<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934
For the quarterly period ended March 31, 1997
or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---
Exchange Act of 1934
For the transition period from to
------------- -------------
Commission file number:
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
number)
2945 Wilderness Place, Boulder, CO 80301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 440-5500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
---- ----
(2) Yes X No
---- ----
Number of shares outstanding of the issuer's common stock, as of March 31,1997:
6,841,479 shares of Common Stock, $.01 par value per share
Page 1
<PAGE> 2
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
March 31, 1997 and June 30, 1996 3
Consolidated Statements of Operations -
for the three and nine months ended March 31, 1997
and 1996 4
Consolidated Statements of Cash Flows -
for the nine months ended March 31, 1997
and 1996 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submissions of Matters to a vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
March 31, June 30,
1997 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $26,698 $25,992
Marketable Securities 5,239 0
Accounts receivable, net of allowance 6,320 7,098
Inventories (Note 2) 10,751 13,868
Prepaid expenses and other current assets 3,512 3,365
Property held for sale 0 5,955
-------------- --------------
Total current assets 52,520 56,278
Property and equipment, at cost, net of
accumulated depreciation and amortization 1,777 1,631
Deposits and other 1,311 2,336
-------------- --------------
Total assets $55,608 $60,245
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $3,182 $4,145
Accrued expenses:
Income taxes 717 1,334
Other 2,627 2,904
Current maturities of long-term debt 57 5,035
-------------- --------------
Total current liabilities 6,583 13,418
Long-term debt 62 115
Other 480 545
-------------- --------------
Total liabilities 7,125 14,078
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par - shares authorized, 12,000 and 12,000; 68 68
shares outstanding, 6,841 and 6,825
Additional paid-in-capital 43,546 43,463
Foreign currency translation (723) (549)
Retained earnings 5,592 3,185
-------------- --------------
Total stockholders' equity 48,483 46,167
-------------- --------------
Total liabilities and stockholders' equity $55,608 $60,245
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
Page 3
<PAGE> 4
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
----------------------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Printers $2,523 $5,197 $6,295 $14,693
Consumable supplies and spare parts 13,497 14,844 35,941 41,537
------------ ------------ -------------- --------------
Total net sales 16,020 20,041 42,236 56,230
Cost of sales 8,390 11,287 22,723 34,094
------------ ------------ -------------- --------------
Gross profit 7,630 8,754 19,513 22,136
------------ ------------ -------------- --------------
Operating Expenses:
Selling, general and administrative 2,701 2,524 7,888 7,917
Research and development 1,771 1,309 6,132 3,800
------------ ------------ -------------- --------------
Total operating expenses 4,472 3,833 14,020 11,717
------------ ------------ -------------- --------------
Operating income 3,158 4,921 5,493 10,419
Other income 594 54 287 73
------------ ------------ -------------- --------------
Income before income taxes 3,752 4,975 5,780 10,492
Income tax (expense) benefit (1,741) (2,410) (2,963) 47
------------ ------------ -------------- --------------
Net income $2,011 $2,565 $2,817 $10,539
============ ============ ============== ==============
Net income applicable to common stockholders $2,011 $2,041 $2,817 $9,187
============ ============ ============== ==============
Pro forma net income per common share (Note 4) $0.29 $0.51 $0.41 $2.07
============ ============ ============== ==============
Pro forma weighted average common and common
equivalent shares outstanding 6,953 5,079 6,953 5,080
============ ============ ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
Page 4
<PAGE> 5
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
March 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income $2,817 $10,539
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 921 1,261
Loss on disposal of property and equipment 907 28
Deferred income taxes 150 (4,282)
Realized gain on marketable securities (77) 0
Unrealized gain on marketable securities (162) 0
Changes in operating assets and liabilities:
Trade receivables 778 (13)
Inventories 2,834 (2,884)
Other current assets (363) (124)
Other assets 549 220
Accounts payable and accrued expenses (1,262) 2,160
------------ -------------
Net cash provided by operating activities 7,092 6,905
------------ -------------
Investing activities:
Purchase of marketable securities (5,000) 0
Purchase of equipment (788) (506)
Proceeds from sale of property and equipment 5,037 0
------------ -------------
Net cash provided by (used in) investing activities (751) (506)
------------ -------------
Financing activities:
Proceeds from exercise of stock options 79 0
Principal payments of long-term debt (4,863) (65)
Payment of dividends (410) 0
------------ -------------
Net cash used in financing activities (5,194) (65)
------------ -------------
Effect of exchange rate changes on cash (441) (841)
------------ -------------
Net increase in cash and cash
equivalents 706 5,493
Cash and cash equivalents, beginning of
period 25,992 6,389
------------ -------------
Cash and cash equivalents, end of period $26,698 $11,882
============ =============
</TABLE>
See Notes to Consolidated Financial Statements
Page 5
<PAGE> 6
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to fairly state the Company's consolidated
financial position and operating results for the interim periods. The results
of operations for the three and nine months ended March 31, 1997 are not
necessarily indicative of the results for the full year.
Note 2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---- ----
(thousands)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $ 4,822 $ 6,183
Raw Materials 5,929 7,685
----------------
$10,751 $13,868
======= =======
</TABLE>
Note 3. Deferred Income Taxes
At March 31, 1997 the Company had a deferred tax asset in the amount
of $3,506,000 ($2,750,000 classified as short term with the balance of $756,000
as long term) based on management's assessment that it is more likely than not
that it will have sufficient taxable income in future periods to realize the
corresponding tax benefit resulting from the recognition of the deferred tax
asset. Management plans to reassess the deferred tax asset on a quarterly basis
and make appropriate adjustments as necessary.
Note 4. Pro Forma Net Income Per Common Share
Pro forma net income per share is computed using net income applicable
to common stockholders increased by the excess liquidation preference
attributable to the period and the weighted average number of common
(approximately 6,841,000 and 4,625,000 as of March 31, 1997 and 1996) and
common equivalent shares outstanding. Common equivalent shares include
convertible preferred stock which was converted into common stock at the
completion of the Company's initial public offering ("IPO") (3,789,000 as of
March 31, 1996) and those shares issuable upon the assumed exercise of dilutive
stock options as adjusted for the effects of the application of Securities and
Page 6
<PAGE> 7
Exchange Commission Staff Accounting Bulletin ("SAB") No. 83. (112,000 and
112,000 for the three and nine months ended March 31, 1997 and 454,000 and
454,000 for the three and nine months ended March 31, 1996). Pursuant to SAB
No. 83, options granted within one year of the IPO which have an exercise price
less than the IPO price are treated as outstanding for all periods presented.
Earnings per share is computed using the treasury stock method, under which the
number of shares outstanding reflects an assumed use of the proceeds from the
assumed exercise of such options to repurchase shares of the Company's common
stock at the IPO price.
Note 5. Adjusted Pro Forma Earnings Per Share
As of June 30, 1996 the Company has utilized all of its net operating
loss carryforwards. Therefore, management anticipates its future effective tax
rate will be approximately 40%. The nine months ended March 31, 1997 reflects
additional income tax expense of $378,000 related to the sale of the Tama
property in Japan.
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
----------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
(thousands, except per share data)
<S> <C> <C> <C> <C>
Pre-tax income (1) $ 3,752 $ 4,975 $ 5,780 $10,492
ELP (2) - 524 - 1,352
Income tax expense (3) 1,741 1,990 2,963 4,197
------- ------- ------- --------
Adjusted pro forma net income $ 2,011 $ 2,461 $ 2,817 $ 4,943
======= ======== ======== ========
Adjusted pro forma net income
per common share $ 0.29 $ 0.48 $ 0.41 $ 0.97
======= ======== ======== ========
Pro forma weighted average
common and common equivalent
shares outstanding 6,953 5,079 6,953 5,080
======= ======== ======== ========
</TABLE>
(1) Pre-tax income for the nine months ended March 31, 1997 includes a
one-time write off of $932,000 related to the Tama property in Japan.
(2) Excess liquidation preference "ELP" was a one-time cash dividend paid
to holders of Senior Convertible Preferred Stock during the Company's
IPO.
(3) Assumes a pro forma income tax rate of 40% for the three and nine
months ending March 31, 1996.
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Note 6. New Accounting Pronouncement
On March 3, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS No. 128"). This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Board Opinion ("APB") No. 15, "Earnings Per Share". SFAS 128
provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997.
Its implementation is not expected to have a material effect on the
consolidated financial statements.
Page 8
<PAGE> 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 TO THREE MONTHS ENDED MARCH
31, 1996
Total net sales. Total net sales decreased 20.1% from $20,041,000 in
the three months ended March 31, 1996 to $16,020,000 in the three months ended
March 31, 1997. Printer sales revenue decreased by 51.5% from $5,197,000 in the
three months ended March 31, 1996 to $2,523,000 in the three months ended March
31, 1997. The decrease in printer revenue is attributable to the introduction
by Hewlett-Packard of a competing 40 page per minute printer and the Oce
acquisition of Siemens Nixdorf (the Company's largest printer customer).
Consumable supplies and spare parts sales decreased by 9.1% from $14,844,000 in
the three months ended March 31, 1996 to $13,497,000 in the three months ended
March 31, 1997. This decrease is due to customers returning to normal inventory
levels after the large build-up in the last six months of fiscal 1996.
Gross profit. Gross profit decreased by 12.8% from $8,754,000 in the
three months ended March 31, 1996 to $7,630,000 in the three months ended March
31, 1997. The gross margin increased from 43.9% to 47.6% in the same period.
The decrease in dollars is due to lower sales during the period. The increase
as a percentage of sales is primarily due to the favorable dollar to yen
exchange rate, higher sales mix of consumable supplies which generate higher
margin and continued cost improvements in the manufacturing process.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 7.0% from $2,524,000 in the three months
ended March 31, 1996 to $2,701,000 in the three months March 31, 1997. The
increase is a result of greater legal expenses in the quarter.
Research and Development Expense. Research and development expenses
increased by 35.3% from $1,309,000 in the three months ended March 31, 1996 to
$1,771,000 in the three months ended March 31, 1997. This increase is due to
expenses associated with the continued development of the KW60 and K40DX
product lines.
Page 9
<PAGE> 10
Interest Income and Other Income (Expense). Interest income and other
income (expense) increased from $54,000 of income in the three months ended
March 31, 1996 to $594,000 of income in the three months ended March 31, 1997.
Net interest income for the three months ended March 31, 1996 was
$13,000, while at March 31, 1997 net interest income of $545,000 was realized
as a result of greater cash available for investment.
Income Tax Expense. Income tax expense for the three months ended
March 31, 1996 was $2,410,000. Income tax expense for the three months ended
March 31, 1997 was $1,741,000.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1997 TO NINE MONTHS ENDED MARCH 31,
1996
Total Net Sales. Total net sales decreased by 24.9% from $56,230,000
in the nine months ended March 31, 1996 to $42,236,000 in the nine months ended
March 31, 1997. Printer sales revenue decreased 57.2% from $14,693,000 in the
nine months ended March 31, 1996 to $6,295,000 in the nine months ended March
31, 1997. The decrease in printer revenue resulted from uncertainty related to
the Hewlett-Packard introduction of a competing 40 page per minute printer and
the Oce acquisition of Siemens Nixdorf (the Company's largest printer customer).
Consumable supplies and spare parts sales decreased 13.5% from $41,537,000 to
$35,941,000 in the same period. This decrease is significantly less than the
decrease in printer sales due to the fact that higher speed printers require
more consumables supplies and spare parts to operate. The decline in sales is
primarily attributable to stronger than usual consumable supplies sales in the
last six months of fiscal year 1996, causing customers to balance their
inventory of supplies in the most recent nine months ended March 31, 1997.
Gross Profit. Gross profit decreased by 11.8% from $22,136,000 in the
nine months ended March 31, 1996 to $19,513,000 in the nine months ended March
31, 1997. The gross margin increased from 39.4% to 46.2% in the same period.
The decrease in dollars is a result of lower sales during the period. The
increase as a percentage of sales is primarily due to the favorable dollar to
yen exchange rate, the higher sales mix of consumable supplies which generate
higher margin and continued cost improvements in the manufacturing process.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained constant at $7,917,000 in the nine months
ended March 31, 1996 compared to $7,888,000 in the nine months ended March 31,
1997.
Page 10
<PAGE> 11
Research and Development Expense. Research and development expense
increased by 61.4% from $3,800,000 in the nine months ended March 31, 1996 to
$6,132,000 in the nine months ended March 31, 1997. This increase is due to
expenses associated with the continued development of the KW60 and K40DX
product lines.
Interest Income and Other Income (Expense). Interest income and other income
(expense) increased from $73,000 of income in the nine months ended March 31,
1996 to $287,000 of income in the nine months ended March 31, 1997. Other
expense at March 31, 1997 includes a book loss of $932,000 as a result of the
November 1996 sale of the Tama property in Japan. Net interest income for the
nine months ended March 31, 1996 was $26,000, while at March 31, 1997 net
interest income of $1,114,000 was realized due to a reduction in long-term debt
as well as more cash available to invest.
Income Tax (Expense) Benefit. Income tax benefit for the nine months
ended March 31, 1996 was $47,000 due to recognition of a $4,282,000 deferred
tax asset during the period. Income tax expense for the nine months ended
March 31, 1997 was $2,963,000. Which includes a one-time tax expense of
$378,000 related to the sale of the Tama property in Japan.
LIQUIDITY AND CAPITAL RESOURCES
Changes in cash during the nine months ended March 31, 1997 resulted
in a net increase of $5,945,000 as compared to a net increase during the nine
months ended March 31, 1996 of $5,493,000.
Net cash provided by operations for the nine months ended March 31,
1997 increased by $187,000 from the nine months ended March 31, 1996. The
primary reasons for this increase were a significant reduction in inventories,
accounts receivable and benefit for deferred income taxes, offset by lower net
income and payment of accounts payable and accrued expenses.
In November 1996 the Company sold the Tama property in Japan. The
proceeds from the sale were used to pay off the debt associated with the
property generating $200,000 in cash. Total long-term debt at March 31, 1997
was $119,000. The Company paid dividends and increased equipment purchases
which were offset by the effect of exchange rate changes on cash, proceeds from
stock option exercise and the net cash realized from the sale of the Tama
property.
Page 11
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 12, 1997, the Company settled the lawsuit brought by Printronix
Corporation. The settlement included the dismissal of all charges against the
Company. The Company does not expect that the completion of this lawsuit will
have a material impact on the Company's results for either the quarter or the
year ended June 30, 1997.
On December 31, 1996 the Company settled the lawsuit brought by
Rosetta Technologies Corporation. The settlement included the dismissal of all
charges against the Company and significant payment of past due invoices by
Rosetta. The completion of this lawsuit had no material impact on the results
for the nine months ended March 31, 1997.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submissions of Matters to a vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Form 8-K
None.
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 9, 1997 KENTEK INFORMATION SYSTEMS, INC.
/s/ PHILIP W. SHIRES
--------------------------------------
Philip W. Shires
President and Chief Executive Officer
(Principal Executive Officer)
/s/ CRAIG G. LAMBORN
----------------------
Craig G. Lamborn
Vice President, Finance and
Administration
(Principal Financial and Accounting
Officer)
Page 13
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Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 26,698
<SECURITIES> 5,239
<RECEIVABLES> 6,320
<ALLOWANCES> 0
<INVENTORY> 10,751
<CURRENT-ASSETS> 52,520
<PP&E> 17,311
<DEPRECIATION> 15,534
<TOTAL-ASSETS> 55,608
<CURRENT-LIABILITIES> 6,583
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 48,415
<TOTAL-LIABILITY-AND-EQUITY> 55,608
<SALES> 16,020
<TOTAL-REVENUES> 16,020
<CGS> 8,390
<TOTAL-COSTS> 12,862
<OTHER-EXPENSES> (49)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (545)
<INCOME-PRETAX> 3,752
<INCOME-TAX> 1,741
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,011
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
