<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 September 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)
<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 September 30,
1998:
6,978,797 shares of Common Stock, $.01 par value per share
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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 -
September 30, 1998 and June 30, 1998 3
Consolidated Statements of Income -
for the three months ended September 30, 1998
and 1997 4
Consolidated Statements of Cash Flows -
for the three months ended September 30, 1998
and 1997 5
Notes to Consolidated Financial Statements -
as of and for the three months ended September 30, 1998 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submissions of Matters to a vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
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PART I. FINANCIAL INFORMATION.
Item 1. Consolidated Financial Statements.
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
September 30, June 30,
1998 1998
------------- --------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 17,785 $ 16,347
Marketable securities 18,185 19,308
Investment in limited partnerships 7,000 7,000
Accounts receivable, less allowance 4,144 5,297
Inventories (Note 2) 7,059 7,725
Deferred income taxes 2,000 2,000
Other 830 701
-------- --------
Total current assets 57,003 58,378
Property and equipment, at cost, less
accumulated depreciation and amortization 2,148 1,794
Deposits and other 1,242 1,300
-------- --------
Total assets $ 60,393 $ 61,472
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,167 $ 2,200
Accrued expenses 2,596 3,050
-------- --------
Total current liabilities 4,763 5,250
Other 539 505
-------- --------
Total liabilities 5,302 5,755
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par - shares authorized, 12,000;
shares issued, 7,181 and 7,137; shares
outstanding, 6,979 and 7,137 72 71
Treasury stock (1,252) --
Additional paid-in-capital 45,106 44,821
Foreign currency translation adjustment (770) (988)
Retained earnings (Note 5) 11,935 11,813
-------- --------
Total stockholders' equity 55,091 55,717
-------- --------
Total liabilities and stockholders' equity $ 60,393 $ 61,472
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
----------------------
1998 1997
------- -------
<S> <C> <C>
Net sales:
Printers $ 969 $ 2,239
Consumable supplies and spare parts 8,606 9,415
------- -------
Total net sales 9,575 11,654
Cost of sales 4,665 6,496
------- -------
Gross profit 4,910 5,158
------- -------
Operating Expenses:
Selling, general and administrative 2,142 2,102
Research and development 3,129 1,905
------- -------
Total operating expenses 5,271 4,007
------- -------
Operating income (361) 1,151
Other income, net 787 787
------- -------
Income before income taxes 426 1,938
Income tax expense 160 727
------- -------
Net income $ 266 $ 1,211
======= =======
Net income per share: (Note 4)
Basic $ 0.04 $ 0.17
======= =======
Diluted $ 0.04 $ 0.17
======= =======
Weighted average shares outstanding:
Basic 7,092 6,983
======= =======
Diluted 7,149 7,231
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 266 $ 1,211
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 363 307
Unrealized gains on forward exchange
contracts and trading securities (162) (235)
Realized and unrealized gains on
available-for-sale securities (45) (1,021)
Changes in operating assets and liabilities:
Trading securities, net 283 59
Accounts receivable 1,153 106
Inventories 696 (738)
Other current assets 129 (625)
Other assets (58) (12)
Accounts payable and accrued expenses (366) 899
-------- --------
Net cash provided by operating activities 2,259 (49)
-------- --------
Investing activities:
Purchase of available-for-sale securities (1,039) (5,155)
Purchase of equipment (688) (147)
Purchase of treasury stock (1,252) 0
Proceeds from sales of available-for-sale securities 1,905 3,438
-------- --------
Net cash provided by (used in) investing activities (1,074) (1,864)
-------- --------
Financing activities:
Proceeds from issuance of common stock 286 564
Dividends paid (144) (139)
-------- --------
Net cash provided by financing activities 142 425
-------- --------
Effect of exchange rate changes on cash 111 (231)
-------- --------
Net increase (decrease) in cash and cash
equivalents 1,438 (1,719)
Cash and cash equivalents, beginning of period 16,347 18,216
-------- --------
Cash and cash equivalents, end of period $ 17,785 $ 16,497
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTH ENDED SEPTEMBER 30, 1998
(Unaudited)
1. STATEMENT OF ACCOUNTING PRESENTATION
The accompanying unaudited consolidated financial statements include all
adjustments have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Article 10 of Regulation S-X. In the opinion of management all
adjustments (consisting only of normal recurring adjustments) considered
necessary for fair presentation have been included. Results of operations for
the three months ended September 30, 1998 are not necessarily indicative of
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, 1998.
2. INVENTORIES
Inventories consist of the following net of allowance:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- --------
(thousands)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $3,907 $4,072
Raw Materials 3,152 3,653
------ ------
$7,059 $7,725
====== ======
</TABLE>
3. TREASURY STOCK
The board of directors has authorized the repurchase of shares of the
Company's common stock. The Company's repurchases of shares of Common Stock are
recorded as Treasury Stock and result in a reduction of Stockholders' equity. No
treasury shares have been reissued however, in the event of future reissuance
the Company will use a first-in, first-out method and the excess of repurchase
cost over reissuance price will be treated as a reduction of retained earnings.
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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 months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Three months ended September 30, 1998
Net income $ 266
=============
Basic net income per share
Income available to
common stockholders $ 266 7,092 $ 0.04
=============
Effect of stock options -- 57
------------- -------------
Diluted net income per share $ 266 7,149 $ 0.04
============= ============= =============
Three months ended September 30, 1997
Net income $ 1,211
=============
Basic net income per share
Income available to
common stockholders $ 1,211 6,983 $ 0.17
=============
Effect of stock options -- 247
------------- -------------
Diluted net income per share $ 1,211 7,231 $ 0.17
============= ============= =============
</TABLE>
5. DIVIDENDS ON COMMON STOCK
The Company declared and paid dividends of $0.02 per share for the quarter
ended June 30, 1998 on September 18, 1998.
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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, 1998,
particularly those contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, L997
Net Sales. Net sales decreased 17.8% from $11,654,000 in the three months
ended September 30, 1997 to $9,575,000 in the three months ended September 30,
1998. Printer sales decreased 56.7% from $2,239,000 in the three months ended
September 30, 1997 to $969,000 in the three months ended September 30, 1998.
This decrease is due primarily to increased competition in the printer market.
Consumable supplies and spare parts sales decreased by 8.6% from $9,415,000 in
the three months ended September 30, 1997 to $8,606,000 in the three months
ended September 30, 1998. This decrease is 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 4.8% from $5,158,000 in the three
months ended September 30, 1997 to $4,910,000 in the three months ended
September 30, 1998. The gross margin increased from 44.3% to 51.3% 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 utilization of foreign exchange forward contracts mitigated the
additional expenses related to the weakening of the dollar in relation to the
Japanese yen.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained relatively flat from $2,102,000 in the three
months ended September 30, 1997 to $2,142,000 in the three months ended
September 30, 1998.
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Research and Development Expense. Research and development expenses
increased by 64.3% from $1,905,000 in the three months ended September 30, 1997
to $3,129,000 in the three months ended September 30, 1998. This increase was
due to prototype and salary expenses related to the development of the KW60
printer.
Other Income, net. Other income remained flat at $787,000 for both the
three months ended September 30, 1997 and 1998.
Income Tax Expense. Income tax expense for the three months ended September
30, 1997 was $727,000 compared to $160,000 for the three months ended September
30, 1998. This decrease is due to the decrease in income before taxes. The
estimated tax rate for both periods is approximately 37.5%.
LIQUIDITY AND CAPITAL RESOURCES
Changes in cash and cash equivalents during the three months ended
September 30, 1998 resulted in a net increase of $1,438,000 as compared to a
decrease of $1,179,000 in the three months ended September 30, 1997. Cash of
approximately $1,252,000 was used to repurchase 202,400 shares of the Company's
Common Stock. Since September 30, 1998, the Company has repurchased an
additional 925,000 shares. The Company may continue to repurchase additional
shares subject to market conditions.
YEAR 2000 COMPLIANCE
The Company has completed and tested conversion from existing accounting
and finance software to programs that are year 2000 compliant. All maintenance
and 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 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
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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 costs associated with year 2000 compliance,
as the majority of the costs have occurred as a result of normal business
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.
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ITEM 3.
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 its 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
$11,680,000 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 90 days or less.
MATURITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR VALUE AT
1999 THEREAFTER TOTAL SEPT. 30, 1998
------- ---------- ------- --------------
<S> <C> <C> <C> <C>
Cash equivalents $ 4,902 $ 4,902 $ 4,902
Average interest rate 4.22% 4.22%
Commercial paper 17,551 $1,050 18,601 18,601
Average interest rate 5.53% 5.40% 5.53%
------- ------ ------- -------
Total investment portfolio $22,453 $1,050 $23,503 $23,503
======= ====== ======= =======
Average interest rate 5.24% 5.40% 5.25%
</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 September 30, 1998, the fair value of the portfolio would decline
by approximately $2,400,000.
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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 four to five 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 risk to the Company. At September 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 $ 3,146 $147 $ --
</TABLE>
Based on the Company's overall currency rate exposure at September 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.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is currently not involved in any significant 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 Financial Data Schedules
-September 30, 1998
-September 30, 1997 - Restated
(b) Form 8-K
Exhibit 99.1 Previously filed on November 16, 1998
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KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998 KENTEK INFORMATION SYSTEMS, INC.
/s/ PHILIP W. SHIRES
--------------------------------------------
Philip W. Shires
President and Chief Executive Officer
(Principal Executive Officer)
/s/ VICKY S. HAMMOND
--------------------------------------------
Vicky S. Hammond
Chief Financial Officer
(Principal Financial and Accounting Officer)
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Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<S> <C>
27.1 Financial Data Schedules
27.2 Restated Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,785
<SECURITIES> 25,185
<RECEIVABLES> 7,000
<ALLOWANCES> 0
<INVENTORY> 4,144
<CURRENT-ASSETS> 57,003
<PP&E> 17,144
<DEPRECIATION> 14,996
<TOTAL-ASSETS> 60,393
<CURRENT-LIABILITIES> 4,763
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 55,019
<TOTAL-LIABILITY-AND-EQUITY> 60,393
<SALES> 9,575
<TOTAL-REVENUES> 9,575
<CGS> 4,665
<TOTAL-COSTS> 9,936
<OTHER-EXPENSES> (787)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 426
<INCOME-TAX> 160
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 266
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 16,497
<SECURITIES> 19,288
<RECEIVABLES> 6,107
<ALLOWANCES> 0
<INVENTORY> 10,720
<CURRENT-ASSETS> 56,464
<PP&E> 17,250
<DEPRECIATION> 15,622
<TOTAL-ASSETS> 59,232
<CURRENT-LIABILITIES> 6,916
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 51,767
<TOTAL-LIABILITY-AND-EQUITY> 59,232
<SALES> 11,654
<TOTAL-REVENUES> 11,654
<CGS> 6,496
<TOTAL-COSTS> 10,503
<OTHER-EXPENSES> (787)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,938
<INCOME-TAX> 727
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,211
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
