<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the quarterly period ended December 31, 1997
or
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from to
------------- --------------
Commission file number:
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3577 22-2406249
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or organization) Code Number)
2945 Wilderness Place, Boulder, CO 80301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 440-5500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
----- -----
(2) Yes X No
----- -----
Number of shares outstanding of the issuer's common stock, as of
December 31, 1997:
7,067,825 shares of Common Stock, $.01 par value per share
Page 1
<PAGE> 2
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
December 31, 1997 and June 30, 1996 3
Consolidated Statements of Income -
for the three and six months ended December 31, 1997
and 1996 4
Consolidated Statements of Cash Flows -
for the six months ended December 31, 1997
and 1996 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submissions of Matters to a vote of Security Holders 12-13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION.
Item 1. Consolidated Financial Statements.
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1997 1997
-------- --------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 17,962 $ 18,216
Marketable securities 18,522 16,374
Accounts receivable, net of allowance 5,181 6,213
Inventories (Note 2) 9,812 10,074
Deferred income taxes (Note 3) 2,848 2,848
Other 1,505 1,045
-------- --------
Total current assets 55,830 54,770
Property and equipment, at cost, net of
accumulated depreciation and amortization 1,667 1,721
Deposits and other 1,056 1,161
-------- --------
Total assets $ 58,553 $ 57,652
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,416 $ 3,324
Accrued expenses 2,916 3,165
-------- --------
Total current liabilities 5,332 6,489
Other 563 502
-------- --------
Total liabilities 5,895 6,991
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par - shares authorized, 12,000;
shares outstanding, 7,068 and 6,929 71 69
Additional paid-in-capital 44,517 43,945
Foreign currency translation adjustment (1,233) (753)
Retained earnings 9,303 7,400
-------- --------
Total stockholders' equity 52,658 50,661
-------- --------
Total liabilities and stockholders' equity $ 58,553 $ 57,652
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 4
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
----------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Printers $ 1,578 $ 1,533 $ 3,817 $ 3,772
Consumable supplies and spare parts 9,592 10,631 19,007 22,444
-------- -------- -------- --------
Total net sales 11,170 12,164 22,824 26,216
Cost of sales 5,686 6,654 12,182 14,333
-------- -------- -------- --------
Gross profit 5,484 5,510 10,642 11,883
-------- -------- -------- --------
Operating Expenses:
Selling, general and administrative 2,227 2,643 4,329 5,187
Research and development 2,484 2,051 4,389 4,361
-------- -------- -------- --------
Total operating expenses 4,711 4,694 8,718 9,548
-------- -------- -------- --------
Operating income 773 816 1,924 2,335
Other income (expense) 775 237 1,562 (307)
-------- -------- -------- --------
Income before income taxes 1,548 1,053 3,486 2,028
Income tax expense 580 454 1,307 1,222
-------- -------- -------- --------
Net income $ 968 $ 599 $ 2,179 $ 806
======== ======== ======== ========
Net income per share: (Note 4)
Basic $ 0.14 $ 0.09 $ 0.31 $ 0.12
======== ======== ======== ========
Diluted $ 0.13 $ 0.09 $ 0.30 $ 0.12
======== ======== ======== ========
Weighted average shares outstanding:
Basic 7,067 6,843 7,029 6,840
======== ======== ======== ========
Diluted 7,184 6,934 7,147 6,932
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 5
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
December 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income $ 2,179 $ 806
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 634 787
Loss on disposal of property and equipment 3 932
Deferred income tax benefit 0 348
Changes in operating assets and liabilities:
Accounts receivable 1,032 1,892
Inventories 152 1,033
Other current assets (1,114) (221)
Other assets 457 (55)
Accounts payable and accrued expenses (492) (3,988)
-------- --------
Net cash provided by operating activities 2,851 1,534
-------- --------
Investing activities:
Purchase of marketable securities, net (2,148) 0
Purchase of equipment (447) (740)
Proceeds from sale of property and equipment 0 5,223
-------- --------
Net cash provided by (used in) investing activities (2,595) 4,483
-------- --------
Financing activities:
Principal payments of long-term debt 0 (5,023)
Proceeds from issuance of common stock 574 79
Dividends paid (279) (274)
-------- --------
Net cash provided by (used in) financing activities 295 (5,218)
-------- --------
Effect of exchange rate changes on cash (805) (12)
-------- --------
Net increase (decrease) in cash and cash
equivalents (254) 787
Cash and cash equivalents, beginning of
period 18,216 25,992
-------- --------
Cash and cash equivalents, end of period $ 17,962 $ 26,779
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
Page 5
<PAGE> 6
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to fairly state the Company's consolidated
financial position and operating results for the interim periods. The results
of operations for the three and six months ended December 31, 1997 are not
necessarily indicative of the results for the full year. These financial
statements and notes should be read in conjunction with the Company's audited
annual consolidated financial statements for the year ended June 30, 1997.
Note 2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
---- ----
(thousands)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $ 5,768 $ 6,064
Raw Materials 4,044 4,010
-------- --------
$ 9,812 $ 10,074
======== ========
</TABLE>
Note 3. Deferred Income Taxes
At December 31, 1997 the Company had a deferred income tax asset in
the amount of $3,338,000 ($2,848,000 classified as short term with the balance
of $490,000 as long term) based on management's assessment that it is more
likely than not that it will have sufficient taxable income in future periods
to realize the corresponding tax benefit resulting from the recognition of the
deferred tax asset. Management reviews the deferred tax asset on a quarterly
basis and makes appropriate adjustments as necessary.
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<PAGE> 7
Note 4. Earnings Per Share
At December 31, 1997 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." All amounts
presented have been restated in accordance with SFAS No. 128. SFAS No. 128
requires companies to present basic earnings per share and diluted earnings per
share, instead of the previously reported primary and fully diluted earnings
per share. The following table is a reconciliation of basic to diluted
earnings per share for the three and six months ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Three months ended December 31, 1997
- -------------------------------------
NET INCOME $ 968
BASIC EPS
Income available to
common stockholders $ 968 7,067 $0.14
=====
EFFECT OF DILUTIVE SECURITIES
Stock options 117
-----
DILUTED EPS $ 968 7,184 $0.13
====== ===== =====
Six months ended December 31, 1997
- ----------------------------------
NET INCOME $2,179
BASIC EPS
Income available to
common stockholders $2,179 7,029 $0.31
=====
EFFECT OF DILUTIVE SECURITIES
Stock options 118
-----
DILUTED EPS $2,179 7,147 $0.30
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Three months ended December 31, 1996
- -------------------------------------
NET INCOME
BASIC EPS
Income available to
common stockholders $ 599 6,843 $0.09
=====
EFFECT OF DILUTIVE SECURITIES
Stock options 92
-----
DILUTED EPS $ 599 6,934 $0.09
======= ===== =====
</TABLE>
Page 7
<PAGE> 8
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Six months ended December 31, 1996
- ----------------------------------
NET INCOME
BASIC EPS
Income available to
common stockholders $ 806 6,840 $0.12
=====
EFFECT OF DILUTIVE SECURITIES
Stock options 92
-----
DILUTED EPS $ 806 6,932 $0.12
======= ===== =====
</TABLE>
The Company declared and paid dividends of $0.02 per share for the
quarter ended December 31, 1996 on February 28, 1997.
Page 8
<PAGE> 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
presented here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and those
discussed in the Company's Form 10-K for the year ended June 30, 1997,
particularly those contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1997 TO THREE MONTHS ENDED
DECEMBER 31, 1996
Total Net Sales. Total net sales decreased 8.2% from $12,164,000 in
the three months ended December 31, 1996 to $11,170,000 in the three months
ended December 31, 1997. Printer sales revenue increased 2.9% from $1,533,000
in the three months ended December 31, 1996 to $1,578,000 in the three months
ended December 31, 1997. Consumable supplies and spare parts sales decreased
by 9.8% from $10,631,000 in the three months ended December 31, 1996 to
$9,592,000 in the three months ended December 31, 1997. This decrease was due
to a declining printer installed base which resulted in lower consumable supply
sales and an increase in market competition by third party remanufacturers of
consumable supplies.
Gross Profit. Gross profit decreased by 0.5% from $5,510,000 in the
three months ended December 31, 1996 to $5,484,000 in the three months ended
December 31, 1997. The gross margin increased from 45.3% to 49.1% in the same
period. The shift of sales from printers to that of consumable supplies and
spare parts, which have a higher gross margin, contributed to the improved
gross margin. The continued strengthening of the dollar in relation to the
Japanese yen also contributed to the improved gross margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 15.7% from $2,643,000 in the three months
ended December 31, 1996 to $2,227,000 in the three months ended December 31,
1997. The decrease was a result of lower legal expenses in the quarter due to
settlement of all pending litigation, the closing of the Haster facility in
Japan and a decrease in sales and marketing expense.
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<PAGE> 10
Research and Development Expense. Research and development expenses
increased by 21.1% from $2,051,000 in the three months ended December 31, 1996
to $2,484,000 in the three months ended December 31, 1997. This increase was
due to hiring of additional employees and prototype expenses related to the
KW60 printer.
Interest Income and Other Income (Expense). Interest income and other
income (expense) increased from $237,000 of income in the three months ended
December 31, 1996 to $775,000 of income in the three months ended December 31,
1997. This increase in income was due primarily to investments in marketable
securities in the three months ended December 31, 1997. The quarter ended
December 31, 1996 also included one time expenses related to the sale of the
Company's Tama property in Japan.
Income Tax Expense. Income tax expense for the three months ended
December 31, 1996 was $454,000 compared to $580,000 for the three months ended
December 31, 1997.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 TO SIX MONTHS ENDED
DECEMBER 31, 1996
Total Net Sales. Total net sales decreased 12.9% from $26,216,000 in
the three months ended December 31, 1996 to $22,824,000 in the three months
ended December 31, 1997. Printer sales revenue increased by 1.2% from
$3,772,000 for the six months ended December 31, 1996 to $3,817,000 for the six
months ended December 31, 1997. Consumable supplies and spare parts sales
decreased by 15.3% from $22,444,000 in the six months ended December 31, 1996
to $19,007,000 in the six months ended December 31, 1997. This decrease was
due to a declining printer installed base which resulted in lower consumable
supply sales and an increase in market competition by third party
remanufacturers of consumable supplies.
Gross Profit. Gross profit decreased by 10.4% from $11,883,000 in the
six months ended December 31, 1996 to $10,642,000 in the six months ended
December 31, 1997. The gross margin increased from 45.3% to 46.6% in the same
period. The shift of sales from printers to that of consumable supplies and
spare parts, which have a higher gross margin, contributed to the improved
gross margin. The continued strengthening of the dollar in relation to the
Japanese yen also contributed to the improved gross margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 16.5% from $5,187,000 in the six months
ended December 31, 1996 to $4,329,000 in the six months December 31, 1997. The
decrease was a result of lower legal expenses in the quarter due to settlement
of all pending litigation, the closing of the Haster facility in Japan and a
decrease in sales and marketing expense.
Page 10
<PAGE> 11
Research and Development Expense. Research and development expenses
increased by 0.6% from $4,361,000 in the six months ended December 31, 1996 to
$4,389,000 in the six months ended December 31, 1997. The six months ended
December 31, 1997 included a higher level of expenses associated with the
development of prototype KW60 printers.
Interest Income and Other Income (Expense). Interest income and other
income (expense) increased from $307,000 of expense in the six months ended
December 31, 1996 to $1,562,000 of income in the six months ended December 31,
1997 due primarily to the book loss of $932,000 related to the sale of the Tama
property in Japan recorded in the six months ended December 31, 1996.
Investments in marketable securities also contributed to the increase in
income.
Income Tax Expense. Income tax expense for the six months ended
December 31, 1996 was $1,222,000 compared to $1,307,000 for the six months
ended December 31, 1997. Income tax expense for the six months ended December
31, 1996 included a one-time tax expense of $378,000 related to the sale of the
Tama property in Japan
LIQUIDITY AND CAPITAL RESOURCES
Changes in cash and cash equivalents during the six months ended
December 31, 1997 resulted in a net decrease of $254,000 as compared to an
increase of $787,000 in the six months ended December 31, 1996. The primary
reason for this decrease is the purchase of marketable securities of
$2,148,000. This purchase was partially offset by an increase in cash provided
by operations of $1,317,000 as a result of a significant increase in net income
for the period ended December 31, 1997.
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<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently not involved in any legal proceedings.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submissions of Matters to a vote of Security Holders
The Company held its Annual Meeting of Stockholders on November 14,
1997.
a) All of the nominees for director were elected with the voting results for
each as follows:
<TABLE>
<CAPTION>
Director Votes for Votes against
-------- --------- -------------
<S> <C> <C>
Howard L. Morgan 5,625,038 16,400
Philip W. Shires 5,625,038 16,400
I. Jimmy Mayer 5,625,038 16,400
Justin J. Perreault 5,625,038 16,400
James H. Simons 5,625,038 16,400
Sheldon Weinig 5,625,038 16,400
</TABLE>
b) The following details the voting results with respect to amending the
Company's 1992 Stock Option Plan to increase the number of shares of Common
Stock authorized for issuance thereunder by 750,000 shares:
<TABLE>
<S> <C>
For 2,438,551
Against 378,638
Abstain 1,091,085
Broker Non-Votes 3,156,469
---------
Total 7,064,743
</TABLE>
Page 12
<PAGE> 13
c) The following details the voting results with respect to ratifying the
selection of Deloitte and Touche as independent auditors for the fiscal year
ended June 30, 1998:
<TABLE>
<S> <C>
For 5,617,694
Against 20,844
Abstain 2,900
Broker Non-Votes 1,423,305
---------
Total 7,064,743
</TABLE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Form 8-K
None.
Page 13
<PAGE> 14
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 13, 1998 KENTEK INFORMATION SYSTEMS, INC.
/s/ PHILIP W. SHIRES
-----------------------------------------
Philip W. Shires
President and Chief Executive Officer
(Principal Executive Officer)
/s/ CRAIG G. LAMBORN
-----------------------------------------
Craig G. Lamborn
Vice President, Finance and Administration
(Principal Financial and Accounting Officer)
Page 14
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Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,962
<SECURITIES> 18,522
<RECEIVABLES> 5,181
<ALLOWANCES> 0
<INVENTORY> 9,812
<CURRENT-ASSETS> 55,830
<PP&E> 17,361
<DEPRECIATION> 15,694
<TOTAL-ASSETS> 58,553
<CURRENT-LIABILITIES> 5,332
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 52,587
<TOTAL-LIABILITY-AND-EQUITY> 58,553
<SALES> 11,170
<TOTAL-REVENUES> 11,170
<CGS> 5,686
<TOTAL-COSTS> 10,397
<OTHER-EXPENSES> (775)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,548
<INCOME-TAX> 580
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 968
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
