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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the fiscal year ended June 30, 1998
or
Transition report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the transition period from _____________to_____________
Commission file number:
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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2945 Wilderness Place, Boulder,
CO 80301 (Address of principal
executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 440-5500
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: COMMON STOCK, $.01 PAR
VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
On September 20, 1998, the bid and ask prices of the Common Stock were
$6.38 and $6.50, respectively. The aggregate market value of the voting stock of
the Issuer held by non-affiliates based on the average bid and ask prices on
September 20, 1998 was $37,562,150.
On September 20, 1998, 7,181,197 shares of the Registrant's
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Item 10, Item 11, Item 12 and Item 13 of
Part III of this Form 10-K are incorporated by reference from the Registrant's
definitive proxy statement to be filed in accordance with Rule 142-101, Schedule
14A, in connection with the Registrant's November 20, 1998 Annual Meeting of
Stockholders for fiscal year ended June 30, 1998.
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KENTEK INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I.
Item 1. Business.........................................................................................................3
Item 2. Properties.......................................................................................................7
Item 3. Legal Proceedings................................................................................................7
Item 4. Submission of Matters to a Vote of Security Holders..............................................................7
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................8
Item 6. Selected Consolidated Financial Data.............................................................................8
Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations...........................9
Item 7a. Quantitative and Qualitative Disclosures about Market Risk......................................................12
Item 8. Financial Statements and Supplementary Data.....................................................................13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................29
PART III.
Item 10. Directors and Executive Officers of the Registrant..............................................................29
Item 11. Executive Compensation..........................................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................................29
Item 13. Certain Relationships and Related Transactions..................................................................29
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................30
SIGNATURES.................................................................................................................31
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THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K WHICH ARE
NOT HISTORICAL FACTS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS FOUND IN ITEM 1
- - BUSINESS, ITEM-3 - LEGAL PROCEEDINGS AND ITEM 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE FORWARD-LOOKING
STATEMENTS OR DISCUSSIONS OF TRENDS WHICH BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES THAT COULD SIGNIFICANTLY IMPACT EXPECTED RESULTS. ACTUAL
FUTURE RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN SUCH
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY ARE THE RISKS AND UNCERTAINTIES DISCUSSED IN THIS ANNUAL
REPORT, INCLUDING IN THE PORTIONS REFERENCED ABOVE AND THOSE DESCRIBED FROM TIME
TO TIME IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION, SUCH AS SIGNIFICANT COMPETITION, INTERNATIONAL OPERATIONS AND
CURRENCY FLUCTUATIONS, DEPENDENCE ON NEW PRODUCTS, RAPID TECHNOLOGICAL CHANGE,
DEPENDENCE ON KEY CUSTOMERS AND AVAILABILITY OF ADEQUATE SOURCES OF SUPPLY.
PART I.
ITEM 1. BUSINESS
Kentek Information Systems, Inc. ("Kentek" or the "Company") is a
leading supplier of heavy-duty, high reliability, mid-range, non-impact laser
printers and related consumable supplies and spare parts. Printers that print 30
to 60 pages per minute ("ppm") and 30,000 to 400,000 pages per month
characterize the mid-range market. The Company's printers are designed primarily
for high-volume printing requirements, including (i) production printing
applications which include printing invoices, forms, payroll, direct mail and
check imaging, (ii) 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 and (iii) computer network
applications for connecting multiple users on a network in order to share a
single heavy-duty printer. The Company was incorporated under the laws of the
state of Delaware in 1981. Its principal offices are located at 2945 Wilderness
Place, Boulder, CO 80301. On April 17, 1996, the Company completed its initial
public offering ("IPO") of 2,200,000 shares of its common stock at $8 per share.
The Company received $15,623,000 in proceeds net of offering costs of
$1,977,000.
The Company is the exclusive manufacturer of consumable supplies for
its printers, with the exception of toner, which is manufactured exclusively for
Kentek to its specifications. Kentek estimates that its printers have an average
useful life of approximately seven years. Over the useful life of these
printers, the consumable supplies must be replaced several times each year under
normal use conditions and, consequently, sales of consumable supplies and spare
parts typically generate revenues in excess of three times the original cost of
the printer and represent approximately 85% of the total cost of ownership of
the printer.
Kentek currently sells its products to a broad base of OEMs, system
integrators, and independent supplies resellers in the mid-range market.
Kentek's customers include BancTec, IBM Global Services, Lexmark, NCR, Oce
Printing Systems, Printer Systems International, Standard Register, Tally and
Unisys. The Company believes its product offerings compete on the basis of its
high printer reliability, the low total cost of ownership of its printers and
consumable supplies, and the attractive pricing Kentek offers its customers.
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.
Mid-Range. This market segment has broadened over the last 24 months.
Historically, it included printers with speeds of 30 to 60 ppm, that provided
enhanced features such as continuous operation and higher duty cycle. The past
two years has seen the introduction of light duty, higher speed machines from
companies such as Hewlett Packard, Lexmark and Xerox. Targeted for the
requirements of the average networked office environment, these printers
typically have many features in common with copiers including stapling,
collating and duty cycles of less than 100,000 pages per month. These printers
are often referred to as digital copiers or "mopiers".
The heavy-duty portion of the mid-range segment includes printers with
speeds of 30-60 ppm with duty cycles of 200,000 to 750,000 pages per month.
These printers typically demonstrate high reliability, high duty cycle, low cost
per printed page and low maintenance. They can handle complex print jobs, run
continuously, and often have advanced computer and network connectivity.
Printers in this range are typically utilized in three distinct applications:
production systems, print-on-demand applications and networks. Production
systems serve specific, print intensive applications such as general accounting,
invoicing, payroll, direct mail, check imaging and generation of mortgage or
insurance forms and documents. These operations share a need for either long
periods of continuous operation or heavy use spread over the month and low cost
per page. The systems are typically connected to a mainframe, mini-computer, or
high-end Windows NT network. Print-on-demand applications use a printer as a
digital copier for users who need to generate multiple custom documents on
demand from a template stored on disk. Network applications use a printer to
serve the print needs of multiple users connected to a network.
For many business applications, when aggregate usage exceeds 50,000
pages per month and/or, page coverage (the percentage of the page covered with
toner) is higher than 4-5% (a standard office memo), a heavy-duty, mid-range
printer can provide a more efficient and cost-effective solution than multiple
low-range printers or multiple light duty mid-range printers. Additionally, a
single, heavy duty 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.
Heavy duty mid-range printers can run continuously and hold sufficient paper and
consumables to require only infrequent operator attention.
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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
company that sold them the printer. As one moves from the low-range printer
market to the mid-range and high-range markets, the revenues generated by sales
of consumable supplies over the life of a printer increasingly exceed the
revenues generated by the initial printer sale.
High-Range. This market segment, defined by printing speeds of 60 ppm
or greater, provides higher duty cycle than the other categories. High-range
printer applications include very high volume applications such as direct mail,
public utility invoices and credit card statements.
PRINCIPAL PRODUCTS
The Company's objective is to provide a complete printer hardware,
software and consumable supplies package that enables Kentek's customers to
easily install Kentek printers within their systems and to meet the end-user's
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 production system, print-on-demand and network 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 many other printers in the industry. For
example, the Company utilizes a simple printer engine design incorporating a
straight paper path that permits the use of a wide variety of printable media
with an incidence of paper jams of approximately 1-in-10,000 printed pages. This
characteristic, in conjunction with high volume paper handling accessories,
permits Kentek printers to operate continuously, unattended at full speed.
Kentek pioneered the use of light emitting diode ("LED") technology in printhead
design. This technology is used to generate the individual pixels on the
photoconductor. The LED array technology uses no moving parts and provides
simple, direct and precise beam alignment from the diode array to the
photoconductor. In contrast, a laser beam printer utilizes a motor to drive a
rotating polygon mirror at speeds of as high as 35,000 rpm and directs the
scanning beam across the width of the photoconductor. As the beam moves from one
side to the other, the spot size modulation and magnification must be managed.
The Company believes that its simple printer engine design and LED array
technology is more durable than laser beam technology, permitting higher duty
cycles at lower costs.
The following descriptions illustrate the principal features of
Kentek's K30/K30D, K31/K31D, K40D and K40DX printers. All printers in the
Company's current line have a rated duty cycle of at least 300,000 pages per
month and interface with IBM, HP, DEC and UNIX platforms through serial,
parallel or network interfaces.
K30 Printer/K30D Printer. The K30/K30D incorporates the Company's
standard design 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 standard K30 configuration includes a Motorola 68020
microprocessor and 8 megabytes of RAM. An optional 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. 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 offers the same standard
features as the K30/K30D and incorporates the RIGS controller described below.
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 12 megabytes to 64 megabytes of RAM, full graphics printing at 300 dpi, one
floppy disk drive, a 540 megabyte or larger internal hard disk and dual cassette
input trays containing a total of 800 sheets and an output tray. Available as an
option is a 50 MHz IDT 3081 RISC microprocessor to accelerate complex graphics.
The K31D printer also offers the duplex printing feature. The K31 and K31D,
30-ppm printers, were introduced in September 1995.
K40D Printer. The K40D also incorporates the 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, 400,000 pages per month
duty cycle, one floppy disk drive a 540 megabyte or larger internal hard disk,
and dual cassette input trays containing a total of 800 sheets and an output
tray. Available as an option is a 50 MHz IDT 3081 RISC microprocessor to
accelerate complex graphics. The K40D, a 40-ppm duplex printer, was introduced
in November 1994.
K40DX Printer. An extension of the K40D, the K40DX includes the
features of straight paper path, LED array printhead, dual component toner
process and the SIGS controller described below. Standard features of the K40DX
model also include a 133 MHz Pentium processor with an internal floating point
co-processor and 16 to 128 megabytes of RAM, full graphics printing at 600 dpi,
multi-active ports, 400,000 per month duty cycle, one floppy disk drive, a 1.2
gigabyte or larger internal hard disk, and dual cassette input trays containing
a total of 800 sheets and an output tray. Available as an option is electronic
collation. The K40DX duplex printer was introduced in May of 1998.
Available as options on all of Kentek's printers are 1,200 and 2,500
sheet-input feeders; 1,400 and 3,500 sheet output stackers; and printer
cabinets.
Kentek also designs and develops proprietary printer controller
hardware and software to manage the complex tasks associated with communicating
with multiple host computers over a network and coordinating complex print jobs
at high speed. Kentek's printers generally include a printer controller (image
generation system or IGS controller) and a machine controller (printer control
logic or PCL controller), each with its associated software. In 1994, Kentek
invented a proprietary RISC-based Image Generation System ("RIGS") architecture
that is used on the K31/K31D and K40D printers. The RIGS architecture uses
higher speed microprocessors, expanded RAM and enhanced ASICs designed to speed
complex text and graphics manipulation. Kentek controllers come standard with HP
PCL5e, HPGL printer control language emulations and TIFF image decompression.
Phoenix Page PostscriptTM is available as a printer control language option.
SIGS Controller. In May 1998, Kentek introduced its SIGS controller
system, which is used on its K40DX printer. The SIGS controller uses an Intel
Pentium(R) processor and an industry standard motherboard with 32 to 128 MB of
RAM, permitting a quick and straightforward upgrade path as faster processors
become available. In addition, the board incorporates a PCI BUS permitting the
addition of industry standard connectivity
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add-on cards. The controller uses a Kentek developed PCI BUS compatible
multi-function card to interface with the machine controller. Also, the SIGS
controller is based on the Lynx operating system and Xionic's intelligent
peripheral systems software, Postscript Level II, TIFF and PCL5e, all industry
standards. The Company believes that the use of such standards lowers its cost
and reduces the time to market when compared to products with a more proprietary
design.
Consumables. The Company is the exclusive manufacturer of consumable
supplies for its printers, with the exception of toner, which is manufactured
exclusively for Kentek to its specifications. The Company's consumable products
are subject to re-manufacturing or recycling by others. Although the Company
believes it has not historically lost a substantial amount of revenue to
recycling or re-manufacturing competition, there is no assurance that the
Company will not be materially and adversely effected by such competition in the
future. Kentek has recently initiated work to develop its own line of
remanufactured consumables.
PRODUCT DEVELOPMENT
The Company believes that the development of new products and the
enhancement of existing products are essential to its future success. Rapidly
changing technology, evolving industry standards, and frequent new product
introductions characterize the market for the Company's products. 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, paper
handling devices and software and consumable supply products. The Company
attempts to maintain its technological competitiveness and position its products
attractively by working with its customers to plan products that meet end-users'
needs.
The Company's current product development efforts are focused on its KW
printer line, as well as on developing higher speed controller and software
enhancements for its existing printer line and introducing new features such as
highlight color and improved paper handling and additional consumable supply
products. The Company believes that its success depends in part on its ability
to enhance existing products and to develop new products that maintain
technological leadership, meet a wide range of changing customer needs and
achieve market acceptance.
K40DF Printer. The K40DF is anticipated to be introduced to customers
in the first half of 1999. The K40DF is a 40-ppm printer designed to have
superior print registration (image registration from top of page within 1
millimeter) and the ability handle a wide variety of paper stocks and weights.
In conjunction with the K40DF, the Company plans to introduce a high capacity
media feeder capable of feeding a similar variety of paper stocks and weights.
The Company believes this product combination will help it penetrate the forms
market.
KW Product Line: The KW product line will offer a series of printers
with speeds ranging from 60 to 90 ppm or more with an initial introduction of a
60 ppm printer and will incorporate new features specifically addressing
concerns of the production systems, print-on-demand and network computing market
segments. This will enable the Company to bring high-range performance to the
mid-range market segment.
The KW product line is a new design that will incorporate 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 include the
SIGS controller system, a scaleable Pentium-based controller motherboard, a PCI
Bus that will increase data transfer rates and enable easy integration of
co-processors, and a multiple-connectivity feature that will ease all types of
network connectivity. The Company believes that the adoption of these
industry-standard processors and communication protocols will decrease the
development and engineering cycles associated with implementing future product
enhancements. In addition, the Company is designing consumable supplies for its
KW printer line that will extend the life span of each component and reduce per
page printing costs.
Development work on the KW60 has taken longer than the Company
originally anticipated. Certain aspects of the technology development have
proven to be very complex, requiring more time and resources than originally
planned. The Company anticipates that it will continue to spend substantial
resources over the next 12-15 months in its efforts to bring the development of
the KW60 to completion and introduce it into the marketplace. 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 and exposure to currency fluctuations.
In addition to printers and controllers, Kentek is developing pre- and
post-processing devices such as staplers, stackers and media feeders that are
targeted for specialized needs of Kentek's customers. By focusing on the needs
of specific vertical markets, the Company believes it can increase its
competitive position in the mid-range market.
The Company maintains product development centers in Boulder, Colorado
for printer engine, controller and software development, and in Nagano, Japan,
for printer engine and paper handling device design. As of June 30, 1998 the
Boulder facility employed 77 full time and contract engineering staff and Nagano
employed 32 full-time and contract engineering staff. The Company's R&D
expenditures for fiscal years ended June 30, 1998, 1997, 1996 were $9,671,000,
$8,601,000 and $6,175,000 respectively.
CUSTOMERS, MARKETING AND SUPPORT
The Company distributes its printers exclusively through sales to OEM
customers and system integrators. In fiscal 1998 net sales to each of Lexmark,
Tally and Oce Printing Systems constituted greater than 10% of the Company's
total net sales. Financial information regarding sales to principal customers is
presented in Note 8 of the notes to consolidated financial statements, which
appear elsewhere in this Form 10-K. The loss or decline of sales to Lexmark,
Tally or Oce Printing Systems would have a material adverse affect on the
Company's business, results of operations and financial condition.
Customers typically begin purchasing a printer only after they have
completed a lengthy evaluation process and integrated the printer into their
product lines. This evaluation process includes participation in the early
stages of the printer design process and qualification of production units as
they become available. In addition, before volume purchases of a commercially
available product can occur, customers must develop marketing programs,
including sales and service training. This long sales cycle makes it difficult
in the short term for the Company to recapture lost revenues through sales to
new customers or through sales of new products to existing customers.
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Kentek supports its customers through an array of sales literature,
technical support and joint sales calling on value added resellers or end-users.
The Company identifies commercial niches where there is a strong need for the
high reliability, high duty cycle and continuous operation features of Kentek
printers, then identifies new or existing customers that can penetrate that
marketplace. In this manner, Kentek is able to leverage the resources of its
sales and marketing organization. The Company has identified six key market
niches - community banking, direct mail, healthcare, insurance, forms producers
and MICR (magnetic ink character recognition) - where it believes Kentek
printers have a competitive price performance advantage. Over the last fiscal
quarter, the Company has increased its sales force in an attempt to more fully
exploit these opportunities. In fiscal 1999, the Company plans to hire
additional sales representatives in a further effort to increase printer sales
both in the above niches as well as internationally.
Consumable supply products for Kentek's printers, excluding toner, are
manufactured exclusively by Kentek and distributed principally through its
customers. In addition, certain consumable supplies are distributed through
third party resellers. Customers sell these consumable supply products and spare
parts directly to their customers through resellers of their computer systems,
or to independent supplies resellers for sale to such customers. The Company
also sells its products directly to supplies distributors, where such sales do
not adversely affect the Company's OEM customers. The Company purchases toner
manufactured exclusively to Kentek's specifications by outside suppliers.
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 2002. In
order to do so, IBM would be required to purchase such consumable supplies from
Lexmark for resale by IBM or to incur engineering, tooling and manufacturing
costs to enter the business of supply consumables for its customers.
As of June 30, 1998, the Company's sales and marketing organization
consists of nineteen persons, of whom seventeen are based in three locations in
the United States, and two are located at a single office in Europe. The Company
complements its field sales support with in-house technical sales personnel and
a product support department to provide technical training and product support
to its customers. Financial information about foreign and domestic sales,
operating income and assets is presented in Note 12 of the notes to consolidated
financial statements, which appear elsewhere in this Form 10-K.
The Company provides a two-year warranty against defects in the
Company's printer products. The Company warrants its consumable supply products
against manufacturing defects with an industry standard "out-of-box" warranty.
Use of consumable supply products not manufactured or approved by Kentek voids
the user's warranty for both the printer and the consumable supply products. The
Company believes that its commitment to quality has resulted in low warranty
expense. In the fiscal years ended June 30, 1998, 1997, and 1996, the Company
processed warranty claims totaling $247,751, $300,883 and $358,634 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
exclusively to Kentek's specifications by outside suppliers.
The Company procures all of its component parts from outside suppliers
including proprietary components associated with the production of both the
printer products and the consumable supply products. Although the Company
generally purchases from multiple vendors, certain of the Company's parts and
components are obtained entirely or substantially from a single source. The
Company owns all of the unique tooling and mask work used for production of
these parts. The tools for producing component parts of the printer engines
reside with component suppliers in Japan, while tooling designed and produced
for manufacturing the components of the consumable supply products are located
mostly in the United States. The Company employs proprietary ASICs in its
controller products and relies on contract manufacturers to assemble its printed
circuit boards. In Management's opinion, adequate sources of supply exist to
maintain current production levels. The Company currently sources over 70% of
its piece-part volume and approximately 50% of the cost of the components for
its consumable supplies in the United States. The Company believes that this has
reduced its manufacturing costs and also reduced its exposure to currency
fluctuation.
The Company has significant operations in Japan, where certain
components of its printers are sourced, designed and manufactured. Operating
expenses and production costs related to Kentek's Japanese operations are
subject to fluctuations in the dollar-yen exchange rate. The Company mitigates a
portion of its currency fluctuation risk through a contractual risk sharing
provision included in certain of its customer agreements that provides for
adjustment of sales price in accordance with fluctuations in exchange rates as
well as through the purchase of forwards in the foreign exchange market. See
Item 7a.
In November 1996, the Company completed the sale of its 16,000 square
foot facility in Japan. The facility had most recently been used for the
manufacture of consumable supplies and was put up for sale when Kentek
transferred its manufacturing to the United States.
BACKLOG
Aggregate backlog as of June 30, 1998 was approximately $6.4 million,
compared to approximately $9.2 million as of June 30, 1997. In both fiscal 1998
and 1997, a major customer of the Company placed orders for delivery of product
for a time horizon greater than three months If these excess orders were
excluded from backlog calculations, total backlog would be approximately $5.1
million in fiscal 1998 and $6.8 million in fiscal 1997. The reduction in
normalized backlog is primarily due to the reduction in consumable supplies
orders from Lexmark resulting from the decline in the installed base of IBM
branded 12 and 24-ppm printers.
Backlog consists of customer orders, the majority of which are
scheduled for shipment within three months following the order date. The Company
also receives orders for immediate shipment, which may not be reflected in
backlog at any given time. Purchasers of standard products may generally cancel
or reschedule orders without significant penalty, and, accordingly, the
Company's backlog at any time is not necessarily indicative of
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future sales. While the Company has operated historically with a 45 to 60 day
backlog of orders, results of operations for a given quarter are significantly
dependent on orders booked and shipped during that quarter, and increasingly
becoming more dependent on orders received during the quarter.
COMPETITION
The Company competes with many companies in the printer segment of its
business, including Hewlett-Packard, Hitachi/Dataproducts, QMS, Konica, Ricoh
Canon, Xerox and Fuji-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, Tally and Printronix. The Company
expects increased competition from established and emerging printer
manufacturers and resellers, including Fujitsu, Kodak and Minolta. As a result
of the complexity of the printer and consumable supplies manufacturing and
distribution businesses, many of the Company's principal customers are also
current or potential competitors, including IBM, Oce Printing Systems,
Printronix and Tally. In addition, the Company's consumable supplies products
are increasingly being remanufactured by third parties; however, the majority of
customers still purchase the Company's unique consumable supplies. 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.
PROPRIETARY RIGHTS
The Company regards much of its hardware and software as proprietary
and relies on a combination of patent, copyright, trademark and trade secret
laws, employee and third-party non-disclosure agreements, and other methods to
protect its products and technology. As of June 30, 1998, the Company had 25
U.S. patents, 12 German patents and 11 United Kingdom patents, all of which will
expire in the period between July 2003 and September 2008. There can be no
assurance, however, that the patents held by the Company will protect the
Company's technology or provide meaningful competitive advantage. In addition,
there can be no assurance that measures taken by the Company to protect its
products and technology will be adequate or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technologies. In addition, the Company has not applied
for patents in Japan. Moreover, the laws of some foreign countries may not
protect the Company's proprietary rights to the same extent as the laws of the
United States. Other companies may 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 and financial statements. Should the Company's products be
found to infringe a third party's protected technology, the Company could be
required to pay damages to the infringed party or be enjoined from manufacturing
and selling such products. The Company could also incur substantial costs to
redesign its products or to defend any legal action taken against it.
EMPLOYEES
As of June 30, 1998, the Company had a total of 257 employees including
197 full-time and 60 part-time or contract. There were 76 full-time and 25
part-time employees in manufacturing, 19 full-time employees in sales and
marketing, and 24 full-time and four part-time employees in general and
administrative functions. In addition, 78 full-time and 31 part-time employees
were engaged in research and development. Of the 257 employees, 188 are located
in the U.S., 67 in Japan and two in Europe. The Company's employees are not
represented by any union, and the Company believes that its relationships with
its employees are good.
ITEM 2. PROPERTIES
Kentek leases its main facilities in Boulder, Colorado and Nagano,
Japan. In Boulder, the Company leases five 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; an approximately 11,000 square foot
facility for consumable supplies recycling; an approximately 7,200 square foot
building for engineering design work; and an approximately 13,800 square foot
facility for future manufacturing of the KW60 printer. In Nagano, the Company
leases a total of approximately 23,500 square feet at four separate sites for
manufacturing, warehousing, and research and development purposes. The Company
also leases office space for sales offices in Allen Park, Michigan, Melbourne,
Florida and in Gorinchem, The Netherlands. Management believes that the Company
has adequate facilities for the conduct of current and future operations.
Furthermore, future lease renewals and/or new locations are expected to
approximate current rental payments.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved with certain claims and disputes incidental to
its business. The Company currently believes the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
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 completion of this lawsuit had no material impact on the Company's
financial statements for the year ended June 30, 1997. On December 31, 1996, the
Company settled the lawsuit with 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 Company's financial statements for the
year ended June 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the Registrant's fiscal year ended June 30, 1998.
7
<PAGE> 8
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER MATTERS
Market Price and Dividend Information
The Company's Common Stock began trading publicly on the NASDAQ
National Market under the ticker symbol KNTK on April 17, 1996. Prior to that
date, there was no public market for the Common Stock. As of June 30, 1998,
7,137,235 shares of Common Stock were outstanding and the Company had
approximately 120 holders of record of the Common Stock, which figure does not
include those stockholders whose certificates are held by nominees. The table
below sets forth the per share quarterly high and low closing prices of the
Common Stock since the Company's initial public offering on April 17, 1996 as
reported on the NASDAQ National Market. A cash dividend of $.02 per share for
the fourth quarter was declared on August 26, 1998. It is anticipated that the
Company will continue to declare quarterly dividends; however, any payment of
future dividends will be at the discretion of the Board of Directors and will
depend on, among other things, the Company's earnings, financial condition and
capital requirements.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 6/30/96 HIGH LOW
------------------------- ---- ---
<S> <C> <C>
4th Quarter $15.50 $8.00
FISCAL YEAR ENDED 6/30/97
-------------------------
1st Quarter $10.75 $4.25
2nd Quarter 6.50 4.38
3rd Quarter 7.38 5.63
4th Quarter 8.25 6.19
FISCAL YEAR ENDED 6/30/98 HIGH LOW
------------------------- ---- ---
1st Quarter $10.38 $6.75
2nd Quarter 9.38 6.25
3rd Quarter 8.88 6.75
4th Quarter 9.38 7.88
</TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SUMMARY OF OPERATIONS
---------------------
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $45,053 $56,460 $74,381 $70,192 $78,867
Operating income 4,243 7,249 13,277 6,406 10,026
Net income 4,977 4,761 13,102 5,035 9,647
PER SHARE DATA: (a)
Net income per basic share $ 0.70 $ 0.70 $ 6.59 $ 6.02 $11.54
Net income per diluted share 0.70 0.69 2.45 1.02 2.01
Weighted average shares:
Basic 7,068 6,849 1,987 836 836
Diluted 7,143 6,924 5,344 (b) 4,934 (c) 4,791 (c)
Cash dividends declared $ 0.08 $ 0.08 $ 0.00 $ 0.00 $ 0.00
BALANCE SHEET DATA:
Working capital $53,128 $48,061 $42,860 $25,506 $17,870
Total assets 61,472 57,652 60,245 39,711 45,450
Long-term debt -- -- 115 6,651 5,864
Total liabilities 5,755 6,991 14,078 17,027 29,692
Total stockholders' equity 55,717 50,661 46,167 22,684 15,758
</TABLE>
(a) Net income per share data have been retroactively restated to give effect
for the adoption of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share".
(b) Weighted average shares have been calculated based on the average market
price per share from the date of the IPO to year-end.
(c) Weighted average shares have been calculated based on Management's estimate
of the market value per share prior to the IPO.
8
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Registrant's Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Form 10-K.
OVERVIEW
The Company sells mid-range, non-impact printers and related consumable
supplies and spare parts. Since 1985, more than 80,000 printers have been sold
and, as a result, the sale of consumable supplies and spare parts represents a
majority of the Company's net sales. From 1985 to 1991, the Company sold its
printers, consumable supplies and spare parts exclusively to IBM. Since 1991,
the Company has sought to reduce its dependence on IBM by expanding its
marketing efforts to other OEMs. In 1995, IBM formally announced its intention
to buy a competitor's line of mid-range printers. Accordingly, sales of
printers, consumable supplies and spare parts have continued to decrease as
older printers are taken out of service thus reducing the installed base of
customers who purchase consumable supplies and spare parts.
The Company continues to manufacture its current printer models in
Japan and is therefore subject to fluctuations in cost related to the dollar-yen
exchange rate. The Company is developing the KW60 printer to meet the evolving
needs of the mid-range printer market and is manufacturing this printer in the
United States.
OPERATING RESULTS
COMPARISON OF FISCAL YEAR 1998 TO FISCAL YEAR 1997
Net Sales. Net sales decreased 20.2% from $56,460,000 in fiscal 1997 to
$45,053,000 in fiscal 1998. Printer sales constituted 14.8% and 15.6%,
respectively, of net sales in fiscal 1997 and 1998. Consumable supplies and
spare parts constituted 85.2% and 84.4%, respectively, of net sales in fiscal
1997 and 1998. The Company derives the majority of its revenue from the ongoing
sales of consumable supplies and spare parts to support its installed base. As
the installed base continues to decline, due to end of life and replacement, the
corresponding decrease in sales could have a material adverse effect on the
Company's business, results of operations and financial condition.
Printer Sales. Printer sales revenue decreased by 15.9% from $8,370,000
in fiscal 1997 to $7,041,000 in fiscal 1998. This decrease is due primarily to
increased competition in the printer market.
Consumable Supplies and Spare Parts Sales. Sales of consumable supplies
and spare parts decreased by 20.9% from $48,090,000 in fiscal 1997 to
$38,012,000 in fiscal 1998. This decrease was due to a declining IBM printer
installed base, which resulted in lower consumable supply sales as well as an
increase in market competition by third party remanufacturers of consumable
supplies.
Gross Profit. Gross profit decreased by 12.6% from $26,017,000 in
fiscal 1997 to $22,729,000 in fiscal 1998. The gross margin percentage increased
from 46.1% to 50.4% in the same period. The shift of sales from printers to
consumable supplies and spare parts, which have a higher gross margin,
contributed to the improved gross margin percentage. The decrease in the
Company's reserves for obsolete inventories and the continued strengthening of
the dollar in relation to the Japanese yen also contributed to the improved
gross margin percentage. The Company continues to focus on inventory management
and reduction of slow moving items.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 13.3% from $10,167,000 in fiscal 1997 to
$8,815,000 in fiscal 1998. The decrease was a result of the sale of the
Company's property in Japan, a decrease in sales and marketing expense and lower
legal expenses due to settlement of all pending litigation.
Research and Development Expense. Research and development expenses
increased by 12.4% from $8,601,000 in fiscal 1997 to $9,671,000 in fiscal 1998.
Fiscal 1998 includes a significantly higher level of expenses associated with
the development of prototype KW60 printers and an increase in salary expense of
approximately $575,000. The development staff has increased by more than 50
personnel and the Company plans to spend more than 21% of fiscal 1999 sales on
research and development expenses.
Other Income (Expense). Other income (expense) increased from
$1,377,000 in fiscal 1997 to $3,314,000 in fiscal 1998. This increase reflects a
one-time book loss of $568,000 related to the sale of the Company's property in
Japan recorded in fiscal 1997. The remaining increase of approximately
$1,000,000 reflects better performance of investments and marketable securities
as well as more cash available to invest in 1998.
Income Tax Expense. Income tax expense for fiscal 1997 was $3,865,000
compared to $2,580,000 for fiscal 1998. Income tax expense for fiscal 1997
included additional tax expense related to the sale of the Company's property in
Japan. During fiscal 1998, the Company filed amended prior year tax returns,
utilizing available research and development credits, which resulted in a
substantial refund. The effective tax rate for fiscal 1997 was 44.8% compared to
34.1% in fiscal 1998. A reconciliation of the income tax rates to the federal
statutory rate is presented in Note 7 of the notes to consolidated financial
statements.
COMPARISON OF FISCAL YEAR 1997 TO FISCAL YEAR 1996
Net Sales. Net sales declined 24.1% from $74,381,000 in fiscal 1996 to
$56,460,000 in fiscal 1997. Printer sales constituted 24.8% and 14.8%,
respectively, of net sales in fiscal 1996 and fiscal 1997. Consumable supplies
and spare parts sales constituted 75.2% and 85.2%, respectively, of net sales in
fiscal 1996 and fiscal 1997.
Printers. Printer sales decreased 54.6% from $18,436,000 in fiscal 1996
to $8,370,000 in fiscal 1997. The decrease in printer sales was due to two major
factors: 1) the introduction by Hewlett-Packard of a competing 40 page per
minute printer, and 2) the acquisition of Siemens Nixdorf (the Company's largest
printer customer) by Oce. Although Oce is currently purchasing printers from
Kentek, annual printer volumes sold to Oce declined by 63.5% from fiscal 1996 to
fiscal 1997.
9
<PAGE> 10
Consumable Supplies and Spare Parts Sales. Consumable supplies and
spare parts sales declined 14.0% from $55,945,000 in fiscal 1996 to $48,090,000
in fiscal 1997. This decrease was due in part to customers returning to normal
inventory levels after a large build-up in the last six months of fiscal 1996.
In addition, lower printer sales have an immediate impact of reducing related
consumable supplies and spare parts sales. Finally, older models of installed
printers are being removed from service, reducing the amount of consumable
supplies sales.
Gross Profit. Gross profit declined 13.2% from $29,973,000 in fiscal
1996 to $26,017,000 in fiscal 1997. The gross margin percentage increased from
40.3% to 46.1% in the same period. The decrease in gross profit is directly
attributable to the reduction in net sales between the two years. The improved
gross margin percentage was primarily caused by reduced manufacturing and
material costs as the Company realizes the benefit of moving supplies
manufacturing from Japan to the United States. Furthermore, the shift of sales
from printers to consumable supplies and spare parts, which have a higher gross
margin, contributed to improved gross margin percentage. The continued
strengthening of the dollar in relation to the Japanese yen also assisted in
improving the gross margin percentage.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 3.4% from $10,521,000 in fiscal 1996 to
$10,167,000 in fiscal 1997. The decrease is a result of reduced profit sharing
bonuses and sales commissions.
Research and Development Expenses. Research and development expenses
increased 39.3% from $6,175,000 in fiscal 1996 to $8,601,000 in fiscal 1997. The
increase is principally attributable to expenses associated with the continued
development of the KW60 product line.
Other Income (Expense). Other income (expense) increased from $188,000
of income in fiscal 1996 to $1,377,000 of income in fiscal 1997. This increase
was realized as a result of greater cash available for investment, partially
offset by an $568,000 loss recorded in November 1996 related to the sale of the
Company's property in Japan.
Income Tax Expense. Income tax expense for fiscal 1996 was $363,000, or
an effective tax rate of 2.7% compared with income tax expense of $3,865,000, or
an effective tax rate of 44.8% in fiscal 1997. During fiscal 1996, the Company
recognized a deferred tax asset of $3,656,000 as a result of temporary timing
differences and the elimination of a valuation allowance that was recorded in
prior years. Recognition of a deferred tax asset reduced income tax expense for
fiscal 1996. During fiscal 1997, the Company incurred additional tax expense
related to the sale of the property in Japan. A reconciliation of the income tax
rates to the federal statutory rate is presented in Note 7 of the Notes to
Consolidated Financial Statements appearing elsewhere in this Form 10-K.
INTERNATIONAL SALES
Direct sales to customers not located in the United States represented
7.2%, 6.0% and 11.8% of the Company's total sales in fiscal years 1998, 1997 and
1996, respectively. Substantially all of the sales made by the Company in
international markets are priced in dollars to eliminate currency risk. The
Company's international sales are concentrated in Europe, and for the year ended
June 30, 1998, 29.5% and 41.4%, respectively, of such sales were to customers
located in Germany and The Netherlands. The Company believes that its recent
decline in international printer sales is primarily attributable to a change in
practice by certain OEM customers to purchase more products in the United States
for resale abroad.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations historically through internally
generated cash, investing, subordinated debt and equity financing, and bank
borrowings. In November 1996, the Company sold its manufacturing facility in
Japan. The proceeds from the sale were used to pay off the Company's short-term
debt and the remaining mortgage on the property.
Changes in cash and cash equivalents during fiscal 1998 resulted in a
net decrease of $1,869,000 as compared to a decrease of $7,776,000 during fiscal
1997. In fiscal 1997, principal payments of long-term debt and capital lease
obligations were $5,150,000 compared to no debt payments and $7,000,000 used for
investment in limited partnerships in fiscal 1998. The purchase of
available-for-sale securities was $2,451,000 less in fiscal 1998. The proceeds
from sales of available-for-sale securities were $6,886,000 more in fiscal 1998,
most of which were invested in the limited partnerships. See Note 2 to the notes
to consolidated financial statements for discussion on the Company's investment
strategies.
Changes in cash and cash equivalents during fiscal 1997 resulted in a
net decrease of $7,776,000 as compared to an increase of $19,603,000 during
fiscal 1996. The primary reasons for this decrease were net purchases of
marketable securities of $8,000,000 and purchases of available-for-sale
securities of $13,237,000, as well as the payoff of the long-term debt
associated with the sale of the Company's property in Japan.
The Company anticipates significant expenses related to research and
development of the KW60 printer in fiscal 1999 that will result in lower cash
flows from operations.
The Company has a $5,000,000 unsecured line of credit with a bank that
expires in October 1998. The Company intends to renew this line of credit in
fiscal 1999. As of June 30, 1998, the Company had no outstanding borrowings
under this credit facility. The Company does not actively draw on this line of
credit, and does not anticipate drawing on this line over the next several
months.
The Company's Board of Directors has authorized a stock buy-back
program with a maximum repurchase of 5% of the outstanding common shares.
Management intends to evaluate its investments and the Company's current stock
price in determining the timing and amount of the stock purchase.
As of June 30, 1998, the Company has recorded a net deferred tax asset
totaled $2,773,000, with $773,000 classified as non-current as a result of the
nature of the temporary differences. The non-current portion is attributable to
property and equipment. At June 30, 1997 the Company had recorded a $3,338,000
net deferred tax asset. The Company has determined that it is more likely than
not that it will have sufficient taxable income in future periods to realize the
corresponding tax benefit resulting from the deferred tax asset. This
determination is based on several recurring periods of profitable operations,
continuing efforts to enhance and develop existing and new customer
relationships, the Company's movement of a substantial portion of its supplies
manufacturing to the United States from Japan and the strengthening of the
dollar against the yen.
10
<PAGE> 11
Management evaluates the positive and negative evidence related to the
recoverability of its deferred tax assets on a quarterly basis and makes
appropriate adjustments.
Financial information about income taxes is presented in Note 7 of the
notes to consolidated financial statements which appear elsewhere in this Form
10-K.
The Company believes that cash flows provided by operating activities,
together with its bank line, will be sufficient to meet the Company's cash
requirements for at least twelve months from the date of this Form 10-K.
Since the first quarter of fiscal 1997, the Company has paid a
quarterly cash dividend to holders of its Common Stock equal to $.02 per share.
The Company presently intends to continue this dividend policy.
YEAR 2000 COMPLIANCE
The Company has completed and tested conversion from existing
accounting and finance software to programs that are year 2000 compliant.
Maintenance or modification costs associated with making all other internal
computer systems year 2000 compliant will be expensed as incurred. As the
Company implements solutions to the year 2000 issue, in some circumstances it
may determine that replacing existing systems, hardware, or equipment may be
more efficient and also provide additional functionality. Replacement of these
systems would be capitalized and would reduce the estimated expenses associated
with the year 2000 issue. The Company is also continuing its assessment of the
readiness of external entities, such as vendors and suppliers, which interface
with the Company and plans to have this assessment complete by June 30, 1999.
The Company believes it has adequate alternative sources of supply for the
majority of the raw materials used in the printer and consumable supplies
production should any particular vendor fail to be year 2000 compliant. The
Company continues to qualify new vendors, both in the U.S. and Japan, for
alternative sources of supply. Alternative vendors will be qualified in fiscal
year 1999.
The Company's contingency plans, if year 2000 modifications do not work
or are not ready by year 2000, relies significantly on manual procedures and
record keeping. All files will be adequately backed up as of December 31, 1999
and will be available for downloading into any spreadsheet package to facilitate
manual record keeping. Adequate hard copy reports of balances and transactions
as of December 31, 1999 will also be available to provide a complete manual
system of accounting, inventory control, shipping and receiving if required.
Subsequent to year 2000, manual systems will continue to be in place to mitigate
the risk of lost information due to any unforeseen interruptions that may occur
as a result of year 2000 issues arising after January 1, 2000.
The Company's past and present printer products incorporate software.
The Company's printer products prior to the K40DX (K2, K2+, K3, K4, K30, K31 and
K40) do not contain any real-time clock functionality and are believed to be
year 2000 compliant. The K40DX printer has a real-time clock and is believed to
be year 2000 compliant. Based on management's assessment, no material product
distribution or warranty claims are expected. Management believes that the
Company will not incur any significant product expenses related to year 2000
compliance.
Management believes that its efforts will result in year 2000
compliance. Kentek has incurred no incremental material costs associated with
year 2000 compliance, as the majority of the costs have occurred as a result of
normal upgrade procedures. The Company does not expect the future costs
associated with these procedures to be material. However, the impact on business
operations of failure by the Company to achieve compliance or failure by
external entities which the Company cannot control, such as vendors, to achieve
compliance, could be material to the Company's financial condition and results
of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share" ("EPS"). SFAS No. 128, which supersedes APB Opinion No. 15,
establishes new standards for computing and presenting EPS. The Company adopted
this Statement in fiscal year 1998. All prior period EPS data have been
restated. The adoption of this Statement had no material effect on the Company's
reported EPS amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. The Company is required
to adopt this Statement in fiscal year 1999. Reclassification of financial
statements for earlier periods provided for comparative purposes are required.
The Company has determined that the adoption of this Statement will not have a
material impact on its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which will be effective for the
Company beginning July 1, 1998. SFAS No. 131 redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has determined
that the adoption of this statement will not have a material impact on its
financial statement disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The accounting
provisions for qualifying hedges allow gains and losses recognized in the income
statement related to a hedged item to be offset by a related derivative's gains
and losses, and requires the Company to formally document, designate, and assess
the effectiveness of transactions that qualify for hedge accounting. The Company
is not required to adopt this Statement until July 1999. The Company has not
determined the impact that adopting this Statement will have on its financial
statements. However, when adopted this Statement could increase volatility in
reported earnings and other comprehensive income of the Company.
In January 1998, the American Institute of Certified Public Accountants
("AICAP") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on the accounting for
11
<PAGE> 12
computer software costs. In April 1998, the AICPA issued SOP No. 98-5,
"Reporting on the Costs of Start-up Activities." This SOP provides guidance on
the accounting for the cost of start-up activities. The Company is not required
to adopt these statements until July 2000 and does not expect the adoption of
these standards to result in material changes to previously reported amounts or
disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relate primarily to the Company's investment portfolio of cash equivalents and
marketable securities. The stated objectives of the Company's investment
guidelines are: safety of principal; liquidity; maximization of yield; and
diversification of risk. The Company places it's cash equivalent and marketable
securities investments with U.S. Treasury and federal agency obligations, high
credit quality commercial paper, obligations of corporations, banks and agencies
including notes and bonds, taxable money market preferreds, certificates and/or
time deposits of high quality commercial banks and tax exempt state and
municipal obligations. The investment portfolio includes only those securities
with active secondary resale markets to ensure portfolio liquidity.
The Company has investments in equity securities in the amount of
$11,982,000 as well as investments in two limited partnerships in the amount of
$7,000,000 that are subject to market and interest rate risk.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's investment portfolio of
debt securities. The debt security investment portfolio has a weighted average
maturity of 904 days or less. Management has historically and intends to
continue selling such investments within one year of the purchase date.
<TABLE>
<CAPTION>
MATURITY
(AMOUNTS IN THOUSANDS)
2015 AND FAIR VALUE AT
1999 THEREAFTER TOTAL JUNE 30, 1998
---- ---------- ----- -------------
<S> <C> <C> <C> <C>
Cash equivalents $3,941 $3,941 $3,941
Average interest rate 5.62% 4.81%
Commercial paper 15,756 $1,050 16,806 16,806
Average interest rate 5.77% 5.62% 5.76%
Tax-exempt investments 1,100 1,300 2,400 2,400
Average interest rate 3.74% 1.28% 2.41%
------- ------ ------- -------
Total investment portfolio $20,797 $2,350 $23,147 $23,147
======= ====== ======= =======
Average interest rate 5.64% 3.22% 5.39%
</TABLE>
The above table is based upon contractual maturity dates in the
Company's investment portfolio of debt securities. These investment securities
are subject to interest rate risk and will fall in value if market interest
rates increase. If market interest rates were to increase immediately and
uniformly by 10% from levels as of June 30, 1998, the fair value of the
portfolio would decline by approximately $3,500,000. See Note 2 to the notes to
consolidated financial statements for additional discussion regarding the
Company's investment securities.
FOREIGN CURRENCY RISK
The Company has operations in Japan, and as a result, operating
expenses are dependent on dollar-yen exchange rates. The Company has purchased
Japanese Yen forward contracts to minimize the effect of fluctuating foreign
currencies on its reported income, generally over the ensuing three months. The
forward contracts do not qualify as hedges for financial reporting purposes and
are reported in the financial statements net of changes in forward rates that
are reflected in income. Although the volatility of income over the period
covered by such contracts is reduced, increased volatility may be reported
during interim periods. The counterparties to the Company's forward contracts
consist of two financial institutions. The credit ratings and concentration of
risk of these financial institutions are monitored on a continuing basis and
present no significant credit risk to the Company. As of June 30, 1997, the
Company did not have any foreign currency forward contracts outstanding. At June
30, 1998, outstanding Japanese yen contractual amounts were as follows:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT GAINS LOSSES
(THOUSANDS)
<S> <C> <C> <C>
Japanese yen forward contracts $ 2,748 $67 $ -
</TABLE>
Based on the Company's overall currency rate exposure at June 30, 1998,
a 10% change in currency rates would not have a material effect on the financial
position, results of operations or cash flows of the Company. See Note 13 of the
notes to consolidated financial statements.
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<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports 14
Consolidated Balance Sheets as of June 30, 1998 and 1997 16
Consolidated Statements of Income for the Years Ended June 30, 1998, 1997 and 1996 17
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998, 1997 and 1996 18
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 19
Notes to Consolidated Financial Statements 20
Financial Statement Schedule II - Consolidated Valuation and Qualifying Accounts 28
</TABLE>
13
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. The consolidated statements of operations,
stockholders' equity, and cash flows and related financial statement schedule of
the Company for the year ended June 30, 1996 were audited by other auditors
whose report, dated August 9, 1996, expressed an unqualified opinion on those
statements and financial statement schedule.
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, such consolidated financial statements present fairly, in all
material respects, the financial position of Kentek Information Systems, Inc.
and subsidiaries as of June 30, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedules for each of the two years in the period ended June 30, 1998, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Denver, Colorado
August 15, 1998
14
<PAGE> 15
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 statements of income,
stockholders' equity, and cash flows of Kentek Information Systems, Inc. and
subsidiaries for the year ended June 30, 1996. Our audit also included the
consolidated financial statement schedule for the year ended June 30, 1996
listed in the Index at Item 8. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Kentek Information Systems, Inc. and subsidiaries for the year ended June 30,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule for the year ended June 30, 1996, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
BDO Seidman, LLP
Los Angeles, California
August 9, 1996
15
<PAGE> 16
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997
(THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30
-------
1998 1997
----- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $16,347 $ 18,216
Marketable securities (Note 2) 19,308 16,374
Investment in limited partnership (Note 2) 7,000 --
Accounts receivable, less allowance for doubtful accounts of
$490 and $653 5,297 6,213
Inventories (Note 3) 7,725 10,074
Deferred income taxes (Note 7) 2,000 2,628
Other 701 1,045
------- --------
Total current assets 58,378 54,550
------- --------
Property and equipment:
Land and buildings 96 117
Tooling 9,749 11,189
Furniture, fixtures and equipment 5,927 5,975
Leasehold improvements 541 502
------- --------
Total property and equipment 16,313 17,783
Less accumulated depreciation and amortization 14,519 16,062
------- --------
Property and equipment, net 1,794 1,721
------- --------
Deposits and other 1,300 1,381
------- --------
Total assets $61,472 $57,652
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,200 $ 3,324
Accrued expenses:
Income taxes 180 -
Bonus 539 618
Other 2,331 2,547
------- --------
Total current liabilities 5,250 6,489
Other 505 502
------- --------
Total liabilities 5,755 6,991
Commitments and contingencies (Note 9)
Stockholders' equity (Note 5):
Common stock, $.01 par--shares authorized, 12,000;
shares outstanding, 7,137 and 6,929 71 69
Additional paid-in capital 44,821 43,945
Foreign currency translation adjustment (988) (753)
Retained earnings 11,813 7,400
------- --------
Total stockholders' equity 55,717 50,661
------- --------
Total liabilities and stockholders' equity $61,472 $ 57,652
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales (Note 8):
Printers $7,041 $ 8,370 $18,436
Consumable supplies and spare parts 38,012 48,090 55,945
------ ------- -------
Total 45,053 56,460 74,381
Cost of sales 22,324 30,443 44,408
------ ------- -------
Gross profit 22,729 26,017 29,973
------ ------- -------
Operating expenses:
Selling, general and administrative 8,815 10,167 10,521
Research and development 9,671 8,601 6,175
------ ------- -------
Total operating expenses 18,486 18,768 16,696
------ ------- -------
Operating income 4,243 7,249 13,277
Other income, net (Note 10) 3,314 1,377 188
------ ------- -------
Income before income taxes 7,557 8,626 13,465
Income tax expense (Note 7) 2,580 3,865 363
------ ------- -------
Net income $4,977 $ 4,761 $13,102
====== ======= =======
Net income applicable to common stockholders (Note 5) $4,977 $ 4,761 $11,750
====== ======= =======
Net income per share:
Basic $ 0.70 $ 0.70 $ 6.59
====== ======= =======
Diluted $ 0.70 $ 0.69 $ 2.45
====== ======= =======
Weighted average shares:
Basic 7,068 6,849 1,987
====== ======= =======
Diluted 7,143 6,924 5,344
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 18
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS)
<TABLE>
<CAPTION>
SENIOR CONVERTIBLE CONVERTIBLE FOREIGN RETAINED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY EARNINGS
--------------- --------------- ------------ PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT)
------ ------ ------ ------ ------ ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE JUNE 30, 1995 11,005 $ 550 1,785 $ 18 836 $ 8 $ 31,484 $ 541 $ (9,917)
Conversion of preferred
stock to common (Note 5) (11,005) (550) (1,785) (18) 3,789 38 530 -- --
Sale of common stock, net
of offering costs
(Note 5) -- -- -- -- 2,200 22 15,601 -- --
Payment of excess
liquidation preference
on preferred stock
conversion (Note 5) -- -- -- -- -- -- (4,152) -- --
Foreign currency translation
adjustment -- -- -- -- -- -- -- (1,090) --
Net income -- -- -- -- -- -- -- -- 13,102
------ ------- ------ ------ ----- ------- -------- ------ -------
BALANCE JUNE 30, 1996 -- -- -- -- 6,825 68 43,463 (549) 3,185
Exercise of stock options -- -- -- -- 104 1 482 --
Dividends paid -- -- -- -- -- -- -- -- (546)
Foreign currency translation
adjustment -- -- -- -- -- -- -- (204) --
Net income -- -- -- -- -- -- -- -- 4,761
------ ------- ------ ------ ----- ------- -------- ------ -------
BALANCE JUNE 30, 1997 -- -- -- -- 6,929 69 43,945 (753) 7,400
Exercise of stock options -- -- -- -- 208 2 876 -- --
Dividends paid -- -- -- -- -- -- -- -- (564)
Foreign currency translation
adjustment -- -- -- -- -- -- -- (235) --
Net income -- -- -- -- -- -- -- -- 4,977
------ ------- ------ ------ ----- ------- -------- ------ -------
BALANCE JUNE 30, 1998 -- $ -- -- $ -- 7,137 $ 71 $ 44,821 $(988) $11,813
====== ======= ====== ====== ===== ======= ======== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 19
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,977 $ 4,761 $ 13,102
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,278 1,281 1,648
Loss on disposal of property and equipment 38 777 191
Deferred income tax expense (benefit) 565 318 (3,656)
Unrealized gains on forward exchange contracts and
trading securities (500) (159) --
Realized and unrealized gains on available-for-sale
securities (1,558) (1,345) --
Changes in operating assets and liabilities:
Trading securities, net (3,254) (8,000) --
Accounts receivable 916 885 724
Inventories 2,008 3,794 (2,122)
Other current assets 28 (429) 129
Other assets (8) 758 (181)
Accounts payable and accrued expenses (351) (1,937) (118)
------- --------- --------
Net cash provided by operating activities 4,139 704 9,717
------- --------- --------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities (10,786) (13,237) --
Investments in limited partnerships (7,000) -- --
Purchase of equipment (1,226) (1,062) (832)
Proceeds from sale of available-for-sale securities 13,233 6,367 --
Proceeds from sale of equipment 3 4,928 12
------- --------- --------
Net cash used in investing activities (5,776) (3,004) (820)
------- --------- --------
FINANCING ACTIVITIES:
Principal payments of long-term debt and capital lease obligations -- (5,150) (85)
Proceeds from issuance of common stock 878 483 17,600
Dividends paid (564) (546) --
Payment of offering costs -- -- (1,977)
Payment of excess liquidation preference on preferred stock -- -- (4,152)
------- --------- --------
Net cash provided by (used in) financing activities 314 (5,213) 11,386
------- --------- --------
Effect of exchange rate changes on cash (546) (263) (680)
------- --------- --------
Net increase (decrease) in cash and cash equivalents (1,869) (7,776) 19,603
Cash and cash equivalents, beginning of year 18,216 25,992 6,389
------- --------- --------
Cash and cash equivalents, end of year $16,347 $ 18,216 $ 25,992
======= ========= ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 7 $ 25 $ 233
Income taxes 2,392 5,304 3,251
</TABLE>
Non-cash activities: Preferred stock of $568,000 was converted into common
stock during the year ended June 30, 1996.
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kentek Information Systems, Inc. (the "Company") is a supplier of
mid-range, non-impact laser printers and related consumable supplies and spare
parts. The Company was incorporated under the laws of the State of Delaware in
1981. The Company's operations in the United States ("U.S.") consist of
manufacturing facilities in Boulder, Colorado, which are used to manufacture the
consumable supply products. 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 Company
designs and engineers its printer engines and supervises their assembly under
contract with a Japanese company. The Company distributes its printers,
consumable supplies and spare parts exclusively through sales to OEM customers
and systems integrators.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries, Kentek
Europe BV, Kentek GmbH and Nippon Kentek. All significant intercompany balances
and transactions have been eliminated in consolidation.
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. Resulting translation adjustments are accumulated in the
foreign currency translation adjustment component of stockholders' equity.
Currency transaction gains and losses are recognized in net income currently.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In addition, significant estimates are included in the accompanying
financial statements related to reserves for inventory obsolescence,
uncollectible accounts receivable and warranty reserves which are based upon
historical and developing trends, aging of items, and other information deemed
pertinent to estimate collectibility and realizability. It is possible that
these reserves may change within a year, and the effect of the change could be
material to the consolidated financial statements.
Cash Equivalents - The Company considers cash, money market accounts
and all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Marketable Securities - Management has determined that the Company's
marketable securities portfolio consists of both available-for-sale and trading
securities.
Marketable securities classified as available-for-sale are available to
support current operations and to take advantage of other investment
opportunities. These securities are stated at fair value based upon market
quotations. Unrealized gains and losses on available-for-sale securities were
not significant. Realized gains and losses are included in other income, net.
Marketable securities classified as trading securities are carried at
fair value based upon market quotations. Net realized and unrealized gains and
losses on trading securities are included in other income, net.
Concentrations of Credit Risk - The Company's financial instruments
that are exposed to concentrations of credit risk consist primarily of cash and
cash equivalent balances in excess of the insurance provided by federal
insurance authorities, marketable securities and accounts receivable.
The Company's cash equivalents are placed with a major financial
institution and are primarily invested in investment grade commercial paper with
an average original maturity of three months or less and money market accounts.
The Company's marketable securities consist of commercial paper and various
equity securities. The exposure to loss resulting from the concentrations of
credit risk with respect to accounts receivable is limited due to generally
short payment terms and the customers' dispersion across geographic areas. The
Company performs ongoing credit evaluation of its customer's financial condition
and generally requires no collateral from its customers.
Inventories - Inventories are valued at the lower of cost (determined
primarily by the weighted moving average method) or market.
Property, Equipment and Depreciation - Property and equipment are
stated at cost. Depreciation is computed by the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Tooling 3
Furniture, fixtures and equipment 3-7
Leasehold improvements Term of Lease
</TABLE>
Impairment of Long-lived Assets - The carrying value of long-lived
assets and certain identified intangible assets held and used by the Company are
evaluated for impairment whenever there is an event or change in circumstances
that indicates that such assets have been impaired or that the carrying value of
such assets might not be recoverable.
20
<PAGE> 21
Income Taxes - The Company accounts for income taxes in accordance with
the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement basis and the income
tax basis of assets and liabilities that will result in taxable or deductible
amounts in the future. Such deferred income tax computations are based on
enacted tax laws and rates applicable to the years in which the differences are
expected to affect taxable income.
Stock Option Plans - The Company accounts for stock-based compensation
to employees and directors using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation".
Net Income Per Share - During 1998, the Company adopted SFAS No. 128,
"Earnings Per Share". SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and supercedes APB Opinion No. 15 and its
related interpretations. All prior periods presented have been restated in
accordance with SFAS No. 128. SFAS No. 128 replaces the presentation of primary
EPS with a presentation of basic EPS, which excludes dilution, and requires dual
presentation of basic and diluted EPS for all entities with complex capital
structures. Diluted EPS is computed similarly to fully diluted EPS pursuant to
APB Opinion No. 15. For the year ended June 30, 1996, net income has been
reduced by the Excess Liquidation Preference ("ELP") (Note 5) attributable to
the Senior Convertible Preferred Stock ("SCPS") totaling $1,352,000, in
computing net income per share. Stock options were omitted from the denominator
because they were antidilutive and were not material. A reconciliation of the
numerator and denominator used in the calculation of basic and diluted earnings
per share is presented below.
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------
Net income $4,977
Basic net income per share ======
Income available to
Common stockholders $4,977 7,068 $0.70
====== =====
Effect of stock options 75
-----
Diluted net income per share $4,977 7,143 $0.70
====== ===== =====
FOR THE YEAR ENDED JUNE 30, 1997
- --------------------------------
Net income $4,761
Basic net income per share ======
Income available to
Common stockholders $4,761 6,849 $0.70
====== =====
Effect of stock options 75
-----
Diluted net income per share $4,761 6,924 $0.69
====== ===== =====
FOR THE YEAR ENDED JUNE 30, 1996
- --------------------------------
Net income $13,102
Basic net income per share =======
Income available to
common stockholders $11,750 1,987 $6.59
======= =====
Effect of convertible preferred stock 3,357
-----
Diluted net income per share $11,750 5,344 $2.45
======= ===== =====
</TABLE>
Revenue Recognition and Product Warranty - Sales of printers,
consumable supplies and spare parts are recorded upon shipment to customers. The
Company warrants its printers against defects in design, materials and
workmanship for two years. A provision for estimated future costs relating to
warranty expense is recorded when products are shipped.
Research and development - Costs incurred in connection with research
and development activities are expensed as incurred.
New Accounting Pronouncements- In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income." SFAS N. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. The Company is required to adopt this statement in fiscal year 1999.
Reclassification of financial statements for earlier periods provided for
comparative purposes are required. The Company has determined that the adoption
of this Statement will have no material impact on its financial disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which will be effective for the
Company beginning July 1, 1998. SFAS No. 131 redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has determined
that the adoption of this statement will not have a material impact on its
financial statement disclosures.
21
<PAGE> 22
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The accounting
provisions for qualifying hedges allow gains and losses recognized related to a
hedged item in the income statement to be offset by related derivative's gains
and losses, and requires the Company to formally document, designate, and assess
the effectiveness of transactions that qualify for hedge accounting. The Company
is not required to adopt this Statement until July 1999. The Company has not
determined its method or timing of adopting this Statement or the impact on its
financial statements. However, when adopted this Statement could increase
volatility in reported earnings and other comprehensive income of the Company.
In January 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on the accounting for computer software costs. In April 1998,
the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-up Activities."
This SOP provides guidance on the accounting for the cost of start-up
activities. The Company is not required to adopt these statements until July
2000 and does not expect the adoption of these standards to result in material
changes to previously reported amounts or disclosures.
Reclassifications - Certain prior year amounts have been reclassified
to conform with the current year presentation.
2. INVESTMENTS
Marketable Securities - The Company accounts for its investments in
marketable securities in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires an entity to
categorize its investments as held-to-maturity, available-for-sale, or trading
securities, according to the use of investment, and to record unrealized gains
and losses in net income or as separate component of stockholders' equity,
depending on the investment's classification. Management determines the proper
classifications of investments in obligations with fixed maturities and
marketable equity securities at the time of purchase and reevaluates such
designations as of each balance sheet date. As of June 30, 1998 and 1997,
available-for-sale and trading securities consisted of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(THOUSANDS)
-----------
<S> <C> <C> <C> <C>
JUNE 30, 1998
Available-for-sale securities
Bank and corporate debt $ 7,326 $ - $ - $ 7,326
Trading securities
Equity 11,549 433 - 11,982
Total $18,875 $ 433 $ - $19,308
JUNE 30, 1997
Available-for-sale securities
Bank and corporate debt $ 8,215 $ - $ - $ 8,215
Trading securities
Equity 8,000 159 - 8,159
Total $16,215 $ 159 $ - $16,374
</TABLE>
As of June 30, 1998, securities classified as available-for-sale had
contractual maturity dates ranging from July 1998 to April 2029, the cost for
these securities approximated their fair value as of June 30, 1998 and 1997.
During 1998 and 1997, proceeds from sales of available-for-sale securities
approximated $13,233,000 and $6,367,000, respectively. The Company uses the
specific identification method to determine cost for available-for-sale
securities. Gross unrealized gains and losses on sales of available-for-sale
securities were not material in 1998 and 1997. Net unrealized holding gains on
trading securities of $433,000 and $159,000 have been included in net income for
1998 and 1997, respectively.
Investments in Limited Partnerships - As of June 30, 1998, the Company
has investments in two limited partnerships. The first investment of $3,000,000
was made in June 1998 in the HCM High Yield Opportunity Fund, LP ("HCM"). The
prospectus for HCM indicates that HCM's investment objective is to provide
investors with risk-adjusted rates of return through a portfolio structured to
generally have the following characteristics: low volatility; short duration
(generally less than 2 years); and an overall high degree of liquidity in the
underlying securities. The partnership will attempt to achieve these objectives
through a two-pronged investment strategy: an emphasis on non-investment grade
fixed income financial instruments (including bonds and bank loans) that, in
HCM's judgement, are likely (i) to be repurchased by the issuer at a premium
within twelve to eighteen months as a result of the occurrence of a corporate
event such as an IPO, asset sale, merger or refinancing and (ii) active trading
of the portfolio. Withdrawals from the partnership may be made quarterly with 30
days notice. The second investment of $4,000,000 was also made in June 1998 in
Cerberus, LP ("CLP"). The prospectus for CLP indicates that CLP invests in
publicly traded and private debt, trade claims, large and middle market bank
loans, distressed real estate and public and private equity, including post
bankruptcy equity. To control risk, assets are broadly diversified among 60 or
more positions. Withdrawals from the fund may be made each June 30 and December
31 with 90 days notice. The Company accounts for the investments in limited
partnerships at cost. Based on information provided by HCM's and CLP's General
Partners, the Company's proportionate share in the fair value of each
partnership as of June 30, 1998 approximated the Company's carrying value for
each investment.
22
<PAGE> 23
3. INVENTORIES
Inventories consist of the following net of allowance:
<TABLE>
<CAPTION>
JUNE 30
-------
1998 1997
---- ----
(THOUSANDS)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $4,072 $ 6,064
Raw materials 3,653 4,010
----- -------
$7,725 $10,074
====== =======
</TABLE>
4. REVOLVING CREDIT AGREEMENT
The Company has an unsecured revolving line-of-credit agreement with a
bank, which expires October 31, 1998. The available loan amount is $5,000,000.
The line-of-credit agreement provides for interest at the bank's prime rate. The
Company must meet certain financial ratio requirements under the terms of the
agreement. At June 30, 1998 and 1997, no amounts were drawn on the
line-of-credit.
5. CAPITAL STOCK
The Company's Board of Directors have authorized a stock buy-back
program with a maximum repurchase of 5% of the outstanding common shares.
Management intends to evaluate its investments and the Company's current stock
price in determining the timing and amount of stock repurchase. During 1998,
1997 and 1996, the Company declared and paid cash dividends per common share
equal to $0.08, $0.08 and nil, respectively.
On April 17, 1996, the Company completed its IPO of 2,200,000 shares of
common stock in the offering at $8 per share. In addition, non-management
stockholders sold an additional 675,000 shares. The Company received $15,623,000
in proceeds, net of offering costs of $1,977,000.
Effective immediately prior to the IPO, the outstanding SCPS and
Convertible Preferred Stock ("CPS") were converted into common stock and the
SCPS and CPS authorized shares were canceled. The SCPS was voting and had a
primary liquidation preference of $1 per share, plus the aggregate amount of the
ELP. ELP accrued on the SCPS at an annual rate of 12%. On April 23, 1996, the
ELP of approximately $4,152,000 was paid to SCPS holders, and the SCPS shares
were converted into common stock at a conversion rate of 1.3869245 shares of
common stock per SCPS share. (Note 1).
6. STOCK OPTION PLAN
The Company currently has one stock option plan, the 1992 Stock Option
Plan ("the Plan"). The Plan provides for the grant of incentive stock options to
officers, directors, and employees of the Company. The Company has reserved
1,250,000 shares of its authorized common stock for stock options for issuance
in connection with the plan. The Plan provides for the grant of stock options,
including incentive stock options and non-statutory stock options. At June 30,
1998, there were 426,148 shares available for future stock option grants. The
following table summarizes information on stock option activity for the Plan:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED AVERAGE
NUMBER OF SHARES PER SHARE EXERCISE PRICE PER SHARE
<S> <C> <C> <C>
Outstanding at
July 1, 1995 344,112 $3.24 - $6.49 $4.13
Granted 378,575 $6.49 $6.49
Expired (41,685) $3.24 - $6.49 $4.43
--------
Outstanding at
June 30, 1996 681,002 $3.24 - $8.38 $5.43
Granted 117,000 $6.00 - $7.88 $6.48
Exercised (104,817) $3.24 - $6.49 $4.61
Canceled and expired (45,772) $3.24 - $8.38 $6.61
--------
Outstanding at
June 30, 1997 647,413 $3.24 - $7.88 $5.67
Granted 109,500 $7.94 - $9.50 $8.68
Exercised (207,890) $3.24 - $6.49 $4.22
Canceled and expired (37,878) $3.24 - $6.63 $5.72
--------
Outstanding at
June 30, 1998 511,145 $3.24 - $9.50 $6.90
=======
</TABLE>
Options issued to officers and employees under the Plan vest
proportionately over three years on each of the first, second, and third
anniversary dates of the option grant date and expire in five years. Options
granted subsequent to July 1, 1997 have a ten-year life. Options issued to
directors under the Plan vest 100% six months after the grant date and expire in
ten years.
The Company accounts for stock options issued to officers, directors and
employees using the intrinsic value method prescribed
by APB No. 25 and has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for options issued
under the Plan. Had compensation expense for the Plan been determined based on
the fair value at the grant date of awards under those plans consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
23
<PAGE> 24
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
6/30/98 6/30/97 6/30/96
------- ------- -------
<S> <C> <C> <C>
Net income - as reported $4,977,000 $4,761,000 $13,102,000
Net income - pro forma 4,511,000 4,437,000 12,995,000
Net income per share - as reported
Basic $0.70 $0.70 $6.59
Diluted 0.70 0.69 2.45
Net income per share - pro forma
Basic $0.64 $0.65 $6.54
Diluted 0.64 0.64 2.43
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model. The following assumptions
used for grants in 1998, 1997 and 1996; risk-free interest rate of 5.20% in
1998, 6.00% in 1997 and 6.47% in 1996; annual dividend of $.08; expected life of
five years; and expected volatility of 53.21% in 1998, 57.00% in 1997 and 51.50%
in 1996. The outstanding stock options at June 30, 1998 have a weighted average
remaining contractual life of four years. The weighted average fair value of
options granted in 1998, 1997 and 1996 were $4.27, $3.16 and $3.09,
respectively.
The following table summarizes information about stock options outstanding
under the Plan as of June 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE EXERCISE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE PRICE
EXERCISE PRICES AT 6/30/98 CONTRACTUAL LIFE PRICE AT 6/30/98 EXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.49 50,391 1 year $6.49 50,391 $6.49
6.49 53,679 2 years 6.49 53,679 6.49
6.49 150,157 3 years 6.49 150,157 6.49
3.24 to 6.63 21,837 4 years 5.05 15,170 6.49
3.24 2,772 5 years 3.24 2,772 3.24
3.24 1,848 6 years 3.24 1,848 3.24
6.49 9,553 7 years 6.49 9,553 6.49
6.49 57,408 8 years 6.49 57,408 6.49
5.64 to 9.50 104,000 9 years 8.08 36,000 6.49
7.94 to 8.81 59,500 10 years 8.00 27,000 5.64
- ---------------------------------------------------------------------------------------------------------------------------
$3.24 to $9.50 511,145 $6.90 403,978 $6.45
===========================================================================================================================
</TABLE>
7. TAXES ON INCOME
Taxes on income consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal $ 1,670 $ 3,072 $ 3,273
State 345 475 746
Foreign -- -- --
-------- -------- --------
2,015 3,547 4,019
-------- -------- --------
Deferred expense (benefit):
Federal 454 215 1,035
State 111 103 55
-------- -------- --------
565 318 1,090
Reduction in valuation allowance -- -- (4,746)
-------- -------- --------
565 318 (3,656)
-------- -------- --------
Income tax expense $ 2,580 $ 3,865 $ 363
======== ======== ========
</TABLE>
The components of the net deferred tax asset are shown below:
<TABLE>
<CAPTION>
JUNE 30
-------
1998 1997
---- ----
(THOUSANDS)
<S> <C> <C>
Inventories $ 1,426 $ 1,694
Accrued expenses and other 397 730
Property and equipment 773 710
Accounts receivable allowance 177 204
------- -------
Net deferred tax asset 2,773 3,338
Less current deferred tax asset 2,000 2,628
------- -------
Non-current deferred tax asset $ 773 $ 710
======= =======
</TABLE>
24
<PAGE> 25
The net deferred tax asset of $2,773,000 at June 30, 1998 is realizable
as the Company has determined, based on several recurring periods of profitable
operations, continuing efforts to enhance and develop existing and new customer
relationships, its movement of a substantial portion of its supplies
manufacturing to the United States from Japan and the strengthening of the
dollar against the yen, that it is more likely than not that it will have
sufficient taxable income in future periods to realize the corresponding tax
benefit resulting from the deferred tax asset. Management plans to re-evaluate
the positive and negative evidence to this effect on a quarterly basis and make
appropriate adjustments to the deferred tax asset. Components of the net
deferred tax asset, other than property and equipment, primarily reverse
annually. As a result of the nature of these temporary differences, $773,000 of
the net deferred tax asset at June 30, 1998 is classified as non-current. The
non-current portion, which is included in deposits and other assets, is
attributable to property and equipment.
The net deferred tax asset at June 30, 1997 was $3,338,000. The current
portion of $2,628,000 is a result of temporary differences that primarily
reverse annually. The remaining non-current portion of $710,000 is attributable
to property and equipment.
A reconciliation of the Company's effective tax rates to the federal
statutory rate is shown below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Federal and state income tax computed at statutory rates $2,887 $3,217 $4,578
Reduction of valuation allowance -- -- (4,746)
Research and development credits (366) -- --
Other permanent differences 59 648 531
------ ------ ------
Tax expense $2,580 $3,865 $ 363
====== ====== ======
</TABLE>
8. SALES TO PRINCIPAL CUSTOMERS
Transactions
Sales to customers and their affiliates which were 10% or more of total
net sales are shown below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer A 28% 34% 32%
Customer B 18 14 16
Customer C -- 2 10
Customer D 18 15 10
</TABLE>
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 2001. Rent expense for the years
ended June 30, 1998, 1997 and 1996 was $983,000, $928,000, and $980,000. Future
minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, (THOUSANDS)
-------- -----------
<S> <C>
1999 $801
2000 679
2001 447
------
$1,927
======
</TABLE>
Employment Agreement
On April 1, 1989, the Company entered into an Employment Agreement with
its President and Chief Executive Officer. The Employment Agreement, as amended,
provides for an annual salary of $252,000, 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, 1998, 1997 and 1996 bonuses of approximately
$113,000, $129,000 and $202,000 have been recorded.
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's contributions are
vested 20% per year beginning with the second year of service. During the years
ended June 30, 1998, 1997 and 1996 the Company's contributions to the plan were
$118,000, $73,000 and $53,000.
25
<PAGE> 26
Related Party Transactions
The Chairman of the Board of Directors provides consulting services to
the Company. Consulting expense for these services for the years ended June 30,
1998, 1997 and 1996 were approximately $79,000, $81,000 and $78,000.
10. OTHER INCOME, NET
Other income, net consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Investment income $3,189 $2,000 $ 520
Foreign currency exchange gain 67 -- --
Interest expense (7) (96) (253)
Loss on sale of assets held for sale -- (568) --
Miscellaneous 65 41 (79)
------ ------ -------
Other income, net $3,314 $1,377 $ 188
====== ====== =======
</TABLE>
11. CONTINGENCIES
The Company is involved with certain claims and disputes incidental to its
business. The Company currently believes that the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
12. OPERATIONS BY GEOGRAPHIC AREA
The Company's operations are conducted in one business segment, mid-range,
non-impact laser printers and related consumable supplies and spare parts. The
Company's production facilities are located in the U.S. and Japan. Export sales
from U.S. based operations, primarily to Germany, approximated $3,254,000,
$3,415,000 and $8,741,000 in 1998, 1997 and 1996, respectively. Intercompany
sales are transacted at established transfer prices and the related profits are
eliminated in consolidation. General corporate assets included in U.S. based
operations primarily consist of cash and cash equivalents, marketable securities
and other investments. These assets approximated $42,655,000, $34,590,000 and
$25,992,000 in 1998, 1997 and 1996, respectively. During the years ended June
30, 1998, 1997 and 1996 the Company had foreign and domestic sales, operating
income and identifiable assets as shown below:
<TABLE>
<CAPTION>
U.S. JAPAN EUROPE TOTAL
---- ----- ------ -----
(THOUSANDS)
<S> <C> <C> <C> <C>
1998
Net sales $41,799 $ -- $ 3,254 $45,053
Operating income (expense) 5,438 (1,080) (115) 4,243
Identifiable assets 58,303 3,132 37 61,472
1997
Net sales $53,045 $ -- $ 3,415
$56,460
Operating income (expense) 9,899 (2,683) 33 7,249
Identifiable assets 54,246 3,195 211 57,652
1996
Net sales $65,640 $ -- $ 8,741
$74,381
Operating income (expense) 14,885 (1,638) 30 13,277
Identifiable assets 49,521 10,460 264 60,245
</TABLE>
13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Foreign Exchange Risk Management
The Company has operations in Japan, and as a result, operating
expenses are dependent on dollar-yen exchange rates. The Company has purchased
Japanese yen forward contracts to minimize the effect of fluctuating foreign
currencies on its reported income, generally over the ensuing three months. The
forward contracts do not qualify as hedges for financial reporting purposes and
are reported in the financial statements net of changes in forward rates that
are reflected in income. Although the volatility of income over the period
covered by such contracts is reduced, increased volatility may be reported
during interim periods. The counterparties to the Company's forward contracts
consist of two financial institutions. The credit ratings and concentration of
risk of these financial institutions are monitored on a continuing basis and
present no significant credit risk to the Company. As of June 30, 1997, the
Company did not have any foreign currency forward contracts outstanding. At June
30, 1998, outstanding Japanese yen contractual amounts were as follows:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT GAINS LOSSES
(THOUSANDS)
<S> <C> <C> <C>
Japanese yen forward contracts $ 2,748 $67 $ -
</TABLE>
26
<PAGE> 27
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value due to
the short-term maturities of these instruments. The fair value of marketable
securities was estimated based on quoted market prices as of year-end. The
estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(THOUSANDS)
<S> <C> <C> <C> <C>
Nonderivatives:
Cash and cash equivalents $16,347 $16,347 $18,216 $18,216
Marketable securities 19,308 19,308 16,374 16,374
Investments in limited partnerships 7,000 7,000 - -
Derivatives:
Japanese yen forward contracts - 67 - -
</TABLE>
27
<PAGE> 28
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------ -------- ---------- ------
<S> <C> <C> <C> <C>
Year Ended June 30, 1998:
Allowance for doubtful accounts $ 653 $ 165 $ 328 $ 490
Allowance for inventory 4,145 279 1,186 3,238
Deferred tax asset valuation allowance -- -- -- --
------ ------- ------ ------
$4,798 $ 444 $1,514 $3,728
====== ======= ====== ======
Year Ended June 30, 1997:
Allowance for doubtful accounts $ 627 $ 138 $ 112 $ 653
Allowance for inventory 3,548 1,023 426 4,145
Deferred tax asset valuation allowance - - - -
------ ------- ------ ------
$4,175 $ 1,161 $ 538 $4,798
====== ======= ====== ======
Year Ended June 30, 1996:
Allowance for doubtful accounts $ 686 $ -- $ 59 $ 627
Allowance for inventory 2,336 1,725 513 3,548
Deferred tax asset valuation allowance 4,746 -- 4,746 --
------ ------- ------ ------
$7,768 $1,725 $5,318 $4,175
====== ====== ====== ======
</TABLE>
28
<PAGE> 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 9, 1997, the Company orally dismissed BDO Seidman LLP ("BDO") as
its principal accountant. The Company confirmed the dismissal of its principal
accountant in a letter to BDO dated May 12, 1997. The decision to dismiss BDO
was approved by the Company's Audit Committee of the Board of Directors.
The BDO reports on the Company's consolidated financial statements for
each of the years ended June 30, 1996 and 1995 did not contain an adverse
opinion or a disclaimer of opinion, nor were such reports qualified or modified
as to audit scope or accounting principles.
During fiscal year 1996 and any subsequent interim period preceding the
dismissal of BDO, the Company is not aware of any disagreements between the
Company and BDO or reportable events as defined in Item 304 of Regulation S-K.
On May 29, 1997, the Board of Directors of the Company authorized the
engagement of the firm of Deloitte & Touche LLP as the Company's independent
auditors for its fiscal year 1997 audit.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers is set
forth in the Proxy Statement under the heading "Directors and Executive
Officers", which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial
owners and management is set forth in the Proxy Statement under the heading
"Security Ownership of Certain Beneficial Owners and Management", which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the heading "Certain
Relationships and Related Transactions", which information is incorporated
herein by reference.
29
<PAGE> 30
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K.
1. Financial Statements: The financial statements of the Company
are included in Part II, Item 8 of this report. See Index to
Financial Statements (F-1) on Page 13.
2. Financial Statement Schedules: Financial statement schedules
required under the related instructions are applicable for the
period ended June 30, 1998, 1997 and 1996, and are therefore
included in Item 8.
3. Report of Other Auditors: Report of BDO Seidman, LLP for
fiscal 1996.
4. Exhibits: The exhibits which are filed with this Report or
which are incorporated herein by reference are set forth in
the Exhibit Index below.
(b) Reports on Form 8-K filed during the fourth quarter of fiscal year 1998 -
None.
EXHIBITS
--------
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
3(i).1+ -- Amended and Restated Certificate of Incorporation of
the Registrant.
3(ii).1+ -- Bylaws of the Registrant.
4.1+ -- Reference is made to Exhibits 3(i).1 and 3(ii).1.
4.2+ -- Specimen Stock Certificate.
10.1+ -- Form of Indemnity Agreement entered into between the
Registrant and its directors and executive officers.
10.2+ -- Common Stock Registration Rights Agreement, dated
as of October 5, 1984, as amended.
10.3+ -- Series A Convertible Preferred Stock Purchase
Agreement, dated as of October 5, 1984, as amended.
10.4+* -- Amended and Restated 1992 Stock Option Plan of the
Registrant (the "Option Plan").
10.5+ -- Form of Option granted to persons other than
non-employee directors under the Option Plan.
10.6+ -- Form of Option granted to non-employee directors
under the Option Plan.
10.7+* -- Employment Agreement between the Registrant and
Philip W. Shires, dated April 1, 1989.
10.8+ -- Lease Agreement between the Registrant and Security
Connecticut Life Insurance Company, dated September
20, 1990, as amended.
10.9+ -- Lease Agreement between the Registrant and Pine
Property Limited Partnership, dated July 15, 1992,
as amended.
10.10+ -- Lease Agreement between the Registrant and BFN
Company, dated September 28, 1994.
10.11+ -- Agreement on Bank Transactions and translation
between Nippon Kentek Kaisha, Ltd. and The Dai-Ichi
Kangyo Bank, Limited, dated as of July 2, 1984.
10.12+ -- Agreement on Purchase or Negotiation of Bills and
translation between Nippon Kentek Kaisha, Limited
and The Dai-Ichi Kangyo Bank, Limited, dated as of
July 2, 1984.
10.12(a)+ -- Security Agreement between the Registrant and the
Dai-Ichi Kangyo Bank, Limited, dated as of July 2,
1992, as amended.
10.12(b)+ -- Guaranty between the Registrant and The Dai-Ichi
Kangyo Bank, Limited, dated as of July 2, 1992.
10.13+ -- Credit and Security Agreement between the
Registrant and Colorado National Bank, dated as of
November 2, 1994, as amended.
10.15+ -- Sales/Purchase Contract between Nippon Kentek Kaisha
Limited and Kao Corporation, dated October 1, 1991.
10.16+ -- Letter Agreement between the Registrant and Lexmark
International, Inc., dated May 10, 1993, as amended.
10.17+ -- Addendum Agreement between the Registrant and
Lexmark International, Inc., dated November 17, 1994.
10.18+ -- Agreement between the Company and Hewlett-Packard
Company, dated March 22, 1994.
10.19+ -- Purchase Agreement between the Company and Siemens
Nixdorf Printing Systems, LP, dated February 3,
1992, as amended.
10.20+ -- Purchase Agreement between the Company and Standard
Register Corporation, dated February 4, 1997.
10.21+ -- Lease Agreement between the Registrant and Avalon
Investment Company, dated March 31, 1997.
21.1+ -- List of subsidiaries of the Registrant.
27.1 -- Financial Data Schedules-Fiscal years ended 1996,
1997 and 1998
+ Previously filed with the Commission as an exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 333-1606) and
incorporated herein by reference.
* Management contract or compensatory plan.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KENTEK INFORMATION SYSTEMS, INC.
By /s/ PHILIP W. SHIRES
Philip W. Shires
President and Chief Executive Officer
September 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ PHILIP W. SHIRES
Philip W. Shires President, Chief Executive Officer
and Director (Principal Executive Officer) September 25, 1998
/s/ VICKY S. HAMMOND
Vicky S. Hammond Chief Financial Officer
(Principal Financial and Accounting Officer) September 25, 1998
/s/ HOWARD L. MORGAN
Howard L. Morgan Chairman of the Board September 25, 1998
/s/ JUSTIN J. PERREAULT
Justin J. Perreault Director September 25, 1998
/s/ JAMES H. SIMONS
James H. Simons Director September 25, 1998
/s/ SHELDON WEINIG
Sheldon Weinig Director September 25, 1998
</TABLE>
31
<PAGE> 32
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
3(i).1+ -- Amended and Restated Certificate of Incorporation of
the Registrant.
3(ii).1+ -- Bylaws of the Registrant.
4.1+ -- Reference is made to Exhibits 3(i).1 and 3(ii).1.
4.2+ -- Specimen Stock Certificate.
10.1+ -- Form of Indemnity Agreement entered into between the
Registrant and its directors and executive officers.
10.2+ -- Common Stock Registration Rights Agreement, dated
as of October 5, 1984, as amended.
10.3+ -- Series A Convertible Preferred Stock Purchase
Agreement, dated as of October 5, 1984, as amended.
10.4+* -- Amended and Restated 1992 Stock Option Plan of the
Registrant (the "Option Plan").
10.5+ -- Form of Option granted to persons other than
non-employee directors under the Option Plan.
10.6+ -- Form of Option granted to non-employee directors
under the Option Plan.
10.7+* -- Employment Agreement between the Registrant and
Philip W. Shires, dated April 1, 1989.
10.8+ -- Lease Agreement between the Registrant and Security
Connecticut Life Insurance Company, dated September
20, 1990, as amended.
10.9+ -- Lease Agreement between the Registrant and Pine
Property Limited Partnership, dated July 15, 1992,
as amended.
10.10+ -- Lease Agreement between the Registrant and BFN
Company, dated September 28, 1994.
10.11+ -- Agreement on Bank Transactions and translation
between Nippon Kentek Kaisha, Ltd. and The Dai-Ichi
Kangyo Bank, Limited, dated as of July 2, 1984.
10.12+ -- Agreement on Purchase or Negotiation of Bills and
translation between Nippon Kentek Kaisha, Limited
and The Dai-Ichi Kangyo Bank, Limited, dated as of
July 2, 1984.
10.12(a)+ -- Security Agreement between the Registrant and the
Dai-Ichi Kangyo Bank, Limited, dated as of July 2,
1992, as amended.
10.12(b)+ -- Guaranty between the Registrant and The Dai-Ichi
Kangyo Bank, Limited, dated as of July 2, 1992.
10.13+ -- Credit and Security Agreement between the
Registrant and Colorado National Bank, dated as of
November 2, 1994, as amended.
10.15+ -- Sales/Purchase Contract between Nippon Kentek Kaisha
Limited and Kao Corporation, dated October 1, 1991.
10.16+ -- Letter Agreement between the Registrant and Lexmark
International, Inc., dated May 10, 1993, as amended.
10.17+ -- Addendum Agreement between the Registrant and
Lexmark International, Inc., dated November 17, 1994.
10.18+ -- Agreement between the Company and Hewlett-Packard
Company, dated March 22, 1994.
10.19+ -- Purchase Agreement between the Company and Siemens
Nixdorf Printing Systems, LP, dated February 3,
1992, as amended.
10.20+ -- Purchase Agreement between the Company and Standard
Register Corporation, dated February 4, 1997.
10.21+ -- Lease Agreement between the Registrant and Avalon
Investment Company, dated March 31, 1997.
21.1+ -- List of subsidiaries of the Registrant.
27.1 -- Financial Data Schedules-Fiscal years ended 1996,
1997 and 1998
+ Previously filed with the Commission as an exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 333-1606) and
incorporated herein by reference.
* Management contract or compensatory plan.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1997 JUL-01-1996 JUL-01-1995
<PERIOD-END> JUN-30-1998 JUN-30-1997 JUN-30-1996
<CASH> 16,347 18,216 25,992
<SECURITIES> 26,308 16,374 0
<RECEIVABLES> 5,297 6,213 7,098
<ALLOWANCES> 0 0 0
<INVENTORY> 7,725 10,074 13,868
<CURRENT-ASSETS> 58,378 54,550 56,278
<PP&E> 16,313 17,783 18,730
<DEPRECIATION> 14,519 16,062 17,099
<TOTAL-ASSETS> 61,472 57,652 60,245
<CURRENT-LIABILITIES> 5,755 6,489 13,418
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 71 69 68
<OTHER-SE> 55,646 50,592 46,099
<TOTAL-LIABILITY-AND-EQUITY> 61,472 57,652 60,245
<SALES> 45,053 56,460 74,381
<TOTAL-REVENUES> 45,053 56,460 74,381
<CGS> 22,324 30,43 44,408
<TOTAL-COSTS> 40,810 49,211 61,104
<OTHER-EXPENSES> 3,314 (1,377) (441)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 253
<INCOME-PRETAX> 7,557 8,626 13,465
<INCOME-TAX> 2,580 3,865 363
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,977 4,761 13,102
<EPS-PRIMARY> 0.70 0.70 6.59
<EPS-DILUTED> 0.70 0.69 2.45
</TABLE>
