<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 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)
<TABLE>
<S> <C> <C>
DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2945 Wilderness Place, Boulder, CO 80301
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (303) 440-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
Number of shares outstanding of the issuer's common stock, as of March
31, 1998:
7,115,632 shares of Common Stock, $.01 par value per share
Page 1
<PAGE> 2
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and June 30, 1997 3
Consolidated Statements of Income -
for the three and nine months ended March 31, 1998
and 1997 4
Consolidated Statements of Cash Flows -
for the nine months ended March 31, 1998
and 1997 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submissions of Matters to a vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION.
Item 1. Consolidated Financial Statements.
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 23,780 $ 18,216
Marketable securities 16,850 16,374
Accounts receivable, net of allowance 5,466 6,213
Inventories (Note 2) 8,320 10,074
Deferred income taxes 2,848 2,848
Other 987 1,045
------------ ------------
Total current assets 58,251 54,770
Property and equipment, at cost, net of
accumulated depreciation and amortization 1,760 1,721
Deposits and other 1,066 1,161
------------ ------------
Total assets $ 61,077 $ 57,652
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,092 $ 3,324
Accrued expenses 3,850 3,165
------------ ------------
Total current liabilities 5,942 6,489
Other 518 502
------------ ------------
Total liabilities 6,460 6,991
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par - shares authorized, 12,000;
shares outstanding, 7,116 and 6,929 71 69
Additional paid-in-capital 44,701 43,945
Foreign currency translation adjustment (1,077) (753)
Retained earnings 10,922 7,400
------------ ------------
Total stockholders' equity 54,617 50,661
------------ ------------
Total liabilities and stockholders' equity $ 61,077 $ 57,652
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
Page 3
<PAGE> 4
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales:
Printers $ 1,539 $ 2,523 $ 5,356 $ 6,295
Consumable supplies and spare parts 10,319 13,497 29,326 35,941
---------- ---------- ---------- ----------
Total net sales 11,858 16,020 34,682 42,236
Cost of sales 5,602 8,390 17,784 22,723
---------- ---------- ---------- ----------
Gross profit 6,256 7,630 16,898 19,513
---------- ---------- ---------- ----------
Operating Expenses:
Selling, general and administrative 2,133 2,701 6,462 7,888
Research and development 2,381 1,771 6,770 6,132
---------- ---------- ---------- ----------
Total operating expenses 4,514 4,472 13,232 14,020
---------- ---------- ---------- ----------
Operating income 1,742 3,158 3,666 5,493
Other income 771 594 2,333 287
---------- ---------- ---------- ----------
Income before income taxes 2,513 3,752 5,999 5,780
Income tax expense 753 1,741 2,060 2,963
---------- ---------- ---------- ----------
Net income $ 1,760 $ 2,011 $ 3,939 $ 2,817
========== ========== ========== ==========
Net income per share: (Note 3)
Basic $ 0.25 $ 0.29 $ 0.56 $ 0.41
---------- ---------- ---------- ----------
Diluted $ 0.24 $ 0.29 $ 0.55 $ 0.41
---------- ---------- ---------- ----------
Weighted average shares outstanding:
Basic 7,085 6,841 7,048 6,841
---------- ---------- ---------- ----------
Diluted 7,196 6,953 7,160 6,952
---------- ---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4
<PAGE> 5
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
March 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 3,941 $ 2,817
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 925 921
Loss on disposal of property and equipment 35 907
Deferred income tax expense 0 150
Changes in operating assets and liabilities:
Accounts receivable 747 778
Inventories 1,457 2,834
Other current assets (645) (363)
Other assets (122) 549
Accounts payable and accrued expenses 623 (1,262)
------------ ------------
Net cash provided by operating activities 6,961 7,331
------------ ------------
Investing activities:
Purchase of marketable securities, net (476) (5,239)
Purchase of equipment (814) (788)
Proceeds from sale of property and equipment 0 5,037
------------ ------------
Net cash used in investing activities (1,290) (990)
------------ ------------
Financing activities:
Principal payments of long-term debt 0 (4,863)
Proceeds from issuance of common stock 758 79
Dividends paid (421) (410)
------------ ------------
Net cash provided by (used in) financing activities 337 (5,194)
------------ ------------
Effect of exchange rate changes on cash (444) (441)
------------ ------------
Net increase in cash and cash
equivalents 5,564 706
Cash and cash equivalents, beginning of
period 18,216 25,992
------------ ------------
Cash and cash equivalents, end of period $ 23,780 $ 26,698
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
Page 5
<PAGE> 6
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to fairly state the Company's consolidated
financial position and operating results for the interim periods. The results of
operations for the three and nine months ended March 31, 1998 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>
March 31, June 30,
1997 1997
---------- ----------
(thousands)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $ 4,305 $ 6,064
Raw Materials 4,015 4,010
---------- ----------
$ 8,320 $ 10,074
========== ==========
</TABLE>
Page 6
<PAGE> 7
Note 3. 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 nine months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Three months ended March 31, 1998
NET INCOME $ 1,760
BASIC EPS
Income available to
common stockholders $ 1,760 7,085 $ 0.25
----------
EFFECT OF DILUTIVE SECURITIES
Stock options 111
----------
DILUTED EPS $ 1,760 7,196 $ 0.24
---------- ---------- ----------
Nine months ended March 31, 1998
NET INCOME $ 3,939
BASIC EPS
Income available to
common stockholders $ 3,939 7,048 $ 0.56
----------
EFFECT OF DILUTIVE SECURITIES
Stock options 112
----------
DILUTED EPS $ 3,939 7,160 $ 0.55
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Three months ended March 31, 1997
NET INCOME $ 2,011
BASIC EPS
Income available to
common stockholders $ 2,011 6,841 $ 0.29
----------
EFFECT OF DILUTIVE SECURITIES
Stock options 112
----------
DILUTED EPS $ 2,011 6,953 $ 0.29
---------- ---------- ----------
</TABLE>
Page 7
<PAGE> 8
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Nine months ended March 31, 1997
NET INCOME $ 2,817
BASIC EPS
Income available to
common stockholders $ 2,817 6,841 $ 0.41
----------
EFFECT OF DILUTIVE SECURITIES
Stock options 111
----------
DILUTED EPS $ 2,817 6,952 $ 0.41
---------- ---------- ----------
</TABLE>
Note 4. Dividends on Common Stock
The Company declared and paid dividends of $0.02 per share for the
quarter ended December 31, 1997 on February 27, 1998.
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" and those discussed in the
section entitled "Risk Factors" in the Company's registration statement on Form
S-1 as amended through April 16, 1996."
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO THREE MONTHS ENDED
MARCH 31, 1997
Total Net Sales. Total net sales decreased 25.9% from $16,020,000 in
the three months ended March 31, 1997 to $11,858,000 in the three months ended
March 31, 1998. Printer sales revenue decreased 39.0% from $2,523,000 in the
three months ended March 31, 1997 to $1,539,000 in the three months ended March
31, 1998. This decrease is due primarily to increased competition in the printer
market. Consumable supplies and spare parts sales decreased by 23.5% from
$13,497,000 in the three months ended March 31, 1997 to $10,319,000 in the three
months ended March 31, 1998. This decrease was due to a declining IBM 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 18.0% from $7,630,000 in the
three months ended March 31, 1997 to $6,256,000 in the three months ended March
31, 1998. The gross margin increased from 47.6% to 52.8% 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 as
well as a reduction in obsolete inventory reserve. 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 21.0% from $2,701,000 in the three months
ended March 31, 1997 to $2,133,000 in the three months ended March 31, 1998. 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 9
<PAGE> 10
Research and Development Expense. Research and development expenses
increased by 34.4% from $1,771,000 in the three months ended March 31, 1997 to
$2,381,000 in the three months ended March 31, 1998. 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 increased from $594,000 of income in the three months ended March 31,
1997 to $771,000 of income in the three months ended March 31, 1998. This
increase in income was due primarily to investments in marketable securities and
interest income in the three months ended March 31, 1998.
Income Tax Expense. Income tax expense for the three months ended March
31, 1997 was $1,741,000 compared to $753,000 for the three months ended March
31, 1998. This decrease is due to one time tax expense related to the sale of
the Tama property in Japan in the quarter ended March 31, 1997 as well as an
income tax benefit of $200,000 in the current quarter due to amendment of a
prior year tax return.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 TO NINE MONTHS ENDED
MARCH 31, 1997
Total Net Sales. Total net sales decreased 17.9% from $42,236,000 in
the nine months ended March 31, 1997 to $34,682,000 in the nine months ended
March 31, 1998. Printer sales revenue decreased by 14.9% from $6,295,000 for the
nine months ended March 31, 1997 to $5,356,000 for the nine months ended March
31, 1998. This decrease is due primarily to increased competition in the printer
market. Consumable supplies and spare parts sales decreased by 18.4% from
$35,941,000 in the nine months ended March 31, 1997 to $29,326,000 in the nine
months ended March 31, 1998. This decrease was due to a declining IBM 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 13.4% from $19,513,000 in the
nine months ended March 31, 1997 to $16,898,000 in the nine months ended March
31, 1998. The gross margin increased from 46.2% to 48.7% 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 as
well as a decrease in obsolete inventory reserve. 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 18.1% from $7,888,000 in the nine months
ended March 31, 1997 to $6,462,000 in the nine months end March 31, 1998. The
decrease was a result of lower legal expenses 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 10.4% from $6,132,000 in the nine months ended March 31, 1997 to
$6,770,000 in the nine months ended March 31, 1998. The nine months ended March
31, 1998 included a significantly higher level of expenses associated with the
development of prototype KW60 printers and an increase in salary expense of
approximately $400,000.
Interest Income and Other Income (Expense). Interest income and other
income (expense) increased from $287,000 of income in the nine months ended
March 31, 1997 to $2,333,000 of income in the nine months ended March 31, 1997.
This increase reflects a book loss of $932,000 related to the sale of the Tama
property in Japan recorded in the nine months ended March 31, 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
and a reduction of debt obligations.
Income Tax Expense. Income tax expense for the nine months ended March
31, 1997 was $2,963,000 compared to $2,060,000 for the nine months ended March
31, 1998. Income tax expense for the nine months ended March 31, 1997 included
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 nine months ended March
31, 1998 resulted in a net increase of $5,564,000 as compared to an increase of
$706,000 in the nine months ended March 31, 1997. Cash was generated by net
income of $3,941,000 and a reduction in inventory of $1,457,000 which was
partially offset by an increase in cash used in investing activities of
$1,290,000.
YEAR 2000 COMPLIANCE
Kentek is in the process of addressing the Year 2000 problem. The
Company has completed a conversion from existing internal software to programs
that are Year 2000 compliant. The Company is also continuing its assessment of
the readiness of external entities, such as vendors, which interface with the
Company. The Company does not expect the costs associated with these procedures
to be material.
The Company's past and present printer products incorporate software.
Based on a preliminary review of the Company's printer products, the Company
believes that it is likely it will not incur significant expenditures related to
Year 2000 compliance.
The Company believes that its efforts will result in Year 2000
compliance. 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 consolidated financial statements.
Page 11
<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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
Exhibit 27.2 Financial Data Schedule - Restated
(b) Form 8-K
None.
Page 12
<PAGE> 13
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 8, 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 13
<PAGE> 14
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
27.2 Financial Data Schedule - Restated
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-30-1998
<CASH> 23,780
<SECURITIES> 16,850
<RECEIVABLES> 5,466
<ALLOWANCES> 0
<INVENTORY> 8,320
<CURRENT-ASSETS> 58,251
<PP&E> 16,621
<DEPRECIATION> 14,861
<TOTAL-ASSETS> 61,077
<CURRENT-LIABILITIES> 5,942
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 54,546
<TOTAL-LIABILITY-AND-EQUITY> 61,077
<SALES> 11,858
<TOTAL-REVENUES> 11,858
<CGS> 5,602
<TOTAL-COSTS> 10,116
<OTHER-EXPENSES> (771)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,513
<INCOME-TAX> 753
<INCOME-CONTINUING> 1,760
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,760
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 26,698
<SECURITIES> 5,239
<RECEIVABLES> 6,320
<ALLOWANCES> 0
<INVENTORY> 10,751
<CURRENT-ASSETS> 52,520
<PP&E> 17,311
<DEPRECIATION> 15,534
<TOTAL-ASSETS> 55,608
<CURRENT-LIABILITIES> 6,583
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 48,415
<TOTAL-LIABILITY-AND-EQUITY> 55,608
<SALES> 16,020
<TOTAL-REVENUES> 16,020
<CGS> 8,390
<TOTAL-COSTS> 12,862
<OTHER-EXPENSES> (49)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (545)
<INCOME-PRETAX> 3,752
<INCOME-TAX> 1,741
<INCOME-CONTINUING> 2,011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,011
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
