<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 December 31, 1996
or
____Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________to_____________
Commission file number:
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2945 Wilderness Place, Boulder, CO 80301
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (303) 440-5500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes _X_ No___
(2) Yes _X_ No___
Number of shares outstanding of the issuer's common stock, as of
January 31,1996:
6,841,479 shares of Common Stock, $.01 par value per share
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
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<S> <C>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
December 31, 1996 and June 30, 1996 3
Consolidated Statements of Operations -
for the three and six months ended December 31, 1996
and 1995 4
Consolidated Statements of Cash Flows -
for the six months ended December 31, 1996
and 1995 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submissions of Matters to a vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
Page 2
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ --------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $26,779 $25,992
Accounts receivable, net of allowance 5,206 7,098
Inventories (Note 2) 12,671 13,868
Prepaid expenses and other current assets 3,371 3,365
Property held for sale 0 5,955
Total current assets 48,027 56,278
------- -------
Property and equipment, at cost, net of
accumulated depreciation and amortization 1,770 1,631
Deposits and other 1,802 2,336
------- -------
Total assets $51,599 $60,245
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,353 $ 4,145
------- -------
Accrued expenses:
Income taxes 615 1,334
Other 1,652 2,904
Current maturities of long-term debt 67 5,035
------- -------
Total current liabilities 4,687 13,418
Long-term debt 77 115
Other 505 545
------- -------
Total liabilities 5,269 14,078
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par - shares authorized, 12,000 68 68
shares outstanding, 6,841 and 6,825
Additional paid-in-capital 43,540 43,463
Foreign currency translation (995) (549)
Retained earnings 3,717 3,185
------- -------
Total stockholders' equity 46,330 46,167
------- -------
Total liabilities and stockholders' equity $51,599 $60,245
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales
Printers $ 1,533 $ 4,980 $ 3,772 $ 9,496
Consumable supplies and spare parts 10,631 13,473 22,444 26,693
-------- -------- -------- --------
Total net sales 12,164 18,453 26,216 36,189
Cost of sales 6,654 11,098 14,333 22,807
-------- -------- -------- --------
Gross profit 5,510 7,355 11,883 13,382
-------- -------- -------- --------
Operating Expenses:
Selling, general and administrative 2,643 2,671 5,187 5,393
Research and development 2,051 1,317 4,361 2,491
-------- -------- -------- --------
Total operating expenses 4,694 3,988 9,548 7,884
-------- -------- -------- --------
Operating income 816 3,367 2,335 5,498
Other income (expense) 237 40 (307) 19
-------- -------- -------- --------
Income before income taxes 1,053 3,407 2,028 5,517
Income tax (expense) benefit (454) 3,120 (1,222) 2,457
-------- -------- -------- --------
Net income $ 599 $ 6,527 $ 806 $ 7,974
======== ======== ======== ========
Net income applicable to common stockholders $ 599 $ 6,113 $ 806 $ 7,146
======== ======== ======== ========
Pro forma net income per common share (Note 4) $ 0.09 $ 1.29 $ 0.12 $ 1.57
======== ======== ======== ========
Pro forma weighted average common and common
equivalent shares outstanding 6,866 5,079 6,933 5,079
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Thousands)
(Unaudited)
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<CAPTION>
Six months ended
December 31,
--------------------------
1996 1995
------- ------
<S> <C> <C>
Operating activities:
Net income $806 $7,974
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 787 925
Loss on disposal of property and equipment 932 23
Benefit for deferred income taxes 348 (4,282)
Changes in operating assets and liabilities:
Trade receivables 1,892 (907)
Inventories 1,033 (2,559)
Other current assets (221) (101)
Other assets (55) 254
Accounts payable and accrued expenses (3,988) 356
------- ------
Net cash provided by operating activities 1,534 1,683
------- ------
Investing activities:
Purchase of equipment (740) (390)
Proceeds from sale of property and equipment 5,223 0
------- ------
Net cash provided by (used in) investing activities 4,483 (390)
------- ------
Financing activities:
Proceeds from exercise of stock options 79 0
Principal payments of long-term debt (5,023) (96)
Payment of dividend (274) 0
Net cash used in financing activities (5,218) (96)
------- ------
Effect of exchange rate changes on cash (12) (636)
------- ------
Net increase in cash and cash
equivalents 787 561
Cash and cash equivalents, at beginning of
period 25,992 6,389
------- ------
Cash and cash equivalents, end of period $26,779 $6,950
======= ======
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to fairly state the Company's consolidated
financial position and operating results for the interim periods. The results
of operations for the three and six months ended December 31, 1996 are not
necessarily indicative of the results for the full year.
Note 2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ -------
(thousands)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $ 6,922 $ 6,183
Raw Materials 5,749 7,685
------- -------
$12,671 $13,868
======= =======
</TABLE>
Note 3. Deferred Income Taxes
At December 31, 1996 the Company had a deferred tax asset in the
amount of $3,308,000 ($558,000 classified as short term with the balance of
$2,750,000 as long term) based on management's assessment that it is more
likely than not that it will have sufficient taxable income in future periods
to realize the corresponding tax benefit resulting from the recognition of the
deferred tax asset. Management plans to reassess the deferred tax asset on a
quarterly basis and make appropriate adjustments as necessary.
Note 4. Pro Forma Net Income Per Common Share
Pro forma net income per share is computed using net income applicable
to common stockholders increased by the excess liquidation preference
attributable to the period and the weighted average number of common (6,841,000
and 4,625,000 as of December 31, 1996 and 1995) and common equivalent shares
outstanding. Common equivalent shares include convertible preferred stock
which was converted into common stock at the completion of the Company's
initial public offering ("IPO") (3,789,000 as of December 31, 1995) and those
shares issuable upon the assumed exercise of dilutive stock options as adjusted
for the effects of the application of Securities and Exchange
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Commission Staff Accounting Bulletin ("SAB") No. 83. (24,000 and 92,000 for the
three and six months ended December 31, 1996 and 454,000 and 454,000 for the
three and six months ended December 31, 1995). Pursuant to SAB No. 83, options
granted within one year of the IPO which have an exercise price less than the
IPO price are treated as outstanding for all periods presented. Earnings per
share is computed using the treasury stock method, under which the number of
shares outstanding reflects an assumed use of the proceeds from the assumed
exercise of such options to repurchase shares of the Company's common stock at
the IPO price.
Note 5. Adjusted Pro Forma Earnings Per Share
As of June 30, 1996 the Company has utilized all of its net operating
loss carryforwards. Therefore, management anticipates its future effective tax
rate will be approximately 40%. The six months ended December 31, 1996
reflects additional income tax expense of $378,000 related to the sale of the
Tama property in Japan.
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
--------------------- -------------------
1996 1995 1996 1995
-------- ------- ------- -------
(thousands, except per share data)
<S> <C> <C> <C> <C>
Pre-tax income (1) $ 1,053 $ 3,407 $ 2,028 $ 5,517
ELP (2) - 414 - 828
Income tax expense (3) 454 1,363 1,222 2,207
-------- ------- ------- -------
Adjusted pro forma net income $ 599 $ 1,630 $ 806 $ 2,482
======== ======= ======= =======
Adjusted pro forma net income
per common share $ 0.09 $ 0.32 $ 0.12 $ 0.49
======== ======= ======= =======
Pro forma weighted average
common and common equivalent
shares outstanding 6,866 5,079 6,933 5,079
======== ======= ======= =======
</TABLE>
(1) Pre-tax income at December 31, 1996 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 six months
ending December 31, 1995.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1996 TO THREE MONTHS ENDED
DECEMBER 31, 1995
Total net sales. Total net sales decreased 34.1% from $18,453,000 in
the three months ended December 31, 1995 to $12,164,000 in the three months
ended December 31, 1996. Printer sales revenue decreased by 69.2% from
$4,980,000 in the three months ended December 31, 1995 to $1,533,000 in the
three months ended December 31, 1996. The decrease in printer revenue is
attributable to the introduction by Hewlett-Packard of a competing 40 page per
minute printer, the Oce acquisition of Siemens Nixdorf (the Company's largest
printer customer), as well as an industry wide slow down in computer systems
sales . Consumable supplies and spare parts sales decreased by 21.1% from
$13,473,000 in the three months ended December 31, 1995 to $10,631,000 in the
three months ended December 31, 1996. This decrease is due to customers
returning to normal inventory levels after the large build-up in the last six
months of fiscal 1996. The Company's customers continue to work off their
excess inventory. The decrease in consumable supplies sales is also
attributable to lower printer sales.
Gross profit. Gross profit decreased by 25.1% from $7,355,000 in the
three months ended December 31, 1995 to $5,510,000 in the three months ended
December 31, 1996. The gross margin increased from 39.9% to 45.3% 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 remained relatively constant from $2,671,000 in the
three months ended December 31, 1995 to $2,643,000 in the three months December
31, 1996. The minimal decrease is a result of lower bonus expense due to the
decrease in pre-tax income, partially offset by increased legal expenses.
Research and Development Expense. Research and development expenses
increased by 55.7% from $1,317,000 in the three months ended December 31, 1995
to $2,051,000 in the three months ended December 31, 1996. This increase is
due to expenses associated with the continued development of the KW60 and K40DX
product lines.
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Interest Income and Other Income (Expense). Interest income and other
income (expense) increased from $40,000 of income in the three months ended
December 31, 1995 to $237,000 of income in the three months ended December 31,
1996.
Net interest expense for the three months ended December 31, 1995 was
$9,000, while at December 31, 1996 net interest income of $279,000 was realized
as a result of greater cash available for investment.
Income Tax (Expense) Benefit. Income tax benefit for the three months
ended December 31, 1995 was $3,120,000 due to recognition of a $4,282,000
deferred tax asset during this period. Income tax expense for the three
months ended December 31, 1996 was $454,000.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 TO SIX MONTHS ENDED DECEMBER
31, 1995
Total Net Sales. Total net sales decreased by 27.6% from $36,189,000
in the six months ended December 31, 1995 to $26,216,000 in the six months
ended December 31, 1996. Printer sales revenue decreased 60.3% from $9,496,000
in the six months ended December 31, 1995 to $3,772,000 in the six months ended
December 31, 1996. The decrease in printer revenue resulted from uncertainty
related to the Hewlett-Packard introduction of a competing 40 page per minute
printer and, to a lesser extent, the Oce acquisition of Siemens Nixdorf (the
Company's largest printer customer). Consumable supplies and spare parts sales
decreased 15.9% from $26,693,000 to $22,444,000 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
that 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 six months ended December 31, 1996.
Gross Profit. Gross profit decreased by 11.2% from $13,382,000 in the
six months ended December 31, 1995 to $11,883,000 in the six months ended
December 31, 1996. The gross margin increased from 36.9% to 45.3% 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.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 3.8% from $5,393,000 in the six months
ended December 31, 1995 to $5,187,000 in the six months ended December 31,
1996. This decrease is a result of lower bonus expense due to the decrease in
pre-tax income, partially offset by increased legal expenses.
Research and Development Expense. Research and development expense
increased by 75.1% from $2,491,000 in the six months ended December 31, 1995 to
$4,361,000 in the six months ended December 31, 1996. This increase is due to
expenses associated with the continued development of the KW60 and K40DX
product lines.
Interest Expense and Other Income (Expense). Interest expense and other income
(expense) increased from $19,000 of income in the six months ended December 31,
1995 to $307,000 of expense in the six months ended December 31, 1996. Other
expense at December 31, 1996 includes a book loss of $932,000 as a result of
the November 1996 sale of the Tama property in Japan. Net interest expense
for the six months ended December 31, 1995 was $17,000, while at December 31,
1996 net interest income of $279,000 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 six months
ended December 31, 1995 was $2,457,000 due to recognition of a $4,282,000
deferred tax asset during the period. Income tax expense for the six months
ended December 31, 1996 was $1,222,000. Income tax expense includes the
provision of an approximate 40% tax rate and a one- time tax expense of
$378,000 related to the sale of the Tama property in Japan.
LIQUIDITY AND CAPITAL RESOURCES
Changes in cash during the six months ended December 31, 1996 resulted
in a net increase of $787,000 as compared to a net increase during the six
months ended December 31, 1995 of $561,000.
Net cash provided by operations for the six months ended December 31,
1996 decreased by $149,000 from the six months ended December 31, 1995. The
primary reasons for this decrease were a reduction in net income, a reduction
in benefit for deferred income taxes, offset by lower trade receivables and
inventory, which provided cash for 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 December 31,
1996 was $144,000. 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 23, 1996 the Company was served a complaint filed by Printronix
Corporation in the Federal District Court for the Central District of
California alleging violations of the Robinson-Patman Act and breach of
contract and seeking an aggregate of $10 million in relief. The suit pertains
to Printronix desire to retain OEM pricing on consumable supplies and spare
parts.
The Company intends to vigorously defend against this claim. In view
of the stage of litigation, management and counsel of the Company are unable to
determine the outcome of the legal action or estimate the amount of the loss,
if any.
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 quarter.
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: February 14, 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)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,779
<SECURITIES> 0
<RECEIVABLES> 5,206
<ALLOWANCES> 0
<INVENTORY> 12,671
<CURRENT-ASSETS> 48,027
<PP&E> 17,955
<DEPRECIATION> 16,185
<TOTAL-ASSETS> 51,599
<CURRENT-LIABILITIES> 4,687
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 46,262
<TOTAL-LIABILITY-AND-EQUITY> 51,599
<SALES> 12,164
<TOTAL-REVENUES> 12,164
<CGS> 6,654
<TOTAL-COSTS> 11,348
<OTHER-EXPENSES> 876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 569
<INCOME-PRETAX> 1,053
<INCOME-TAX> 454
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 599
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
