<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, 1999
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: 000-27814
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 3577 22-2406249
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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 March 31,
1999:
4,596,447 shares of Common Stock, $.01 par value per share
<PAGE> 2
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and June 30, 1998 3
Consolidated Statements of Income -
for the three and nine months ended March 31, 1999
and 1998 4
Consolidated Statements of Cash Flows -
for the nine months ended March 31, 1999
and 1998 5
Notes to Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 - 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submissions of Matters to a vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</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,
1999 1998
-------------- ---------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 9,070 $ 16,347
Marketable securities 18,271 19,308
Investment in limited partnerships 7,000 7,000
Accounts receivable, less allowance 4,426 5,297
Inventories (Note 2) 5,670 7,725
Deferred income taxes 1,937 2,000
Other 934 701
-------------- ---------------
Total current assets 47,308 58,378
Property and equipment, at cost, less
accumulated depreciation and amortization 1,648 1,794
Deposits and other 1,128 1,300
-------------- ---------------
Total assets $ 50,084 $ 61,472
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,352 $ 2,200
Accrued expenses (Note 4) 2,869 3,050
-------------- ---------------
Total current liabilities 5,221 5,250
Other 472 505
-------------- ---------------
Total liabilities 5,693 5,755
-------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par - shares authorized, 12,000;
shares issued, 7,186 and 7,137; shares
outstanding, 4,596 and 7,137 72 71
Treasury stock (Note 3) (15,179) --
Additional paid-in-capital 45,113 44,821
Foreign currency translation adjustment (460) (988)
Retained earnings 14,845 11,813
-------------- ---------------
Total stockholders' equity 44,391 55,717
-------------- ---------------
Total liabilities and stockholders' equity $ 50,084 $ 61,472
============== ===============
</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,
------------------------- -------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales:
Printers $ 1,368 $ 1,539 $ 3,470 $ 5,356
Consumable supplies and spare parts 9,070 10,319 24,549 29,326
------- ------- ------- -------
Total net sales 10,438 11,858 28,019 34,682
Cost of sales 4,894 5,602 12,959 17,784
------- ------- ------- -------
Gross profit 5,544 6,256 15,060 16,898
------- ------- ------- -------
Operating Expenses:
Selling, general and administrative 1,972 2,133 6,434 6,462
Research and development 673 2,381 6,157 6,770
Restructuring charge (Note 4) - - 1,142 -
------- ------- ------- -------
Total operating expenses 2,645 4,514 13,733 13,232
------- ------- ------- -------
Operating (loss) income 2,899 1,742 1,327 3,666
Other income, net 647 771 2,158 2,333
------- ------- ------- -------
(Loss) income before income taxes 3,546 2,513 3,485 5,999
Income tax (benefit) expense 96 753 96 2,060
------- ------- ------- -------
Net (loss) income $ 3,450 $ 1,760 $ 3,389 $ 3,939
======= ======= ======= =======
Net (loss) income per share: (Note 5)
Basic $ 0.72 $ 0.25 $ 0.56 $ 0.56
======= ======= ======= =======
Diluted $ 0.71 $ 0.24 $ 0.56 $ 0.55
======= ======= ======= =======
Weighted average shares outstanding:
Basic 4,817 7,085 6,053 7,048
======= ======= ======= =======
Diluted 4,827 7,196 6,064 7,160
======= ======= ======= =======
</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
-------------------------
1999 1998
<S> <C> <C>
Operating activities:
Net income $ 3,389 $ 3,941
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 975 925
Loss on disposal of property and equipment 464 35
Restructuring charge, net of cash payments 446 0
Changes in operating assets and liabilities:
Accounts receivable 871 747
Inventories 2,340 1,457
Other current assets (87) (645)
Other assets (184) (122)
Accounts payable and accrued expenses (1,017) 623
-------- --------
Net cash provided by operating activities 7,197 6,961
-------- --------
Investing activities:
Purchase of marketable securities, net 1,037 (476)
Purchase of equipment (1,170) (814)
Proceeds from sale of equipment 10 0
-------- --------
Net cash provided by (used in) investing activities (123) (1,290)
-------- --------
Financing activities:
Proceeds from issuance of common stock 292 758
Dividends paid (357) (421)
Purchase of treasury stock (15,179) 0
-------- --------
Net cash provided by financing activities (15,244) 337
-------- --------
Effect of exchange rate changes on cash 893 (444)
-------- --------
Net decrease in cash and cash
equivalents (7,277) 5,564
Cash and cash equivalents, beginning of period 16,347 18,216
-------- --------
Cash and cash equivalents, end of period $ 9,070 $ 23,780
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
Page 5
<PAGE> 6
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. STATEMENT OF ACCOUNTING PRESENTATION
The accompanying unaudited consolidated financial statements of Kentek
Information Systems, Inc. (the "Company" or "Kentek") 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 and nine months ended March 31,
1999 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 consolidated financial statements and notes thereto for the year ended
June 30, 1998 filed with the Securities and Exchange Commission in the Company's
Annual Report on Form 10-K.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- --------
(thousands)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $ 2,663 $ 4,072
Raw Materials 3,007 3,653
-------- -------
$ 5,670 $ 7,725
======== =======
</TABLE>
NOTE 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.
As of March 31, 1999, the Company has repurchased 2,589,750 shares of its common
stock at an aggregate cost of $15,179,084. Repurchases of stock have been
suspended pending action by the Special Committee of the Board of Directors on
the offer by Kentek Management to purchase the Company.
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NOTE 4. RESTRUCTURING CHARGE
In November 1998, the Company terminated its development effort on the
KW60, a wide-format, 60 page-per-minute printer. The Company recorded a pre-tax
restructuring charge of approximately $1,142,000 million for severance and other
termination benefits and other related exit costs. This charge includes
involuntary employee termination benefits for 75 employees, primarily within the
Company's Research and Development Group. The following table summarizes the
costs associated with the restructuring charge (thousands):
<TABLE>
<CAPTION>
Severance &
other termin- Write-off of Noncancellable Total restruct-
ation benefits long-lived assets operating leases uring charge
-------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Initial reserve $ 542 $ 446 $ 154 $ 1,142
Utilized through March 31, 1999 (542) (446) (123) (1,111)
----- ----- ----- -------
Balance, March 31, 1999 $ - $ - $ 31 $ 31
===== ===== ===== =======
</TABLE>
NOTE 5. 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, 1999 and 1998:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Three months ended March 31, 1999
- ---------------------------------
EARNINGS PER BASIC SHARE
Income attributable to
common stockholders $ 3,450 4,817 $ 0.72
========
EFFECT OF DILUTIVE SECURITIES
Stock options -- 10
--------- -------
EARNINGS PER DILUTED SHARE $ 3,450 4,827 $ 0.71
========= ======= ========
Nine months ended March 31, 1999
- --------------------------------
EARNINGS PER BASIC SHARE
Income attributable to
common stockholders $ 3,389 6,053 $ 0.56
========
EFFECT OF DILUTIVE SECURITIES
Stock options -- 11
-------- -------
EARNINGS PER DILUTED SHARE $ 3,389 6,064 $ 0.56
======== ======= ========
</TABLE>
Page 7
<PAGE> 8
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Three months ended March 31, 1998
- ---------------------------------
EARNINGS PER BASIC SHARE
Income available to
common stockholders $ 1,760 7,085 $ 0.25
========
EFFECT OF DILUTIVE SECURITIES
Stock options -- 112
-------- -------
EARNINGS PER DILUTED SHARE $ 1,760 7,197 $ 0.24
======== ======= ========
Nine months ended March 31, 1998
- --------------------------------
EARNINGS PER BASIC SHARE
Income available to
common stockholders $ 3,939 7,048 $ 0.56
========
EFFECT OF DILUTIVE SECURITIES
Stock options -- 112
-------- -------
EARNINGS PER DILUTED SHARE $ 3,939 7,160 $ 0.55
======== ======= ========
</TABLE>
The Company declared dividends of $0.02 per share for the quarters
ended June 30, 1998, September 30, 1998 and December 31, 1998 and paid such
dividends on September 18, 1998, December 4, 1998 and March 31, 1999,
respectively.
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NOTE 6. OTHER COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This standard requires
reporting of changes in stockholders' equity that do not result directly from
transactions with share owners. Components of other comprehensive income are as
follows (thousands):
Three Months Ended:
<TABLE>
<CAPTION>
Current
Balance, January 1 Period Change Balance, March 31
------------------------- ------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cumulative foreign currency
translation adjustment $ (641) $(1,233) $ 181 $ 156 $(460) $(1,077)
Net income 3,450 1,760
------- -------
Comprehensive income $ 3,631 $ 1,916
======= =======
</TABLE>
Nine Months Ended:
<TABLE>
<CAPTION>
Current
Balance, July 1 Period Change Balance, March 31
------------------------- ------------------------- ---------------------------
1998 1997 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cumulative foreign currency
translation adjustment $ (988) $ (753) $ 528 $ (324) $(460) $(1,077)
Net income 3,389 3,939
------- ------
Comprehensive income $ 3,917 $3,615
======= ======
</TABLE>
NOTE 7. SUBSEQUENT EVENT
On April 21, 1999, Kentek Information Systems, Inc. announced that it had
received a proposal from the Company's President and Chief Executive Officer to
acquire the remaining outstanding shares of the Company's common stock not
already owned personally. The initial offer was a cash price of $7.50 per share
at closing plus an additional consideration in the form of a contingent payment
right.
Kentek's Board of Directors formed a Special Committee of independent
directors to review the advisability of this proposal. The Committee is chaired
by Kentek's Chairman of the Board of Directors, and includes two outside
directors. The Special Committee has retained Janney Montgomery Scott, Inc. to
serve as independent financial advisor to the Special Committee and Cooley
Godward LLP to serve as independent legal counsel to the Special Committee.
On May 14, 1999, the Company announced that it had agreed to a definitive
merger agreement with a newly formed corporation organized by Philip W. Shires,
the President and Chief Executive Officer of Kentek. Under the terms of the
merger agreement, each Kentek shareholder would receive, at closing, $8.29 in
cash for each share of Kentek common stock.
Page 9
<PAGE> 10
The Board of Directors of Kentek, acting on the unanimous recommendation of
the Special Committee of independent directors, unanimously approved the
transaction and recommended that the stockholders of Kentek approve and adopt
the agreement and merger. The transaction is subject to the approval of Kentek's
stockholders, financing, any applicable regulatory approvals and certain other
conditions.
Kentek expects to mail a proxy statement describing the transaction to all
stockholders of Kentek upon completion of Securities and Exchange Commission
review. The transaction is expected to close during the summer.
The proposed acquisition may only be completed in accordance with
applicable state and federal laws, including the Securities Act of 1933 and the
Securities Exchange Act of 1934.
Page 10
<PAGE> 11
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."
On May 14, 1999, the Company announced that it had agreed to a
definitive merger agreement with a newly formed corporation organized by Philip
W. Shires, the President and Chief Executive Officer of Kentek. Under the terms
of the merger agreement, each Kentek shareholder would receive, at closing,
$8.29 in cash for each share of Kentek common stock. For further discussion,
See Note 7 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO THREE MONTHS ENDED
MARCH 31, 1998
Total Net Sales. Total net sales decreased 12.0% from $11,858,000 in
the three months ended March 31, 1998 to $10,438,000 in the three months ended
March 31, 1999. Printer sales revenue decreased 11.1% from $1,539,000 in the
three months ended March 31, 1998 to $1,368,000 in the three months ended March
31, 1999. This decline was due to increased competition from lower priced, light
duty printers offered by other manufacturers. Consumable supplies and spare
parts sales decreased by 12.1% from $10,319,000 in the three months ended March
31, 1998 to $9,070,000 in the three months ended March 31, 1999. This decrease
was due to a declining printer installed base which resulted in lower consumable
supplies and spare parts sales.
Gross Profit. Gross profit decreased by 11.4% from $6,256,000 in the
three months ended March 31, 1998 to $5,544,000 in the three months ended March
31, 1999. The gross margin increased from 52.8% to 53.1% in the same period. The
increase in gross margins was due to a decrease in manufacturing overhead and a
shift to sales of higher margin consumable supplies. These benefits were offset
by the strengthening of the yen against the dollar.
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<PAGE> 12
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 7.5% from $2,133,000 in the three months
ended March 31, 1998 to $1,972,000 in the three months ended March 31, 1999. The
decrease was a result of lower headcount due to the termination of the Company's
KW60 project. See Note 4 to the Consolidated Financial Statements.
Research and Development Expense. Research and development expenses
decreased by 71.7% from $2,381,000 in the three months ended March 31, 1998 to
$673,000 in the three months ended March 31, 1999. This decrease was due to the
termination of the KW60 project which resulted in significant reduction in
headcount and other development expenses. The Company terminated the KW60
because in its estimation the return on future sales of the printer no longer
warranted the substantial investment in time and resources that would be
required to finish development. The Company anticipates these expenses to
continue at reduced levels in future periods.
Other Income, net. Other income, net decreased from $771,000 of income
in the three months ended March 31, 1998 to $647,000 in the three months ended
March 31, 1999. This decrease was due primarily to recognition of losses
associated with the disposition and sale of certain assets. These losses were
offset by an increase in interest and investment income of $271,000.
Income Tax Expense (Benefit). Income tax expense for the three months
ended March 31, 1998 was $753,000 compared to $96,000 for the three months ended
March 31, 1999. The Company's effective income tax rate for the quarter and nine
months ended March 31, 1999 includes certain non-recurring adjustments,
primarily related to research and development credits, that were included in its
amended tax returns.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1999 TO NINE MONTHS ENDED
MARCH 31, 1998
Total Net Sales. Total net sales decreased 19.2% from $34,682,000 in
the nine months ended March 31, 1998 to $28,019,000 in the nine months ended
March 31, 1999. Printer sales revenue decreased by 35.2% from $5,356,000 for the
nine months ended March 31, 1998 to $3,470,000 for the nine months ended March
31, 1999. This decline was due to increased competition from lower priced, light
duty printers offered by other manufacturers. Consumable supplies and spare
parts sales decreased by 16.3% from $29,326,000 in the nine months ended March
31, 1998 to $24,549,000 in the nine months ended March 31, 1999. This decrease
was due to a declining printer installed base which resulted in lower consumable
supplies and spare parts sales.
Gross Profit. Gross profit decreased by 10.9% from $16,898,000 in the
nine months ended March 31, 1998 to $15,060,000 in the nine months ended
December 31, 1998. The gross margin increased from 48.7% to 53.7% in the same
period. The increase
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<PAGE> 13
in gross margins was due to a significant decrease in manufacturing overhead, a
shift to sales of higher margin consumable supplies and an increase in the
strength of the dollar in relation to the Japanese yen.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 0.4% from $6,462,000 in the nine months
ended March 31, 1998 to $6,434,000 in the nine months March 31, 1999. The
decrease was a result of a lower accrual for profit sharing offset by increased
sales and marketing expense.
Research and Development Expense. Research and development expenses decreased by
9.1% from $6,770,000 in the nine months ended March 31, 1998 to $6,157,000 in
the nine months ended March 31, 1999. The nine months ended March 31, 1998
included a higher level of expenses associated with the development of the KW60
printer prior to its termination in November of 1998. The Company terminated the
KW60 because in its estimation the return on future sales of the printer no
longer warranted the substantial investment in time and resources that would be
required to finish development.
Restructuring Charge. In November 1998, the Company terminated its development
effort on the KW60, a wide-format, 60 page-per-minute printer. The Company
recorded a pre-tax restructuring charge of approximately $1,142,000 for
severance and other termination benefits and other related exit costs. See Note
4 to the Consolidated Financial Statements.
Other Income, net. Other income, net decreased from $2,333,000 in the
nine months ended March 31, 1998 to $2,158,000 in the nine months ended March
31, 1999. This decrease was due primarily to recognition of losses on the
disposition and sale of certain assets. These losses were offset by an increase
in interest and investment income of $212,000.
Income Tax Expense. Income tax expense for the nine months ended March
31, 1998 was $2,060,000 compared to $ 96,000 for the nine months ended March 31,
1999. The Company's effective income tax rate for the quarter and nine months
ended March 31, 1999 includes certain non-recurring adjustments, primarily
related to research and development credits, that were included in its amended
tax returns.
LIQUIDITY AND CAPITAL RESOURCES
Changes in cash and cash equivalents during the nine months ended March
31, 1999 resulted in a net decrease of $7,277,000 as compared to a net increase
of $5,564,000 for the nine months ended March 31, 1998. The primary reason for
this decrease is the Company's repurchase of 2,589,751 shares of the Company's
common stock for approximately $15,179,000. This use of cash was offset by an
increase in the sale of marketable securities of approximately $1,513,000 and
an increase in the effect of
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<PAGE> 14
exchange rates on cash of approximately $1,337,000. The Company does not believe
that the negative sales trends will have a material impact on its liquidity and
capital reserves due to the cost reduction initiatives already completed and
in-process.
YEAR 2000 COMPLIANCE
The Company has completed and tested conversion of its accounting and
finance software operating on its IBM AS400-based computers to programs that are
year 2000 compliant. These AS400-based programs are used to compile business
transactions and information and have been tested and judged 100% compliant. The
PC-based network software and business productivity applications such as
Microsoft Office 97, email and internet have been tested for year 2000
compliance and have been determined to require software upgrades from Microsoft,
scheduled to be released by late summer, in order to be fully year 2000
compliant. In addition, there are stand-alone, manufacturing tracking systems
that will have to be replaced by year 2000 compliant systems. The Company
estimates that the testing, conversion and/or replacement of these systems will
be completed by June 30, 1999. All maintenance and modification costs associated
with making all 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. Any
replacement of these systems would be capitalized, and would further 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's contingency plans, if year 2000 modifications do not work
or are not ready by year 2000, rely significantly on manual procedures and
record keeping. All files are presently backed up daily and will be adequately
backed up as of June 30, 1999, which is the end of the Company's fiscal year, as
well as of September 30, 1999, and 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 June 30, 1999,
September 30, 1999, and 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
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<PAGE> 15
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 been incurred 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.
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 also invests in trading securities on a regular basis. The
portfolio is managed by an outside professional and may include equity
securities. Total funds devoted to trading securities are approximately
$18,271,000. As of March 31, 1999, the portfolio did not contain any equities.
The Company also has 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.
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<PAGE> 16
<TABLE>
<CAPTION>
MATURITY
(AMOUNTS IN THOUSANDS)
FAIR VALUE AT
1999 THEREAFTER TOTAL MAR 31, 1999
---- ---------- ----- -------------
<S> <C> <C> <C> <C>
Cash equivalents $ 5,749 $ 5,749 $ 5,749
Average interest rate 4.49% 4.49%
Commercial paper 1,998 $ 0 1,998 1,998
Average interest rate 4.88% 4.88%
------- -------- ------- -------
Total investment portfolio $ 7,747 $ 0 $ 7,747 $ 7,747
======= ======== ======= =======
Average interest rate 4.59% 4.59%
</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.
Due to the short term maturities of the portfolio, no material change in value
is expected if interest rates change.
FOREIGN CURRENCY RISK
The Company has operations in Japan, and as a result, cost of sales and
operating expenses are dependent on dollar-yen exchange rates. On occasion the
Company has purchased Japanese yen forward exchange contracts to minimize the
effect of fluctuating foreign currencies on its reported income, generally over
the ensuing four to five months. The forward exchange 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. At March
31, 1999, the Company did not have any forward exchange contracts outstanding
Based on the Company's overall currency rate exposure at March 31,
1999, a 10% change in currency rates would not have a significant material
effect on the financial position, results of operations or cash flows of the
Company.
Page 16
<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently not involved in any material 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 Schedule
(b) Form 8-K
Filed on November 16, 1998.
Page 17
<PAGE> 18
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 14, 1999 KENTEK INFORMATION SYSTEMS, INC.
/s/ HOWARD L. MORGAN
-----------------------------------------
Howard L. Morgan
Chairman of the Board
/s/ PHILIP W. SHIRES
-----------------------------------------
Philip W. Shires
President and Chief Executive Officer and
Interim Chief Accounting Officer
(Principal Executive Officer)
Page 18
<PAGE> 19
Exhibit Index
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule-9 month
27.2 Financial Data Schedule-3 month
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 9,070
<SECURITIES> 25,271
<RECEIVABLES> 4,426
<ALLOWANCES> 0
<INVENTORY> 5,670
<CURRENT-ASSETS> 47,308
<PP&E> 18,111
<DEPRECIATION> 16,463
<TOTAL-ASSETS> 50,084
<CURRENT-LIABILITIES> 5,221
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 44,319
<TOTAL-LIABILITY-AND-EQUITY> 50,084
<SALES> 28,019
<TOTAL-REVENUES> 28,019
<CGS> 12,959
<TOTAL-COSTS> 26,692
<OTHER-EXPENSES> (2,158)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,485
<INCOME-TAX> 96
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,389
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,070
<SECURITIES> 25,271
<RECEIVABLES> 4,426
<ALLOWANCES> 0
<INVENTORY> 5,670
<CURRENT-ASSETS> 47,308
<PP&E> 18,111
<DEPRECIATION> 16,463
<TOTAL-ASSETS> 50,084
<CURRENT-LIABILITIES> 5,221
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 44,319
<TOTAL-LIABILITY-AND-EQUITY> 50,084
<SALES> 10,438
<TOTAL-REVENUES> 10,438
<CGS> 4,894
<TOTAL-COSTS> 7,539
<OTHER-EXPENSES> (647)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,546
<INCOME-TAX> 96
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,450
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.71
</TABLE>
