchase shares of Common Stock had been exercised under the Option
Plan. Between December 31, 1995 and February 8, 1996, the Company granted
options to purchase 256,151 shares of Common Stock at a weighted average per
share exercise price of $6.49. A total of 106,838 shares of Common Stock are
available for future issuance under the Option Plan. The Option Plan will
terminate in October 2002, unless sooner terminated by the Board of Directors.

The Option Plan provides for the grant of both incentive stock options,
intended to qualify as such under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and non-statutory stock options. Except for the
administration of options granted to non-employee directors of the Company, as
described below, the Board has delegated administration of the Option Plan to
the Compensation Committee, which is comprised of disinterested directors.
Subject to the limitations set forth in the Option Plan, the Compensation
Committee has the authority to select the persons to whom grants are to be made,
to designate the number of shares to be covered by each option, to determine
whether an option is to be an incentive stock option or a non-statutory stock
option, to establish vesting schedules, and, subject to certain restrictions, to
specify the type of consideration to be paid to the Company upon exercise and to
specify other terms of the options.

The maximum term of options granted under the Option Plan is ten years. The
aggregate fair market value of the stock with respect to which incentive stock
options are first exercisable in any calendar year may not exceed $100,000 per
optionee; portions in excess of such amount shall be treated as non-statutory
stock options. Options granted under the Option Plan are non-transferable and
generally expire ninety days after the termination of an optionee's service to
the Company. In general, in the event the optionee's service terminates by
reason of death, permanent disability or retirement from employment on or after
age 65, such optionee's option generally becomes immediately exercisable in full
and remains exercisable for six months after such death, permanent disability or
retirement.

In the event of a merger or consolidation in which the Company is the
surviving corporation, the Board has discretion to prescribe the terms and
conditions for the modification of the options granted under the Option Plan. In
the event of a dissolution or liquidation of the Company, or a merger or
consolidation in which the Company is not the surviving corporation, all
outstanding options will terminate unless assumed by another corporation.

Although no specific vesting schedule is required under the Option Plan,
options previously granted under the Option Plan have generally vested in three
equal annual installments. The exercise price of incentive stock options must
equal at least the fair market value of the Common Stock on the date of grant,
except that the exercise price of incentive stock options granted to any person
who at the time of grant owns stock possessing more than 10% of the total
combined voting power of all classes of stock must be at least 110% of the fair
market value of such stock on the date of grant. The exercise price of
non-statutory stock options under the Option Plan may be no less than 85% of the
fair market value of the Common Stock on the date of grant.

Pursuant to the terms of the Option Plan, each director of the Company who
is not otherwise employed by the Company or a subsidiary of the Company is
automatically granted an option, on the first business day of each calendar
year, to purchase 9,000 shares of Common Stock. A non-employee director who
becomes a director of the Company after the first business day of a particular
calendar year is automatically granted an option, on the first business day on
which such person is a director, to purchase a number of shares of Common Stock
equal to 9,000 multiplied by the number of calendar months remaining in such
calendar year. The exercise price of options granted to non-employee directors
will generally equal the fair market value of the Common Stock on the date of
grant. All options granted to non-employee directors vest in full six months
after the date of grant.

43
<PAGE> 47

OPTION GRANTS

The Company did not grant options to purchase shares of the Company's
Common Stock to any of the Named Executive Officers in fiscal 1995.

The following table sets forth information with respect to (i) the exercise
of stock options by the Named Executive Officers during the fiscal year ended
June 30, 1995, (ii) the number of securities underlying unexercised options held
by the Named Executive Officers as of June 30, 1995 and (iii) the value of
unexercised in-the-money options (i.e., options for which the fair market value
of the Common Stock ($6.49 at June 30, 1995) exceeds the exercise price) as of
June 30, 1995:

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
SHARES ACQUIRED --------------------------- ------------------------------
NAME ON EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
----------------------- --------------- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Philip W. Shires....... -- 51,367 102,735(2) $ 133,556 $267,111
Takanori J.
Hishikawa............ -- 5,136 10,274 8,346 16,695
Craig G. Lamborn....... -- 5,136 10,274(3) 8,346 16,695
Robert M. Parks........ -- -- -- -- --
Steve C. Johnson....... -- -- -- -- --
Richard L. Kann........ -- 1,541 7,705(4) 5,008 10,017
</TABLE>

- ---------------

(1) Based on the fair market value of the Common Stock as of June 30, 1995
($6.49), minus the exercise price, multiplied by the number of shares
underlying the option.

(2) After June 30, 1995, Mr. Shires was granted an additional 95,896 securities
underlying unexercised options.

(3) After June 30, 1995, Mr. Lamborn was granted an additional 34,589 securities
underlying unexercised options.

(4) After June 30, 1995, Mr. Kann was granted an additional 20,753 securities
underlying unexercised options.

EMPLOYMENT AGREEMENT

The Company entered into an Employment Agreement with Mr. Shires on April
1, 1989 (the "Employment Agreement"). The Employment Agreement, which pursuant
to its terms has been amended by the Board of Directors, currently provides for
(i) an annual salary of $230,000, (ii) an annual bonus equal to 1.5% of the
Company's pre-tax profit for each fiscal year and (iii) a leased or purchased
automobile or an 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, Mr. Shires is entitled to a monthly severance payment equal to his
then current monthly salary (exclusive of any incentive compensation or bonus)
for a period of six months after such termination. Mr. Shires is obligated not
to solicit any employees to leave employment of the Company for a period of
three years after termination of his employment.

401(K) PLAN

In January 1986, the Company adopted and in January 1988 and January 1990
amended, a tax-qualified employee savings and retirement plan (the "401(k)
Plan") covering all of the Company's employees located in the United States
after six months of employment who are at least 21 years of age and who have
worked at least 1,000 hours during the year. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the lesser of
17% of eligible compensation or the statutorily prescribed annual limit ($9,500
in 1996) and have such amount contributed to the 401(k) Plan. The Company
contributes 50% of each employee's salary deferral contribution, up to an amount
that does not exceed six percent of such employee's compensation. The trustee
under the 401(k) Plan, at the direction of each participant, invests the assets
of the 401(k) Plan in any of five investment options. The 401(k) Plan is
intended to qualify under Section 401 of the Code; thus contributions by
employees to the 401(k) Plan, as well as income earned on

44
<PAGE> 48

plan contributions, are not taxable to employees until withdrawn, and the
contributions by employees are deductible by the Company when made.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent not prohibited by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, the Company has
entered into indemnity agreements with each of its directors and executive
officers.

In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company or its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies, such as an injunction or other forms of
non-monetary relief, would remain available under Delaware law. Each director
will continue to be subject to liability for breach of the director's duty of
loyalty to the Company or its stockholders, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
any transaction from which the director derived an improper personal benefit and
for improper distributions to stockholders. This provision also does not affect
a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.

There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.

CERTAIN TRANSACTIONS

In 1993, the Company offered the Senior Preferred to all of its then
existing stockholders on a pro-rata basis. In June 1993, the Company issued
shares of Senior Preferred convertible into an aggregate of 3,391,761 shares of
Common Stock at approximately $3.25 per share resulting in aggregate proceeds to
the Company of $4,005,000 in cash and $7,000,000 in exchanged debt. Aeneas
Venture Corporation, a more than five percent stockholder of the Company of
which Mr. Perreault was Vice President until November 1995, paid for the
purchase of shares of Senior Preferred convertible into 522,715 shares of Common
Stock by exchanging certain warrants and the principal and accrued interest
under certain subordinated debentures and of shares convertible into 462,308
shares of Common Stock with cash. Auber Investments Limited, a more than five
percent stockholder of the Company, paid for the purchase of shares of Senior
Preferred convertible into 823,524 shares of Common Stock by exchanging certain
warrants and the principal and accrued interest under certain subordinated
debentures and of shares convertible into 154,102 shares of Common Stock with
cash. Murdoch & Co., a more than five percent stockholder of the Company, paid
for the purchase of shares of Senior Preferred convertible into 332,244 shares
of Common Stock by exchanging certain warrants and the principal and accrued
interest under certain subordinated debentures and of shares convertible into
311,766 shares of Common Stock with cash (all of the shares acquired upon such
exchange and 284,165 of the shares acquired for cash were acquired on behalf of
a trust for the benefit of Dr. Simons, a director of the Company, and members of
his immediate family). Mr. Emmerman, a director of the Company, paid for the
purchase of shares of Senior Preferred convertible into 17,567 shares of Common
Stock by exchanging certain warrants and the principal and accrued interest of
certain subordinated debentures and of shares convertible into 13,252 shares of
Common Stock with cash. Dr. Morgan, a director of the Company, paid for the
purchase of shares of Senior Preferred convertible into 2,156 shares of Common
Stock by exchanging certain warrants and the principal and accrued interest of
certain subordinated debentures and of shares convertible into 13,653 shares of
Common Stock with cash. See "Principal and Selling Stockholders."

The Company intends to pay approximately $4.1 million of Excess Liquidation
Preference obligation to the holders of the Senior Preferred following the
closing of this offering, including approximately $1.2 million

45
<PAGE> 49

to Aeneas Venture Corporation, $1.2 million to Auber Investments Limited, and
$800,000 to Murdoch & Co., each of which is a more than five percent stockholder
of the Company.

During fiscal years 1993, 1994 and 1995 and the six months ended December
31, 1995, the Company paid The Arca Group, Inc. $94,600, $79,400, $87,500 and
$32,650, respectively, for consulting services provided by Dr. Morgan, Chairman
of the Board of Directors, related to engineering strategic planning. Dr. Morgan
is the President of The Arca Group, Inc. The Company anticipates that it will
continue to engage The Arca Group, Inc. following completion of this offering.

The Company entered into a Modification to Employment Agreement with Mr.
Kensuke Fukae, the founder and the former President and Chief Executive Officer
of the Company, on December 1, 1992 pursuant to which Mr. Fukae agreed to
provide certain services on behalf of the Company and to abide by certain
confidentiality and non-competition provisions in exchange for payment by the
Company to Mr. Fukae of $90,000 per year through June 30, 1996.

The Company believes that the foregoing transactions were in its best
interests. As a matter of policy these transactions were, and all future
transactions between the Company and any of its officers, directors or principal
stockholders will be, approved by a majority of the independent and
disinterested members of the Board of Directors, will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be in connection with bona fide purposes of the Company.

46
<PAGE> 50

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1996, and as
adjusted to reflect the sale of the Common Stock being offered hereby by (i)
each Selling Stockholder, (ii) each person (or group of affiliated persons) who
is known by the Company to own beneficially more than 5% of the Common Stock,
(iii) each of the Company's directors, (iv) each of the Named Executive Officers
and (v) all directors and current executive officers of the Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
OFFERING(1) NUMBER OF OFFERING(1)
-------------------- SHARES --------------------
NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- -------------------------------------- -------- ------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
Aeneas Venture Corporation(2)......... 1,106,388 23.9% 175,669(3) 930,719 13.6%
600 Atlantic Avenue
Boston, Massachusetts 02110
Auber Investments Limited(4).......... 1,092,548 23.6 -- 1,092,548 16.0
Tropic Isle Building
Wickhams Cay
Road Town, Tortola
British Virgin Islands
Murdoch & Co.(5)...................... 812,980 17.6 -- 812,980 11.9
c/o Bermuda Trust Company, Ltd.
6 Front Street
Hamilton HM11 Bermuda
James H. Simons, Ph.D.(6)............. 795,106 17.2 -- 795,106 11.6
c/o Renaissance Technologies Corp.
800 Third Avenue
New York, New York 10022
Michael N Emmerman(7)................. 48,026 1.0 -- 48,026 *
Takanori J. Hishikawa(8).............. 7,705 * -- 7,705 *
Steven C. Johnson..................... -- -- -- -- --
Richard L. Kann(8).................... 7,191 * -- 7,191 *
Toshiki Kaura(9)...................... 121,868 2.6 -- 121,868 1.8
Craig G. Lamborn(8)................... 16,438 * -- 16,438 *
I. Jimmy Mayer(10).................... 97,080 2.1 16,963(11) 80,117 1.2
Howard L. Morgan, Ph.D.(12)........... 70,447 1.5 -- 70,447 1.0
Robert M. Parks....................... 2,222 * 0 2,222 *
Justin J. Perreault................... -- -- -- -- --
Philip W. Shires(8)................... 154,102 3.2 -- 154,102 2.2
All directors and current executive
officers as a group (10
persons)(13)........................ 1,315,909 27.0 16,963 1,298,946 18.4
All other selling stockholders, each
beneficially owning less than 1.1%
of the shares outstanding after the
offering (27 persons)(14)........... 633,679 13.1 107,368 526,311 7.7
</TABLE>

- ---------------

* Less than one percent.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options currently exercisable within 60 days of March 31, 1996, are
deemed outstanding for computing the percentage of the person or entity
holding such securities but are not outstanding for computing the
percentage of any other person or entity. Except as indicated by footnote,
and subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them. The
information set forth in the table has been adjusted to reflect the effects
of the automatic conversion, on the closing date of this offering, of
outstanding shares of Senior

47
<PAGE> 51

Preferred and Series A Convertible Preferred Stock into shares of Common
Stock and the related adjustments of outstanding options granted under the
1992 Stock Option Plan.

(2) Aeneas Venture Corporation ("Aeneas") is a wholly-owned subsidiary of the
President and Fellows of Harvard College ("Harvard") which assists in the
management of the Harvard University endowment fund. Aeneas operates for
the sole benefit of Harvard. Tim R. Palmer is a Managing Director of
Harvard Private Capital Group, Inc. ("HPC") which is the investment advisor
for Aeneas. Mr. Palmer has primary investment responsibility for the Aeneas
shares. Mr. Palmer does not, however, possess either sole investment or
sole voting power over the shares, but rather shares such authority with
Michael R. Eisenson, President and Chief Executive Officer of HPC.

(3) Assuming the Underwriters' over-allotment option is exercised in full,
Aeneas Venture Corporation will sell 395,257 shares in the offering and
will beneficially own 711,131 shares, or 10.4%, after the offering.

(4) Auber Investments Limited is a British Virgin Islands corporation, the
following officers and directors of which have voting and investment power
with respect to securities held by the corporation: Linda Massac
(President/Director), Gath A. T. Hewlett (Vice President/Director) and
Myrthlyne Penn (Secretary/Director).

(5) Includes 775,482 shares of Common Stock held as nominee of a trust for the
benefit of James H. Simons and members of his immediate family.

(6) Includes 775,482 shares of Common Stock held by Murdoch & Co., as nominee
of a trust for the benefit of Mr. Simons and members of his immediate
family. Also includes options granted under the 1992 Stock Option Plan and
exercisable within 60 days of March 31, 1996 to purchase an aggregate of
8,319 shares of Common Stock.

(7) Includes options granted under the 1992 Stock Option Plan and exercisable
within 60 days of March 31, 1996 to purchase an aggregate of 8,319 shares
of Common Stock.

(8) Consists solely of options granted under the 1992 Stock Option Plan and
exercisable within 60 days of March 31, 1996.

(9) Includes 97,177 shares of Common Stock held by Kankaku Investment Co., Ltd.
("KIC") and 24,691 shares of Common Stock held by KKI-Hambro Japan
International Venture Fund with respect to which Mr. Kaura has sole voting
and investment power in his capacity as General Manager and Director of
KIC.

(10) Includes (i) 65,647 shares held by Sir Lan Investments Limited, a
corporation owned by Mr. Mayer's children, (ii) 26,813 shares held by
Romano Properties Limited, a corporation owned by Mr. Mayer's spouse and
her children, and (iii) options granted under the 1992 Stock Option Plan
and exercisable within 60 days of March 31, 1996 to purchase an aggregate
of 4,620 shares of Common Stock. The shares being offered by Mr. Mayer
consist of 12,044 of the shares held by Sir Lan Investments Limited and
4,919 of the shares held by Romano Properties Limited.

(11) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
Mayer will sell 38,166 shares in the offering (27,098 of the shares held by
Sir Lan Investments Limited and 11,068 of the shares held by Romano
Properties Limited) and will beneficially own 58,914 shares, or less than
1.0%, after the offering.

(12) Includes options granted under the 1992 Stock Option Plan and exercisable
within 60 days of March 31, 1996 to purchase an aggregate of 49,412 shares
of Common Stock.

(13) Includes options granted under the 1992 Stock Option Plan and exercisable
within 60 days of March 31, 1996 to purchase an aggregate of 254,052 shares
of Common Stock.

(14) All other selling stockholders are comprised of 27 individuals and
entities, none of whom is an officer or director of the Company. Assuming
the Underwriters' over-allotment option is exercised in full, the other
selling stockholders will sell an aggregate of 241,577 shares in the
offering and will beneficially own an aggregate of 392,102 shares, or 5.7%,
after the offering.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, based upon shares outstanding as of
December 31, 1995, the Company will have 6,824,528 shares of Common Stock
outstanding. Of these shares, the 2,500,000 shares offered hereby (2,875,000
shares if the Underwriters' over-allotment options are exercised in full) will
be freely tradable without restriction under the Securities Act, unless they are
held by "affiliates" of the Company as that term is defined under the Securities
Act and the regulations promulgated thereunder.

The remaining 4,324,528 shares of Common Stock held by existing
stockholders were sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted" securities
within the meaning of Rule 144 under the Securities Act. Approximately 236,196
shares of Common Stock will be eligible for sale in the public market as of the
date of this Prospectus in reliance on Rule 144(k). Beginning 90 days after the
date of this Prospectus, approximately 176,790 shares will become eligible for
sale subject to the provisions of Rule 144 and pursuant to Rule 701 under the
Securities Act, and holders of then vested options to purchase 29,277 shares
will be entitled to exercise such options and sell such shares subject to the
provisions of Rule 144 and Rule 701. Following the expiration of a 180-day
Lockup Period (as defined below), approximately 4,104,174 additional shares of
Common Stock

48
<PAGE> 52

(plus 327,593 additional shares issuable upon exercise of then vested options)
will become available for sale in the public market subject to compliance with
Rule 144, Rule 144(k) or Rule 701.

<TABLE>
<CAPTION>
DAYS AFTER SHARES
DATE OF ELIGIBLE FOR
THIS PROSPECTUS FUTURE SALE COMMENT
------------------------- ------------ ---------------------------------------------
<S> <C> <C>
Upon Effectiveness....... 2,500,000 Freely tradable, shares sold in offering.
Upon Effectiveness....... 236,196 Rule 144(k) (shares not subject to 180-day
Lockup).
90 Days.................. 206,067 Rule 144 and Rule 701 (outstanding shares and
option shares not subject to 180-day Lockup).
180 Days................. 4,431,767 Lockup released. Outstanding shares and
option shares salable under Rule 144, 144(k)
and Rule 701.
</TABLE>

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years is entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of the Common Stock (approximately
68,245 shares immediately after this offering) or (ii) the average weekly
trading volume during the four calendar weeks preceding such sale, subject to
the filing of a Form 144 with respect to such sale and to compliance with
certain public information and manner of sale requirements. A person (or persons
whose shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned his or her shares for at least three years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. Persons deemed to be affiliates must always sell pursuant to
Rule 144, even after the applicable holding periods have been satisfied.

Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits non-affiliates to sell their Rule
701 shares without having to comply with the public information, holding-period,
volume-limitation or notice provisions of Rule 144, and permit affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus.

The Company, the Selling Stockholders, and the directors, executive
officers and certain other stockholders of the Company, holding in the aggregate
approximately 4,104,174 shares (and vested options to purchase an additional
163,645 shares) of Common Stock, have agreed that they will not, directly or
indirectly, offer, sell, offer to sell, contract to sell, grant any option to
purchase or otherwise dispose of or transfer any shares of Common Stock or other
capital stock or any securities convertible into, or exercisable or exchangeable
for Common Stock without the prior written consent of Janney Montgomery Scott
Inc., on behalf of the Underwriters for a period of 180 days from the date of
this Prospectus.

Immediately following the offering, the Company intends to file a
registration statement on Form S-8 under the Securities Act to register shares
of Common Stock reserved for issuance under its stock option plans, thus
permitting the resale of such shares by non-affiliates upon issuance in the
public market without restrictions under the Securities Act. As of the date of
this Prospectus, options to purchase 643,162 shares of Common Stock were
outstanding.

In addition, after this offering, the holders of approximately 4,323,818
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock -- Registration Rights."

In April 1990, the Securities and Exchange Commission adopted Rule 144A,
which permits the resale of "restricted" securities to qualified institutional
buyers, subject to compliance with conditions of Rule 144A. In May 1990, the
Securities and Exchange Commission adopted Regulation S, which permits the sale
of

49
<PAGE> 53

restricted securities to persons located outside of the U.S. in certain
circumstances. The Company is unable to predict the impact of Rule 144A or
Regulation S on the public market for the Common Stock.

The Company is unable to estimate the number of shares that will be sold
under Rule 144, Rule 701, pursuant to the exercise of registration rights or
otherwise, since this will depend on the market price for the Common Stock, the
personal circumstances of the sellers and other factors. Prior to this offering,
there has been no public market for the Common Stock, and there can be no
assurance that a significant public market for the Common Stock will develop or
be sustained after the offering. Any future sale of substantial amounts of
Common Stock in the open market may adversely affect the market price of the
Common Stock offered hereby and could impair the Company's future ability to
raise capital through an offering of its equity securities.

DESCRIPTION OF CAPITAL STOCK

The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement, of which this Prospectus is a part.

On or before the date of closing of this offering, the Company will file a
Restated Certificate of Incorporation which will eliminate all currently
authorized preferred stock of the Company and create a new class of authorized
preferred stock. Accordingly, following the closing of this offering, the
Company's authorized capital stock will consist of 12,000,000 shares of Common
Stock, $.01 par value per share, and 2,000,000 shares of Preferred Stock, $.01
par value per share.

COMMON STOCK

As of December 31, 1995, there were 4,624,528 shares of Common Stock
outstanding held by approximately 108 holders of record. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the stockholders. The holders of Common Stock are not
entitled to cumulative voting rights with respect to the election of directors,
and as a consequence, minority stockholders will not be able to elect directors
on the basis of their votes alone. Subject to preferences that may be applicable
to any shares of Preferred Stock issued in the future, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of the Company, holders of
the Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
Preferred Stock. Holders of Common Stock have no preemptive rights and no right
to convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are, and all shares of Common Stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
stockholders, to issue up to 2,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue any shares of Preferred Stock.

50
<PAGE> 54

REGISTRATION RIGHTS

The Company has entered into registration rights agreements with the
holders of 778,635 outstanding shares of Common Stock (the "Common Registrable
Securities") and the holders of 3,545,183 shares of Common Stock issued upon
conversion of Series A Convertible Preferred Stock and Senior Preferred (the
"Preferred Registrable Securities"). Under the terms of the agreements, subject
to certain exceptions, the holders of at least 111,111 shares of Common
Registrable Securities and the holders of at least 166,666 shares of Preferred
Registrable Securities each may require the Company to use its best efforts to
register on two occasions their registrable securities for public resale,
provided, however, that the holders of 166,666 shares of Senior Preferred may
require the Company to register their registrable securities for public resale
to the exclusion of any other registrable securities on one occasion. The
holders of Common Registrable Securities and Preferred Registrable Securities
each may also require, subject to certain limitations, the Company to register
such shares on Form S-3 on two occasions. In addition, whenever the Company
proposes to register any of its securities under the Securities Act, the holders
of Common Registrable Securities and Preferred Registrable Securities are
entitled, subject to certain restrictions, to include their registrable
securities in such registration. The Company is required to bear all
registration expenses in connection with the registration of registrable
securities in two demand registrations, two S-3 registrations and all Company
registrations.

Registration rights may be transferred to an assignee of Registrable
Securities. Common Registrable Securities and Common Stock issuable upon
conversion of Senior Preferred cease to be registrable securities at such time
as (i) a registration statement with respect to the sale of such securities
shall have become effective under the Securities Act and such securities shall
have been disposed of in accordance with such registration statement, or (ii)
the registrable securities held by such person shall have been sold under
circumstances in which all of the applicable provisions of Rule 144 under the
Securities Act are met. Registration rights may be amended or waived with
respect to the Preferred Registrable Securities by the Company and holders of a
majority in interest of the Preferred Registrable Securities and with respect to
the Common Registrable Securities by the Company and holders of two-thirds
interest of the Common Registrable Securities, and, for those provisions
affecting the rights of holders of Common Stock issued upon conversion of Senior
Preferred, by holders of two-thirds interest of Common Stock issued upon
conversion of Senior Preferred. The demand registration rights granted under the
registration rights agreements terminate ten years after the closing of the
Company's initial public offering.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock. The Company's Certificate of
Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors. These provisions may have the
effect of deterring hostile takeovers or delaying changes in control or
management of the Company.

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for the Company's Common Stock.

51
<PAGE> 55

UNDERWRITING

The Underwriters named below (the "Underwriters"), for whom Janney
Montgomery Scott Inc. and Hanifen, Imhoff Inc. are acting as Representatives,
have severally agreed, subject to the terms and conditions of the underwriting
agreement by and among the Company, the Underwriters and the Selling
Stockholders (the "Underwriting Agreement"), to purchase from the Company and
the Selling Stockholders the number of shares of Common Stock set forth below
opposite their respective names, at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------------ ---------
<S> <C>
Janney Montgomery Scott Inc............................................. 778,000
Hanifen, Imhoff Inc..................................................... 778,000
Advest, Inc............................................................. 34,000
The Chicago Corporation................................................. 34,000
Crowell, Weedon & Co.................................................... 34,000
Dain Bosworth Incorporated.............................................. 34,000
Everen Securities, Inc.................................................. 34,000
Fahnestock & Co. Inc.................................................... 34,000
First Albany Corporation................................................ 34,000
First of Michigan Corporation........................................... 34,000
Furman Selz LLC......................................................... 34,000
Interstate/Johnson Lane Corporation..................................... 34,000
Legg Mason Wood Walker, Incorporated.................................... 34,000
McDonald & Company Securities, Inc...................................... 34,000
Needham & Company, Inc.................................................. 34,000
Piper Jaffray Inc....................................................... 34,000
Principal Financial Securities, Inc..................................... 34,000
Rauscher Pierce Refsnes, Inc............................................ 34,000
Raymond James & Associates, Inc......................................... 34,000
The Robinson-Humphrey Company, Inc...................................... 34,000
SoundView Financial Group, Inc.......................................... 34,000
Stephens Inc............................................................ 34,000
Sutro & Co. Incorporated................................................ 34,000
Tucker Anthony Incorporated............................................. 34,000
Wheat, First Securities, Inc............................................ 34,000
Cruttenden Roth, Incorporated........................................... 18,000
Equitable Securities Corporation........................................ 18,000
Howe Barnes Investments Inc............................................. 18,000
Mesirow Financial, Inc.................................................. 18,000
Neidiger, Tucker, Bruner, Inc........................................... 18,000
Parker/Hunter Incorporated.............................................. 18,000
Pennsylvania Merchant Group Ltd......................................... 18,000
Scott & Stringfellow, Inc............................................... 18,000
Van Kasper & Company.................................................... 18,000
---------
Total......................................................... 2,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, and that the
Underwriters will purchase the total number of shares of Common Stock shown
above if any of such shares are purchased.

The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose initially to offer the shares of
Common Stock offered hereby directly to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers (who may
be

52
<PAGE> 56

Underwriters) at such price less a concession not in excess of $.30 per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $.10 to other Underwriters and certain other dealers. After the
initial public offering, the public offering price and such concessions may be
changed by the Representatives.

In addition to the underwriting discounts and commissions, the Company will
pay the Representatives a $125,000 non-accountable expense allowance upon the
completion of this offering.

The Selling Stockholders have granted to the Underwriters an overallotment
option exercisable for 30 days from the date of this Prospectus, to purchase, in
the aggregate, up to 375,000 additional shares of Common Stock at the initial
public offering price, less underwriting discounts and commissions, as set forth
on the cover page of this Prospectus. The Underwriters may exercise such options
solely for the purpose of covering over-allotments incurred in the sale of the
shares of Common Stock offered hereby. To the extent such option to purchase is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to the total number of shares in such table.

The Selling Stockholders, and the Company's officers, directors and certain
other stockholders of the Company owning, in the aggregate, 4,104,174 shares
(and vested options to purchase an additional 163,645 shares) of Common Stock,
have agreed that they will not, directly or indirectly, offer, sell, offer to
sell, contract to sell, grant any option to purchase or otherwise dispose of or
transfer any shares of Common Stock or any securities convertible into, or
exercisable or exchangeable for Common Stock or other capital stock for a period
of 180 days from the date of this Prospectus without the prior written consent
of Janney Montgomery Scott Inc. on behalf of the Underwriters.

The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against, or contribute to losses arising out of, certain
liabilities incurred in connection with this offering, including liabilities
under the Securities Act.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.

Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price has been determined
through negotiations among the Company, the Selling Stockholders and the
Representatives. Among the factors considered in such determination were the
history of and the prospects for the industry in which the Company competes, the
capability of the Company's management, the past and present operations of the
Company, the historical results of operations of the Company and the trend of
its earnings, the prospects for future earnings of the Company, the general
condition of the securities markets at the time of the offering and the prices
of similar securities of generally comparable companies.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward Castro Huddleson & Tatum, Boulder, Colorado. Certain
legal matters in connection with the Common Stock will be passed on for the
Underwriters by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.

EXPERTS

The consolidated financial statements and schedules included in this
Prospectus and in the Registration Statement have been audited by BDO Seidman,
LLP independent certified public accountants, to the extent and for the periods
set forth in their reports appearing elsewhere herein and in the Registrations
Statement, and are included in reliance upon such reports given upon the
authority of said firm as experts in accounting and auditing.

53
<PAGE> 57

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement (the "Registration Statement")
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and such Common Stock, reference is made to the
Registration Statement and the schedules and exhibits filed as a part thereof.
Statements contained in this Prospectus regarding the contents of any contract
or any other document are not necessarily complete and, in each instance,
reference is hereby made to the copy of such contract or document filed as an
exhibit to the Registration Statement. The Registration Statement, including
exhibits thereto, may be inspected without charge at the Securities and Exchange
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the Public Reference Section, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, on payment
of the prescribed fees.

54
<PAGE> 58

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, 1994 and 1995 and December 31, 1995
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1993, 1994 and 1995
and for the Six Months Ended December 31, 1994 and 1995 (unaudited)................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1993,
1994 and 1995 and for the Six Months Ended December 31, 1995 (unaudited)............ F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1993, 1994 and 1995
and for the Six Months Ended December 31, 1994 and 1995 (unaudited)................. F-6
Summary of Accounting Policies........................................................ F-7
Notes to Consolidated Financial Statements............................................ F-10
</TABLE>

F-1
<PAGE> 59

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, 1994 and 1995 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1995. 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, 1994 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1995, in conformity with generally accepted accounting
principles.

BDO SEIDMAN, LLP

Los Angeles, California
August 18, 1995, except for
the reverse stock split discussed
in Note 5, and Note 13 which are
dated April 16, 1996

F-2
<PAGE> 60

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(THOUSANDS)

ASSETS (Note 3)

<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, DECEMBER 31,
------------------- DECEMBER 31, 1995
1994 1995 1995 (NOTE 5)
-------- ------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 4,031 $ 6,389 $ 6,950 $ 6,950
Accounts receivable, less allowance for possible losses
of
$965, $686, and $812.................................. 15,573 7,822 8,729 8,729
Inventories (Note 2).................................... 13,556 12,613 14,463 14,463
Other................................................... 1,224 642 515 515
Property held for sale.................................. 6,696 7,716 6,317 6,317
Deferred income taxes (Note 7).......................... -- -- 3,032 3,032
-------- ------- -------- --------
Total current assets............................. 41,080 35,182 40,006 40,006
-------- ------- -------- --------
Property and Equipment (Note 4):
Land and buildings...................................... 136 158 130 130
Tooling................................................. 18,472 18,629 15,383 15,383
Furniture, fixtures and equipment....................... 7,012 6,983 6,542 6,542
Leasehold improvements.................................. 487 496 447 447
-------- ------- -------- --------
26,107 26,266 22,502 22,502
Less accumulated depreciation and amortization............ 23,722 23,551 20,383 20,383
-------- ------- -------- --------
2,385 2,715 2,119 2,119
Deposits and Other (Notes 4 and 7)........................ 1,985 1,814 2,514 2,514
-------- ------- -------- --------
Total assets..................................... $ 45,450 $39,711 $ 44,639 $ 44,639
======== ======= ======== ========
</TABLE>

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, DECEMBER 31,
------------------- DECEMBER 31, 1995
1994 1995 1995 (NOTE 5)
-------- ------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current liabilities:
Notes payable (Note 3)
Related party......................................... $ 7,942 $ -- $ -- $ --
Accounts payable........................................ 11,681 6,399 5,790 5,790
Accrued expenses
Income taxes.......................................... 87 594 741 741
Other................................................. 2,963 2,582 2,212 5,840
Current maturities of long-term debt (Note 4)........... 537 101 5,349 5,349
-------- ------- -------- --------
Total current liabilities........................ 23,210 9,676 14,092 17,720
Long-term debt (Note 4):
Related party........................................... 5,523 6,424 -- --
Other................................................... 341 227 157 157
Other..................................................... 618 700 599 599
-------- ------- -------- --------
Total liabilities................................ 29,692 17,027 14,848 18,476
-------- ------- -------- --------
Commitments and contingencies (Notes 8 and 9)
Stockholders' equity (Notes 5 and 6):
Senior preferred stock, $.05 par -- shares authorized,
14,000; shares outstanding, 11,005.................... 550 550 550 --
Convertible preferred stock, $.01 par -- shares
authorized, 16,000; shares outstanding, 1,785......... 18 18 18 --
Common stock, $.01 par -- shares authorized, 12,000;
shares outstanding, 836 and pro forma 4,625........... 8 8 8 46
Additional paid-in capital.............................. 31,484 31,484 31,484 32,014
Foreign currency translation adjustment................. (1,350) 541 (326) (326)
Accumulated deficit..................................... (14,952) (9,917) (1,943) (5,571)
-------- ------- -------- --------
Total stockholders' equity....................... 15,758 22,684 29,791 26,163
-------- ------- -------- --------
Total liabilities and stockholders' equity....... $ 45,450 $39,711 $ 44,639 $ 44,639
======== ======= ======== ========
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

F-3
<PAGE> 61

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED
----------------------------- DECEMBER 31,
1993 1994 1995 -------------------------
------- ------- ------- 1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (Notes 8 and 12):
Printers.................................. $18,821 $28,891 $21,736 $14,582 $ 9,496
Consumable supplies and spare parts....... 37,054 49,976 48,456 23,840 26,693
------- ------- ------- ------- -------
Total net sales............................. 55,875 78,867 70,192 38,422 36,189
Cost of sales............................... 43,248 53,786 48,449 25,743 22,807
------- ------- ------- ------- -------
Gross profit................................ 12,627 25,081 21,743 12,679 13,382
------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative....... 9,199 9,920 9,980 5,116 5,393
Research and development.................. 4,606 5,135 5,357 2,848 2,491
------- ------- ------- ------- -------
Total operating expenses.................... 13,805 15,055 15,337 7,964 7,884
------- ------- ------- ------- -------
Operating income (loss)..................... (1,178) 10,026 6,406 4,715 5,498
Other income (expense) (Note 10)............ 523 (70) (445) (105) 19
------- ------- ------- ------- -------
Income (loss) before income taxes........... (655) 9,956 5,961 4,610 5,517
Income tax (expense) benefit (Note 7)....... -- (309) (926) (737) 2,457
------- ------- ------- ------- -------
Net income (loss)........................... $ (655) $ 9,647 $ 5,035 $ 3,873 $ 7,974
======= ======= ======= ======= =======
Net income (loss) applicable to common
stockholders.............................. $ (655) $ 8,326 $ 3,556 $ 3,134 $ 7,146
======= ======= ======= ======= =======
Pro forma (unaudited):
Net income applicable to common
stockholders........................... $ 3,556 $ 7,146
Pro forma adjustment:
Senior preferred stock excess liquidation
preference (Note 5).................... 1,479 828
------- -------
Pro forma net income........................ $ 5,035 $ 7,974
======= =======
Pro forma net income per common share....... $ .99 $ 1.57
======= =======
Pro forma weighted average common and common
equivalent shares outstanding............. 5,099 5,079
======= =======
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

F-4
<PAGE> 62

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1993, 1994, AND 1995
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
(THOUSANDS)

<TABLE>
<CAPTION>
SENIOR CONVERTIBLE FOREIGN
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY
---------------- ---------------- ---------------- PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT
------ ------ ------ ------ ------ ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, at July 1, 1992... -- $ -- 1,785 $ 18 836 $8 $ 21,149 $ (572) $ (23,944)
Exchange of subordinated
debentures (Note 5).... 7,000 350 -- -- -- -- 6,574 -- --
Sale of senior preferred
stock (Note 5)......... 4,000 200 -- -- -- -- 3,756 -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (652) --
Net loss for the year.... -- -- -- -- -- -- -- -- (655)
------ ---- ----- --- ----- -- -------- -------- ---------
Balance, at June 30,
1993..................... 11,000 550 1,785 18 836 8 31,479 (1,224) (24,599)
Sale of senior preferred
stock (Note 5)......... 5 -- -- -- -- -- 5 -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (126) --
Net income for the
period................. -- -- -- -- -- -- -- -- 9,647
------ ---- ----- --- ----- -- -------- -------- ---------
Balance, at June 30,
1994..................... 11,005 550 1,785 18 836 8 31,484 (1,350) (14,952)
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- 1,891 --
Net income for the
period................. -- -- -- -- -- -- -- -- 5,035
------ ---- ----- --- ----- -- -------- -------- ---------
Balance, at June 30,
1995..................... 11,005 550 1,785 18 836 8 31,484 541 (9,917)
Foreign currency
translation adjustment
(unaudited)............ -- -- -- -- -- -- -- (867) --
Net income for the period
(unaudited)............ -- -- -- -- -- -- -- -- 7,974
------ ---- ----- --- ----- -- -------- -------- ---------
Balance, at December 31,
1995 (unaudited)......... 11,005 $550 1,785 $ 18 836 $8 $ 31,484 $ (326) $ (1,943)
====== ==== ===== === ===== == ======== ======== =========
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

F-5
<PAGE> 63

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED
----------------------------- DECEMBER 31,
1993 1994 1995 --------------------------
------- ------- ------- 1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................... $ (655) $ 9,647 $ 5,035 $ 3,873 $ 7,974
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 1,109 1,465 1,818 830 925
Provision for losses on trade
receivables........................ 138 78 (279) (183) 126
Loss on disposal of property and
equipment.......................... -- -- 130 133 23
Benefit for deferred income taxes.... -- -- -- -- (4,282)
Changes in operating assets and
liabilities:
Trade receivables.................... (19) (8,257) 8,030 6,533 (1,033)
Inventories.......................... 3,026 (6,369) 1,589 (1,783) (2,559)
Other current assets................. 508 (241) 678 622 (101)
Other assets......................... (181) 1,269 140 (27) 254
Accounts payable and accrued
expenses........................... (3,009) 2,834 (6,125) (6,073) 356
------- ------- ------- ------- -------
Net cash provided by operating
activities.............................. 917 426 11,016 3,925 1,683
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Purchase of equipment................... (964) (1,769) (1,758) (1,128) (390)
------- ------- ------- ------- -------
FINANCING ACTIVITIES:
Net payment of loans and notes
payable.............................. (1,559) (1,979) (7,730) (7,737) --
Principal payments of long-term debt.... (406) (556) (760) (299) (96)
Proceeds from sale of stock............. -- 4,005 -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities.............................. (1,965) 1,470 (8,490) (8,036) (96)
------- ------- ------- ------- -------
Effect of exchange rate changes on cash... (821) 959 1,590 3,346 (636)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................. (2,833) 1,086 2,358 (1,893) 561
Cash and cash equivalents, at beginning of
period.................................. 5,778 2,945 4,031 4,031 6,389
------- ------- ------- ------- -------
Cash and cash equivalents, at end of
period.................................. $ 2,945 $ 4,031 $ 6,389 $ 2,138 $ 6,950
======= ======= ======= ======= =======
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

F-6
<PAGE> 64

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Kentek
Information Systems, Inc. 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.

CONCENTRATIONS OF CREDIT RISK

The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalent balances in excess of the
insurance provided by federal insurance authorities and accounts receivable.

The Company's cash equivalents are placed with a major financial
institution and are primarily invested in investment grade commercial paper and
certificates of deposit with an average original maturity of three months or
less. Concentrations of credit risk with respect to accounts receivable are
limited due to generally short payment terms and the customers' dispersion
across geographic areas.

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>
Buildings............................................................ 31 1/2
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 effective
June 30, 1995, the Company had concluded are not needed for ongoing operations.

INCOME TAXES

Through June 30, 1993, the Company followed the provisions of Accounting
Principles Board Opinion 11, "Accounting for Income Taxes". Effective July 1,
1993, the Company implemented Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under the provisions of SFAS
No. 109, the Company elected not to restate prior years and determined that the
cumulative effect of this accounting change is not material to the financial
statements.

F-7
<PAGE> 65

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.

REVENUE RECOGNITION

Sales of printers and consumable supplies are recorded upon shipment to
customers.

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS

For the fiscal years ended June 30, 1994 and 1995, and for the six months
ended December 31, 1994 and 1995, net income has been reduced by the Excess
Liquidation Preference ("ELP") (Note 5) attributable to the senior preferred
stock by $1,321,000, $1,479,000, $739,000 and $828,000, respectively, in
computing net income applicable to common stockholders. No ELP was attributable
to the fiscal year ended June 30, 1993.

PRO FORMA EARNINGS PER SHARE

Historical per share information is not considered relevant as it would
differ materially from pro forma per share data, given the significance of the
senior preferred stock not being considered a common stock equivalent in
computing primary earnings per share.

Pro forma net income per share is computed using pro forma net income and
the pro forma weighted average number of common and common equivalent shares
outstanding after reflecting a 1 for 4.5 reverse stock split effected
immediately prior to the offering. Common equivalent shares include convertible
preferred stock which will automatically be converted into common stock in the
event of a public offering, 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 ("SEC") Staff Accounting Bulletin ("SAB") No.
83 (290,307 shares). Pursuant to SAB No. 83, options granted within one year of
the initial public offering which have an exercise price less than the initial
public offering 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 initial public offering price.

Pro forma weighted average common and common equivalent shares outstanding
consist of the following:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1995 DECEMBER 31, 1995
------------- -----------------
(THOUSANDS)
<S> <C> <C>
Common stock........................................... 836 836
Convertible preferred stock............................ 397 397
Assumed exercise of options............................ 474 454
Senior preferred stock................................. 3,392 3,392
----- -----
5,099 5,079
===== =====
</TABLE>

CASH EQUIVALENTS

The Company considers cash and all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.

UNAUDITED PERIODS

The financial information with respect to the six months ended December 31,
1994 and 1995, is unaudited. In the opinion of management, such information
contains all adjustments, consisting only of normal recurring accruals necessary
for a fair presentation of the results for such periods. The results of
operations for the period December 31, 1995 is not necessarily indicative of the
results of operations for the full fiscal year.

F-8
<PAGE> 66

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 1993 and 1994
financial statements to conform to current year presentation.

F-9
<PAGE> 67

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995)

1. RECAPITALIZATION PLAN

In June 1993 the Company initiated a private placement and sold 11,005,000
shares of Senior Preferred Stock at a purchase price of $1 per share. In
conjunction with the private placement, the Company developed a Recapitalization
Plan ("Plan"). The Plan consisted of the exchange of the Company's outstanding
10% subordinated debentures into 7,000,000 shares of Senior Preferred Stock, the
sale of an additional 4,005,000 shares of Senior Preferred Stock and amendments
to the Kentek 1992 Stock Option Plan. The Company had $5,000,000 of the 10%
subordinated debentures due June 30, 1993 and $2,000,000 due January 1, 1994,
all of which were converted to Senior Preferred Stock as of June 30, 1993 and
received proceeds of $4,005,000 from the sale of 4,005,000 shares of Senior
Preferred Stock.

2. INVENTORIES

Inventories consisted of the following:

<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1994 1995 1995
------- ------- ------------
(THOUSANDS)
<S> <C> <C> <C>
Finished printers, consumable supplies and spare
parts.............................................. $ 7,009 $ 5,655 $ 6,307
Raw materials........................................ 6,547 6,958 8,156
------- ------- --------
$13,556 $12,613 $ 14,463
======= ======= ========
</TABLE>

3. NOTE PAYABLE AND REVOLVING CREDIT AGREEMENT

Note payable -- related party consisted of the following:

<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1994 1995 1995
------ ------- ------------
(THOUSANDS)
<S> <C> <C> <C>
Related party -- 7.75%-7.875% bank sight drafts,
payable to an affiliated bank of a 1.2% stockholder
of the company...................................... $7,942 $ -- $ --
====== ======= =======
</TABLE>

The Company has a revolving line-of-credit agreement with an unaffiliated
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 of America. In addition, the Company must meet certain
financial ratio requirements under the terms of the agreement. At June 30, 1995
and December 31, 1995 no amounts were drawn on the line-of-credit.

F-10
<PAGE> 68

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED AS TO THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995)

4. LONG-TERM DEBT

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1994 1995 1995
------ ------ ------------
(THOUSANDS)
<S> <C> <C> <C>
Related party -- 3.35%-4.1% bank loans, payable to an
affiliated bank of a 1.2% stockholder of the company,
due July 1996........................................ $5,523 $6,424 $5,261
Less current maturities................................ -- -- 5,261
------ ------ ------
$5,523 $6,424 $ --
====== ====== ======
Other:
Loan payable in equal installments through 1996 with
interest at 4.9%-7.5%................................ $ 715 $ -- $ --
Obligations under capital leases....................... 146 294 220
Other.................................................. 17 34 25
------ ------ ------
878 328 245
Less current maturities................................ 537 101 88
------ ------ ------
$ 341 $ 227 $ 157
====== ====== ======
</TABLE>

Guarantee deposits of $1,062,000, included in deposits and other, land and
buildings having a net book value of $4,401,000 included in property held for
sale, and the common stock of a subsidiary of Nippon Kentek of $708,000, are
pledged as collateral for long-term debt aggregating $6,424,000 as of June 30,
1995.

As of June 30, 1995, 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>
1996.................................................... $ 102 $ -- $ 102
1997.................................................... 86 6,432 6,518
1998.................................................... 66 11 77
1999.................................................... 54 14 68
2000.................................................... 9 1 10
----- ------- ------
Total payments.......................................... 317 6,458 6,775
Less amounts representing interest...................... 23 -- 23
----- ------- ------
Principal payments...................................... 294 6,458 6,752
Less current maturities................................. 101 -- 101
----- ------- ------
Total long-term obligations............................. $ 193 $ 6,458 $6,651
===== ======= ======
</TABLE>

The balance in property and equipment at June 30, 1994 and 1995 and
December 31, 1995, includes equipment under capital leases with a total cost of
$567,000 and $420,000 and $307,000 and accumulated depreciation of $464,000 and
$335,000 and $236,000.

F-11
<PAGE> 69

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED AS TO THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995)

5. 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 to be effected
immediately prior to the effective date of the Registration Statement of which
this Prospectus is a part and the authorization of 2,000,000 additional shares
of common stock. All references in the consolidated financial statements with
regards to share and per share amounts have been calculated giving retroactive
effect to the 1-for-4.5 reserve stock split.

On June 27, 1993, the Company amended its Restated Certificate of
Incorporation to, among other matters, authorize the issuance of 14,000,000
shares of Senior Preferred Stock (par value $.05 per share). Additionally, the
authorized number of shares of the convertible preferred stock (par value $.01
per share, liquidation value $6.00 per share, convertible into common stock at a
rate of 1 for 1) were increased from 2,510,000 to 16,000,000. Convertible
preferred stock consists of 13,000,000 authorized shares of Series A Preferred
Stock, of which 1,785,054 shares are issued and outstanding, and 3,000,000
authorized shares of undesignated preferred stock, of which none are issued and
outstanding. The authorized number of shares of common stock (par value $.01 per
share) was increased from 1,876,667 to 10,000,000.

The Senior Preferred Stock is voting and has a primary liquidation
preference of $1 per share plus the aggregate amount of the Excess Liquidation
Preference ("ELP"). ELP accrues on the Senior Preferred Stock at an annual rate
of the greater of 12% or the prime rate. Senior Preferred Stock will be
convertible at any time, at the option of the holder, at a conversion rate equal
to .4462635 of a share of convertible preferred stock and .940661 of a share of
common stock. In total, Senior Preferred Stock is convertible into common stock
at a Conversion Rate of 1.3869245 per share. The conversion ratio of the Senior
Preferred Stock increases over time by the amount of ELP compounded annually.
Upon automatic conversion of the Senior Preferred Stock or upon liquidation of
the Company, the ELP must be settled in cash or in common stock, at the
Company's option. The Company contemplates that the ELP will be settled in cash
upon conversion of the Senior Preferred Stock resulting from the proposed public
offering. ELP at June 30, 1994 and 1995 and December 31, 1995 was $1,321,000 and
$2,800,000 and $3,628,000.

In the event of an underwritten public offering of equity securities, all
shares of the Senior Preferred Stock and convertible preferred stock will be
automatically converted into common stock on the closing date of such public
offering.

Pro forma consolidated balance sheet amounts after the conversion of the
Senior Preferred Stock and the convertible preferred stock and the accrual of
ELP are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Total current liabilities........................... $ 14,092 $ 3,628 $17,720
======== ======== =======
Stockholders' equity:
Senior preferred stock............................ $ 550 $ (550) $ --
Convertible preferred stock....................... 18 (18) --
Common stock...................................... 8 38 46
Additional paid-in capital........................ 31,484 530 32,014
Foreign currency translation adjustment........... (326) -- (326)
Accumulated deficit............................... (1,943) (3,628) (5,571)
-------- -------- -------
Total stockholders' equity.......................... $ 29,791 $ (3,628) $26,163
======== ======== =======
</TABLE>

F-12
<PAGE> 70

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED AS TO THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995)

6. STOCK OPTIONS

During the year ended June 30, 1993, the Company terminated its existing
1982 Stock Option Plan ("Old Plan") and adopted a new plan, the 1992 Stock
Option Plan ("New Plan"). The New Plan provides for the grant of options to
purchase up to a total of 1,750,000 shares of Senior Preferred Stock convertible
into common stock at a conversion rate of 1.3869245 per share or 539,360 shares
of common stock after adjustment for a 1-for-4.5 reverse stock split.

As of December 31, 1995 the number of options exercisable are 586,250 and
options for 494,250 shares of Senior Preferred Stock are still available for
grant under the new plan. The options exercisable and available to grant are
convertible into 180,685 and 152,349 shares of common stock, respectively, after
adjustment for the reverse stock split. Under the terms of the New Plan,
following conversion of the Senior Preferred Stock upon the closing of this
offering, all outstanding options will be converted into options to purchase
common stock.

The following is a summary of the Old Plan and New Plan stock option
activity:

<TABLE>
<CAPTION>
OPTION PRICE
---------------
<S> <C> <C>
Options outstanding at July 1, 1992............................... 548,232 $6.50 to $9.00
Options granted................................................. 131,500 $6.50
Options cancelled and expired................................... (153,500) $6.50 to $7.00
--------- --------------
Options outstanding at June 30, 1993.............................. 526,232 $6.50 to $9.00
Options cancelled and expired (Old Plan termination)............ (526,232) $6.50 to $9.00
Options granted................................................. 1,190,875 $1.00 to $2.00
--------- --------------
Options outstanding at June 30, 1994.............................. 1,190,875 $1.00 to $2.00
Options granted................................................. 80,500 $2.00
Options cancelled and expired................................... (154,875) $1.00 to $2.00
--------- --------------
Options outstanding at June 30, 1995.............................. 1,116,500 $1.00 to $2.00
Options granted................................................. 275,500 $2.00
Options cancelled and expired................................... (136,250) $1.00 to $2.00
--------- --------------
Options outstanding at December 31, 1995.......................... 1,255,750 $1.00 to $2.00
========= ==============
Common shares and option price represented by options outstanding
at December 31, 1995............................................ 1,741,550 $1.02
========= ==============
Common shares and option price, reflecting a 1 for 4.5 reverse
stock split, represented by options outstanding at December 31,
1995............................................................ 387,011 $4.60
========= ==============
</TABLE>

F-13
<PAGE> 71

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED AS TO THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995)

7. TAXES ON INCOME

The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
July 1, 1993. This statement supersedes Accounting Principles Board Opinion No.
11, "Accounting for Income Taxes," which was the Company's previous method of
accounting for income taxes. There was no effect of adopting SFAS No. 109 on the
Company's financial statements.

Taxes on income consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED JUNE SIX MONTHS ENDED
30, DECEMBER 31,
------------------ ------------------
1994 1995 1994 1995
------- ------- ------- -------
(THOUSANDS)
<S> <C> <C> <C> <C>
Current (expense):
Federal.......................................... $ (232) $ (845) $ (683) $(1,505)
State............................................ (77) (51) (40) (320)
Foreign.......................................... -- (30) (14) --
------- ------- ------- -------
(309) (926) (737) (1,825)
------- ------- ------- -------
Deferred (expense) benefit:
Federal.......................................... (3,249) (1,632) (1,495) (496)
State............................................ (304) (210) (186) 32
------- ------- ------- -------
(3,553) (1,842) (1,681) (464)
Valuation allowance(1)............................. 3,553 1,842 1,681 4,746
------- ------- ------- -------
-- -- -- 4,282
------- ------- ------- -------
Income tax (expense) benefit: ..................... $ (309) $ (926) $ (737) $ 2,457
======= ======= ======= =======
</TABLE>

- ---------------

(1) Reduction of valuation allowance for the years ended June 30, 1994 and 1995
and the six months ended December 31, 1994 due to utilization of net
operating loss carryforward and tax credits, and for the six months ended
December 31, 1995, due to the tax benefit of the deferred tax asset expected
to be realized against taxable income in future periods.

As a result of tax operating losses, the Company had no taxes on income
during the year ended June 30, 1993.

The components of the net deferred tax asset are shown below:

<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1994 1995 1995
-------- -------- ------------
(THOUSANDS)
<S> <C> <C> <C>
Loss carryforwards................................... $ 3,121 $ -- $ --
Research and development tax credits................. 838 821 --
Inventory............................................ 819 1,214 1,473
Accrued expenses and other........................... 637 758 697
Property and equipment............................... 605 716 860
Accounts receivable allowance........................ 358 254 300
Alternative minimum tax credits...................... 210 983 952
Valuation allowance.................................. (6,588) (4,746) --
-------- -------- ------
Net deferred tax asset............................... $ -- $ -- $4,282
======== ======== ======
</TABLE>

A valuation allowance equal to the deferred tax asset has been recorded at
June 30, 1994 and 1995, as management of the Company has not been able to
determine that it is more likely than not that the deferred tax asset will 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

F-14
<PAGE> 72

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED AS TO THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995)

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 ($4,282,000) at December 31, 1995 is realizable
as the Company has determined, based on several recurring periods of profitable
operations, continuing successful 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 and alternative minimum
tax credits, primarily reverse annually. As a result of the nature of these
temporary differences and tax credits, $1,250,000 of the net deferred tax asset
at December 31, 1995 is classified as non-current. The non-current portion is
comprised of $650,000 attributable to property and equipment and $600,000
attributable to the tax credits.

A reconciliation of the effective tax rates to the federal statutory rate
is shown below:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------ ------------------
1994 1995 1994 1995
------- ------- ------- -------
(THOUSANDS)
<S> <C> <C> <C> <C>
Federal income tax computed at statutory
rate......................................... $(3,385) $(2,027) $(1,567) $(1,876)
Reduction of valuation allowance............... 3,553 1,842 1,681 4,746
Alternative minimum tax........................ (210) (773) (507) --
Other.......................................... (267) 32 (344) (413)
------- ------- ------- -------
Tax (expense) benefit.......................... $ (309) $ (926) $ (737) $ 2,457
======= ======= ======= =======
</TABLE>

As of June 30, 1995, the Company has unused research and development tax
credits of approximately $821,000 expiring through the year 2005 and the
alternative minimum tax credits of approximately $983,000 which carryforward
indefinitely are available for carryforward against future years' U.S. income
tax.

8. PRINCIPAL CUSTOMER AGREEMENT AND TRANSACTIONS

Agreement

The Company has entered into an agreement with a major company engaged in
the manufacture and worldwide sale of computer and other office equipment. The
agreement gives the company the right under certain circumstances to use certain
patents, technical information and know-how, and development of Kentek printers.

The agreement also provides for sales of the Company's printers, related
parts, accessories and other items at specified prices. With certain exceptions,
neither the Company nor the principal customer are prohibited from selling or
purchasing competitive products to or from other parties.

Transactions

Sales to three principal customers and their affiliates exceeded 10% of
combined net sales for the three years ended June 30, 1995. Sales to such
customers as a percentage of net sales are presented in the following table:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Customer A........................................................ 27% 32% 14%
Customer B........................................................ 33 26 32
Customer C........................................................ 7 7 12
</TABLE>

F-15
<PAGE> 73

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED AS TO THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995)

9. COMMITMENTS AND RELATED PARTY TRANSACTIONS

Operating Leases

The Company leases office and warehouse space under operating leases
expiring at various dates through the year 2000. Rent expense for the years
ended June 30, 1993, 1994 and 1995 and for the six months ended December 31,
1994 and 1995 was $1,311,000, $1,115,000 and $1,106,000 and $552,000 and
$540,000. Future minimum lease payments under operating leases are as follows:

<TABLE>
<CAPTION>
YEARS ENDING
JUNE 30, (THOUSANDS)
- ------------
<S> <C> <C>
1996............................................. $ 564
1997............................................. 316
1998............................................. 312
1999............................................. 234
2000............................................. 5
-------
$ 1,431
=======
</TABLE>

Employment Agreement

On April 1, 1989, the Company entered into an Employment Agreement with the
President and Chief Executive Officer. The Employment Agreement provides for an
annual salary of $230,000, 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, 1994, 1995 and December 31, 1995 bonuses of
approximately $150,000, $80,000 and $84,000 has 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, 1993,
1994 and 1995, and for the six months ended December 31, 1994 and 1995 the
Company's contributions to the plan were $87,000, $87,000 and $103,000, and
$57,000 and $34,000.

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, 1993, 1994 and 1995 and for the six months ended December 31, 1994 and
1995 were approximately $94,600, $79,400 and $87,500 and $46,400 and $32,650.

F-16
<PAGE> 74

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED AS TO THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995)

10. OTHER INCOME (EXPENSE)

Other income (expense) consisted of the following:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------- ---------------
1993 1994 1995 1994 1995
------- ----- ----- ----- -----
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest expense....................... $(1,955) $(842) $(844) $(417) $(151)
Litigation settlement.................. -- -- (325) -- --
Foreign currency exchange gain......... 393 668 338 287 --
Recovery of tooling costs.............. 1,573 -- -- -- --
Interest income........................ 260 261 347 35 134
Miscellaneous.......................... 252 (157) 39 (10) 36
------- ----- ----- ----- -----
Other income (expense)................. $ 523 $ (70) $(445) $(105) $ 19
======= ===== ===== ===== =====
</TABLE>

11. SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
-------------------------- ---------------
1993 1994 1995 1994 1995
------ ------ ---- ---- ------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................... $2,039 $1,069 $655 $470 $ 149
Income taxes................................ 20 145 391 165 1,682
</TABLE>

12. OPERATION BY GEOGRAPHIC AREA

During the years ended June 30, 1993, 1994 and 1995 the Company had foreign
and domestic sales, operating income (loss) and assets as noted below:

<TABLE>
<CAPTION>
U.S. JAPAN EUROPE TOTAL
------- ------- ------- -------
(THOUSANDS)
<S> <C> <C> <C> <C>
1993
Net sales.................................... $37,987 $ 2,283 $15,605 $55,875
Operating loss............................... (800) (48) (330) (1,178)
Assets....................................... 17,791 15,732 182 33,705
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
1995
Net sales.................................... 61,766 -- 8,426 70,192
Operating income............................. 5,637 -- 769 6,406
Assets....................................... 23,686 15,780 245 39,711
</TABLE>

F-17
<PAGE> 75

KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED AS TO THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995)

13. SUBSEQUENT EVENTS

Public Offering

The Company has signed an engagement letter with an underwriter in
connection with a proposed public offering of 2,500,000 shares of the Company's
common stock.

Stock Option Plan

The Company increased up to a total of 2,433,443 shares of Senior Preferred
Stock, convertible into 750,000 shares of common stock after adjustment for a
1-for-4.5 reverse stock split, that can be purchased with options granted by the
New Plan.

F-18
<PAGE> 76

================================================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SHARES OF COMMON STOCK OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.

---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 12
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 27
Management............................ 40
Certain Transactions.................. 45
Principal and Selling Stockholders.... 47
Shares Eligible for Future Sale....... 48
Description of Capital Stock.......... 50
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Additional Information................ 54
Index to Financial Statements......... F-1
</TABLE>

---------------------

UNTIL MAY 13, 1996, (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING) ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

================================================================================

2,500,000 SHARES

LOGO

COMMON STOCK

--------------------

PROSPECTUS

--------------------

JANNEY MONTGOMERY SCOTT INC.

HANIFEN, IMHOFF INC.

APRIL 17, 1996
================================================================================